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Lattice Semiconductor Corporation (NASDAQ:LSCC)

Q3 2012 Earnings Conference Call

October 18, 2012, 17:00 PM ET

Executives

Darin Billerbeck -- President and CEO

Joe Bedewi -- CFO

David Pasquale -- Global IR Partners

Analysts

Nick Clare -- Baird

Ruben Roy -- Mizuho Securities

Richard Shannon -- Craig-Hallum

Ian Ing -- Lazard Capital Markets

Bill Dezellem -- Tieton Capital

David Duley -- Steelhead Securities

Operator

Good evening. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Lattice Semiconductor Third 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'll now turn the call over to our host, Mr. David Pasquale, Global IR Partners. Sir, you may begin.

David Pasquale -- Global IR Partners

Thank you, operator. Welcome everyone to Lattice Semiconductor's third quarter 2012 results conference call. Joining us from the Company today are Mr. Darin Billerbeck, the Company's President and CEO; and Mr. Joe Bedewi, Lattice's Chief Financial Officer. Both executives will be available for Q&A after the prepared comments.

If you have not yet received a copy of today's results release, please 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 statements. 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 fourth 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 reports on Form 10-Q. The Company disclaims any obligation to publicly update or revise any such forward-looking statements to reflect events or circumstances that occur after this call. Our prepared remarks also will be presented within the requirements of SEC Regulation G regarding generally accepted accounting principles or GAAP.

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

Darin Billerbeck

Thank you, David, and thanks to everyone for joining us on our call today. In terms of Q3, revenue was $70.9 million. This is in line with our guidance and reflects the impact of macro weakness on our comps business. The comps softness is muting the positive impact of our continued success of our new products in both consumer and non-consumer segments.

From an operational perspective, we are finally beginning to see the benefit of our prior cost reduction actions. Those actions positively impacted Q3 and helped us deliver a 54.4% gross margin. We do not expect the business environment to change significantly over the near term. We expect continued pressure on our comps business and continued weakness in Europe.

Given our outlook, we are proactively taking additional restructuring actions to further streamline our organization and to focus our strategy in pursuing the low-density FPGA markets. The restructuring is primarily focused on consolidating sales and marketing in both the US and in Europe.

This includes the elimination of several subscale sites and middle management positions in sales and marketing. We are focusing our team on having the right people with the right experience in the right locations to give Lattice the best chance of winning. This is essential to our future's success.

We expect our latest actions to result in a 13% workforce reduction. This is on top of the 5% headcount reduction announced in Q2. I want to be clear that while we are working to better align our operating costs to the current business environment, we remain fully committed to executing on our product roadmaps and as always, we'll continue to provide excellent customer support.

In terms of added color for the third quarter, the revenue mix of new, mainstream and mature was 26%, 54% and 20% of revenue respectively in Q3. Revenues from our new product was up 34% quarter-on-quarter, reflecting the strength in our ECP3 and iCE40 product family shipments.

Revenues from new products was up 95% in Q3 2012 versus Q2 of 2011. New product growth from ECP3, MachXO, iCE40 and our power management devices is the key to our future growth. Q3 new product growth reflects our momentum in both consumer and non-consumer areas and includes several non-handset opportunities.

Mainstream products were down about 10% quarter-on-quarter. This was due to a specific customer placing higher MachXO orders in Q2 that did not repeat in Q3. Revenues from our mature product was down about 3% when compared to prior quarter due to softness in the industrial market. The revenue mix between FPGA and PLD products was 37% and 63% respectively.

Our ECP3 family continued to perform well and is driving growth in our FPGA segment. On the PLD side, we benefitted from growth in our iCE family. iCE40 is now the fastest ramping product in Lattice's history.

On a geographic basis revenue from Asia, including Japan, was about 69% of the total revenue slightly lower on an absolute dollar basis compared to Q2. Revenue from North America was about 13% of the total revenue, up about 3% compared to last quarter. Europe was 18% of the total revenue, up about 3% compared to Q2.

On an end-market basis, communications represented 47% of revenue in Q3 compared to 51% in Q2. This reflects ongoing macro weakness in the comps segment. We do anticipate our comps business to be slightly lower over time, as we increase the Company's penetration into other markets including industrial, consumer, auto and medical.

Computing was relatively flat at 12% of the revenue in Q3 as compared to 12% in Q2. The slight decline on an absolute dollar basis was due to a decline in the server market. Industrial and other was flat at 27% of revenue in Q3 and in Q2. Consumer increased to 14% of revenue in Q3 from 10% in Q2, primarily reflecting the continued ramp of our iCE family. As we have previously stated, the segment will be highly variable based on consumer product lifecycles.

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

Joe Bedewi

Thanks, Darin. As noted earlier, revenue for the third quarter was 70.9 million, leveled with the 70.8 million experienced in Q2 and a decrease of 13.2% from the year-ago period. Gross margin for Q3 was 54.4% compared to 52.3% in the prior quarter and 58.6% in the year-ago period. The improvement is due primarily to manufacturing cost reduction actions.

Total operating expenses for the third quarter came in at 38.9 million. Expenses were higher than guidance due to a one-time event and some [spent] timing. We accelerated mass charges to enable a stronger ramp for our consumer products and we experienced un-forecasted severance charges.

As Darin's noted earlier, we are taking steps to restructure our sales and marketing functions. We anticipate the cost of this restructuring to be approximately $6 million, which will include severance and facilities closure-related expenses. We expect 5.5 million of this cost to be recognized in the fourth quarter with the remainder to be recognized in Q1. The impact of this restructure will be a reduction in operational spending of approximately $12 million annually.

Looking back to Q3, we experienced a net loss of 2.2 million or $0.02 for basic and diluted share as compared to a net loss of 12.5 million or $0.11 for basic and diluted share in the second quarter, and compared to net income of 13.3 million or $0.11 per diluted share a year-ago period.

The second quarter of 2012 included a tax provision of 10.5 million or $0.09 per basic and diluted share related to the implementation of our new global tax structure. Our tax provision declined to 1.9 million in Q3. Our cash tax impact is minimal due to our continuing utilization of NOLs.

We expect diluted share count to be approximately 116.8 million shares. The share count reflects the retirement of approximately 1.391 million shares purchased at a cost of 5.4 million in the third quarter. Our year-to-date total shares repurchased is now at 2.73 million shares purchased at a cost of 12.4 million under our previously announced 2012 stock buyback program.

We ended the quarter with a cash and cash equivalents and short-term and long-term securities balance of 190.9 million, an increase of 1.7 million over the prior June quarter. And we continue to have no debt. Accounts receivable at October 1 was 56 million compared to 60.4 million at the end of Q2. Days sales outstanding was 71 days compared to 77 days last quarter.

Inventory at September 29, 2012 was 37.4 million compared to 37.1 million last quarter. Most of inventory now stands at 3.5 months compared to 3.3 months at the end of Q2 2012. We spent approximately 3.2 million on capital expenditures and 5.9 million on depreciation and amortization expense during the third quarter compared to 4.6 million and 5.2 million respectively in Q2.

I'll now turn things back over to Darin for the fourth quarter business outlook.

Darin Billerbeck

Thank you, Joe. While we remain in a challenging environment, we acted this quarter to streamline the Company for long-term success. Our goal is to be number one in the low-density FPGA market. We continue to focus on reducing our costs while improving our efficiencies of the Company.

Let me now turn to our fourth quarter 2012 expectations. We expect revenues to be approximately flat, plus or minus 2% compared to Q3. Q4 gross margins are expected to be approximately 53% plus or minus 2 points. Total operating expenses are expected to be approximately $43 million including approximately $5.5 million in restructuring charges.

So this concludes our prepared remarks. Operator, we'll now be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Tristan Gerra with Baird.

Darin Billerbeck

Hi, Tristan Gerra.

Joe Bedewi

Hi, Tristan.

Nick Clare -- Baird

Hi. This is actually Nick calling in for Tristan. Can you guys hear me okay?

Darin Billerbeck

Yep.

Joe Bedewi

Yep.

Nick Clare -- Baird

Okay, great. So I guess first, can you quantify how 65-nanometer products did during the quarter?

Darin Billerbeck

Well, all of our products shipping today are 65-nanometer, expect for iCE, right. So iCE40 is the only one. So if you exclude that, everything was 65 or over.

Nick Clare -- Baird

Okay, all right. Well, then if you look at I guess the 90-nanometer node, is that still growing for you?

Darin Billerbeck

Okay, that's – hold on a second, I got to go back and look at that.

Joe Bedewi

Mostly on mainstream.

Darin Billerbeck

Yeah, that's mainstream. It continues to grow. We continue to get to a lot of quotes and orders for that. So I don't expect that to climb significantly. Some of the older products beyond that will. You would expect them to naturally decline over time. But on 90-nanometer, probably not. 90 and 60 are kind of peaking today and they'll stay kind of flat to that level for quite some time if they follow traditional FPGA.

Nick Clare -- Baird

Okay. How would you or I guess when would you expect Lattice to participate with LTE deployments?

Darin Billerbeck

Okay. So let's not forget that people think of us as these high-end ECP3, ECP4 product that get into that market being 6 gig SERDES, but a lot of our shipments are still XO and XO2, which are controlled playing for those. So we do ship in those today. We just don't ship in the high end with 3 plus gig SERDES devices.

Nick Clare -- Baird

Okay. Given you just announced another restructuring effort to further cut costs, it's clear now that the prior is paying off. Should revenue growth or the macro remain muted again next year, how much more room is there to cut expenses further beyond what you're guiding now for 4Q?

Darin Billerbeck

Yeah, there's always room to cut if business conditions change. I think what we've tried to do is balance the resources that we have today with the ability to grow and then leverage that from where we're at today, leverage that outward. We believe that what we've done today gives us a great balance between what we do for the US core competency sites and then our higher value, lower cost sites over in Shanghai and also in the Philippines.

And so we're really focused on that balance. Over time, I would expect the majority of our growth to occur overseas but we will still be showing up some capabilities in our San Jose site and also in [Oregon] site as well. The biggest change that we had was really bringing in the satellite sites that we had into either LSV or LHQ. That was the primarily focus of this reduction. There were other smaller things that happened worldwide, but that was our primarily focus was really for streamlining and then we'll rebuild some of that back in the US and also some offshore.

Nick Clare -- Baird

Okay. Kind of looking at the SiliconBlue part of the business, Xilinx tried entering kind of the mobile phone market a few years ago with its CoolRunner chip and it really didn't gain much traction. I'm just kind of curious what leads you to believe that the SiliconBlue stuff, what it is – what leads it to be successful in an area whereas a peer could not be?

Darin Billerbeck

You have to be committed and you have to be focused. That's the first thing. I think Xilinx spent a lot of their effort as I would if I were them on the higher end FPGA. For us it's about smartphones and it's about the evolutions of tablets and other things that are evolving in a very rapid rate. And so what you're starting to see is in a smartphone for instance, you might have multiple different sensors on that phone and you have to keep up the speed with all that.

So when you see a platform that it's driven once every year and a half or two years from the high end platform for smartphones or for some of the tablets, it's hard for them to keep up with the, let's say the sensor hubs and some of the other features, innovations. We provide a very unique, low cost FPGA that is both fast and it also provides the IO count they need at the cost structure.

And so I believe that we'll be more successful than everyone else because we understand it and it also takes a lot of rigor to do a lot of the design service. You can't just hand it like you do through distribution to a smartphone manufacturer. So it takes a lot of energy and effort and focus plus you have to have some expertise in that market.

Nick Clare -- Baird

Okay. Then lastly I guess, can you speak to any update on SiliconBlue design wins for the quarter, any type of contribution to give to your 4Q rev guidance?

Darin Billerbeck

Yeah, in fact the (inaudible) that we have, the SiliconBlue is now close to the second highest as far as that we are starting to see design win momentum for. It was difficult for us at first because we didn't have all the collateral and we didn't have everything aligned to be able to take SiliconBlue devices, being the iCE family and drive them through distributions. We now have that and we're starting to see the benefits of both focusing on consumers but also focusing on the broader market. A lot of people think iCE40 can only play in a smartphone or a tablet and that's not true. iCE40 can play in just about every market segment that we play in today.

Nick Clare -- Baird

Okay, great. Thanks, guys. That was it for me.

Darin Billerbeck

All right, thanks.

Operator

Our next question comes from Ruben Roy with Mizuho Securities.

Darin Billerbeck

Hi, Ruben.

Ruben Roy -- Mizuho Securities

Hey, Darin. Hi, Joe. I had a question on the iCE40 stuff that you were just discussing. In Q2 you had a bit of a falloff in the consumer revenue mostly related to non-iCE revenues and obviously a nice jump back here in Q3. Was that all driven by iCE40, the growth in the consumer business?

Darin Billerbeck

It's primarily driven by iCE40 today and we do have some shipments still on 65, but they're minimal and most of those are in some of the older design wins. But we are beginning to get some traction of the iCE40 in some of the larger design wins that we've been working on for about the last six to nine months.

Ruben Roy -- Mizuho Securities

Okay. And so as you start to see the design activity pick up with iCE40, do you have a sense – I think when you look at kind of the mature stuff obviously not great growth there and I think the larger PLD companies talk about sort of in the high single digit growth for the industry over the next several years. Have you taken a stab at where you're consumer business could end up looking just from a CAGR perspective, given the design activity that you're looking at?

Darin Billerbeck

Yeah, a lot bigger than all of that, that's for sure. So we look at it. There's – again, this is a new market but when you kind of trade a new market with a [hand] that's 1 billion units, we don't have to get much to make a pretty big name for our Company which is why we're focused on it. But I think the key for us is to get more than one substantial win that can balance and then you can grow, because if you just have one, it's very variable. So what we're trying to do at this point is really build the base for consumer.

And what we're finding is actually outside of consumers, there may be a pretty large base with this also, including servers, including some of the networks, including some places where they may not need the features of MachXO2 or even XO, they just need simple Blue Logic or IO expanders.

So we're starting to find some other homes. So our challenge is going to be able to grow that base and then have consumer just pile on top. And so we're building the Company's structure as if this consumer – the [variable] consumer doesn't exists. So when it happens, it's an upside. When it doesn't happen, it's part of our [POR].

Ruben Roy -- Mizuho Securities

Great. Okay. Thanks for that. And then just finally for Joe, on the gross margin a nice uptick here based on some of the efforts that you were working on over the course of the year. Still kind of a wide range of guidance if you look at the midpoint and then add, I guess it was plus or minus 200 basis points. So what's driving the uncertainty at this point and the visibility in the gross margins?

Joe Bedewi

It is still the same story we said before, it's product and customer mix, highly volatile still. We've got our handle around the cost reductions and those are starting to flow through nicely, but we still have variability there.

Ruben Roy -- Mizuho Securities

Okay, all right, I got it. Okay, well, that's all I had.

Joe Bedewi

Okay.

Ruben Roy -- Mizuho Securities

Thank you.

Darin Billerbeck

Thanks.

Operator

Our next question comes from Richard Shannon with Craig-Hallum.

Darin Billerbeck

Hi, Richard.

Joe Bedewi

Hey, Richard.

Richard Shannon – Craig-Hallum

Hey, Darin, Joe. How are you guys doing?

Darin Billerbeck

Good.

Richard Shannon – Craig-Hallum

Darin, I think maybe I'd like to parse one of your statements in your prepared remarks regarding commentary on the communications business. If I caught your phrase correctly it said you expect the communications business to be lower over time as you focus on other markets. Can you help us understand exactly what you mean by that? Are you focusing less investment in that vertical? What does that mean about the product roadmaps in the comp space?

Darin Billerbeck

Yes, we're not abandoning comps in any way. That's our largest market. So we're going to continue to service that market as we always have. The difference – the reason I'm bringing that comment to everyone is the fact that there's other markets around it that had a higher growth rate. And when those things start to kick in, you're going to start to see comps as a percentage to begin decrease and people shouldn't take that as we're not successful in comps, it just mean that comps may not grow as fast as some of the others markets we're going into.

Richard Shannon – Craig-Hallum

Okay. So that wasn't lower on dollars, that was on percent of sale then?

Joe Bedewi

Yeah, that's exactly correct. And we have a lot of different products that fit within the comps market. So we're not trying to establish a record that we're getting out of that.

Richard Shannon – Craig-Hallum

Okay. So we should still expect to see an ECP4 or whatever you want to call that at some point down the road then?

Joe Bedewi

Absolutely.

Richard Shannon – Craig-Hallum

Okay, good. I wanted to make sure I got that one right. Let's see, second of all, I'm not sure if you got asked this earlier, I had to jump off just briefly there, but looking at the OpEx trajectory as you get through these restructuring charges. I saw your filing that said you expect a reduction in OpEx of about 12.3 million. How should we think about a starting point in OpEx including that $0.5 million charge you expect just starting in the first quarter.

Joe Bedewi

So we're going to get the restructuring. You saw that in Q4 and there will be some small restructuring go through in Q1. We'll start to see the bulk of that $12 million coming in the second quarter going forward. So we still have some lingering transitions happening in Q1.

Richard Shannon – Craig-Hallum

Okay. So to try to put numbers for that commentary, if I take out the $5.5 million of charges in the fourth quarter here you get about a 30 million or 36.5 million – 37.5 million run rate. Do we think about a number that actually gets maybe $3 million per quarter lower than that.

Joe Bedewi

Correct.

Richard Shannon – Craig-Hallum

Okay, all right. Fair enough then. Darin, maybe a question for you on the iCE products. I think your press release said you did about 3 million units of iCE 40-nanometer. Did I gather from your previous comments that that largely came from a single large volume win?

Darin Billerbeck

It's primarily one win, but there's a lot of other smaller wins within there. So it's – there's different ramp rates depending on where they are and the maturation of their ramps and their product launches. So, yeah, it's primarily driven by one specific but there are a lot of other client wins and early involvement in that number.

Richard Shannon – Craig-Hallum

Okay. Darin, care to take a guess on where we could be hearing from you and say the middle of next year about the number of designs and number of units you might be selling with iCE40 or iCE products in general, how should we think about the potential there?

Darin Billerbeck

We have a lot of irons in the fire for sure, right. And we have a lot of focus on that market for sure. But we don't give out forward-looking guidance on that. But I think at the beginning we want to be looking at some pretty high growth rates until we get to a stable unit shipment. But this thing is shipping at volumes that the Company hasn't seen. So when you think about that 3 million units and at the end of a quarter very, very quickly, those are pretty big run rates.

So when we look at it from that perspective, we have to prepare ourselves with both the upside potential of that but also the variability. Because one of the challenges in this market is people start up really, really fast and then they get into the market and they shut it down really fast. So we got to be prepared with inventory positions, to be able to ramp quickly and also to be able to -- not to put stuff in the packages, so we have (inaudible) for any other opportunities that are out there. So that's the challenge that we look for. But iCE will be our fastest growth product, I believe, next year.

Richard Shannon – Craig-Hallum

Okay, all right. Fair enough. And then just lastly on your guidance for the fourth quarter, can you give us your expectations on relative growth by end markets, specifically comps please?

Darin Billerbeck

Yeah, I think comps is -- from what I can see, comps looks relatively flat to us. I think we're continuing to ship and see existing marketplace that we've seen. When I look at everybody else, look at the [DTE] and look at various press releases that we've seen, we don't see a massive decline in any way. But we don't see also is recovering back some of the levels with that before. Consumer, we think, will grow because I think there's more opportunity. In a down environment, consumer seems to always do well.

So I would expect us to continue to grow and consumer comps will be relative flat and the rest of the market recovers as the macro recovers. I think industrial was down a little bit. But again Europe was down so far since last year that even (inaudible) is still down a lot, right. Because I think it came up for us maybe 3% but that doesn’t move the needle compared to where it was before. So we're still kind of anxious to see when Europe actually recovers and it seems as though China's distribution if you haven't heard that from other calls, China's distribution seems to be relative flat also.

Richard Shannon – Craig-Hallum

Okay, fair enough. I appreciate the stuff, guys. I'll jump out of line. Thanks.

Darin Billerbeck

Thanks, Richard.

Operator

(Operator Instructions). Our next question comes from Ian Ing with Lazard Capital Markets.

Darin Billerbeck

Hi, Ian.

Joe Bedewi

Hi, Ian.

Ian Ing – Lazard Capital Markets

Hey, Darin. Hey, Joe. So the gross margin guidance, I mean wide range but a little bit down actually at the midpoint. I mean is this largely mix shift or are there some other factors?

Joe Bedewi

There's costs reductions baked in there still. It is largely mix shift and we had a couple of one-time events that hit COGS this quarter that will not repeat, there were less than a point but we're being conservative.

Ian Ing – Lazard Capital Markets

I see. And in the past, Joe, you've talked about sort of a 2.5 point gross margin tailwinds through several factors in coming quarters. I mean how much of that are we through and how much of that is – still has a head, would you say?

Joe Bedewi

We still have some cost reductions that are flowing through. We expect to see some of that in Q4 and potentially in Q1 as inventory run through. So we still believe there's some left.

Ian Ing – Lazard Capital Markets

Okay. And then shifting over to consumer win here, you said one particular customer. Would you say that all the regional platforms for that customer have ramped at this point or still some – I have to come to the market still and just play out?

Joe Bedewi

Very few have ramped to a significant level, right? We do have to focus our design win opportunities not only on the one customer but also on the platforms of many other. So there's a lot of platform opportunities out there. So the key is getting into a platform and then go all over the place regional. And so that's what we're focused on today. But the answer is no. We haven't ramped in a large way the platforms that we're in today.

Ian Ing – Lazard Capital Markets

Okay, sure. And with the restructure, do you have a sort of a sense of the new operating breakeven what revenue generates?

Darin Billerbeck

The new operating breakeven is in the 270, 280 range.

Ian Ing – Lazard Capital Markets

Okay, great. And my last question for now is this headcount reduction and low density alignment, perhaps you could talk about is there any sort of end markets or applications being deemphasized at this point?

Darin Billerbeck

No markets being deemphasized, but the approach to the market is. So, for instance, in some cases what we're finding is that it's better for us to offer mid to low destiny communication devices or very low power and very low costs versus trying to go up and provide the higher LED densities with some of the higher frequencies and higher SERDES. So what we're trying to do is really find the areas within the markets that we can dominate versus this kind of sort of play. And so XO, XO2 and iCE are all capable of doing things within the comps market, albeit in a smaller level than you would with ECP3 but ECP3 is still very successful in those markets for more of a control plane application. So expect us to be relevant in that particular application, probably not so relevant in a 12 gig, 20 gig SERDES environment.

Ian Ing – Lazard Capital Markets

Okay. So it sounds like you'll still go after 6 gig applications and lower and you have ECP3 out in the market now. Do you have everything in place to continue that roadmap and get that many customers, et cetera, get the process and the manufacturing partnership, et cetera?

Darin Billerbeck

Yeah, we don't have any issues. That product's been out for a long time. I think for us like you said, we really want to be looking at 3 gig and then less than 6 gig over time and then finding the areas where the head net gives us opportunities. There's a huge opportunity today outside of the big fast remote radio heads in both the head net opportunities from (inaudible) to all the different alternatives that are being offered. So we're primarily focused on more the areas that align to the less densities and performance that we can offer.

Ian Ing – Lazard Capital Markets

How do you see small cells playing out the next few years?

Darin Billerbeck

Maybe I'm different than others. I don't see that dominating in the next few years. I think it's a potential that everybody has to get into and I think there are so many players out there. But it has to be aligned and it has to be complementary to the remote radio heads. And you'll hear different opinions from different people. But I think that will grow moderately over time. And at some point in time, you're going to have a mixture of high end remote radio heads with the head net type complementary items that again add bandwidth.

But I haven't seen as much growth in that and not to be too far off, I think that's expected with where they are in the maturation phase of those devices. But I respect that makes logical sense. I don't know if you guys – I actually have a device in my house that enable me to get higher bandwidth. And so some of them are very well done, I hear others that are not so well done. So we'll see how that emerges. But I think it's a great opportunity for us with a low density, low power, (inaudible) innovation and maybe not as high of the expense of some of the big expensive FPGA devices.

Ian Ing – Lazard Capital Markets

Okay, that's it from me. Thank a lot guys. Thanks Joe.

Joe Bedewi

Thanks.

Operator

Our next question comes from Bill Dezellem with Tieton Capital.

Darin Billerbeck

Hey, Bill.

Bill Dezellem – Tieton Capital

Good afternoon. A couple of questions here. First of all, the low density PLD decline that you're seeing. Do you attribute that specifically to the economy or do you believe there is some market share phenomenon or loss taking place, or is there something else coming into play that's relevant in a discussion?

Darin Billerbeck

I think there's a number of factors that [inaudible] to decrease. And it all actually goes back to Tsunami days, right? So when we had this Tsunami in Japan a year ago, I think there was a lot of people that bought product not only from the newer products areas but also for some of the old [fields]. And I believe that what ended up happening was we – and I had mentioned this many times on the call where I say we weren't seeing a decline in some of the PLD price that we would naturally model in, because we naturally modeled a 5% to 7% or so decline and we weren't seeing that last year. And all of a sudden this year, it's double that. And so people are concerned.

So I think there is -- some of that was by heads of 2011 that I think affected everybody. The other thing is some of these products are very old and you are – that basis is running out. And there's also things like iCE today that can actually be PLD like. So you got an iCE product that's very simplistic in nature, the cost structure is very similar. So you're going to start to see some of the transition, some of the older PLDs to newer devices today. So I don't know that it's an unnatural phenomenon but I think for us there was a couple of things that happened, macro event and also Tsunami that I'm sure accelerated this normal decline.

Bill Dezellem – Tieton Capital

Thank you. And I guess if we take that forward, do you anticipate that rate of decline then to start to normalize to that 5 to 7% that you would model in, or do we continue for a period of time at a higher rate?

Darin Billerbeck

Well, I would say no. I think it models at a natural rate that's it's been at before. I would argue it would probably slowdown if we accelerate it that way. The macro is driving people not to use PLDs. They didn't supply it because of demand issues, and it comes back when their demand comes back. So there is an artifact of macros that's in there, but we're going to go ahead and model it the way we always have and I think that's the only way we can based on run rates over the history of those products. So I don't expect an acceleration of that. I expect what we have today is what we're going to get. And if the macro increased as you could see, the PLD market's flat for a year-on-year is similar to what it did in 2011. I think in 2010 also, it accelerated upwards too.

Bill Dezellem – Tieton Capital

Thank you. I'm sorry…

Darin Billerbeck

No, go ahead.

Bill Dezellem – Tieton Capital

And then shifting to an entirely different question. There is a history where the Chinese telecom equipment company have cut their orders way back in the fourth quarter. What's the risk that that happens to this Q4 and do you already have that modeled in, and it's being offset by some other positives or does this year appear different?

Darin Billerbeck

No, I think what you just said is accurate. I think that's what we're modeling in. We're going to believe that the last two years is going to be the same as this year and we have to have growth from other segments, and we were expecting that.

Bill Dezellem – Tieton Capital

And so if we have an abnormality and history does not repeat itself this year, that actually would actually be upside for you then?

Darin Billerbeck

Yes, that's correct.

Bill Dezellem – Tieton Capital

Great.

Darin Billerbeck

We're trying to be proactive here. I'm laughing because a lot of people say, okay, what's the trend? Two out of three years it's been down and so is it going to be another one out of three or is it two out of – so we're going to model in the two out of three years being accurate.

Bill Dezellem – Tieton Capital

That's very helpful. Thank you and good luck with the quarter.

Darin Billerbeck

All right. Thank you. Thanks.

Operator

(Operator Instructions). Our next question comes from David Duley with Steelhead Securities.

David Duley – Steelhead Securities

Thanks. Just a couple of quick questions. Will all the $12 million savings that you plan from this restructuring come in the SG&A line or where will it be dispersed?

Joe Bedewi

There is some within the R&D line also. The majority will be SG&A.

David Duley – Steelhead Securities

Okay. Now is there a chance with – once you get a lot of these new products out the door that you'll be able to lower the R&D expense from this $19 million, $20 million level or should we just get used to that level?

Joe Bedewi

You probably want to get used to that level, because again remember we had to go through a streamlining with an R&D about a year and a half ago. We're still rebuilding that. That will be leveragable as we move up, but we will continue to invest in R&D to get more our products out in the market segment we serve. And our plan today is not to back off of our R&D spending and to continue to try to develop as many products that we can in the markets we serve.

David Duley – Steelhead Securities

Okay. And there was something about mass cost, those are in the COGS line?

Joe Bedewi

No. They are in operational spending.

David Duley – Steelhead Securities

Okay. So as far as operational spending, how -- is there a percentage that you can help us understand how big the mass costs are and how they variable around, any sort of color on that area would be helpful?

Darin Billerbeck

Well on 40-nanometer, the mass costs are about $1 million. All right, so every time we turn a product about $1 million then we accelerate one of those into Q2 that we originally had forecasted for Q3. I'm sorry, Q3 that we originally forecasted for Q4 and that's a good thing because that means we're going to get that product out faster than we had. But we are constantly looking at that and we're not going to penny-wise and (inaudible) about getting products to the market in that sense.

David Duley – Steelhead Securities

The absolute level of mass costs in a given quarter is at a $5 million or a $10 million, I'm just trying to figure out how much that is of your cost structure?

Darin Billerbeck

It's highly variable depending on when we tape out. So that's a tough one to call, but it's not $5 million.

Joe Bedewi

That would be by products.

David Duley – Steelhead Securities

Okay. I'm just curious about the industrial business. I can't remember your comments if it was up this quarter. I got my little charts, said that it was up a little bit but are there any signs of life in that business coming back as this point for you or is there any pre-order activity that you can point to?

Darin Billerbeck

I think it does, it comes back. It's a big focus for us, but it's also design win oriented. There's a lot of industrial visits we've had over the years with some of the PLD products and even some of the FPJ products. Where we can serve industrial in a big way is with the same products that we service with comps being ECP3. When you start doing surveillance and video and some of the switching and some of the other applications that we have, those are huge. And remember we've been working on those for years. So that's not a new initiative for us. And we had a plan – maybe a year and a half what I call the ECP research which was selling ECP3 outside of comps.

And the reason we did that was because we felt like our collateral to be able to push that into that particular product into a broader base was mature enough, because it's a very resources intensive cell. So we had to make sure that we were mature enough in the product and mature enough in the collateral and sales force so we could spring that out into the industrial market. We expect to be bigger in the industrial market over time as more of our products are industrial, qualified and also designed.

David Duley – Steelhead Securities

And you feel it's flat quarter-on-quarter by the way?

Darin Billerbeck

Yeah.

David Duley – Steelhead Securities

Okay. And you expect it to be flat or down little bit next quarter?

Darin Billerbeck

Yes. That's what in the model.

David Duley – Steelhead Securities

And is that the sector where you physically have inventory in the channel or maybe you can comment about what channel inventory you do have and what you can see there?

Darin Billerbeck

That's the sector that's typically served by (inaudible) for the most part and we have not seen an inordinate growth of inventory on the channel (inaudible).

David Duley – Steelhead Securities

Okay, thank you.

Operator

Our next question comes from the line of Richard Shannon with Craig-Hallum.

Darin Billerbeck

Hey, Richard.

Richard Shannon -- Craig-Hallum

Just got few quick follow-ups. Darin I'm asking you to look into your crystal ball passed this current quarter, if you can give us a sense of how you view seasonality especially given your higher consumer exposure then in the past. What would you typically expect, I'm not asking for a specific guidance, but what would you typically expect in the first quarter?

Darin Billerbeck

Actually here what's really interesting? So consumer isn't seasonal. It's not like we used to think. So in the old days, other companies that I've been at there were two things that triggers a lot of what we call consumer backed, but it was actually more computing which was back to school and Lunar New Year and then added Christmas in there. Consumer doesn't do that at all, at least the consumer if you're looking at the handset business. It launches when they're ready and in some cases, people wait for other people to launch and they launch right after it.

So I don't see this as a Christmas or Lunar New Year phenomenon. It just happens on a regular basis and we're seeing that with some of the customer we serve today where they'll ramp in November for Lunar New Year, but they're also ramping next January and February because they have a new market and a new product that they want to go ahead and go after. So we're not seeing seasonality in consumer but there still is it looks like seasonality in comps.

Richard Shannon -- Craig-Hallum

Okay, all right, fair enough. And then Joe, a quick question for you. I think a previous caller asked you about breakeven levels and did some quick math here based on the OpEx numbers you had mentioned to me earlier and I was coming up with the gross margin that fits into that model of 52%, which seemed kind of low. What would the whole breakeven model look like at that 270, 280 annual revenue level?

Joe Bedewi

What do you mean by the whole model, I'm sorry? That is a conservative number.

Richard Shannon -- Craig-Hallum

Okay. 52 seemed low, but are you telling me that's about right then, 52?

Joe Bedewi

No. I'm telling you that where we modeled the breakeven at for going forward depending upon mix of course, that would imply a pretty healthy consumer mix and a pretty healthy mix of our new products.

Richard Shannon -- Craig-Hallum

Okay, that's great. Thanks a lot guys, appreciate it.

Darin Billerbeck

Thanks, Richard.

Operator

There appear to be no further questions at this time. I'll now turn the call back over to the CEO, Mr. Darin Billerbeck. Please go ahead, sir.

Darin Billerbeck

Okay. I just want to thank everybody for joining us on the call today. Obviously, it's a difficult environment for any of us to call. I think the thing is that we have been focused on are the right things, being streamlining the Company for future success and then focusing on the things that we control which are specifically design wins and then servicing the customers that we have today. So thanks again.

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