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Executives

Darin G. Billerbeck – President and Chief Executive Officer

Douglas Hunter – Chief of Staff and Vice President, Corporate Marketing

Lattice Semiconductor Corporation (LSCC) Deutsche Bank’s dbAccess 2012 Technology Conference September 13, 2012 5:40 PM ET

Unidentified Analyst

Good afternoon, everyone. Thanks for joining us for the late afternoon session of our third day of tech conference. We’re really pleased to have Lattice Semiconductor. With us today, we have Darin Billerbeck, President and CEO; as well as Doug Hunter, Chief of Staff and VP of Corporate Marketing with us. Then we’ll go and let them kick it off with a brief overview of the company and we’ll watch in the Q&A. Darin?

Darin G. Billerbeck

Okay, thank you, and thanks, everybody. I know that for many people are catching flight and this is the last show if you will of Deutsche Bank. So as we go through this, I mean this is one of the things we’ll try to go fast and then just open it up for questions as best we can. As you know, there is always a Safe Harbor in all of these presentations. So I’m going to give you everything that we know to the best of our knowledge, trying to give you any forward-looking statements.

Bottom line is about semiconductors. We’ve made a lot of distinctions between our self as of late as we don’t want to be compared to Xilinx and Altera, and to give you guys really kind of a balance between those companies. They spend about $400 million, $500 million in R&D. We spend about $60 million, and so just putting those into relative terms, we’re off to a completely different space. For many, many years, everybody wants to compare us and contrast us per say, you really shouldn’t because we play in a space that we think is unique to our capabilities and something that we can deliver on.

So again, we’re in Programmable Logic business, there is no question about that. We really lead with low power, low cost and innovation. People say why can you do that if you’re not the leader in technology? And I’ve told many of you over the years, they build New York, we build Portland, okay. That architecture is completely different. The number of cars they can get through New York is analogous to the routing of big LUT densities. Portland is very analogous to smaller densities, if you have a smaller footprint, you have a lower power. You can’t scale as high, but on the other hand you can do a lot of things with your power and your cost structures.

And then we have consistent new product growth, that’s good news, bad news. We have a lot of great growth. In fact, the new products are growing very well. The biggest issue is, there also lower margin and we don’t have enough older margin business, we’ll get into some of that stuff.

Healthy balance sheet, we got lots of cash. In the last 10 years, we’ve sold 1 billion of programmable devices, all good. What have we done in the last 12 months? We spent a lot of time in R&D. We’ve really had a very difficult time in R&D because we had multiple sites. We closed all the sites as of today. Most of our R&D, the majority of our silicon R&D and software R&D is done in San Jose now. We have a little outside of that.

We do have an intact team in the Philippines, which is about one-fifth the cost of what the U.S. is and about maybe half the cost of China. So it’s pretty good model for us going on. We don’t have Allentown, which is our old Pennsylvania site and then we’ve repurposed Shanghai to be really focused on our customers and softwares, who do a lot of support out there.

We have a lot of new products that are coming out. We have XO2, which is new to us, as it about a year-ago or so. We expect that to actually begin to gain a lot of traction in the upcoming year, it’s got some good traction now. ECP3, we provided a couple of different what we call derivatives. At core ECP3, now we have high performance and low power and a very small form factor. And that form factor enables us to get into things like collision avoidance, and cameras and video for the automotive industry, because it’s significant. We have very low power, burn up some of the sensing technologies. There is no fans, and you can sit those devices in the Frontier Hood in Phoenix, Arizona. So there is lot of capabilities that we have in those particular applications.

We also did a big NuHo distribution relationship. If you remember, there is really Arrow and Avnet, and NuHo was number one on their line card for a lot of things and this is good for us. And then we acquired SiliconBlue, most of you know about that. That’s really focused on the low-end. Although, we are finding, it has a lot of capabilities in other markets and just the mobile FPGA market, which is good. It also provides us a scalable non-volatile memory, which nobody in the industry has below 65 nanometers, so that’s good for us. And we grew our revenue nicely in 2011, maybe not so nice this year. We’ll talk a little bit about that.

Our environment, a lot of people talked about communications and they see this is were Xilinx, Altera and Lattice play. But where we play as we play it through the whole thing, so XO2 is really our glue logic or controlled playing device that enables me to play all the way from the core through the access network, but when we talk about our data products, we’re talking about this last mile if you will, really the access portion of it, right. So when we talk 3-gig SERDES and those types of devices that have DSPs and different things. That’s over in this red space, where you talk about 20-gig, 100-gig, that’s really to the far right of this picture.

If you look at that, just to summarize it, this whole Internet of things and that Internet of things really surround the core and what we called the metro, the edge, and access that we depicted in the last page. Lattice is really focusing from about the edge outward to the thing. SiliconBlue is more about thin device, whereas ECP3 is more of an edge device. So that’s how you interpret our product line up. Competition obviously focuses more from access inward. Power is not a real big issue for them.

So the Internet of things can be anything from cars to appliances to tablets to smartphones and cameras. If you look at the volumes of this thing, it’s humongous. It’s probably one of the largest shipments in the world if you look at on a sheer number standpoint. And if you just take smartphones and that was really surprising to me, because in 2002, when I was running Intel’s flash division, they did the flash, who were selling about 1 billion handsets, and out of that 1 billion handsets, about 50 million were smartphones.

We never thought smartphones. We invested in technology, but we never thought smartphones will take off today. Smartphones are larger, one of the largest market segments in the handset. And it’s become almost analogous where the phone is really just a smartphone. They’re likes of Apple and Samsung’s Galaxy. But there is also a lot of mobile computing devices and digital still cameras, and then digital still cameras, the applications are simplistic, but they’re still numerous.

And most people are going to understand that you’re going to start seeing things like iPods and different devices become more digital still cameras, just like one-time the phone didn’t have a camera and now all phones have a camera. You’re going to see the capabilities of those cameras rise. The same feature sets that are driven in the cameras can also be used in a lot of the mobile applications, smartphones, or tablets and things like that.

Big market for sure, this is really kind of the breakout of the transition. So things are going from what’s called homogenous networks, which are these big towers that you see everywhere to what’s called heterogeneous networks. If you haven’t had seen these devices today, ATD makes devices for your home that actually gives you your own cell tower, and all they do is connected to your 802.11 network, and you actually have little tower in your house and provide your cellphone coverage, actually have a similar version that in my house, they work really well.

But the difference is that, we’re going to have a big tower up in a neighborhood that as far as network coverage for them, so saves them a lot of money. You also certainly see that in cities. We’re using Microwave technology in smaller cells. So it’s clear, the low-density FPGAs and ASIC approach to the smaller cells really aligns to what we do. And this big old systematic step, and like I said, there isn’t going to need more of those cells really aligns to our competitors. So we’re starting to see a lot of that as we go through it. We’re focused on just enough power, just enough performance, and it fits the needs of a lot of the new applications that are coming out and the infrastructure build out that’s coming.

If you look at that just and if you take in terms of size, obviously the biggest size FPGA market, there is really Remote Radio Heads along with Microwave Backhaul and some of the macro baseband stations and things like that. And we’re really focused on the small cell, some of the low-end radio technologies, right. This is what we do best. The market is clearly not as big, but it’s a market where our capabilities are aligned to the need.

So again, heterogeneous networks that required a lot lower power, a lot lower performance, they sit in places where there aren’t fans and there isn’t unlimited power, so that’s the focus that we have. The mantra you’re going to hear from us a lot of it is, we want to really spend our time doing less than a 100K LUT devices. We’ll expand beyond that. We sell a lot of 150K LUT devices. But our primary target is less than 100K LUT. It’s a very low innovative low-power solution. You’ve got to be a reliable supplier for sure and then you have to provide great service and support.

So that’s a big deal for us, it’s continue what we’ve always done well and we service smaller customers better than a big customers can service them. But we also can attack spaces that aligned with our capabilities. From a [differences] Asian standpoint, you’re going to hear people talk about high-end, mid-range, and low-end. We also have mixed signal and our software and IP, development kits to bottom. But the mid-range gets kind of cloudy for you guys, to understand its mid-range 350K LUTs, or the 150K LUTs, or what is it. You’re going to find that depending on who is talking to you, it can range. The range is pretty broad, but the bottom line, there is a lot of wireless, wireline, and camera and displays in this range.

So this is service-based, DSP-based products that either need switching for video, or need high-definition video, or they could be any kind of a camera or data interface. The low-end range is typically things that you see what’s glue logic, maybe a little bit more control functions, or I/O expansions. So you see a lot of that in that space. And then in our mixed signal, we primarily do what’s called Clock and Power Management. And that stuff like sequencing for servers, where they want to bring up the servers one at a time, or they want to turn fans and on and off and different things, where you’re not just, you turn the switch on and it just burns up your entire breaker system. So the sequence things, so they down over the big power drain burn up portions of their, is their motherboards or some of the server boards.

If you look at our product range, obviously we’ve got ECP3 and ECP4 really in that mid-range high-end. If you think about, for us it’s the high-end, but for our competitors really the lowest end of the mid-range. And then the low NPL, these are XO2 and now our iCE products. The XO2, which you think what’s different between those, XO2 is more of an I/O rich product, whereas Lattice iCE40 is really a smaller I/O, cheaper glue logic very, very low power for mobile devices.

It doesn’t mean that XO2 can’t do that, but it was really designed as a low LUT I/O, high I/O device and both come in high power and low power operations. And in Power Manager and Platform Manager and Platform Manager is really Power Manager with programmability in it. So it enables us to the programmable logic and some of the sequencing. And then finally, we have our Lattice Diamond software, and as all of you know, software is really important in the FPGA business.

If you look at some of the mid-range places that we play with ECP3, you can see the wireless infrastructure and again, that’s more 3G and below access in the wireline access, where they’re doing conversions for 10-gig Ethernet and then we have some other areas where just video processing-intensive, it could be switching, intense video processing, and things like that. That run through or it could things like surveillance, things like just cameras that you’re going to see and also various editing applications that we’re in.

On the differentiation, we also came in with a very low power version of that device and again, that’s suited more towards the being closed, or encapsulated areas where they just really want to have, I don’t know if you guys know, but it’s really a temperature atmosphere deal, where you can’t explore your device with the heat and thermals from the electrical.

And then on the high speed, it’s really the highest performance versions of that low power, it’s not really is important, and then finally we do some small form factors. And that’s because some of the die sizes we have on the lower end, ECP3 are very tiny. I mean iCE makes these things look huge, but the 3G SERDES is the smallest 3G SERDES device I think on the planet, so it’s pretty small.

If you look at some of this, we also provide, these are big things for surveillance, where you’re taking video, imaging, and you’re reprocessing them for clarity. And this just shows an example of an overexposed, underexposed picture, and then what you can do with the software on ECP3, and you can do this in various definitions.

And you may wonder why on some of these video applications you need such high definition. They’re now in the cars, they are actually depicting between sizes of our objects and what those objects are. And so it could be a cat versus a person and that’s big. So a lot of this simulation and the software and verification becomes very important in their process of detection. So these are some of the reference design kits that we provide. Under the more mobile applications, you can see the smartphone, we talked about that also, and I’ll get into some applications in a bit on that.

But also there are servers where they just want some PLLs, technical support, low price, simple memory configurations that they have, so these devices fit nicely. And that’s primarily XO2 of a high-voltage range that it provide and then digital still cameras. We do a lot of image rotations or dual screen rotations, so from Samsung, new phones for instance have LCDs on both sides. You can take pictures, and actually see the pictures that you’re taking on both sides of the camera.

If you look at what we originally called the iCE40 that was built as more of a sensor hub than anything, so it’s a companionship to an application processor, you say, why would you do that? All application processors are pin-limited or output limited, so you can take four or five pins or the necessary output. And then you can configure it, so that you can send all the different devices that are hung on. So like an Apple has multiple sensors, you don’t want the general-purpose processor, or any of the other processing continuing to burn current way you’re trying to sense those, so using FPGA and it simplest form to detect those. And then if there is something significant that often wakes up the application process or it does something.

And then there is also things, this is really the center expansion, and this could be anything, and those are real phones that we come in and they do compasses and battery monitor, touch panels like gyroscope. So lots of applications has been getting here, and you’ll see more of this, more smaller applications or microcontrollers that are then built it to an application process or in a mobile device, so that’s how they keep the current down, not only is the screen a big current drop, so is all the sensing that goes on.

So when you pick up your phone and you put it next to you, it senses that, when you put it in your pocket, it senses that. So it changes the actual antenna tuning depending on what you’re doing on that. There’s a lot of things that you may not know that your phone does a bit of ring, and you can make a phone call.

And then this is really our Power Management and Platform Management, a lot of telecom industries do that for some of the management of hardware, so you’re not taking hardware down. You can actually pull it up, and do different things. So we’re at low cost, obviously, it enables the reliability system, because if they have an issue, they don’t want to add stuff, they can actually reprogram. Some of the products even office automation and other one was surprised to us, but it turns up to be a great business. So I’ll say hard drives for hot process and different things like that, and that turns out to be pretty good, because we’re a more reliable and then also lower cost. And people say, well, how low cost are you?

On the high-end, you can take what’s considered about $20 of discrete components and really kind of own them down to about $9 integrated circuit solution, and that’s pretty significant. And on the lowest end, where maybe people don’t need all of the performance, or all the integration, you can take a smaller version of that and it’s down to about $25. So we don’t have the average ASPs Lattice as much, the big companies do, $10s, and $12s, $20s and $50 ASPs. We run around $2.50. So these things are still significant portion of product offerings.

Financially, obviously, it’s been flat for about a year, which is bad. Some of that is just caused by the macro stuff, I think more than anything. I think our job is regardless of what’s going on in the macro. We just got to grow those new designs and continue to faster the development of our new products and get them into market as fast as we can. Again, revenue for Q2 was about $70 million, so it’s been floating around $70 million for about three quarters now.

If you look at the growth of the new products, this is the good news, bad news. We’re growing new products really quickly, their lower margins, their older margins, because the older products are falling off. I do expect the older products to recover as time goes on, and we expect that our cost structures to help the new products to get lower cost as we go through the next few quarters.

If you look at the focus there, we really hasn’t changed at all. In market, consumers about 10%, we’re spending a lot of energy on that with iCE containing about 12% industrial and others 26%, and then communications is our big deal. And then if you look at the breakdown, Asia and Japan are really the biggest portion about 50%, 69% along with Europe, even though Europe is really starting to take a die for us, and I don’t think that’s anything in consistent with the rest of the world. And then we don’t really have any big customers through timing and that’s good, because we can diversify some of the revenue we have.

Lots of cash, no debt, that’s a good thing for us. People ask us all the time, what we’re doing with the cash? In the last quarter, we bought back about 5 million shares of stock. We’ll continue to do a lot of that stuff and we want to continue to be able to generate cash as we go through even the roughest time. So even if we’re sitting at $70 million, we won’t generate cash.

This next quarter is probably plus or minus 2%. We’ve announced that we really don’t comment on that stuff with margins, this supporting part of the margins in the 52% plus or minus 2%, and that’s all driven by new product growth, it’s great and some of the older products are falling off, obviously starts that we like. And then the total operating expenses, we’ve been trimming all long, we’ll continue to do that. So for sitting at $70 million for too long, we’re going to make some streamlining of the company structure plan, and that’s where we are at.

So, again, we’re very committed to the market space that we’re in. We don’t want you guys to ever compare us to Xilinx and Altera. The big market growth drivers for us are going to be in the low end. We’re actually seeing it in some of that today, which got a quote today, where I said who is the competition, the pretty interesting high volume application turns out for ASICs.

So just like the big guys are trying to displace ASICs in a high-end, we’re actually displacing ASICs in a low-end. And that was our goal and some of the consumer stuff, which is to get some of the combinational ASICs that are smaller out there, and they said, there is two issues that customer ask, one is their four ASICs they want to replace, and the other one is a footprint problem. And both of those you can sell with products that we offer especially in the low-end.

Okay, that’s it. So, thank you.

Douglas Hunter

So that’s helpful overview. If you want to have a see, we can move into the Q&A.

Question-and-Answer Session

Unidentified Analyst

So some of the questions that we’ve been asking every company have been around macro, obviously everybody is being impacted into certain degree. Well, I’d like to get your thoughts on, are you thinking the second half of this year shaping out versus the second half of last year in terms of demand, as well as maybe on supply side as well, could you talk about that?

Darin G. Billerbeck

So if I look at the macro today, I don’t see it. When we came early in the year, we thought that the macro for Q3 and Q4 is going to be really good, and we’re going to get recovery. I don’t necessarily see that, I think there is still a lot of uncertainty.

If you look at last year, Q3 actually was very stronger than Q4 (inaudible). I don’t know that we’re going to see that type of a roll off that we saw last year. I don’t think you have the same macro events that are going on would cause that. But all-in-all, I think we’re just assuming 2012 just going to be a rough year. I do think 2013, if we look at it ends up to be better, because I just think – because no inventory buildup, we don’t see a lot of things that we saw in some of the other macro events where people are building too much.

It doesn’t mean that the comps guys are more built for the first part of the year and see what they sell and either pullback or pull in stuff for Q3 and Q4 and some of that we saw a little bit in Q2 and Q3. So comps I think is a lot healthier than it was earlier, but I don’t expect to have a giant rebound in the second half of the year.

Unidentified Analyst

And I think a little bit more than half of your revenues go to distribution, what you see in terms of distribution inventory levels of those?

Darin G. Billerbeck

Well, yeah, so we haven’t seen any distribution buildup. In fact, we checked that on a very regular basis, we see distributions. One of the biggest falloff, because people ask me, why did the distribution falloff so much? Just between Q3 of last year, I think Q2 of this year I think the falloff was 37%. So Europe alone through distribution just has been hammered.

There is no particular application, if you just look at it. It’s in a general product line, since everything has just dropped. So that’s we’re working on today. It’s really rebuilding that, some of that gets displaced with automotive ones that we’ve got a couple of years ago. So, we’ll start to see more automotive and some of our industrial design wins flow through. So even if it doesn’t recover, we’re starting to rebuild a lot of that with the design wins that we had for the last couple of years.

But overall, I think distribution is going to remain fairly flat, until really the macro events recover. I’m hoping that, that comes back in a much bigger sense, because there is no inventory buildup and we won’t see a lot of stuff in the channel that we tell there is unhealthy mix in the channel.

Unidentified Analyst

I know that your mix was moved maybe more towards consumer in the last few years, how that affects your seasonality this quarter and maybe into the fourth quarter, is it changed for you at all?

Douglas Hunter

Okay, so this is interesting. So the consumer market is actually, exactly a mirror image of the comms market, so the comms market actually does, it almost like IT guys gets their budget approved in January, February and then everybody feels like crazy in Q2 and Q3 and it figure out what they’ve got. The consumer market is really tuned a lot for different seasonality and different builds, one is Christmas, those who are back-to-school year, September built for computers really is Christmas and that’s Lunar New Year, and then there is various drops in there. So if you look at those one is Q4 and Q1 targeted, the other one is really Q2 and Q3. So I actually, I think consumer being bigger in consumer might help us with some of the linearity problems you’ve got in past, because it’s only about 13% of the total.

Unidentified Analyst

But it might flatten things out to the…

Unidentified Company Representative

Yeah, I think if you can get most things kind of an anti-cyclical right where they are kind of popping in and I think, but we got to build the consumer level bigger in the sense if it has to be a bigger base, when we get some of the upside that you’re doing some of the consumer account, it’s not as lumpy, as it has been in past, because right now you get the big consumer over and looks like it swaps some of the other product lines that we have. And we’ve seen that in the past.

Unidentified Analyst

Okay, then I just moving on to your largest end market networking, some of the weakest area is driven by macro as well and we’ve been hearing that from other semi companies, it is like that this wave of data that the amount of data that people are using on their cellphones and the other mobile devices is just exploding, but it doesn’t seem to be translating into chaos spend again, I guess everybody is kind of scratching their heads…

Unidentified Company Representative

First of all, yes it is – who is pushing that, say, in the U.S. we get kind of get do thinking that our models are worth is not. So the fact that the U.S. were data hungry where hog, if your data hog and we think data is free, but we all pay $100, $150 a month for our cellphone and appliances, but the whole service, right. You pick $5 or $4 a month in India you’re not buying lot of data on that.

So I’m not sure that I buy the LTE rolls out everywhere at the same pace, it’s going to be the portability, just like 3G was originally. I see it going up big in the United States, next is probably Europe and creates or even done, but that’s the different story. But Japan would do it, I mean not Japan, but give it to the China do when the specifications all about it’s done, but we don’t see comms as weak I think is everyone else, so our comps business from last couple of quarters are actually okay.

Our other business is back and the comms has been okay, and I think that’s been our effective, you’re still building 3G, 3G systems are going to be higher than LTE systems for a while, because all the emerging companies don’t have data yet, you will still see people redesign 3G, will LTE happen, absolutely, there is no question is going to happen. So we don’t see just that, but it also we maybe servicing a different market.

Unidentified Analyst

I think so it does, there’s LTE just layer on top or what are you seeing on 3G, once this finally does begin to ramp and how we should think about that?

Darin G. Billerbeck

Yeah, I mean you can see LTE a lot, so I’m the LTE guy, okay. I take my part everywhere. Las Vegas has LTE, this building has LTE, Portland does not. So what’s interesting, as in the difference in LTE and even if you look at horizons roll up and I actually stopped it and paused it, one of the (inaudible) to check it out, it set 4G LTE and it was only in big cities and there was nothing in the Midwest.

So they’re going to get full coverage across over that over time. But it going to go where people can pay for it, maybe New York, San Francisco, probably not Portland, right, but those kinds of areas. So, I think LTE is going to happen little later on top absolutely. There is no question. The growth, I don’t see LTE taken off as fast as everybody else, but…

Unidentified Analyst

But you’re not claiming on that?

Darin G. Billerbeck

But I’m not claiming on that, because we service the whole XO services the entire market. So what is 3G or LTE doesn’t matter. XO, ECP3, which is our comp devices primarily 3G and that’s why we’re focused on today, 3G and 2G network spaces because there’s a still lot of business there and there is people still do on cost reductions there.

Unidentified Analyst

And maybe just to help and best as understands the competitive dynamics, you mentioned that you do see different dynamics then maybe some of the other semis who do you (inaudible) with competitors? Your competitors in that space is that the Broadcom as a world or…?

Darin G. Billerbeck

No, actually those are – lot of those guys are complimented like Cavium, Broadcom, some of those guys are complementary staff well, which is good because many of them are going after the head nets and some are doing in full integration, others are doing most of the functionality inside of a microprocessor, our network process and then our service side with a smaller FPGA.

It does not mean there won’t be LTE Remote Radio Head technologies because those are still dominating, but these others ones are going to serve right now and that’s the one we’re targeting, and that’s why when we showed before like it’s a smaller market today. It will grow, but it’s not going to be humongous Remote Radio Head for LTE that has multi-mode systems and things like that.

Unidentified Analyst

So your primary focus is on the smaller cells in the head networks?

Darin G. Billerbeck

Absolutely.

Unidentified Analyst

And you see that is actually showing up in your 3G business?

Darin G. Billerbeck

A little bit, we have a couple of little wins that we have so far, but it hasn’t really taken off. I’ve heard that there is not as much as people think, and all we can do is, get the design wins for the future and right now that’s what we’re focused on, and I guess really that design win, and then getting the design wins that we had a couple of years ago into production as fast as we can. And actually that what heard is our ECP3 or larger densities 150K LUT that the density shipping into some of the 3G or some of our big new products that ramp, I heard in our margins. The higher of the densities that’s more competitive natures is a bad business.

Unidentified Analyst

Okay, maybe just shifting gears a little bit, you mentioned that the revenue run rate is not meeting kind of what you expected maybe a year-ago, and you’ve taken some actions just on – and I think you referenced some of the plant closing that you’ve done. But maybe just talk a little bit about what droves the reorganization activity that you guys have been undergoing? What are some expected benefits from that?

Darin G. Billerbeck

Yes, so when you talk reorg, we started in March of last year with R&D and we restructured R&D and pulled in all the R&D resources really into LSD and headquarters in (inaudible) Philippines. That’s a huge benefit, because we added about a 120,000 heads in Philippines at a lower overall run rate and we had prior to that, so that’s significant.

The second thing we did was we removed all of our operations, customer warehouse, everything overseas. We didn’t see the benefit in Q2. Q2 was a kind of a perfect storming because we didn’t get any benefits from all of our structural changes we’ve made in operation. We didn’t get any benefit from our gold to copper transitions, right. We didn’t get and then we had the offset of new products with older product falling off, so it was almost like a perfect storm of badness. And so this quarter at least, we started flowing through those operational improvements.

What we did in April of this year and also last quarter, I think in the June timeframe, we’re reduced the head count, just on performance based up that we had a focal to cut about 4% and then 5%. So we cut quite a few resources today. But the company still structured at about $300 million run rate, we’re setting at $280s. So we’re going to have to really look at streamlining that the overall structure for the margins and for the short-term $70 million and we’re prepared to do that.

Unidentified Analyst

Where some of the decision points are on that if you see things remain soft from a couple of quarters a little bit something?

Darin G. Billerbeck

Yeah, so the first couple of quarters we were like – let’s just start reducing with the natural things. I think you start getting into, if you can’t see (inaudible) really quick, you’re going to start doing the stuff. It maybe as a fulfill restructure of sales and marketing. And when we look at sales and marketing, think about went through R&D, went through operations other than SG&A. And so you starting to think about, okay how do I service to customers and the distributors and the geographies that I have, is there a better more efficient way to do sales and marketing in those areas.

Some of the stuffs is making versus buying IP. How much IP, if you’re not doing the high-end, you need 6-gig or 12-gig, 30 IP, do you need (inaudible) and all the interfaces.

So some of that as we’ve tuned our taste to the areas we can be successful, then we also have to think back on the things that we’re going to do from the technology and not overreach our capability and overreach our budget. So that’s the big challenge that we have right now, which is really resetting that from an SG&A perspective.

Unidentified Analyst

Just maybe see if there is any questions from the audience? If you look away from the mike, please.

Unidentified Analyst

Given your cash balance in the absence of debt, can you comment on M&A opportunities? And the second question would be – do you consider yourself as a target?

Darin G. Billerbeck

What’s the first question?

Unidentified Analyst

The M&A opportunities, I mean you have a lot of cash, right?

Darin G. Billerbeck

Yeah.

Unidentified Analyst

You have zero debt, so would a financial acquisition be on the place right now?

Darin G. Billerbeck

Absolutely, I think we’re looking all the time. I would argue that that SiliconBlue is unique for us, because they were fairly reasonably priced and they were targeted in the same place that we were and they’re already accretive, and that’s the good news on SiliconBlue. We’ve already made that accretive about a quarter before, we thought it would be, so that was good.

The issue that we have right now is, as you have to look at the one of the something is bigger than that, that thing give you more economy and the scale. And so we’re looking at all those adjacent areas or areas that we playing or we see people all the time. A fine example is, you’re going after automotive video, there maybe opportunities to align in that particular states, or even some of the video processing areas that we have, there is some alignments there.

The issue is all the analog mixed-signal companies’ think they are worth of fortune, right, and then these other areas maybe not so attractive. The other thing we got to do is, when you look an acquisition what we’re success for in SiliconBlue from the same technology. So we can leverage R&D, all the way across all the product lines. And that some of the mismatches you have with analog mixed-signals and some of those things you are on both technologies and you can’t leverage R&D.

So, we’re looking at M&A, and I’m sure that over time, there will be different targets than we see today. But again, we’ve got a couple of targets we were looking at. But today it’s probably not as good over time, because lot of people are saying, oh, our economy is bad and when it grows it will be better, we’ll see, right, because SiliconBlue had the same thing before we, I think we’ve talked to them for a year and a half before we actually pulled the trigger. So, yeah, we’re still looking at that.

Unidentified Analyst

And would you consider yourself as a target if there’s opportunity that comes out?

Darin G. Billerbeck

Our stock, always tell people this, are we in a process, no, right, whereas can people buy our stock everyday on the stock markets? Yes. Can people call me? Yes, all right. So, how we are targeted, I’m sure those people out there are looking at us, I wouldn’t doubt that. I think we have a great growth trajectory and I think we streamline our business. We can return a lot to our shareholders pretty significant. I think I’d rather wait for us to get into that note, so we can get a higher value and then try to do something when the whole macros a little depressed. But yeah, I mean, I didn’t come here to sell the company, but you can’t stop it if somebody comes in and does that.

Douglas Hunter

Yeah, the high class problem.

Unidentified Analyst

You talked about 52% gross margin and you also talked good news, bad news on the new products, which were quite grew about $15 million a quarter, not being headwind for gross margin, is that temporary and where at what scale do they start? Is that a permanent headwind or at some scale they move the model back to your gross margin?

Darin G. Billerbeck

Yeah, I mean let me talk about the perfect storm of badness, okay. So, we didn’t get any sort of the GAAP accounting systems, right. We made the changes in operations, but we can’t see them because they tied into your inventory. So, you don’t see them to flow into the inventory, so you are stuck right. So, we made those back in, I think we finished them in March, you still don’t see it. All those parts that we are shipping are 100% gold, right. All those wafer costs that we’re shipping, we bought a year – before even got here we bought those products, right.

So you got all those bad stuff going on. Do I think it’s permanent? No. But it’s going to take us time to drill out of it as we go through it. But the big thing we can control just within the control we have is, one is if you go your revenue absorption goes down that helps right way. But converting everything from gold to copper, we get some benefit in Q4, right and more of the benefits there. This quarter we’ll see a little benefit of the operations stuff, because we are falling stuff through, but in Q4 you’ll see all of it.

And so, it’s really just a – it’s a balance of these new products you got hit with the double whammy and everything that’s going on, and they grew really faster and there is nothing to offset them. So, I think by next year, you’re going to see some of that distribution start to fell off, this year will come back and then some of the cost structures will help the margins in the things that we’re selling.

And then the other thing that most people don’t want to talk about, but I’ll talk about it is you had to hold your pricing, right. You can’t sit there, if you have great pricing in certain places then you go to have kind of the way those to hold on it and I think that’s the challenge, so while people just expect, but if you gave those forward-looking prices too far then you’re going to hold the line to get to these things back. So, we’re going to have a new combination of all those things and then be careful not tell these customers since we go through it. So we have quick customers and everybody on everything that we do.

Unidentified Analyst

Well, basically we’re running a little bit over time, but I’d like to thank again Lattice for joining us today.

Darin G. Billerbeck

Okay, thank you, guys. I know it’s been a long show.

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Source: Lattice Semiconductor's CEO Presents at Deutsche Bank's dbAccess 2012 Technology Conference (Transcript)
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