Good day. My name is Victoria and I'll be your conference operator. At this time, I’d like to welcome everyone to the Lattice Semiconductor First Quarter 2015 Conference Call. [Operator Instructions] After the call has ended, if you would like to listen to the replay of this conference, you may access it by dialing 404-537-3406 and use conference ID 41056653. Thank you. I would now like to turn the call over to David Pasquale of Global IR Partners. Sir, you may begin.

Thank you, operator. Welcome everyone to Lattice Semiconductor's fourth quarter and full year 2015 results conference call. Joining us today from the Company 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 website. Please note, we also published a PowerPoint presentation on the IR site to accompany today's call. The slides will be referenced in management's prepared comments. If you could now turn to Slide 2 please which covers the Safe Harbor statement. 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 first quarter and full year 2016. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. The matters that we discuss today other than historical information include forward-looking statements relating to our future financial performance and other performance expectations. Investors are cautioned that forward-looking statements are neither promises nor guarantees. They involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended January 03, 2015 and our quarterly reports on Form 10-Q. The Company disclaims any obligation to publicly update or revise any such forward-looking statements to reflect events or circumstances that occur after this call. Our prepared remarks also will be presented within the requirements of SEC Regulation G regarding generally accepted accounting principles or GAAP. Some financial information presented by us during the 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 the call, you will find that the required presentation of in reconciliation to the most directly comparable GAAP financial measure is in the Company's earnings press release. I would 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 our call today. I'm going to start my comments on Page 3 of the slides. Results for the fourth quarter came in as expected, but we are surprised by a payment delay relating to an IP sale, which occurred during the quarter. Because of this delay, we were unable to recognize $7 million of forecasted revenue resulting in our revenue in non-GAAP gross margin being below our expectations. We expect to recognize the revenue in associated cost to sales when future payments are received. Overall, Q4 GAAP revenue came in at $101.2 million which was down 7.8% from Q3. Our Q4 non-GAAP gross margins was 54.6% compared to 55.7%. Our non-GAAP net loss was $0.04 per share in both Q4 and Q3. GAAP revenue was $406 million at full year 2015, an increase of 10.9% full year 2014. Revenue was higher due to addition of the Silicon Image products and licensing revenue as a result of the acquisition in early March of 2015. Our non-GAAP gross margins for full year was 56.2% and our non-GAAP net loss was $0.13 per share. 2015 ended up with double digit growth from 2014 as we mentioned previously, but down from our original estimates when we acquired Silicon Image. On the consumer side, revenue dropped significantly for both our FPGAs and Imaging Product with Samsung as our customer struggled with profitability and began focusing newer phone models at the lower end of the market. This lower cost focused approach reduced the higher-end feature sets that we provide. In the communication's market, Huawei and ZTE combined dropped almost 25% FPGA shipment, as LTE buildouts in China softened. Industrial for the year was our highlight increasing on a non-GAAP basis almost 7% due to the strength…

Thanks, Darin. If you turn to Slide 11, I'm going to touch on the financial highlights from the quarter. As part of our press release, we have provided detailed reconciliations of GAAP to non-GAAP financial measures. For the fiscal fourth quarter of 2015, revenue was $101.2 million on a GAAP basis and $101.3 million on a non-GAAP basis. Gross margin for fiscal Q4 2015 was 53.5% on a GAAP basis and 54.6% on a non-GAAP basis. When compared to Q3 GAAP gross margin of 54.5%, the gross margin benefit we achieved from improved mix and the sell through of previously reserved products was more than offset by increased period costs, the effects of lower manufacturing volume in Q3, and Q3 scrap recovery which did not occur in Q4. The increase in period cost includes cost associated with ramping dual source fab and backend capability, which we expect to incur through Q2 2016. Total non-GAAP operating expenses for the fourth quarter were $51.9 million excluding $3.5 million in restructuring charges, $0.4 million in acquisition related expenses, $8.8 million in amortization of acquired intangible assets, $21.7 million in impairment of goodwill and intangible assets, and $4.4 million in stock-based compensation. I'd like to provide a bit more information related to the impairment charge we incurred in Q4. During the quarter, there were two separate impairment triggers associated with the Qterics long-lived assets. First, the Company made the decision to no longer pursue the data services business. In line with the process we followed related to capital allocation and operational effectiveness, we made the decision that resources would be better utilized in our core business operations. Second, the Company agreed to redeem an equity investment in Qterics made by Qualcomm. Following our assessment of impairment of long-lived assets of Qterics, we determined that…

Thank you, Joe. In terms of our specific expectation on a non-GAAP basis, revenue for the first quarter of 2016 is expected to be between approximately $95 million and $100 million on a non-GAAP basis with revenue for the full year 2016 expected to be approximately $460 million to $470 million on a non-GAAP basis. Non-GAAP gross margin percentage for both first quarter in the full year of 2016 is expected to be approximately 56% plus or minus 2%. Total operating expenses including acquisition or restructuring related charges are expected to be approximately $49.6 million plus or minus 3% on a non-GAAP basis for the first quarter of 2016 and approximately $175 million plus or minus 3% on a non-GAAP basis for the full year 2016, which includes the benefit of synergy savings. Restructuring charges are expected to be approximately $2.1 million for the first quarter of 2016 and approximately $2.8 million for the full year 2016. Acquisition related charges including amortization acquired intangible assets are expected to be approximately $8.9 million in the first quarter of 2016 and approximately $35.8 million for the full year 2016. In summary, the positive impact of our major transformational moves in 2015, have positioned us for long-term success. We expect Q1 to represent a low point 2016. And we are well positioned for growth in the second half of 2016 led by existing design winds in our three key markets: consumer, communications, and industrial. If macro improves, we should do even better. We will be well positioned to o adjust the numerous and diverse opportunities to be outlined in the call today with our expanded solutions and our competitive advantages. We are focused on the ongoing execution of our business strategy remain fully committed to driving a higher returns for all of our shareholders, which I continue to be the largest individual shareholder. That concludes our prepared remarks. Operator, we will now be happy to take any questions.

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

Good afternoon. Your full-year revenue guidance implies a 20% type of sequential growth for the couple of quarters later this year. What's the basis for the assumption that your second half is going to be so strong relative to prior years, and also what type of year-over-year growth are you expecting in your consumer business this year?

Between 2015 and 2016, Tristan, it's going to be a lot of consumer. There is some industrial in there also, so we're going to consider consumer to be up. We are going to consider industrial to be up, communication is probably going to be down. We are going to call that 5% to 10% and IP is roughly flat.

Okay. And is the delayed IP payment embedded in your Q1 revenue guidance?

No. Not materially.

Okay. And then finally, could you give us an update on your 1180 wireless technology in terms of potential timing and when it gets material to the topline?

Yes. I think the nice thing is Qualcomm and Intel seem to be working together, which is going to help the ecosystem, because Qualcomm is kind of been leading with the AD solutions. And as you guys are aware we are very inter-operability - we have a lot of inter-operability between Qualcomm. So Intel and Qualcomm end up with the same [Mach Fi] [ph] in all the software then we are in good position. We announced at CES, a dongle for Qualcomm Y Gig, which works today. We work with their factory in Israel to make sure that we worked functionally and from the data transfer perspective. So we expect to roll out that dongle as the demand come sin. Again, Qualcomm is going to be integrating that on mobile devices. Intel has already announced the integration of their millimeter wave solutions on the laptop front. So there will plenty of devices to connect to after that.

Great. Thank you.

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

Good afternoon, Darin and Joe. Thank you for taking my questions. I guess maybe I'll follow up on one of the last questions here, thinking about your growth profile for the year, particularly in the second half. My guess is talking about consumer first as part of the drivers for the sequence of growth throughout the rest of the year. Is it safe to assume that will be the big part of the growth driver, or should we see more balance between that and industrial, any more color you can give us on that, please?

Yes. Consumer will be a bigger driver. So obviously as Joe had mentioned, there is going to be some gross margin pressure, because of that stuff. But we are not considering it. Again, you got a good mix of consumer industrial in some of the IP to offset that. So that will make - that will actually end up for a nice year for us. But yes, consumer will be the big trigger. But let's not count on industrial, some of the growth there.

Okay. I want to step away from the revenue part of that question, just ask another quick one on gross margin. So a decent part of your consumer related product lines, at least historically, have been below corporate average gross margins. And your guidance for the year is the same for the first quarter. Can you help us resolve that? Can you help us figure out or understand why that would not be under a little bit of pressure as you grow consumer in the second half?

There is some pressure there for sure. But you still have the IP and royalty that round volume that's going to come through as well as industrial up tick, and we have some product, I call it evolutions that will help us on the margin side also.

Okay. Fair enough. Back again to the consumer bucket, maybe delving into that a little bit more. You've got a number of different pieces here, both from the Lattice as well as Silicon Image side. Curious, any one of these going to be bigger driver than others? I can see how your eyes product line could be a big driver, potentially maybe even some larger customer wins, but sounds like you're getting a little more excited about Y Gig, and then where does USB actually fit into that?

Yes. So let's start with the consumer. Most of the consumer growth will be FPGAs this year. So it will be consumer FPGAs, which is certainly been working on for a while to kind of reestablish post the Samsung era. And then you got the - we do still see a lot, although not as large as Samsung, a lot of the MHL and some of the emerging countries, the reference design that I alluded to with MediaTek, there is an MHL reference design out there also that ships into India where they do use their smartphones kind of as productivity enhancements for them because they don't have laptops and PCs. The USB Type-C, we are still seeing a lot of video over USB 3.0 of the micro - some of the micro USB's not necessarily as big of the USB 3.1. However, to talk out of the other side of my mouth, Microsoft did announce a whole slew of families that use USB 3.1 and we are in those. So the key for us is really the adoption of that through multiple different platforms being the big guys adopting 3.1 and then being able to establish ourselves is kind of the keys to run in video out of that platform, because a lot of people don’t necessarily they want to burden the phones with the video in the phone but they want to be able to convert it once it comes out versus tablets and some of the other higher in them want to have the embedded features that have been able to establish a video as a video output out of those. So we are going to see kind of an HDMI MHL consumer front which is really kind of an emerging markets and maybe tablets and those things but the big driver for consumer is going to be FPGAs being iced.

Okay. Perfect. Maybe a couple of quick questions and I will jump online. I think you mentioned some costs that you're bearing out throughout this year as you go to some dual source manufacturing. Can you help us understand what's going on there? What's driving this? Is this more of an internal push or is this something that's being requested by some customers here?

So that's what we started talking about in Q3 where we are moving to dual source with fab and back end capability. It was driven by customers. And was playing it out – basically it will be completed by the second quarter of this year.

Second quarter of this year. Okay. Fair enough. And my last quick question, Joe, what amount of cash flow do you expect to use to pay down debt here? What are your parameters? How are you thinking about that?

What kind of cash flow do we expect to see?

Yes, how much will you pay down debt this year, do you expect?

So based on this model we have 75% free cash flow suite. We won't have any obligation to pay debt based on last year because of the cash flow being firstly negative because of the consolidation. Going into 2016, the 460 to 470 model of what you see if you look at the street numbers, we’re going to spin somewhere in the 50 million range on cash is what we’re anticipating free cash flow. 75% of that will go to pay down debt.

Okay. Perfect. I think that's all my questions. I will jump in line, guys. Thank you.

Your next question comes from the line of Pardee Ho with Everbright.

Hello, Darin and Joe. Thanks for taking my call. I have a question on the IOT and the virtual reality market. So would you mind commenting on them? And also how would the ICE product be used in these devices? And then my next question would be, how is your recovery of the TSMC facilities affecting your product schedule?

[Audio Gap] the parts that we had were past some of the steps there, so I think we will be okay there, minimal disruption. If you look at the virtual reality headsets they typically are combination. What you’ll see is an FPGA may use kind of I/O expansion which means the input will come in and it will be split for your left and right eye. So that’s a lot of times what you'll see an FPGA. HDMI image will actually be processed and then modified using SIM G product. So you will see both SIM G product in those virtual headsets plus an FPGA as I/O expansion in the left and right splitter. So we have combo solutions for that. We are not going to ship super high volume but they do prove than in these particular application it’s a great way for us to get some stickiness with the combination of the two products. And then additionally there is also some wireless versions of that using YHD that you can put into some of those virtual reality headsets much more expensive but then you’re not going to stop with the wire sitting on your virtual reality headset. So we are working on that both on 10 ADP version and then we’re also working on the 4K version of that. So that will be a much more expensive solution but it maybe sort after being of the limitations of the wire on your virtual reality headset.

Okay. Good. Thank you. And also, you had talked about the Type-C a little bit earlier. So I would like to understand more about how much you expect that would be contributing to the bottom line, and what you think your market share would be in this area?

I think today, so USBs types, we’re using an FPGA solution today and that’s what you’re seeing in some of the Microsoft devices that are out there an FPGA program a logic solution in there. The next guys that I’m seeing using that connector is going to be people LeTV in China and some other people. So the volumes I don’t think are going to be as big as people think as that matures. But by the time that hits volume we’ll have a different product, which an ASSP that will then move into the FPGA sockets for lower cost for us and higher volume. So, we're not predicting, like last year we thought this was a big market. This year, it’s probably somewhere around $10 million max as we walk through this thing, and a lot of those just the adoption rate for USD.

Okay, good. Thank you very much.

[Operator Instructions] Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

Thank you. Relative to your two largest OEMs that you addressed in the press release, would you discuss the weakness that you did see in the quarter and whether the level of softness abated as the quarter went on or whether it accelerated? And kind of how you are viewing those two customers in 2016?

If you're talking about the mobile customers being -- one was pretty much right on target with what we saw, another one was slightly soft but not really affecting us, it's like $1 million or $2 million off. But the bottom line is I think we accurately called those guys in Q4. I think the disturbing trend is just the fact that -- lot of these consumer platforms, if you take a strategic direction to go after a lower-end product line then you are doomed to compete with a lot of people versus just one big guy. And I think that’s going to be the challenge for some of these people, is profitability more important than leadership. And I think that'll be the challenge for us. Because again, our products are really leadership products that belong in the highest end smartphones, tablets, and other devices within the IOT spectrum.

Thank you.

Your next question comes from the line of Sanjay Devgan with Columbia Management.

Hey guys, thanks for taking my question. Just a quick question on the OpEx trajectory. So, I think going at the December quarter you guys had talked about $49 million OpEx run rate and then it came in a little higher than that, and the assumption was that all of the OpEx or restructuring would be -- we'd realize a full benefit starting in Q1. But it looks like you guys are now talking about $49.6 million in Q1 and so it’s just a straight line math. You guys are keeping the full year guide at $175 million and I think the assumption was that once you guys were at an OpEx run, we'd be looking at $43 million or $44 million somewhere in that range. But given the higher OpEx, the higher base, you guys are keeping the full year guidance unchanged. Is it fair to assume that the run rate is going to be kind of $1 million or $2 million lower than that previous assumption? And then, I guess, as follow on: how should I think about OpEx growth thereafter?

So, we talked about the 175 as being aggregate number on the year. The number would flux based on mass sets and some variable charges. So you're starting to see that in Q1. Q4, we exceeded the target because we had some headcount that remained on books longer than we had anticipated and we had some outside services charges related to the consolidation and systems efforts that were ongoing. So we expect to still hit that 175. It will be bouncing around to some degree based on variability due to mass sets and timing.

Yes, so Sanjay, the mass sets nowadays can be on some of our more complex products over a $1 million, and on some of the less complex products. We’ve been taking a different strategy of using some of the shuttles and other things. But it still moves around like Joe, said. And these are $1 million $1.5 million hits when you take those.

Related to the leverage going forward, we still see that 175 as a solid number in line with the revenue forecast. So if we have uptick in revenue, we don’t anticipate adding structural OpEx to support it. There'll be some related to sales, incentives, but that’s really it. So, we think we have a pretty good head room above that to increase.

Right, okay. But if I just -

There is some variability in there going downward also but not as much.

Right. But if I look at -- if I just kind of do the new math and if we take the full year guide, it kind of implies, like I said, $41.8 million on a quarterly basis going forward. That’s better than what I had thought and I was just wondering how should I kind of assume the OpEx ticking down? I mean, should we start to see the full run rate starting in Q2 or will there be a gradual decline down and will go from kind of an intermediate step and then we'll realize the full OpEx run rate in Q3.

You're going to see a bit more gradual.

Okay, bit more gradual. Okay, thank you.

Your next question comes from the line of Chris Roland with FBR & Company. Q – David Haberle: Hi guys David Haberle on for Chris Roland. Real quick, how should we think about royalties from Silicon that you guys collected in this quarter, that you actually collected, and has this business increased or decreased year over year?

Between 2014 and 2015, it decreased. Between 2015 and 2016, we kind of have a model that's fairly flat. And between last quarter and this quarter, it will probably come around pretty flat. Are you there?

Yes, I’m still here. I apologize.

So when we do that, we expect for 2016, the royalty rates actually will probably decline through the year. And that depends on IP cores and patent sales and things like that. But today we’ve kind of modeled that in. For Q1, it’s probably higher and that kind of comes down in Q2, Q3, and Q4 but that’s what we've modeled, we could do better than that but we're modeling it as fairly flat to 2015.

All right. And my second question: given kind of the Altera Intel integration, are you guys seeing any change in landscape of FPGAs pricing, increase in sales, anything like that?

Yes, I mean a little here and there. It’s funny because we jumped into tcom, that was a direct go head-to-head with one of those two, I won’t tell you who. And we did pretty well as we kind of walk through that thing. But I think the biggest changes that we're starting to see is with our distributors just looking straight at displacing on the next design win, some of XMA for our product lines. And because they see that some of the customers may not want to deal with Intel anymore, or be in a kind of a monopoly if you will, if Intel absorbs Altera and Altera doesn’t create the same strategy they did. So, I think we'll see it, but it’s going to be more of a design win and then out in time you'll see the benefits. And there is stuff, like I said, in consumer, it can happen pretty quick, it can happen in four or five months if you're doing a programmable [indiscernible]. In some of the communication stuff it takes quite a while.

We did see some instant pop early on when the announcement came and we talked to that. There hasn’t been significant change in that going forward.

But we do have a very deliberate plan to replace other company sockets because we believe have an advantage in the longevity of what we do.

All right. And the last question, you guys are working down towards $100 million of cash on the balance sheet, what’s your comfortable level there in the cash department?

$100 million. That’s the number that we’ve stated. We can go below that, we've looked at our cash flow and run rates. We’ve got coverage for about 7.5 quarters right now as we look at some of the ratios out there. So there’s a mental number that we have in our head, around a $100 million. So, we're definitely looking to optimize an increase as we go forward.

Yes, we're focused on cash, don’t think we're not. I mean typically you aren’t but again we want to generate cash and pay down the debt. That’s a big focus as far as right now which it should be. Right? When you take on debt, you got to generate cash and pay it down. So that’s what we're doing.

Right. Thanks, guys.

[Operator Instructions] Your next question comes from the line of Francis Chang with 3i Debt Management.

Hi Darin and Joe, thanks for taking the question. I’m just trying to get a sense of Silicon Imaging’s revenue contribution. If you look at the two years, $366 million of revenue last year and $411 million on a non-GAAP basis, can you give directionally how much was Silicon Imaging during that stub year?

We haven’t broken it out that way and we’ve typically avoided talking to it in terms of previous company, current company. We look at it at different take, we look at it in market segments with consumer, industrial, and coms.

We will say it, in 2016 we expect Silicon Image revenue to go down because of the transition on HDTV. And again some of that's integration, there's transition. And then out in time we expect it to go back up with the advent of HDMI 2.1 which is the next version of HDMI.

Okay. And then when you were talking about royalties decline in 2014 and 2015, again, could you give me a sense of quantity of royalty revenue in '15?

So some of it in '15, there was quite a bit of stuff in there from IP cores to patent sales - 2014. They had a lot of different things within those ranges. They also had a true-up in there on the last quarter of '14 which caused those things to go way up there. And that was like a couple of trip that they had. When we modeled that in, we modeled that in for the first couple of years to be roughly about $40 million and then we modeled it down over time. And that could be conservative but I think over time, it should drop from the 40 unless MHL and super MHL, and some of the other consortiums begin to pick up. But we did assume that HDMI, over time, would decrease and then some of the others would increase. We had at it in a 7 million to 8 million a quarter run rate, and it’s slowly declining.

Okay. Thank you.

That’s just the HDMI royalty number, MHL royalty number.

Correct. Thank you.

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

Yes, thanks for taking my question. Just a quick clarification. You talked about this delayed IP payout or payment. Could you give us a little bit more details about when you do expect to pick that revenue back up and what caused the delay?

Okay. So I’m going to summarize it real quickly. We had a contract, they didn't pay us, we believe they will, there is always risk, there are other potential buyers, and we don’t have anything material in 2016 listed for that. That’s about all I can say. Do that makes sense?

Okay. And as far as when you look at all these consumer opportunities that you mentioned, and I guess that's the key driver to this big spike up in revenue in the second half of the year, why exactly are you so confident that those happen and you have such visibility into two quarters out as to why there will be this big recovery?

Well, lot of it is your interaction with the customer and their interaction with you. And with a lot of these large customers, they get into the details of what you do for each product that you are talking about, and they focus on making sure that you can supply them because again, they don’t want to risk their large volume things for anybody's product. So you got to be really careful as you engage in these things that you don’t overestimate or underrate estimate cause both can get you in trouble. So we’ve taken the right steps I believe to be confident, and the assessment we have in design wins and there is always risk as Safe Harbor says, there is always risk that something happens but we are really confident with what we have looking forward.

So I guess you have a lot of design wins with large customers, that's the key answer.

Yes, in order to move the needle for this year, absolutely.

Okay. Final thing for me is, you mentioned that you thought the communications business would be down this year. Could you just elaborate a little bit why you think that is and what the trends are? Thank you.

I mean, I think as you talk to anybody who is dealing with communication market right now, I think that’s the best I’ve seen it as flat. And as we, kind of, look at it, we saw the LTE build out soften between '14 and '15, and then we saw some business analysis by the government, if you will, that seems to hold some things there in Q2. We just don’t see anything driving the LTE buildouts in China with the macro that we are seeing and a macro around the United States. I don’t see the buildouts. So we are taking a conservative approach there and saying hey, we think that it’s down. It’s about as simple as we can get it. And there’s always little bit of lag with Xilinx and us cause our Q4 communications actually looked okay and we are calling Q1 communications down. They said communication is up but again, you typically buy our products first cause they are not expensive. So they roll those out and they’ll buy Xilinx's, last in first out kind of technology. So there is always a difference and they also service a bigger, broader, in the wireless than we do. So if it's wireless deal, then they may see upsides and we don’t.

Okay. And I want to sneak one more in. Did you have any 10% customers for calendar 2015, if you could share with us who those were?

We do not.

Excellent. Thank you.

[Operator Instructions] We have no further questions at this time. And I'd like to turn the call back over to Lattice Semiconductor CEO, Mr. Billerbeck for closing remarks.

Okay, thank you. As always we appreciate your continued support as we drive to grow and improve our financials and pay back the debt. It's not lost on us at the beginning of 2015 production so far short of the stated goals. We did take quick and decisive action to resize the company and create long-term shareholder value by making hard decisions fast. We expect to outgrow the market in 2016 while continuing to execute towards doubling our EPS. We remain confident in our strategy. Thanks again for joining us today and we appreciate your support.