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

Jaime Viteri - Robert W. Baird Christopher Longiaru - Sidoti & Company Mark Lipacis - Jefferies Jorge Rivas - Craig-Hallum Bill Dezellem - Tieton Capital Management Purdy Ho - China Everbright Securities Rob Jost - Invesco Steve Huffman - PineBridge Investments Chris Roland - FBR & Company Todd Morgan - Jefferies Sanjay Devgan - Columbia Management

Good afternoon. My name is Doris and I'll be your conference operator today. At this time, I’d like to welcome everyone to the Lattice Semiconductor 3Q 2015 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] Today's call is being recorded with OnCore replay beginning tonight two hours after the call you may dial 800-855-8367 enter in the IP number to listen to the OnCore replay. Thank you. I would now like to turn the call over to our host David Pasquale of Global IR Partners. Sir, please go ahead.

Yes. Thank you, operator. Welcome everyone to Lattice Semiconductor's third 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. Please note that we also published a PowerPoint presentation on the IR site to accompany today's call. The slide will be referenced in management’s prepared comments. And at this time if you could please turn to Slide 2 this covers the Safe Harbor. Before we begin the formal remarks, I'll review the Safe Harbor statement. It is our intention that this call will comply with the requirements of SEC Regulation FD. This call includes and constitutes the Company's official guidance for the fiscal fourth quarter of 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 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 in our fiscal year 2014 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 will also be presented within the requirements of SEC Regulation G regarding generally accepted accounting principles or GAAP. Some financial information presented by us during this call 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 our operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. If we use any non-GAAP financial measures during this call, you will find that the required presentation of in reconciliation to the most directly comparable GAAP financial measure in the Company's earnings press release. At this time, I’d like to now turn the call over to Mr. Darin Billerbeck. Please go ahead, sir.

Thank you, David and thanks to everyone for joining us on our call today. I'm going to start my comments on Slide 3. Results for the third quarter came in as expected. GAAP revenue came in at $109.7 million which was up 3% compared to Q2. Our non-GAAP margin was 55.7% and we improved on our net loss to $0.04 per share on a non-GAAP basis compared to $0.07 in Q2. Turning to Slide 4, we've not been afraid to take our new capabilities in to areas we felt we can grow faster than the market. The consumer market was our latest example. We made a business where others said one could not exist. We were able to take advantage of the M&A market earlier this year with the acquisition of Silicon Image this significantly expanded our array of products and capabilities. From FPGAs to Video IP standards expertise to DTV and AVR leadership products to industry leading millimeter-wave technologies. Not to mention we benefit significantly from IP sales for collecting reoccurring royalties on HDMI and MHL. All of these capabilities enabled us to have broader deeper discussions with our existing customers while opening up new opportunities and new customers. Our portfolio is clearly much broader and stronger today that it was a year-ago, more capabilities gives us more opportunities to grow. At the same time we've been ahead of plan on achieving synergies on the Silicon Imagine integration. But once with a number in the $30 million range has expanded closer to $49 million in actionable synergies. In line with market environment and our constant drive to build a lean agile organization we also took additional actions in the third quarter to resize our company. That resizing resulted in a reduction of about 13% of total workforce a resizing was above and beyond the actions that are already taken with our stated synergies. Additionally this was also in line with our comments on the Q2 call where we said based on our additional review we've reduced our OpEx by an additional $10 million to $15 million on an annualized basis and to reach our target operating income. The resizing numbers actually came in about the $10 million to 15 million stated goals at around $25 million. Joe will walk you through the impact this has on our model. These difficult but necessary decisions aligned our resources with our long-term strategic plan and will not impact our ability to meet our customer needs or further our capabilities. The bottom line as we favor opportunities to reduce the spending in just about every area, one particular area that is very near and dear to me is R&D. Since I joined Lattice the team has worked diligently to evaluate all programs, resources and capabilities to align them to a long-term plan. The key has always been to prioritize programs based on the highest potential return with the best chances of winning and defending. We created compelling affordable roadmap with faster launches and more differentiated solutions utilizing even more engineering reuse from fifth generation iCE, third generation Mach and ECP family to our newest imaging and millimeter wave products we continue to strive for getting more out of less while creating solutions that just plain work. With that we continue to support and invest all three of our major capabilities FPGAs, wired ASSPs and millimeter-wave technology. And we’re expanding in all three of our key market segments consumer, industrial and communications. We are gaining traction in our key markets and we feel confident about our business prospects longer term. If you turn to Slide 5 I want to touch on a few examples where we are winning. Our iCE product family continues to find home in smartphone, tablets, wearables, vending machine and even smartcard readers where only a tiny FPGA can execute the always on functionality while conserving power. We’re also committed to driving the next generation HDMI standards to higher levels of performance and capabilities. Our leadership and expertise will drive the next 4K and 8K TV interfaces offering significantly higher bandwidth for applications like HD audio and ER. We expect we’ll have a nine month time to market advantage in this area. X03 is in full production and you can expect to see a fast ramp similar to what we achieved on XO2. We just released a high-speed version of our successful X03 product to support of the 900 megabits per second on D5 transceivers. Our ECP5 product is targeted for compact low-power high-volume application such as small cells micro, servers broadband access and industrial video. ECP5 is the optimal product to have features and functionalities to complement those delivered by A6 and ASDs reducing development risk and accelerating time-to-market. 60 gigahertz is very real. Our technology has enabled the first 60 gigahertz smartphone. This design is in production and creating a new used case for mobile set-top box and mobile productivity solution. But after those point to point 1080p was real ADP what does that capability really do? It enables you to play movies or games from your mobile device to your TV without compression or wires, there will be zero wire lag for video streaming and gaming. In addition we can use the same technology to support backhaul applications for Next-Gen wireless and wireline networks. These are applications that demand high-speed reliable wireless data transmission over hundreds of meters. We’re already working with key customers to make this happen and there is some exciting possibilities. The important take away today is that the while the markets are volatile and headwinds remains Lattice is positioned well to weather the storm. That concludes my initial comments. I will not turn the call over to Joe for details on the financials. Joe?

Thanks Darin. If you turn to Slide 6 I will discuss the financial highlights from the quarter. As part of our press release we provided detailed reconciliations of GAAP to non-GAAP financial measures. For the fiscal third quarter of 2015 revenue was 109.7 million on a GAAP basis and 110.1 million on a non-GAAP basis. Gross margin for Q3 2015 was 54.5% on a GAAP basis and 55.7% on a non-GAAP basis. This includes 1.2 million in charges associated with ramping a dual sourced 40 nanometer fab and backend capability which negatively impacted gross margin by approximately 1%. We expect the comparable impact to occur in Q4 and Q1 2016. Total non-GAAP operating expenses for the third quarter were 57.6 million excluding 6.8 million of restructuring charges 0.6 million in acquisition-related charges, 8.9 million in amortization of acquired intangibles and 3.8 million in stock-based compensation. This compares to our guidance of approximately 60 million plus or minus 20% on a non-GAAP basis. The sequential decrease in non-GAAP expenses compared to Q2 reflects the continued successful integration of Silicon Image and our laser focus on synergy value capture. The income tax expense for the quarter was 0.3 million. Cash tax expense was approximately 2.3 million for the quarter. We continue to expect our annual cash tax expense to be between 8 million and 9 million. The annualized cash tax amount is largely dependent on foreign withholding taxes associated with our licensing revenue. On a GAAP basis reflecting the aggregate impact of the various items mentioned, we recorded a net loss for the third quarter of approximately 24.9 million or a loss of $0.21 per basic and diluted share. On a non-GAAP basis net loss was 5.2 million or $0.04 per basic and diluted share. For the quarter basic and diluted share count was approximately 117.7 million shares. Net cash used in operating activities was 10.4 million in Q3. We ended the quarter with cash and investments of approximately 118.4 million. Accounts receivable was 85.3 million at the end of Q3 as compared to 76.9 million at the end of Q2. Days sales outstanding were 71 days compared to 66 days last quarter. Inventory at quarter end was 79 million compared to 80.8 million at the end of Q2. Months of inventory stands at 4.8 months compared to five months at the end of Q2. We spent approximately 4.6 million on capital expenditures and incurred 17.6 million in depreciation and amortization expense during the quarter compared to 4.2 million and 17.5 million respectively in Q2. The interest expense for the quarter was 5.8 million. On Slide 7 you can see our achievement of above target synergies. When we announced our acquisition of Silicon Image earlier this year, we committed to synergies in the $30 million range. We moved this up to $42 million shortly afterwards. To-date we have increased our action synergies to approximately $49 million. This amount correlates to actions we have committed to take after the acquisition of Silicon Image. Additional reactions based on the actions taken this month are not reflected in this value. If you turn to Slide 8, you can see what we’ve done with our recently announced job action. We announced a workforce reduction of approximately 13%. The latest action is part of our overall plan to reduce costs and better align our workforce with the long-term strategic needs of our business. This is an integral component to our plan to achieve a 20% non-GAAP operating target. As a result, we accrued severance and related cost of approximately 5.7 million as a part of the restructuring charge in Q3. We expect to incur approximately 500,000 in additional charges associated with this action over the next six months. And taking into account our openly revised synergy amount and the job action, we expect to be at an annualized OpEx run rate of approximately 175 million for 2016. This concludes the financial review portion of the call. I am going to turn it back over to Darin to talk about our fourth quarter business outlook. Darin?

Thank you, Joe. In terms of our specific expectation on a non-GAAP basis for the fourth quarter 2015, we expect revenues to be approximately flat to plus or minus 3% compared to Q3 of 2015. Q4 gross margins are expected to be approximately 57% plus or minus 2%. Total operating expenses are expected to be approximately $49 million plus or minus 3%. Q4 restructuring charges are expected to be approximately $7 million with acquisition related charges including the amortization of acquired intangibles in Q4 expected to be approximately 9.5 million. In summary the macro environment continues to provide headwinds. We understand this and have proactively sized our business to meet our financial goals without compromising our future growth. We have clear competitive advantage in many areas with our monitors of low power, low cost, small form factor FPGAs along with our leadership imaging and millimeter wave product offerings. We have the right team in place that is highly capable and committed to the long-term success of Lattice. So while the macro environment may not be that great, we understand the cycles don’t last forever, and market doesn’t go up forever nor does it go down forever. When the macro improves Lattice will be ready with a leaner operating structure and a powerful solutions portfolio positioned to win. That concludes our prepared remarks. Operator we will now be happy to take any questions.

[Operator Instructions] And our first question is from the line of Jaime Viteri with Baird.

And I was just wondering if you could talk a little about the opportunities offered by Type-C connectors for Lattice?

Yes, in fact this is Darin by the way. You are going to see Type-Cs in a lot of different areas. The most recent at least that are encouraging to us are the Microsoft offerings that you’ve been seeing in all the different phones, tablets and also the chargers. So we spend a lot of time on the European design wins there. We have also got some additional design wins in other areas. But most of them to the most part haven’t ramped as much as high as we had expected at least within the Q3 and Q4 time period. But we are seeing some progress in the latest offerings actually with Microsoft supported ShelComp are going to be some of the big deals that we are going to see overtime.

And what is the demand outlook for the iCE40 the 80-40 type of products in smartphones, are there any functionalities which can bring these products back into phones that micro controllers cannot handle currently?

Yes there is the time of different opportunities. Again when we started we were doing some just basic IR remote and we were doing the barcode labeling type features. Today there's more RAM on these devices lower power on these devices so they can do just about any recognition or detection feature that requires an always on functionality at extremely low power, which is difficult to respond. So think about the difference between a micro controller FPGA we can respond very quickly to things like a touch or a voice command where a microcontroller can't that is the slow speed. On the other hand micro controller can do slow calculation, which are probably a low-power applications that they are better at than an FPGA. So we look at those applications but again, it is almost like instant on always listening very, very low-power.

And just one more question, could you give us the status of industrial demand in Europe which as I know is the higher margin business for you?

Yes. For this quarter if you look at Europe in general it was down a little bit, but we are expecting I think next quarter for it to be just flat or slightly up. So Europe hasn't been as impacted by the macro events in China as some of the other, Europe and America actually have been our high points China has been really lowest point just today. I mean Japan is suffering a little bit but China is really the big digger for us.

And our next question is from question line of Christopher Longiaru with Sidoti & Company.

Could you just talk a little bit more around some of the opportunities -- can you hear me?

Yes.

Can you talk more about some of the opportunities around 60 gigahertz and kind of how those filter in from a timing perspective? Like obviously some of the opportunities that you have in smartphones and consumer are faster, you talked about backhaul a little bit that obviously takes a little longer, just some of your long-term views on that?

Yes. So I think there's really going to be almost five different versions of millimeter wave which is 60 gig and that goes between 20 gigahertz and 70 gigahertz or that range. But for the first one if you talk about Snap which is really kind of our very close proximity high performance data transfer there is two opportunities there they won't be huge in 2016 but we’re starting the development of one is connector less laptop where you plug it into a docking station and there is more connectors, and that’s all kind of like USB functionality at USB Type C 3.1 Type C performance. So 6 gigabits to 12 gigabits where you put your laptop in and the basic -- there is no connectors on the laptop no connectors on the docking station, that’s one. The other one is simple thinking transfer where you just drop your phone down and as you're charging it you could transfer the data or put it next to a device and transfer the data. The speeds of that type of a data transfer can download a high-definition movie in probably about 7 seconds to 10 seconds, so pretty darn fast there. So that’s kind of on that consumer portion of it then there's also a wide gig portion of it where Intel and Qualcomm are driving different angles. Intel is driving from the laptop Qualcomm is driving from the smartphone. So you're going to see both of those start rolling out in the next couple years albeit not big. We won't play significantly in the phones or the laptops we’ll play in accessory. So we’re Gen 3 radio that currently does the Letv WiHD solution also works for a like a -- it just has the different base amount. So that type of a market I don't expect to have for two to three years in volume, the bigger one that we really differentiate ourselves one is this hundreds of meter solution where you're working with the big carriers that want to have fiber to the home or fiber to the campus or through a different medium, it's a high-speed data transfer with multiple antennas and larger basement but it uses a similar radio to Gen 3 our radio that we use WiHD and other things. So I actually think that the biggest differentiator for us today is going to be that backhaul wireless solution. That’s a big market it's a big differentiator a lot of the FPGA guys don't have those capabilities and we’re competing with completely different people in that market. We’ll also be successful in the consumer stuff but we are not going to see triple digit numbers on wireless probably for the next 3 to 5 the biggest seller today's WiHD which is the 1080p solution that we across on the Letv to the TV and that’s just flat out 1080p wireless that goes from any mobiles device directly to your TV and all that TV needs is a HDMI connector through a receiver and we make that too. We make both to the transceiver and the receiver for both of those applications, one in the phone the other one goes in the TV.

And some of those are already in I think the Samsung TV is that right?

No, they are actually in the Letv phones and the Letv TV dongles. Samsung has not put 60 gigahertz in the TVs to-date.

And my other question has to do with -- you guys cut a lot of cost out can you talk about with some of the -- you started with the 49 million in synergies how much of that was gross margin on a cost of goods sold line. Just to get an idea of what a normalized gross margin will look like when some of the industrial demand comes back.

Under 5 million was gross margin related with that 49 million.

Our next question is from Mark Lipacis with Jefferies.

First question on the OpEx savings going forward, the bogie looks to be $175 million run rate in 2016. Is that for the full year or do you expect to hit that run rate at some time during the year and how should we think about the savings moving through the year until you get to that run rate?

Yes, that’s for full year. So we expect it to leave this year with our synergies intact and then the headcount actions that we took are virtually completed by the end of this year also, so it’s a full year run rate and it will fluctuate throughout the year because it will have different periods where maths are higher and so forth. So there is some variability in there but that’s the annualized number.

So in Q1 so the $49 million of OpEx that you guided for Q4 so you’ll have some kind of a step down in Q1, is that the right way to think about it and then kind of…

Yes.

…bouncing on a plus or minus from there?

That is the right way to think about it, correct.

Okay, great. And then on the different product cycles that you highlighted which ones do you think have the best opportunity to provide an upside surprise in 2016? Thank you.

Yes, mobile devices are for sure the highest probability as we go through. I don’t think the comms infrastructure build out is going to be significant next year in industrial when it snaps back it doesn’t snap back into those giant wave. So I think you are really talking about the mobile platforms albeit being smartphones and tablets. And it really is -- it's really trying to get into some of the bigger design wins like we had in the past. And I think those are the opportunities that really change the game and they drive a lot of EBITDA if you will if you can pay down the debt.

Our next question is from the line of Jorge Rivas with Craig Hallum.

Hi guys this is Jorge sitting in for Richard today. First question on your communications segment, and I wonder if you can provide some color given that many other companies haven’t actually make a call, I don’t recall were you in the China LTE build out but you had nice upside there. So I am wondering what drove the upside, whether this was driven by a design win or maybe you are seeing some benefits from the Altera acquisition?

Yes I would say the latter but that’s not it right. I think the bottom-line was Q2 was so bad that when Q3 came back we were up almost 20% between Q2 and Q3 and so it is kind of stepping back but it’s reaching the Q4 levels. We actually thought, we originally entered the year and talked to our key comms guys, and they said yes Q2 is an abnormality, Q3 will come back and then Q4 will be strong. We are not seeing that. So we got an uplift in Q3 which was significant because Q2 was low but we’re seeing it just flattish between Q3 and Q4. So it’s not stepping back up to the Q1 levels.

And one last question. So wondering about your largest mobile customer in Korea, they are slated to introduce their next flagship product in early calendar 2016. So should we anticipate that you still have an opportunity to get in there?

Yes, I mean we don’t comment on any of large OEMs. We don’t have any specifics on any of those things. But I can tell you as we feel comfortable with the design win opportunities that we have and again there are always possibilities we can’t commit to them as we walk through it. But I think we have to be careful with Samsung and I will be a little bit more specific with Samsung because they are going through their own structural changes in their mobile world because they are having a difficult time I think in the high end. And so as Samsung moves forward the question is will they have the volumes that they want to have in those high end products, because it feels like based on some of their earning releases I have seen in the last couple of days, that there is one very, very dominant figure in the high end and that does impact the Chinese manufacturers also because remember last year we were very focused on winning China Inc. and the mobile opportunities was we thought would be pretty significant. And we got all those wins but the volumes just didn’t materialize. And so the winners in Asia from what I can tell seem to be Huawei, LG, and then possibly HTC if they make a comeback, but right now they don’t look like they are making it. So as we kind of walk through this, we are seeing the big winners in China being the Chinese OEM which are Huawei and ZTE, obviously Samsung will be there, I don’t think anybody else survives long-term.

Our next question is from the line of Bill Dezellem with Tieton Capital Management.

The gross margin forecast that you gave is nicely up from the third quarter and I don’t think that I have clarity on how you are getting that?

It’s a mix issue. So we have a better mix going into Q4 than Q3. We have been targeting in the range of 56 to 60 going forward and we are still in that range. So when I see the high-end we move it up a little bit so [Multiple Speaker] mix.

Yes, it’s really consumer down, industrial flat to slightly up and licensing up that’s the mix.

Yes.

Right, so you're going to see that, come up.

And overtime did licensing actually increase as a percentage and therefore that number that gross margin target will continue to grow?

Yes, it increased a little in Q3, because it was pretty low in Q4 right? And so -- but we’re seeing that as being stronger than what we would have thought. So that’s what really lifted because that’s a fairly nice gross margin.

And it's pretty steady, so licensing is fairly predictable. It gets a little bit lumpy with some of the core work that we do, but it's fairly predictable. So as you see flexes in consumer for example license don’t have a greater impact.

And then did we hear you correctly that relative to the USB connectors you really still not seeing much in terms of the ramp that is a still in front of us?

Yes, I mean obviously we’re disappointed by the USB Type-C I actually own a phone that has USB type Type-C that probably no one in the U.S. have which is the Letv which has our 60 gigahertz solution and I hooked it up to our TV at home just to see how well it would work. That USB connector is phenomenal, better than anything I've ever seen on any appliance ever. And I wish again you had a network but the problem is those USB connectors are only starting to become available. We were told they would be available in early 2015 and I have only seen two devices that are using it today so. At Microsoft and these other big manufacturers embrace that and you're going to see that next year. And what that means for us Bill is that you're going to see a transition from that FPGA that we explained you to our ASSP product pretty quick. We thought we’d ship more FPGAs into that market and we did, so these guys will actually -- some will use an FPGA solution but they will transition to our ASSP solution faster that we thought, which is good. I mean you're not going to lose the business, so I mean the good news, but the bad news is it's been delayed in the production ramp.

And so this is a case where had you not to purchased Silicon Image you almost would have been skipped over not totally but almost but now you'll be able to participate in [Multiple Speakers]?

Yes absolutely and let's not forget some of the things that we can do that nobody else can do right? So we have the ability to put HDMI and EDP over USB Type-C, and we can either do that inside of the device or we can do it outside of the device. So the nice thing about having that image expertise now is that like you said I don't get to find out with an FPGA but more meaningful is that we can be the people that can provide the access video out of any mobile devices that use USB Type-C.

And one additional question ECP5 did that shift in volume this quarter or was it just introduced this quarter?

It was -- we've been sampling it for over a year. It's been in production since early ’15 but it's a slow ramper because of the complexity of the design. We’re shipping some volume today but not really material that would affect. But we do expect that overtime to be a faster growth than what we saw in its predecessor which was ECP3. Just because there is more solutions and it services more markets. ECP3 was a concentric device ECP5 has handled head nets but also micro servers and multiple video applications in industrial, so that’s a much more diverse product than we thought with ECP3.

We're actually seeing more design opportunities in the industrial space on 5 early on than we are across comms.

[Operator Instructions] We do have a question from the line of Purdy Ho with China Everbright Securities.

So my question is regarding your iCE 40. So I would like to a vision more about how do you see yourself in supplying this to whether cell phone market or do you more see yourselves in supplying it to the Internet of things market. And so along the line I would like to know your view on the Internet of things market size expansion going forward [Multiple Speakers]?

So the iCE 40 product the first instantiation of it was in the Smartphone industry doing higher and low barcode label those things, as it has evolved it has created -- it actually has more DSP functionality and even lower power with different RAM configuration, what that enables us to do is it can actually do very, very low power instant on features, but it can also do display and sensor interfaces that an application process or may be asleep and not want to do. So you'll find applications like in the Pebble watch we do something different than we do in the Samsung Gear which might be different than something we do in the Citizen watch. So each one of those things in one case we interface to the GPS in another case we do the display and in another case we do the sensor and then finally in another we’ll do a simple Bluetooth wireless solution for them. So you look at us as the low cost low IO product that can interface between just about anyone of the interfaces that displays that they have. So that’s really what it does in wearables and then in smartphones you want to think of it more as detection as anything as it's a product that is sitting idle that is waiting for either a detection or a recognition feature. So it could detect your voice. It could recognize a fingerprint. It can do an iris scan. It can do multiple different functionality, depending on what the customer wants, it’s very flexible device that they can program to meet their needs or we can provide a canned solution metrics out of our 20 different opportunities that we have. The Chinese manufacturers typically want an off the shelf solution whereas the big OEMs want to have their own design sources so they will have us to do it for them. So it’s a very flexible device, very low power and enables people to put products into their product that are very low cost.

Okay. And would you mine also commenting on seeing the views of ZTE and Huawei?

In the comms market or in smartphone?

Smartphones.

So in smartphone like the plank or for instance there is a plank phone that Huawei has. There’s different versions of the plank, we do support them in multiple features, I can’t tell you what they are. ZTE, also we support ZTE. So both of those customers we have some pretty good relationships and capabilities. But they ship -- let’s not forget, they ship high end phones, they ship medium end phones and then some of the low end phones. I expect both of those manufacturers to move up to the higher end smartphones in China long-term because I think that’s where the money is for them. So both of them will be more the innovators in China as oppose to what you see out of Xiaomi or Oppo or some of the Internet sales phones. So I think Huawei and ZTE will lead that. The latest smartphone I have seen from Huawei is pretty impressive. The screen is bigger than any screen I’ve seen as far as the thinness of the edge and the size. So I think these guys are being really creative in the form factors. But don’t count out ZTE it has some pretty fabulous phones too.

Our next question is from the lines of Rob Jost with Invesco.

A couple, I heard just general comments around where you were seeing weaknesses and strength and I was cut off for a second with the operator side and I didn’t hear all of what you said. It sounded a bounce back in was it your comms in China?

Yes we had a bounce back in comms for sure, right, so as we kind of walk through comms. And that sure was fairly flat and then consumer was down. So we had…

Okay.

…:

Yes, okay. So then looking out to the fourth quarter then, are you -- now that you have this kind of correction I guess from the second quarter to the third quarter with these comms, is your outlook that it steps down again or is it sort of flat from 3Q?

No the way I would look at it today, at least the way that we’re looking at the forecast that we’ve given you guys, is consumer we expect to be down slightly once again, industrial I think will be flat to slightly up, I think the licensing will be up and then communications will be flat as far as that. The comms, so again our consumer I think will go down and a part of that is that since you have the seasonality in Q4 and we knew that as we walked into Q4 we just thought that the macro for comms and just the -- and some of the tcom stuff that we had invested would make up more for some of the downside in the other areas. And comm isn’t coming back as much as we thought and neither is distribution worldwide. And that’s all driven by the softness in China.

Okay. And then my last question is just around the cost rate I am looking at your Slide 7, it looks on the 40, I am trying to figure out here, what is your action done, have your action done all 49 million?

Yes.

Okay. So then what was the impact for the quarter of the 49?

The impact for the quarter in terms of the production?

Yes.

Oh! Boy. We are thinking, hold on.

Okay. [Multiple Speakers]

That’s a good question because we have been tracking it as we go forward.

I heard you say COGS were about 5.

Yes, COGS were 5 as a total.

5 as a total, so that’s not all fourth quarter…

Oh yes okay.

So it’s about 2 million-2.5 million this quarter what impacted in this quarter.

We have some overtime and then…

But we are still…

Go ahead sorry.

No, I was going to say we’ still have yet to see the impact flow through okay I thought if we were…

Yes.

...we are heading on sometime.

You’ve seen some of the impact flowing through because you’ve seen reductions in our OpEx overtime right. So we are 60s every last quarter we did 56 this quarter, so we’ve seen that step down. You see 49 going into the next quarter and then you will see another step down as we hit to this 175 going into next year. Some of that is still synergies, because it will happen in Q4 and you will see the benefit in Q1 and beyond and then you will also see the reduction of the actions that we just took. [Multiple Speakers].

Okay, right. When do you see the 49 hitting full run rate, is that early ’16?

Q1.

Yes.

Q1 okay.

Yes.

Q1.

End of the year it will be done.

Our next question is from the line of Steve Huffman from PineBridge Investments.

Yes, just one question. What’s your target level again, and how do you plan to pay on -- pay down the debt?

So we did not, we haven’t got a target leverage that we've been operating to. We've got a debt suit that we have to year or two based on free cash flow 70% suit. So our plan is debt first before we do anything else in terms of buyback or anything like that. So debt is clearly our number one priority, so it is in debt pay back, sorry?

What is your current leverage?

Current leverage I think is 4.5ish.

Our next question is from the line of Chris Roland with FBR & Company.

First question is kind of bigger picture I guess for Darin. So Darin as we’re looking into 2016 what new products are you most excited about? What's going to be a potential real needle mover for you guys?

Well I mean the most -- the newest products that I am most excited about is one that we developed a year ago that is a pretty good killer solution in smartphone. And I won't tell you exactly what it is. But the nice thing is we have it, we’re rolling through it, which is good but the things that excite me that are coming up. We've got a pretty interesting product that we’re going to come out with next year which is more of a programmable ASSP, and this is the first time where we've taken the benefit of a specific market segment hardened a lot of the IP and then made it programmable. So it doesn't have as many IOs as a traditional FPGA but it's a lot more flexible and it's a target at the specific market. And that’s kind of the first instantiation, of what we said that we would do with the acquisition related capabilities which was let’s tie some of the video capabilities that we have into a product that has the flexibility for a specific marketplace. I won't tell you exactly what it is but that’s exciting to me. The other one is the millimeter wave backhaul is exciting because I think it's to going to get more traction than people think not be big in revenue for ’16 but we should see some good stuff in ’17 and then let's not forget the millimeter wave and what we’re finding is a very interesting play with the WiHD in medical and in the industrial field where we’re starting to see medical surgery room that wants to go completely wireless so they don't have any cables within the room that have to be cleaned. And so those are some very unique opportunities that we’re starting to see more applications for because we have the product. And it's something that direct communication between let's say a surgical instrument and a display without having cables strewed all over the place in the surgery room. So healthcare actually is turning out to be something that may be a good potential for us, that close proximity 60 gig is big and then the backhaul. I don't think Wigate will be big in any way next year but I think the other capabilities will start to grow.

The smartphone product sounds pretty exciting. Do you already have a design win for it or you won't be sampling until next year?

No we have a couple of design wins where and there with that product. I can't comment on the design wins in that particular because we’re not supposed to. So what we try to do is stay kind of agnostic to any of those comments. But the bottom-line is we have built a product a couple years ago actually a year and a half ago it took a while to get perfect for the smartphone and I think that will be one of our larger possible growth opportunity.

One more if I can, so for USB 3.1C some other guys are making some noise out there Fairchild the NXP in particular. So would you consider this a back half disappointment for you guys or are you guys were you thought you would be. And how do you look at 2016 are there still a lot of great opportunities for you guys?

Yes I mean absolutely a disappointment. When we came into the year we had -- I was looking at it I think in April and there was $53 million of opportunity that I was looking at for USB that obviously it's lifetime revenue, that we were looking at that was just in front of us. And the majority of that stuff just started pushing and pushing and pushing and pushing and then there's so many different ways that you can architect USB Type-C because they have the PC PD they have all the charging which is the wall stuff and then also have the video and you have the high-speed and slow speed data. And so as we started focusing on the roadmap we focused on areas where our video expertise and the switching expertise enabled us to go after some pretty good capabilities and some prospects. It doesn't mean that we didn't win with the FPGAs look because we do have quite a few different design wins albeit I think people were overaggressive about what they think what they thought our customers thought they would ramp. So I think that the accessory guys were ahead of the platform guys. Meaning that we’re not devices that had USB Type-C designed in turn for the accessory guys to support which drove the volumes down. So yes, absolute disappointment we do expect to have some solid USB growth next year, albeit it might going to be different than we thought it may be more on our ASSP than we thought versus our FPGA.

Our next question is from the line of Todd Morgan with Jefferies.

You have guys covered a lot of stuff. I did want to try and follow-up on the incremental cost saving comments that you made earlier. This has I guess been a big part of the story and you talked a lot about some of the things you have done already. Can you at least generalize about what some of those areas are and kind of how far you are going in kind of uncovering these additional opportunities that you’ve laid out?

So you are talking about the synergy or the recent actions that we took to kind of resize?

I guess both right, because you’ve increased those numbers kind of all along.

So, on the synergy side, that’s a little bit different because the synergies were just combinational effect and we looked at that and we started finding more and more opportunities in that combinational effect and that’s related overlapping capabilities, capabilities that we can streamline, facilities that are overlapping, combing facilities, that kind of thing. So that was all associated with just bringing the two companies together and optimizing. That’s where the 49 came from and that’s as we dug deeper more and more came out. It doesn’t do anything to hurt our overall capability and it kept us with pretty close to the time frame of projects that we were anticipating meeting as the two companies combined. The synergy action I will call it the -- not the synergy action but the headcount and workforce resizing that we just did was really a function of looking at what do we need to optimize short-term versus long-term. So it was a roadmap driven exercise that we leveraged while we looked at our strategic plan and said what can I move out, what can I move forward, what can I afford to drop? Because it’s really not a capability that we want to keep, so there was a lot of work done in R&D around timing and projects would be completed as well as what we can combine together. So this one was when where we actually took capability and do lose some short-term speed in getting things done. We have sacrificed any long-term capabilities in this exercise. Does that make sense?

Sure. Again especially it sounds like there is sort of lot sort of R&D assessment and there’s a big part of what you are talking about here.

Yes R&D, let’s not forget R&D was a big part of our spending over end for both companies. It’s only combined and we said look, if we are going to go head and hit an operating income of 20% R&D needs to be sitting around 19%-20%. And so we really looked at the programs and then we looked at the capabilities and what we tried to do is really structure ourselves so that we have certain capabilities in the United States and then other capabilities overseas. So we picked up factories Hyderabad which are capable of doing some future designs. We also have design capabilities in China and Philippines. In the Philippines, as Joe was mentioning on some of the synergy, I think we closed Taiwan and moved everything to the Philippines which really hurt our overall cost. So we spent a lot of time really looking at the capabilities and the next phase of this thing is going to be making each site more capable of doing imaging and FPGA along with some millimeter wave. So the challenge we have long-term is not just having specific resources that can do specific things but really kind of having everybody and a lot of the sites be able to do the different capabilities and that way gives more flexibility.

[Operator Instructions] We do have a follow up question from the line of Jaime Viteri with Baird.

Just a quick follow-up on the HDMI commentary that you made, what is your revenue outlook for 2016 for HDMI and how does the ramp-up 4K TVs expect that revenue outlook?

So we would expect -- we’ll expect -- I won’t give you specifics but I am going to expect that HDMI revenue in 2016 actually goes down because of the transition to the next specification. And then in 2017 it comes back up. So it’s on a Silicon basis right now the royalty basis remain fairly comms at constant through time, you go see the royalty stuff continue that revenue stream continues as long as that’s particular and in the next version just adds more to that royalty base. So we expect the HDMI as it sits today will slowdown and then in 2017 will kick back us.

And there are no more questions we have. Sir do you have any other further remarks.

Yes, hi. We appreciate the continued support from all of our shareholders. Lattice has more capabilities than ever with multi flavors of FPGAs, imaging products and millimeter wave technology. Our capabilities obviously means more opportunities to grow. Our goals remain clear, continue to grow faster than the market and focus on increasing our shareholder value and it really all comes down to winning new opportunities while completing flawless down the ones that we have. So thanks again for your support.

And sir we do have one more phone question from the line of Sanjay Devgan with Columbia Management.

Just a quick question on the gross margin, you talked about 57% gross margins next quarter but here was a $1.2 million I guess charge that was kind of built into that and you guys talked about that comparable impact occurring 4Q and 1Q. So if I am reading that correctly, does that mean that your gross margins would have been higher by that 1.2 million without that impact and that should kind of unwind as we get into Q2 and we should run at a higher gross margin rate?

Yes, so the answer is we’re going to run at a gross margin that is always dependent on next Sunday so we know that right? But that particular charge is kind of a dual sourcing charge. Because we’re going to have to move we've to move manufacturing to sites now versus fabs within the same site. So there is requirement but some of the larger OEMs that say you have to have your product in different sites. So that’s why we had to take that charge. And that was an unforecasted charge that hit the gross margin for this quarter, and it will continue for a couple of quarters as we walk through this.

And it would have been higher you're correct. Our gross margin would have been higher.

I wouldn't call it up next year because of this tools site going away because metric obviously changes big time.

And sir we do have no other questions.

Thank you.

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.