David Pasquale - Global IR Partners Darin Billerbeck - President, CEO Joe Bedewi - CFO, Corporate VP

Tristan Gerra - Baird Joe Gall - FBR Capital Markets Sundeep Bajikar - Jefferies Richard Shannon - Craig-Hallum Bill Dezellem - Tieton Capital Management David Duley - Steelhead Todd Morgan - Jefferies

Good afternoon. My name is Amy and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lattice Semiconductor's First Quarter 2015 Results 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 period. [Operator Instructions] Thank you. David Pasquale, of Global IR Partners, you may begin your conference.

Thank you, operator. Welcome everyone to Lattice Semiconductor's first quarter 2015 results conference call. Joining us from the company today are Mr. Darin Billerbeck, Lattice'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 email Global IR Partners using lscc@globalirpartners.com or you can get a copy of the release off of the Investor Relations section of Lattice Semiconductor's Web site. Before we begin the formal remarks, I'll review the Safe Harbor statement. Is our intention that this call will comply with the requirement of SEC Regulation FD. This call includes and constitutes the company's official guidance for the fiscal second quarter and full year 2015. 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 the 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 2014 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 requirement of SEC Regulation G regarding generally accepted accounting principles or GAAP. Some financial information presented by us during this will be provided on both a GAAP and a non-GAAP basis by disclosing certain non-GAAP information management intends to provide investors with additional information to permit further analysis of the company's performance for results and underlying trends. Management uses non-GAAP measures to better asses operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared and in accordance with GAAP. If we use any non-GAAP financial measures during the call, you will find that the required presentation of an reconciliation to the most directly comparable GAAP financial measure in the company's earnings press release. I would now like to turn the call over to Mr. Darin Billerbeck. Please go ahead, sir.

Thank you, David, and thanks for everyone for joining us our call today. Our goal for today is to update everyone on our current business and our longer-term revenue targets for 2015. We understand with the Silicon Image acquisition there's a lot of new data. The first big take away from today's call is that we feel great about the Silicon Image acquisition and our combined business outlook. We are modeling midpoint non-GAAP revenue for approximately $485 million for the full year 2015 and will continue to work to achieve above industry average growth. To put this into perspective, we've already grown revenue from $279 million for the full-year 2012 to $330 million in 2013 to $366 million in 2014 that's $485 million that's a 30% year-on-year projected growth. Second, the year is developing as expected. We told everybody on the last call that we anticipated the first couple of quarters of 2015 would be tough until consumers bounce back. That has not changed. We expect we will end 2015 with revenue from consumer up over 2014. We also expect modest growth in industrial while communications market is tracking slightly lower than 2014. However, we do expect Q3 and Q4 communications revenues to be slightly better than Q2 as the China LTE deployment continues. Revenue from China input growth throughout the year along with other opportunities intelligent connectivity solutions. Underpinning our strategy is a powerful line of new products such as UltraLite, XO3, ECB5, Titan, Saber, Snap, WiGig and WiHD among others. Third, our revenue risk has been significantly mitigated by the diversification of our end market and reduced customer concentration. To give you an example on the end market side, last year in consumer we are focused on the mobile opportunities specifically high-end smartphones. Consumer in 2015 now consists of DTVs, digital still cameras, AVRs, two-in-ones, tablets, wearables and other high-volume areas. One diversification example on the customer front is a smartphone OEM that was about 20% of our revenue in Q1 of last year. We now expect mobile revenue from that same OEM to be about 5% this year and potentially larger in DTV revenue this year than in mobile at the same OEM. Fourth, our team is hitting it out of the ballpark on execution, integration and consolidation. We are working around the clock given the huge potential we see. Joe will walk through the financials but we've already taken targeted cost synergies up close to $42 million. This is up over 30% from approximately $32 million when we announced our acquisition of Silicon Image earlier this year and up from approximately $36 million we committed to when we closed the deal in March. The key here is all of the actions we are taking or driving increased efficiencies at Lattice. Nothing we have done as adversely impacted customers and nothing we have done as impacted our revenue. Finally, we are laser focused on driving profitability. Our goal is clear. We are working to achieve 20% non-GAAP operating income at any revenue level. This will allow us to achieve our goal of doubling our non-GAAP earnings per share on an annualized basis over the next two years. We view this as both realistic and achievable. We had an excellent track record of execution which will continue to build upon. So you can see why we are optimistic. We've been delivering above market growth over the past few years while laying the groundwork for a long-term success. We've been financially diligent and our leveraged our balance sheet to further increase our scale as a global leader in smart connectivity solutions. This is already opened new opportunities. We intend to use our free cash flow to rapidly deleverage our balance sheet. This in turn will give us added flexibility and open additional opportunities. We like this cycle and are confident we will drive increased value for our customers and shareholders as we move forward. In terms of other color on end market and geographic revenue, we provided a detailed table as part of our Q1 release. That concludes my initial comments. I will now turn the call over to Joe for details on the financials. Joe?

Thanks, Darin. Our acquisition of Silicon Image closed on March 10, 2015. Accordingly, our results include the financial results of Silicon Image from that date forward. Q1 financial results were significantly impacted by a number of factors during the quarter primarily related to the acquisition of Silicon Image. Here's a quick summary. $24.7 million of income tax expense primarily related to establishing a full valuation allowance against our net deferred tax assets, $18.2 million of acquisition-related charges including approximately $8 million in severance and stock compensation cost related to change of control payment to departing executives. $4.9 million of restructuring charges as a result of synergy actions already taken as we drive toward our targets. $4.2 million related to GAAP purchase price accounting including $1.2 million associated with deferred revenue and $3 million associated with the sell-through of acquired inventory. And finally, $2.9 million of amortization of acquired intangible assets. As part of our press release we provided detailed reconciliations of GAAP to non-GAAP financial measures including these and other reconciling items. For the fiscal quarter 2015 revenue was $88.6 million on a GAAP basis and $90.4 million on a non-GAAP basis. We benefited in Q1 from about $5.9 million in revenue related to consumer-electronics, which is evidence of our diversification in the consumer end market. Our top seven customers accounted for just over 40% of our total Q1 revenue with the largest three each at approximately 10%. Gross margin for fiscal Q1 2015 was 54% on a GAAP basis and 57.8% on a non-GAAP basis. Operating expenses for the first quarter were $74.8 million including $4.9 million in restructuring charges, $18.2 million in acquisition-related expenses consisting of approximately $10.2 million in professional services related to M&A including legal accounting, licenses and fees and approximately $8 million in severance and stock compensation cost related to change of control payments to departing executives. And finally $2.9 million related to amortization of acquired intangibles. We expect to incur additional restructuring and acquisition-related expenses throughout 2015 as workforce and site consolidation actions are taken. Income tax expense for the quarter was $24.7 million. This includes approximately $21 million of tax expense resulting from establishing a full valuation allowance for our deferred tax assets. The valuation allowance is a result of expected losses before taxes in the U.S. on a GAAP basis primarily due to forecasted interest expense on our long-term debt and the amortization of acquired intangibles. Cash tax expense was approximately $1.1 million for the quarter. We expect our annual cash tax expense to be between $8 million and $9 million. On a GAAP basis reflecting the aggregate impact of the various items mentioned, we recorded a net loss for the quarter of approximately $53.3 million or a loss of $0.46 per basic and diluted share. On a non-GAAP basis net income was $3.9 million or $0.03 per basic and diluted share. For the quarter diluted share count was approximately 117 million shares, net cash used in operating activity was $1.8 million in Q1. We ended the quarter with cash and investments of approximately $159.8 million. Accounts receivable increased to $80.8 million at the end of Q1 as compared to $62.4 million at the end of Q4. Days sales outstanding increased to 82 days compared to 67 days last quarter. This increase is primarily due to the inclusion of the fair value of acquired receivables. Inventory at quarter end was $80.6 million compared to $64.9 million at the end of Q4 once that inventory stands at 5.9 months compared to 5.2 months at the end of Q4. This increase is due to including the fair value of acquired inventory from the Silicon Image acquisition. We spent approximately $2.9 million on capital expenditures and incurred $7.9 million in depreciation and amortization expense during the quarter compared to $3.4 million and $5.4 million respectively in Q4. We repurchased approximately 1.1 million shares under our share repurchase program in Q1 at a total cost of $7 million which completed our previously authorized 20 million-dollar repurchase program. Our cash strategy will shift to a focus on deleveraging our balance sheet. In connection with our acquisition of Silicon Image, we issued $350 million in term debt. This is shown in our balance sheet net of related financing costs. Interest expense for the quarter was $1.6 million. This concludes the financial review portion of the call. I'm going to turn it back over to Darin for the second quarter and full year business outlook. Darin?

Thank you, Joe. As we look forward into Q2, we are positioned for another above market growth year in 2015. After all when was the last time Lattice had a triple digit revenue quarter. We will be relentless in delivering on the opportunities in front of us and in continuing our successful integration and the consolidation plan which we started at the end of Q1. In terms of our specific expectations on a non-GAAP basis for the second quarter 2015, we expect revenues to be approximately $120 million plus or minus 3%. Q2 gross margins are expected to be approximately 56.5% plus or minus two points. Total operating expenses are expected to be approximately $65.2 million plus or minus 2%. Q2 restructuring charges are expected to be approximately $10 million with acquisition-related charges including the amortization of acquired intangibles in Q2 expected to be approximately $10.5 million. For the full-year 2015 on a non-GAAP basis, we expect revenue midpoint for 2015 to be approximately $485 million. We expect gross margins to be approximately 56.5% plus or minus two points. We expect total operating expenses in 2015 to be approximately $215 million plus or minus 2% excluding restructuring and the acquisition-related charges. This includes the positive impact of any synergy savings. Restructuring for the full-year 2015 are expected to be approximately $25 million with the acquisition-related charges including the amortization of acquired intangibles for the full-year expected to be approximately $49 million. We expect annualized operating synergies to be approximately $42 million as we exit the year. In summary, we are confident in the outlook of our business and excited about the many opportunities in front of us. We have broadened our intellectual property, our product lines, further diversified end markets and we are no longer are reliant on a single customer for growth. We're confident we can achieve our targets; this concludes the adoption of USB 3.1 later this year, further development of the China market and a rebound at consumer OEMs. We have a great opportunity in front of us as we leverage our increased scale as the global leader in smartphone connectivity solutions and drive the synergies across the business. We appreciate your continued support as always. This concludes our prepared remarks. Operator, we would now be happy to take any questions.

[Operator Instructions] Your first question comes from the line of Tristan Gerra with Baird. Tristan, your line is open.

Could you give us some color as to the revenue outlook between your core business and Silicon Image and specifically what type of sequential increase or change would you expect in Q2 for your core business and also what type of year-over-year decline for Silicon Image you are looking at for the full year?

Yes. I don't want to comment on the decline for Silicon Image, Tristan. But what I can say is, there is really wasn't a whole lot of Silicon Image mobile revenue at a large OEM post Q1. Our LLC, the Lattice Mobile was down also, but not quite as significantly as we kind of walk through the year. So we knew ahead of time that mobile was going to be a challenge for us. But in the end, after we are done with the consolidation you will see that the consumer market for us will be somewhere between about 40% to 45% of the total. Industrial was at about where did before with communications being quite a bit higher. So we expect that it will still have a fairly diversified portfolio, but I think the bigger difference Tristan is, before our mobile, our consumer products was really all about mobile and smartphone. That diversification I talked about in the script is more about how we're diversifying from these mobile devices into tablets, into two-in-ones, into digital TVs, into AVRs and all sorts of other devices. So instead of having one particular force in one market, we have a diversified market and that's what really brought the Silicon Imaging play for us with that diversification of consumer being both growth, but also an area that we could keep the IP-focused on leading edge standards. And I think the biggest issue Tristan was we didn't have really the DNA in the Lattice side to get in front of those initiatives the Silicon Image has.

Okay. And you mentioned that Silicon Image doesn't have much mobile revenue anymore. So it sounds like, the bulk of the revenue adjustment related to be the Samsung announcement that Silicon Image did last December is behind. So is it fair to assume that there was a bigger downward adjustment in the first half of this year for Silicon Image revenue wise that they will be in the second half of this year?

Yes. There was a bigger decline I think that everybody anticipated. Because I think on the MHL front there was an elimination not only on the S6, but also on the S5, the S4 and some of even the note products. So when Samsung move forward with the S6, they had a deliberate decision on focusing on products that have the highest gross margin. So you started to see them start slowing down the S4 and the S5 and then building up the S6 as they went through it. And if you look at some of the commercials and advertising, you can see that's happening already. So I think there was an element of getting removed on MHL and not supporting MHL. But then also not really ramping any of the previous products like they had done in the past though MHL was removed from all of those almost at one-time.

Okay. That's useful. And then last question regarding wireless infrastructure, lot of companies obviously over the past earnings season have talked about continued weakness. Is there visibility into the second half leading us to believe that your wireless infrastructure business is going to pick-up another being Asia? And then a follow-up question on to that is how is your higher-margin European business impacted by the weakness of the euro?

Yes. So let's talk about the wireless infrastructure first. We kind of have modeled in that the first part of 2015 would be difficult in the wireless, although we thought it would be better than Q4, and it was. So Q1 actually was a little bit better, but then as you look at the year you could tell the licenses look like they got a little bit delayed, there were customers that maybe had inventory coming out of last year still. So we still see Q3 and Q4 with all the licenses in place and now you are starting to see what people build. We see Q3 and Q4 on the infrastructure side being healthier than it is in Q2. I mean nothing to write home about, but not a decline, right? So I think things will start modestly improving there. And then as you were talking about in Europe I think with the industrial side of your – we haven't seen a lot of negativity from that yet although we expected modest growth from the industrial throughout this year. And we are kind of seeing that today. So we see consumer is growing because of some of that diversification that we had overall between 2015 and 2014. We see industrial growing modestly overall, but that also includes Japan and it includes China and some other areas. But we haven't in a significant shortfall in Europe. And then the communications market we think will be slightly down going from 2014 to 2015.

Okay. Thank you very much.

Okay. Thanks Tristan.

Presenters, your next question comes from line of Christopher Rolland from FBR Capital Markets. Your line is open.

Hey, guys, thanks for the questions, this is Joe on for Chris. Just digging into the consumer market a little bit more, you guys discussed briefly MHL, but I was wondering if you could talk about the USB 3.1 opportunity where we are with the adoption there. And then a little bit further what do you guys see with WiGig and Wireless HD and where we are [shifting from] [ph] evidence?

Sure. Let's start with USB 3.1. I mean there's a lot of really interesting applications for. I think the rollout might be slower than a lot of people thought, so because we used an FPGA early, I think we got some pretty good early adoptions. We have past that point of trying to get design wins. We are more into how fast these things roll out. So at this point, we feel comfortable. The other bonus that we got was Silicon Image is a product called the Saber. I don't know if you guys know that. But Saber was exactly what we were talking about when we acquired Silicon Image, which was – okay, Saber is the cost reduction of the FPGA that does the original 3.1. So now we have an ASIC that displaces ourself over time. So we can you Saber in different places, but more for our wins that we have there then we can sustain them longer. So that's the first initial FPGA to ASIC transition that we will have. So that's one area. So we expect that to grow this year. A lot of those design wins are done just how fast they roll this out and who's actually going to begin putting that in their laptops or phones or this other because I've heard Samsung on Galaxy S6 isn't going to USB 3.1, right? So Apple says they are – the people say they will still see the rollout as people adopted. So wireless, where did you want to go, Wireless HD versus WiGig?

Yes.

Okay. So WiHD just everybody understands, WiHD is a super fast video wireless device that has zero latency. So essentially if you are going to project video from a device let's say a gaming device to a TV, you wouldn't use WiGig, you use WiHD. So it is not as – it's not going to be adopted as widely as WiGig, but there are applications where they want very, very low latency. And we are already going to have material revenue in 2015 on WiHD. But what people don't understand is we also participate in WiGig. And we are currently working on verifying some of the interoperability of the baseband with one of our larger mobile application processor company. So we already have the extensiation of our WiGig baseband and our radios. And the nice thing is that the radio technology that we use for WiGig is also the similar radio technology we use for WiHD. And the beamforming that we use and the RF-tilting is second to none in the industry. So our radios actually one of the biggest benefits that we have seen of this acquisition not that it will generate revenue in 2015, but it's got a lot of potential for 2016 and beyond. And it is not just limited to WiHD and WiGig, that same radio technology we can use in the backhaul and in a very small version of it, we use it in Snap, which is at close proximity. So I would expect WiGig to go with Intel and Qualcomm go because they are going to drive WiGig adoptions for the application processors of tablets and of PCs. And then you will see two different versions of the wireless technology WiGig connectivity for things that are higher power, but then you will see things like Snap for things that will have very low power close proximity. Because Snap, WiGig can never reach the cost structures of Snap primarily because it has to have all the interoperability, the [indiscernible] whereas Snap is a very simple baseband that does just as what you would consider wireless USB 2 and 3. So very high performance that can do data, eventually it will do video. So people can translate video straight across close proximity at a much lower power, a much lower cost on WiGig. So it will be similar to what you will see on like -- when you originally came out with Bluetooth and everybody said Wi-Fi is going to kill Bluetooth. Wi-Fi can't do what Bluetooth does because of the power and because of the connectivity of it.

Great. That was super helpful. And then switching gears into the industrial front. I believe you have said that you guided that segment with some strength this year. Where are we with the XO3 ramp and if you can just give anymore qualitative color for the rest of this year? Thanks.

Yes. So the nice thing about XO3, it is a pretty big cost reduction over XO2. So on a cost per I/O it is quite a bit lower and we will call it more affordable than XO2. So that's going actually really well. Surprisingly, four or five years ago when we talked about XO3 and we talked about the smaller pitches and lower cost packages, people told me that, oh, there is no way people will adopt 0.5-millimeter in 0.8-millimeter pitch. But they did. They did it because of the price point and because the micro server guys are going along with blade servers and smaller form factors. So that's off going quite well. In fact the XO3 ramp with the flash version is doing really well. There is another version of it that has OTP that isn't doing quite as well, but we would expect XO3 over time to overtake XO2 in the higher volume applications. Today, it doesn't feel as meaningful because it is in the hundreds of thousands of dollars, but it will get to the millions fast.

Great. Thanks guys. Congrats on closing the deal.

Yes.

Presenters, your next question comes from the line of Sundeep Bajikar from Jefferies. Your line is open.

Hi, guys. Thanks for taking the question. First, just on USB 3.1 and MHL, just wondering to what extent is the outlook for USB 3.1 connected with the requirement to carry video? Is that a primary mechanism for Lattice to be able to differentiate? And if so in what timeframe should we expect to see a capability like that in the market. And as part of that maybe also talk about embedded display board give us a sense for whether Lattice might already have access to that IP to the extent you want to offer multiple solutions?

Okay. So let's start with MHL, right? So MHL was written into the spec for USB 3.1. So you can already run MHL over USB 3.1. So the nice thing is having MHL, having that IP to be more in the consortium founder enabled us to have the IP and just run it, right? So you will see a lot of video solutions. EDP is also over USB 3.1, so people shouldn't think it doesn't exclude game. And so you will see areas where they are driving display embedded display port will kind of roll. When you are trying to drive a big TV or a larger display you will see MHL kind of dominate which is why I think it is 40% of the DTVs today have MHL in them as a connector. And it is kind of an MHL/HDMI connector, which is nice because it's one of the fastest. And it will eventually become one of the standards for 8-K. So we see MHL is relevant even though, today you are seeing people like Samsung to have removed it because Samsung was trying to play the game from a content perspective. If you look at Microsoft, Microsoft is starting to play the game from a productivity standpoint. So you are going to start to see when people want productivity they are going to start using things like MHL because they want to take your two-in-one be able to projected up to the screen and have it mere image that screen where MHL does quite a nice job on that. EDP doesn't. We do have both IPs and we will develop products that will have both MHL, HDMI, they will have MIPI and they will have USB. So you are going to see all of those interfaces from us because again we prefer to be somebody who can provide all solutions not just one, now granted on HDMI and MHL we get royalty, so that's good. But it doesn't mean we are going to defy gravity if those opportunities exist.

Okay. That's very helpful. Switching gears, wanted to know how we should think about timing for hybrid FPGA, SSP type solutions. I know it is a little further out in the future. And should we assume that such hybrid solutions would be based on mature node manufacturing like 28-nanometer for example?

Interesting. So today, I will give a couple of examples, right? So today there's obviously an example on USB 3.1 where there's different channels that could use programmability. But I will give you one we just found – the other was quite interesting. If somebody wanted an HDMI MHL bridged to USB 3, right? And so we can do that with a Silicon Image, HDMI receiver and a LatticeECB5 FPGA. So the first extensiation of that we will stack, I mean first of all, just sell two products by themselves. And then we will do in the old Intel days we will stack them and then we will integrate them. And so that's the progression that we use when small form factor is needed, you will see a stack in HDMI receiver with the 5-gig [certi] [ph] to FPGA. After that then we're going to go ahead, we will stack and then we will integrate to that particular solution. And that gives customers flexibility to do that plus it also lowers the power and reduces the cost. So you're going see a bunch of these things and in addition we are finding things which I don't know if we will integrate over time, but there's things like we found out that as they've brought in, there are RF opportunities in SiBEAM. We can actually do some baseband control for beamforming and RF tilting along with the [SIPRI] [ph] interface. So that FPGA then gets tagged right on to the baseband that they have. Eventually one could argue that some of the algorithms for Silicon Image is beamforming or SiBEAMs beamforming could be done in an FPGA tune to the RF. So those are areas where not every radio is going to fit with every baseband, so we are thinking through whether you want to put an FPGA on the side of the RF and make it more configurable. Same thing with T-CONs, right? We do configurable T-CONs in China where there is an FPGA sitting up next to the T-CON. Now, a lot of people – well, all the T-CONs have no money, it's really, really tough business. Silicon Images to be in the T-CON business. So those are opportunities as we think through it, if we can lower the cost and lower the overall building material where people aren't spending on T-CON every five minutes that might be a great opportunity for us as we walk through. So lots of that stuff. Clearly, we are not going after the Intel, Altera acquisition which is probably more server and hardware acceleration, right? We are going after more of the integration, so that people have the flexibility to be able to use cost-effective products into the product line that they wanted to get them to market faster.

Okay. Got it. And very helpful. And then a last one for me, for Joe, how should we think of operating expenses as percent of revenues going forward? Should we expect them to trend in the 40% range or lower as a longer-term target into next year?

They will be in the 40% or lower range because we are targeting operating income of 20%. That's what we are moving to with this acquisition. We have the opportunity to do that. That's driving some of the aggressive synergies that we are seeing also. So you should see an operating income of 20%. That's the target.

Perfect. Thanks so much.

Thanks.

[Operator Instructions] Your next question comes from the line of Richard Shannon from Craig-Hallum. Your line is open.

Richard.

Darin and Joe, how are you guys doing?

Good.

Good. Let me follow-up on that last question Joe; actually let me ask you in a more specific manner. Can you give us kind of -- do the math for us, as you look at your OpEx going throughout this year and especially if you expect to get to that 20% pro forma operating margin number exiting this year or is it going to be more into next year?

It will be next year. This year we are going to see synergies throughout the year. We are going to exit the year at that $42 million run rate. And we will start to see the 20% operating income going into next year. Does that help?

Okay. That is helpful. I was trying to fix that – look at those two piece of math together and it wasn't working but that's helpful.

I mean, you've got to take things down. You've got to overlap. We've got some headcount stuff, since site synergies that we are doing as we combine sites, things like that that are going to bleed through. But, we are going to be substantially complete with that this year exit at $42 million on run rate basis.

Okay, perfect. Also following up on the question and topic on 60 gigahertz. Wondering if you can give us a sense of timing on both the Snap side and the WiGig side to see any meaningful revenues this year? And how does the competitive environment shaping on WiGig?

Yes. Okay. Let's start with Snap. So Snap we are sampling USB 2 and 3, this week. So you will see Snap attacking some of the large OEMs more on the tablet kind of market starting first and then there is some other data transfer opportunities that we are going to have. So that's going to happen right away. WiHD we will see meaningful shipments this year being material, this year but primarily driven of things like projectors and gaming and things like that, so not the big market of laptop and display connectivity. WiGig, you heard a lot of hoopla from people integrating some of the – integrating the wireless into their application processors. I think the jury is still out on whether the displays guys want to adopt that because it is a pretty expensive solution today. It is cheaper to integrate on 14 or 16 nanometer. But I think what you're going to see is, the guys that play on the outside looking and being not onside not inside the application processors or microprocessors are going to play on the outside being the connected devices, they are going to be using something like 28-nanometer or 22-nanometer. The cheapest is 28-nanometer, so you will see that baseband driven there. I don't think you're going to see real revenue on that and probably till next year. And then even then I think the ramp is really end of 2016 and end of 2017 as that technology takes off because there's a lot of ecosystem that's going to have to be done like the interoperability between the different WiGig solutions right because you have got one big guy has one solution and the other big guy has another solution. So that's probably going to end up being some camps in some of the protocols and how interoperable will be. We are starting to that right now. The nice thing is we also have an FPGA that we can drive into this and help us get to market even faster.

Okay. Maybe one last question for me. Just on the big picture cap again in gross margins. You got a lot of different end markets here; you talked about your diversification in your prepared remarks. If you exclude the licensing that came from Silicon Image with all the programmable parts and the standard parts, now this end markets, how do you see the gross margins trending over the next one to two years? Is something that can stay at this kind of 55% level? Could it go lower to get a higher volume markets, how you kind of think about this area?

So I think about it identically as Silicon Blue. When we first bought Silicon Blue everyone said there's no way they'll ever get the margins up to 50%. Because we drove volumes we're able to drive the cost. So a lot of these Silicon Image products don't get the benefit of the lower cost structures that we had by driving some of the high volumes that we had. So I think that what you're going to see is we are going to have to be very targeted to our approaches with consumer. But then also, we are going to have to drive the cost structure like we did with Silicon Blue. So we're going to have to be driving the right package solution, the right assembly test manufacturers being the trick that we did to lower our cost was we picked standard packages that already had extremely low cost, put our products in the lower cost packages and that drove the silicon cost, the testing cost and all the other things down. So a lot of that is part of the synergy work that Joe doesn't count, but it is more the cost optimized portion that helps margin, right? I mean you don't count that as a synergy, you count that as a margin number.

Okay.

Okay. And we've been driving that for the past three years in the Lattice business, the same model holds true.

Okay. Good enough. That's all the question for me guys. Thank you.

Thanks, Richard.

Presenters, your next question comes from the line of Bill Dezellem from Tieton Capital Management. Bill, your line is open.

Thank you. A couple of questions, the first one and I hope I didn't miss this earlier on in your opening remarks. But would you please explain the difference between the GAAP and non-GAAP revenues and how long you anticipate there to be a difference between the two? And then secondarily, the distribution direct split shifted in the quarter by a reasonably wide margin. I was curious if that was just noise or whether that's something structurally that's going to be different with the new consolidated companies?

Okay. So I did walk through the differences between GAAP and non-GAAP in the initial commentary. And I can kind of walk through it again but there's a bunch of stuff that hit non-GAAP related to – for example we had tax hit of $24.7 million --

Joe, may I interrupt you not the expense items, specifically the revenue GAAP non-GAAP differential.

Oh, that is a deferred revenue issue. And that will be done by the end of this year. And there's also on the cost side we have the step up for the acquired inventory value that will have led up into the year also.

Okay, great. Thank you.

And then on the distribution – yes, the – it's just -- that's an artifact that the OEM has been down. The large OEM has been down and distribution being up. So it is all about switching, that's really in the noise. We will see that kind of bounce around that level. So it's really in the noise of the quarter on how well the OEMs did versus the distribution and distribution this quarter did much better.

Great. Thank you both.

Thanks, Bill.

[Operator Instructions] Your next question comes from the line of David Duley from Steelhead. Your line is open.

Thank so much for taking my question. Just a little confusing and I'm not sure if you addressed it earlier because I was a minute late coming onto the call. But as far as your annual guidance what are you assuming for the core Lattice revenue, is that still some of flattish or is it down, I think it was flat to down before something like that, could you just help us out with that?

Well, in Q1 it was supposed to be flat to down. We're going to try to combine the companies over time. But, Q2 is going to be fairly consistent with Q1 as we kind of move through it. We knew that Silicon Image was going to have some issues because of the large OEM that it kind of designed them out of their platforms. So that's really the delta between a lot of the Q2 numbers that you see. But, the nice thing for us is, as we are moving forward to Q3 and Q4, we do expect to grow as we gave out the guidance for the year.

And so then most the delta, I guess -- so I guess that kind of answers my question, so then for the year the Lattice position will be somewhat flattish with the strong second half?

Flattish to what? Are you talking about --

Or 60 million that you did last year.

Yes. I think what you want to do is ignore looking at the rear view mirror, right? We are trying to do right now is just get a handle on both businesses and the opportunities that we have. So we are focused on looking at -- Silicon Image opportunities are in DTV because we expect DTVs to grow with some of the HDCP, the high-def content and production devices that we have. So Silicon Image will grow. The issue is, they were shrinking so fast in the mobile segment that that kind of put a damper on some of the stuff.

And going forward it gets a little tough too because Darin pointed out the one example we have or Sabers coming in as an ASSP that will take over the FPGA in the USB side, so there is some mix going on there were we had forecasted potentially longer FPGAs, while we are going to be Saber now. So those kind of opportunities are starting to show up. So we much rather look at this going forward as a combined company and not start splitting the hair, so to speak.

Okay.

Also remember we didn't include a lot of Q1 revenue for Silicon Image, right? So that's when people look at the data, revenue that we didn't recognize in Q1. And so as we are moving through the year our expectations as Joe said is really look at those growth potentials and then it really becomes a margin play, right? Because we can continue to service some things with the FPGAs, but they are from a very competitive environment, we are going to put products like Saber right into those slots and convert them. Because then we – we are going to end up with a lower ASP, but a much higher margin, but much higher volume, right? Not with the intension, we get in first with a FPGA and then we define longer with an ASSP.

Right. Okay. And then just on the operating census – people have asked couple of different times, but just on the dollar basis incentive what the savings is or what percentage it is going to be because that's a little confusing. Dollar-wise, what should we -- the Q2 guidance as far as operating expenses, what do you think the linearity -- the dollar expenses on operating expenses will look like going in Q3 and Q4 in the second half?

Well, that's tough because you got dollars that are hitting for acquisition-related charges that are front loaded in the year. You've got some restructuring charges that are front ended loaded in the year as we do people in side movements, that's a tough one.

Without the one timers perhaps. Because you are saying you are going to get all the cost savings by year-end, so obviously, we know, right, since we know the beginning and ending number just kind of roughing it out without the acquisition related stuff.

Yes. So when you look at -- we targeted for Q2 operating expenses are going to be approximately $65.2 million plus or minus two on a non-GAAP basis so that's kind of excluding all that stuff.

And we will decline going forward as we get savings.

It will decline all the way to Q4, but you're not going to get all the synergy savings in 2015. You're coming in later in the year and some of those related cost reductions aren't going to happen even until the June timeframe, July timeframe and beyond. So you take just kind of a linear swag at it as you go that way and then end up at the $42 million.

Okay. I see all the cuts will be made by year end, but the impact on the P&L still takes a few quarters to sit through.

Sure. Because there are people that are still lagging and so forth.

Okay. Thank you very much. That's it.

[Operator Instructions] Your next question comes from the line of Todd Morgan with Jefferies. Your line is open.

Thank you. And thanks for holding the call. Just a follow-up on the cost-saving discussion. So when you announced the deal, I think you said $32 million of cost saves were the amount expected. And now you found I guess another $10 million as the deals closely looked at it. Can you talk about what types of areas that additional savings amount has come from? Where those additional savings? Where are they coming from?

So we started looking at things in the Center of Excellence approach and as we started looking at those, we found more opportunities to cut. So we are rapidly moving to the centers of excellence and we are finding duplication of effort in some cases, duplication of functions in some cases so we are moving that away and taking care of that earlier. So we are seeing an overall potential reduction in headcount. We've got sites in Asia, for example that we are moving to lower-cost GOs are shifting from China and Taiwan into the Philippines and into India. We shifted more responsibility to lower-cost GOs than we anticipated, so stuff leaving the U.S. going overseas. It has been more than expected as we really dove in deep. Does that help?

Okay. Thanks.

Within the G&A elements also, so there is some consolidation going on or we getting much more efficient in getting rid of duplications there.

Okay.

And a lot of the kernel consulting type expanding.

Yes. That was one of the bigger things that I think was uncovered, there was a lot of consultants in outside services and all this other stuff as we do internally, right? And so we found a lot of that stuff so.

Great. That's the right kind of number. And then just secondly $159 million of cash at the end of the quarter, can you give us a sense as kind of what the needed minimum balances or what you sort of target cash flow would be because my guess is, you have a lot of extra right now.

Yes. We talked to 100 million every time we talked about this. We've done what we call nuclear winter scenarios in the $90 million or $100 million range. So that's kind of the target. We expected to be at about $159 million, $160 million when we modeled this as we get the closing went through the quarter. Also by kind of not doing the stock buyback plan that we had been doing. We expect to free up more cash to really deleverage and that's the plan right because people keep ask us, when are you going to deleverage? Some people want us to go slower, the people wanted to go faster, but we have plan, we want to get this thing paid down as quickly as possible. Our goal was in three years and really the debt is pretty much balance, right, so we want to have the debt to be below the cash.

Great. Well, thank you very much then.

[Operator Instructions]

Okay. Operator, I think we are out of time right now. So I think we're going to have to move on. So I would like to go ahead and summarize if I could and we're going to have follow-up calls with everybody if they have any further questions. So in summary, we are really excited about the prospect for the combination of Lattice and Silicon Image. There's still a lot of heavy lifting to do to realize the synergies, but we will get it done. We are no longer relying on one customer or one portion of the consumer market for growth. And 2015 is going to definitely be a year of transition for us, but our actions today will shape the company's for many years to come. So I want to thank you all for your continued support and forward to your questions in one the close session. All right. Thank you.

This concludes today's conference call. You may now disconnect.