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

Tristan Gerra - R.W. Baird Joseph Gallo - FBR Capital Markets Richard Shannon - Craig-Hallum Christopher Longiaru - Sidoti & Company Sundeep Bajikar - Jefferies William Dezellem - Tieton Capital Management Todd Morgan - Jefferies.

Good afternoon. My name is Katrina and I'll be your conference operator today. At this time, I’d like to welcome everyone to the Lattice Semiconductor Second Quarter 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] Thank you. Mr. Pasquale, you may begin your conference..

Thank you, operator. Welcome everyone to Lattice Semiconductor's 2Q 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.

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 third 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 a press release or publicly announced conference call.

The matters that we discuss today other than historical information include forward-looking statements relating to our future financial performance and other performance expectations. Investors are cautioned that forward-looking statements are neither promises nor guarantees.

They involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our fiscal year 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 will also be presented within the requirement 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 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 in reconciliation to the most directly comparable GAAP financial measure is 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. Q2 revenue was the highest for the Company in almost 15 years. We continue to execute on our long-term growth opportunities while driving our integration ahead of schedule.

And while Q2 revenue was below our expectations, we don't believe this quarter reflects a potential for our revenue and the value growth we see going forward. To put this in perspective, we remain firmly on track to achieve double-digit revenue growth for the full-year 2015.

This is consistent with the growth we have delivered since diversifying into consumer market for the past three years. Over the same period, there have been numerous variables in terms of customer programs ramping and macro driven fluctuation in end market.

Even with these fluctuations in entering the consumer market, we’ve kept our gross margin steady in the mid 50s. Clearly the macro environment is weak and the headwinds are expected to continue into Q3.

The important takeaway is that at Lattice we are controlling the variables that we control by leveraging our entry scale to drive non-GAAP operating income to our 20% target even on the lower expected revenue. We view this 20% target as both realistic and achievable.

In Q2, we saw the macro environment to grade in both Europe and China as we move through the quarter with particular weakness in the final weeks. We’re not alarmed moving through the quarter based on our discussions with our distribution partners and where we saw the quarter rolling out.

However, distribution did not rebound as it typically does late in the quarter and the end result was almost half of our top distribution customers worldwide were impacted by the general slowdown in one way or another. On the OEM side, we had a single communications customer inventory correction.

Both our [indiscernible] and our OEM inventory correction were on FPGA products. We still remain confident. Overall, they were well positioned in the right markets with the right customers. We already have numerous potential growth opportunities in place.

These include already announced design wins with ZTE, Huawei, Letv, Google and others, along with some potential big opportunities at the big guys. Finally, our integration of Silicon Image is running ahead of plan.

We’ve got excited about the transformational acquisition a few months ago is intact and still has potential ahead we acquired the business. We are also confident we will meet our target operational synergies of $42 million on an annualized basis as we exit 2015. We’ve already realized $33 million in run rate synergies for the full-year 2016 run rate.

Joe will touch on this more in a second, but we’re not sitting back on our overall OpEx spending either. In addition, we’re finalizing our strategic long range plan. In addition, as we’re finalizing our strategic long range plan, we will evaluate all of our R&D programs.

Those programs that don’t meet our ROI goals will be cut for other businesses that are not aligned with our strategic direction, we will pursue other strategies. Importantly, all the actions that are driving increased efficiencies or reducing costs will not adversely impact our customers or our long-term revenue prospect.

That concludes my initial comments. I’ll now turn the call over to Joe.

Joe?.

Thanks, Darin.

Our Q2 financial results were impacted by a number of factors, primarily related to the acquisition, including $8.9 million in amortization of acquired tangibles, $3.3 million of acquisition related charges primarily for legal and outside services, $4.1 million of restructuring charges as a result of synergy actions already taken as we drive toward our targets and $4.5 million related to GAAP purchase price accounting.

In that $4.5 million, we’ve included $2.9 million associated with deferred revenue and $1.6 million associated with the sell-through of acquired inventory. As part of our press release, we provided a detailed reconciliation of GAAP to non-GAAP financial measures, including these and other reconciling items.

For the fiscal second quarter of 2015, revenue was $106.5 million on a GAAP basis, and $109.4 million on non-GAAP basis. Gross margin for fiscal 2015 -- Q2 2015 was 54.6% on a GAAP basis and 56.9% on a non-GAAP basis.

Non-GAAP operating expenses for the second quarter were $63.2 million, excluding $4.1 million in restructuring charges, $3.3 million in acquisition related expenses, $8.9 million in amortization of acquired intangibles and $5 million in stock-based compensation.

This compares to our guidance of approximately $65.2 million plus or minus 2% on a non-GAAP basis. The sequential increase in non-GAAP expenses compared to Q1 was primarily due to the inclusion of a full quarter of Silicon Image spending for the acquisition. As Darin noted, we’re not sitting back on OpEx.

We intend to aggressively cut expenses on programs that are delivering less than required ROI. We're finalizing our evaluation of all programs and will be taking action in Q3. Based on our initial review, we are looking to cut an additional $10 million to $15 million from our OpEx on an annualized basis.

And as Darin pointed out, the actions we are taking are driving increased efficiencies at Lattice and instilling a more disciplined approach to driving return on investment. The integration of both companies necessitates the need to evaluate all ongoing programs for synergies and appropriate resource allocation.

Income tax expense for the quarter was $4.1 million; cash tax expense was approximately $2 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 the form withholding taxes associated with the licensing revenues.

On a GAAP basis reflecting the aggregate impact of the various items mentioned, we recorded a net loss for the second quarter of approximately $35.6 million or a loss of $0.30 per basic and diluted share. On a non-GAAP basis, net loss was $8.6 million or $0.07 per basic and diluted share.

For the quarter, diluted share account was approximately 116.9 million shares. Net cash used in operating activities was $15.1 million in Q2. We ended the quarter with cash and investments of approximately $138.1 million. Accounts receivable decreased to $76.9 million at the end of Q2 as compared to $80.8 million at the end of Q1.

Day sales outstanding improved to 66 days compared to 82 days last quarter. The inventory at quarter end was $80.8 million compared to $80.6 million at the end of Q1. Months of inventory stand at 5 months compared to 5.9 months at the end of Q1.

We spend approximately $4.2 million on capital expenditures and incurred $17.1 million in depreciation and amortization expense during the quarter compared to $2.9 million and $7.9 million respectively in Q1. The interest expense for the quarter was $5.5 million. This concludes the financial review portion of the call.

I'm going to turn it back over to Darin for the third quarter and full-year 2015 business outlook.

Darin?.

Thanks, Joe. In terms of our specific expectations on a non-GAAP basis for third quarter 2015, we expect revenues to approximately be flat to up 6% as compared to Q2 2015. Q3 gross margins are expected to be approximately 56.5% plus or minus 2%. Total operating expenses are expected to be approximately $60 million plus or minus 2%.

Q3 restructuring charges are expected to be approximately $7 million with acquisition related charges including the amortization of acquired intangibles in Q3 expected to be approximately $9.5 million.

For the full-year 2005, on a non-GAAP basis, based on macro weakness and softness in the communications markets we are resetting our yearly guidance to be down approximately 10% from the $485 million. We continue to expect gross margins to be approximately 56.5% plus or minus 2%. This is unchanged from our prior guidance.

We expect total operating expenses in 2015 to be approximately $215 million plus or minus 2% excluding restructuring and acquisition related charges. This includes a positive impact of the synergy savings. This is unchanged from our prior guidance.

But as we noted earlier, we are revisiting our OpEx model, so that it is aligned with the expected lower revenue level.

Restructuring charges for the full-year of 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 $52 million. This is also unchanged from our prior guidance.

Finally our goal remains achieving 20% non-GAAP operating income are expected to lower 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 continue to view this as both realistic and achievable based on our track record of delivering double-digit yearly growth, which we’ve delivered over the past three years.

In summary, while we expect headwinds in Q3 from the lingering macro weakness worldwide, we are executing against a robust sales pipeline and remain focused on winning an increased share in each of our end market.

We will use the lower revenue to drive our OpEx spending down; in addition to our already committed synergies giving us more leverage as we grow. We continue to be well-positioned over the long-term in the right markets with the right customers. We are confident we will rebound as the broader market health improves. That concludes our prepared remarks.

Operator, we would now be happy to take any questions..

Hi. Good afternoon. Could you talk a little bit the revenue opportunities coming from Silicon Image in terms of the various technologies, notably coming on the SiBEAM side [technical difficulty].

What’s the potential and what’s the timing of those area SNAPs?.

Yes, we still have a lot of products that are coming in the pipeline, some of them with the HDMI product that we have, some are with superMHL products that we have and some of those are just the port processors and other ones are the high-performance high bandwidth video products.

So still have all of those that service the TV markets and the AVR markets and things like that. In addition to that, we have on the SNAP technology which is really our second wireless technology that comes online. And SNAP is for everyone online is really the wireless USB type solution.

So it's really kind of a 6 to 10 gigabytes per second solution that's 60 gigahertz. And so that technology we're not going to expect giant revenue in 2016, but we do expect to start building the design win funnel for that as we move from ’16 to ’17.

So ’16 we will see some material revenue albeit not -- probably in the low double-digit kind of space, but we will be selling a lot of this the WiHD, which is really the wireless HDMI solution, which is a 1080p uncompressed and that will be different if you do some compression techniques. So that’s been shipping.

It will ship almost double digits at this year in 2015 and we expect that to be a little bit stronger growth for ’16..

Okay.

And then, could you give us an update on your outlook in digital TVs and specifically I think you've talked in the past about a second half ramp at your -- what used to be your large customer in digital TV related to 4K TVs?.

Yes, I mean, we see those design wins kind of moving through the pipeline. Some of the stuff and some of the higher ends that gets integrated as you guys know, some of the SoC actually does takeaway and then we continue to introduce new products.

So we still have a couple of products that are coming on online that are higher performance processor, but I think the one that’s going to drive a lot of the higher growth will be our superMHL products, which are more high-end 4K and high-end 8K televisions which are all the highest bandwidth products available in the market today/none.

So those particular products I think are taping out later this year, early next year and we expect those to be second half of next year and then through 2017..

Okay. And then, you talked about a correction in the distribution, also at a communication OEM.

I'm assuming in China are you seeing a stabilization in the second half and into Q4, notably in communication and wireless infrastructure? And what's your view of the inventories that are left in the China base station market currently? And then any commentary about [indiscernible]?.

Yes so let -- yes, let me talk about -- let's talk about China first and our specific OEM. I know that Xilinx alluded to this also on their call. So there is a situation where the company have created lot of inventory in that particular channel. We assumed that our revenue at that customer would be down.

I think Altera said that or Xilinx said that they may. We already had discount of that revenue fairly significantly and they took it down even further. So when we look at Q3 and Q4 the comps, we’re not assuming that they are going to get back to Q1 levels at any time during Q3 or Q4.

And we maybe a little bit conservative there, but we're assuming that they are going to bleed off inventory in Q3, which means it will go up maybe a million or two in revenue from that particular OEM and then we assume kind of the same thing in Q4. So we are not being overly aggressive. In fact, we may be too conservative on the China comps.

And again, China Mobile seems to be selling down a little bit China unit comp and other seem to be taken up the SoC from what we could tell in the licenses. So we’re not calling a big SNAP back in the communication market.

We are calling one customer to come back a little bit and when we talk about coming back, we’re coming back to just over half of what they shift in Q1. So, I mean, we’re still kind of trying to be conservative there.

On the distribution deal, I mean, this was kind of a crazy one, because as we looked at it this we are going through this its like 14 of the 20 of our top customers, not just the one that we track, you can’t track a [indiscernible] in HD, 14 of the 20 were down.

And when you go back and look at each one of them, they’re all being a little bit cautious on their end market demand, which means that the end market customers are selling through. So I think that’s just going to ripple through and so we’ve been trying to be somewhat conservative on our distribution.

We actually have distribution in Q3 going down slightly. So we’re not calling distribution up in Q3 either. So we’re making up a lot of the ground on the new initiatives we talked about Tristan over the last couple of years, which is T-CONS and some of the other new initiatives that we have there starting to pile in.

So we're not expecting this deed to SNAP back in Q3 and we're not expecting a huge SNAP back in communications..

Great. Thank you..

All right..

Your next question comes from Christopher Rolland with FBR Capital Markets..

Hey guys. This is Joe on for Chris. Thanks for letting me ask the questions..

Hi, Joe..

Hey. So it seems like more and more people are coming up with a 3.1 A6 solution.

Are these guys are placing your solutions and has or will the market mature enough for FPGAs to be designed out?.

I mean, the good news is I think with you guys on the acquisitions to begin with, we said hey one of the first movers that we’re going to convert FPGAs into A6 and guess what in some cases that doesn’t happened, because they want the flexibility with FPGAs. We are going to displace it with Saber.

So we’re going to displace our self with our ourselves, which was the whole plan. It’s win early and defend longer. So we expect Saber to probably be the lion share of the revenue through 2016. So 2015 all our shipments will be USB will be on FPGA.

And the type of wins that we have on that when you kind of take a step back and say, well, who are all the customers you are winning, it's like Celcom, Microsoft, Nokia, a bunch of Taiwanese guys, there are some HP stuff in there.

So some of those will ship with FPGAs, but in 2016 when they want the [indiscernible] they will convert to Saber, which is our ASSP solution..

Awesome. Thanks for the color there. And then, on the Chinese consumer ramp, it appears to be going a little bit slow. Do you guys like your content there, we’ve [indiscernible] BBK and content in OPPO mobile devices as well.

Is there any other design wins we should be aware of and what are your general thoughts on that market?.

Yes, I mean, what’s interesting is, if you asked me this a year-ago, I’d say man we’re killing, if I knew how many design wins that we have in China, like we killed it. The problem is they’re just not winning. And I think Huawei and I said this before on the other phones, Huawei gets straight.

We have -- I don’t know five design wins in Huawei right now and while we seems to be doing the best with anyone. But you got ZTE, got HTC, you got LG, you got all these other guys right there. We are in, they are just not winning again really Apple.

I think Apple is struggling, and I think Samsung are -- Apple struggling, but still winning, Samsung is struggling. You saw the mobile thing I think it was today or yesterday. I don’t remember the days anymore, but Samsung was struggling big time. So yes, I mean we are confident; we have a lot of design wins.

The issue is, are they really going to ship these things in volume..

Awesome. Thanks, guys..

Yes..

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

Hi, Richard..

Good afternoon Joe and Darin.

How are you guys doing?.

Good..

Good. Let’s hear a few questions for you. I noticed in your guidance for the third quarter you got the gross margins coming up here a little bit.

Can you help us understand, I assume it’s related to mix somehow, but maybe help us how you're seeing the revenue pieces within your total number transitioning the quarter?.

Yes, it’s absolutely mix related. And it's just some cost savings that we have gotten are coming through and some volumes that we are increasing. So we get some good news flowing through there. It’s a slight pop, but it's kind of where we're heading and we are just taking things up as we get from our knowledge on it..

Okay. All right, fair enough. Joe, can you help us with the kind of the math on the OpEx, how you expect to end the year in the run rate or -- I guess maybe more first quarter next year on a pro-forma basis.

I don’t know if you want to do that adding in the potential $10 million to $15 million of additional stuff that you’re contemplating, but can you help us with that number?.

We are still working through additional cuts. And those cuts will be program related. So the synergy cuts are going to be baked in and that would have had a set of run rate getting close to this 20% op inc number that we’re targeting based on our pro-forma model.

And we’re going to go take that down some depending upon where revenue is and depending upon our review of programs. So the program review is ongoing right now and it will involve looking at the timing of programs, as well as effectiveness in terms of utilization of cash.

So I don’t really have solid numbers that I’d like to talk to you now, but coming out of the year it will be better than we have targeted with the savings..

Yes and Richard let me comment a little bit on these programs, because I don't want people to get the wrong opinion when I say hey we are going to go look at the ROIs. Lattice does rigorous ROIs on everything that we do. Silicon Image did not.

So as we are walking through this, it’s really pulling Silicon Image through the Lattice process to ensure that everything that we do has an ROI that then gives us that benefit that we expect over time. And so, I don’t want that -- people confuse when Joe talks about killing programs or pushing programs, that these are the things out there.

It’s all based on the fact that we have a pretty rigorous system for return on invested -- on investment and we expect to hit those on all of our programs..

And beyond that we are part of the integration. It was a review of our programs and a look at the synergistic revenue opportunities going forward. We baked nothing in to our forecast when we talked earlier about synergistic revenue. So we are melding that together as we go through our strategic long reach plan right now..

Okay. Fair enough. Maybe just a couple more questions for me. Darin, I think you got asked this on the last quarterly conference call.

I wanted to see if you had any updates after Intel [indiscernible] formal offer for Altera and any potential benefits that may flow through Lattice over time?.

Yes, $8 million to date. So 2015 we’re going to make $8 million off of that acquisition, because we’ve already been designed in and are shipping a product that used to be serviced by Altera. And so we’re going to continue to do that. Our goal is probably triple that, maybe quadruple that.

It’s going to take time, because each one of those things has a design win and we had a customer that basically said, I am not going to support this and they design them out. So we put in one of our product with an ECP -- it was an ECP3 product that displays one of Altera’s product.

I won’t tell you the application, because I don’t want to walk it back in, in trying to do something. But that’s the kind of thing that we would have expected, albeit $8 million is small, but that’s what we’re going to go do. We’re go in piece by piece by piece and we’re going to find these opportunities..

Okay. Sounds great. Last question for me, I will jump out of line. Darin, I think you went through the prepared script a little fast, but I think you’re mentioning some potential larger sizeable opportunities in the second half of the year.

Why don’t you clarify what you’re referring to, what segment of products et cetera, I just want to make sure I understand the scope of that comment?.

Yes. So for the second half of this year, we’re really talking about some communication, little bit of communications come back, we talk about [indiscernible] down, I would expect Q4 for to finally kind of come back a little bit.

And then with consumer mobile we expect to get some small uptick, albeit from a lot of programs that we’ve already been working on, through a lot of peripheral devices. So even when people say hey you’re out of the S6, there is a lot of derivative products that were not out of.

And so, some of that stuff has a little bit of a SNAP back, but not anything to right [indiscernible] for.

What I was alluding to is that we’re continuing to have some pretty deep discussions at the big guys about FPGA technologies and how they benefit them for some of the new technologies and capabilities they want to put in the hardware side of the phone.

And there was a lot of -- I’m not going to tell you all the features, because I’m not supposed to, but there is a ton of features now that are starting to open-up or you need that hardware acceleration, you need that instant on. So we call it always on, always its listening and it's more than just voice.

So it’s those types of applications that we’re working on and we’re working with the big guys. So we’re always engaged with those guys and as I said one of those things changes our trajectory pretty quick..

Okay.

Is that -- it sounds something along the lines of the Sensor Fusion stuff, that might in the right area there?.

No, let’s not call it that -- yes, you’re talking about Fusion, the Sensor Fusion stuff and all that stuff..

Yes..

Where we -- we don’t go head to head with micros, what we do is we do features that the micro guys can’t do.

And granted, some of the features get integrated over time and some of them don’t, because at the high performance feature they haven’t put on their phone or its new to their phone, a lot of times they’ll embrace us to solve that for them, because in a development phase a lot of things that an FPGA can do and an iCE [ph] can't.

And then later on they will try to integrate years down the line, and that’s what happened. That’s what happened all through the Silicon Image consumer programs and the Lattice consumer programs, as you win, you try to hold them for two to three years, you got win the next one and that’s just the nature of the beast..

Right. Okay, I will jump the line guys. Thank you..

Thanks..

Your next question comes from Christopher Longiaru with Sidoti & Company..

Hey, Chris..

Hey, guys. Thanks for taking my question.

So just the gross margins are holding up really well, how much of that is integration? Are you getting any synergies there? Can you talk a little bit to -- what's going on with the gross margins and why they’re holding up?.

They’re holding up because we had been driving some significant cost reductions. We’re starting to see some potential synergies moving forward, those won't come clear till later. So this has been a mix issue, and the fact that we’ve already driven significant reductions in our portfolio to maintain the mid-50s that we had on FPGAs.

The products coming from Silicon Image have slightly better combined margins due to the licensing revenue and the IP..

And so, this is basically Lattice’s problem before Silicon Image, the improvements came there and you, when you talk about further improvements on the Silicon Image side that you expect those way -- those are separate from -- what's going, okay.

And then, how much -- can you comment how much licensing revenue, Silicon Image had I think it was 15% to 20% of their business tended to be licensing revenue, pretty high gross margin.

Can you just comment as to how that is trending now?.

Yes, I’ll put it this way. It’s not trending down, if that’s what your question is. I mean, I think it’s a healthy run rate. As we move through, I think the challenge that we have -- yes, the challenge that we have right now is that, there was a mix -- they kind of mixed stuff up from IP cores, IP licenses and then there was some other things.

And so, we kind of look it as, its like, it’s probably 10% of, I mean look at Joe..

Rough and dirty..

Okay. And we should just kind of think about that as kind of just hanging out around that level.

Is that fair?.

Yes, and they had it a little higher than that in their original run rate because of some of the deals they got some other things that were done in 2014. We think a standard run rate right now is about 10%. I mean, that’s good realism for modeling..

Okay. And just, you had talked about some chips that you guys were stacking. Last quarter some Silicon Image chips and some Lattice chips.

Can you comment on any progress there and also maybe future integration of those functions into one?.

Yes, I mean most of the things -- so think of what we’re doing and I’ll simplify it. So USB 3.1 we came in with an FPGA and then we figured everything we needed to figure out and then we hardened a lot of that stuff both in a [indiscernible] we will ship that into that in 2016, that’s kind of the plan.

For stacking, most of the stacks that we do today would be like an FPGA with a Bluetooth radio or these things. So we didn’t mean to insinuate, if we said that, that’s probably not what we were targeting. Now we could because we have the stacking capability.

Stack a lot of our products, but the difference is you wanted a high speed video with some flexibility on the isle. You could stack a Silicon Image product right on top of an FPGA. So, we could do that today.

Right now we’re focusing most of our synergies -- most of our synergies are in that win, early and defend longer or still have a whole program right now on how do we put these things together. And I’ll give you a fine example. So USB 3.0 that nobody really talks about anybody because it runs into 3.1 Type-C.

We used to have a design win with Cypress, where Cypress provided the front end and we provided the back end of 3.1 solution, we now do that internally with a Silicon Image product and an FPGA from Lattice. So that’s one example, we’ll display some of the other guys too. And that may have been where you’ve said; Oh, they’re probably stacking that.

We don’t need to stack it because there’s usually board space on a 3.0 solution. There is not board space on a 3.1 Type-C, just the form factors are really tiny..

Got it. Yes, it’s super helpful..

Okay..

And just kind of diving into the inventory a little bit more. I know there’s a lot of China inventory and comps.

Your inventory was up a little bit, was the majority of that internal inventory bump comps?.

Yes..

Okay. And nothing else in that inventory now, in inventory bump ….

Nothing significant. Nothing of a significant change. So, like we said there was one customer who did not pull DMI into the quarter, so the DMI inventory sits there, we own it..

Okay. And I’m sorry if I missed this.

How many 10% customers did you have in the quarter?.

One..

One..

Okay, great. Thank you guys. I appreciate it..

Your next question comes from Sundeep Bajikar with Jefferies..

Hi, Sundeep..

Hi, guys. Thanks for taking the question. First, if you could just give us an update on customer revenue timeline from China smartphone.

How should we think of the second half over first half revenue growth from new smartphone design wins? Overall in China as well as non-China combined?.

Okay. So, Q3 and Q4 you’re going to see ramps, the bigger ramps from Huawei and Letv because those are both pretty big, Huawei you guys know the features because we stuck it in the -- Letv is an -- it’s a WiHD solution. If you guys haven’t seen that, it’s pretty cool.

You can take a smartphone and you can project the 1080p off of a smartphone wirelessly into your TV using an HDMI port and a module that does that. You can also do gaming because of its WiHD and its super fast response. That turns out to be one of the killer products out there, and that’s ramping pretty quick.

So those two alone a long way listen lets not forget that Samsung derivatives that we are in. So a lot of the things that are derivatives too like the Galaxy S6, we still plan those and that’s our plan.

So we’ll grow some of that modestly through Q3 and Q4, albeit not like the big win of the S6 or S5 or S4 would be, but we do start to see that growth..

Okay, that’s great to hear. And then, just following up, if you could give us more color quantitatively in terms of what is driving the lower expectations.

For example, how much of the cut in your expectations for the year came from core Lattice versus the acquired business of Silicon Image?.

So the majority of it, probably at least 50% of the cut is just distribution.

Distribution was down quite a bit lower than what we thought for this quarter, and again remember our expectations where the distribution would grow throughout the year which is how we get to the $485 million, distribution looks like it’s pretty heavily affected by the macro. So we’ve tried to be conservative and pull a lot of that.

About half of the drop is just distribution in general, and then the other half is just softness and a lot of the OEMs that we’re predicting, so it’s a second half downturn.

Right now some of it could be DTVs because we’re trying to take slant that says, hey, if we’re starting to see this macro event occur then we wouldn’t expect that these OEMs to have this robust ramp in their particular product. So we’ve tried to take more of a holistic view of this thing. So I’ll just say, [indiscernible] also be up.

We took [indiscernible] down and then we looked at all of the OEMs and we pushed them down also. Trying to be realistic about what that macro impact would have. So it does affect some Silicon Image products in the DTV space and it does affect the overall mobile.

We’ve already had mobile go down, and Q3 and Q4 will probably come back, that’s so low in Q2. But TVs we would expect, AVRs we would expect all those things to be hit by the macro. So we’re predicting it. If it doesn’t happen its upside..

Okay, great. That’s very, very helpful.

And then just as a follow-up on that, as we think about the full year 2015, how should we think of revenue performance across the different segments, particularly communications and industrials, should we assume both down significantly for the year?.

For consumer its kind of -- it’s a little cloudy because we’re going to throw in Silicon Image which is going to make the consumer look like its doing great. And it is doing well, if you look at it from the 3.65 to the 4 that we’re at today. It looks like it’s a great growth rate.

But in reality, it’s from -- a lot of that’s from the acquisition which we expect. I think industrial -- Joe, is looking at the numbers today..

They’re pretty much flat year-on-year, slightly down in comps from last year because comps was a heavy front end year.

So you got comps down but industrial was fairly well flat year-on-year, and we would have predicted in the 45 number that industrial would have gone, communications we knew was going to be down slightly lower, we expected consumer to be higher at least in the room [ph] for analysis that we had..

Okay, that’s very helpful. Thanks so much..

Yes..

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

Hi, Bill..

Good afternoon. A group of questions here for you.

You had mentioned that you’re going to be cutting $10 million to $15 million out of your operating expenses and yet you’ve also said that you have achieved $33 million of your $42 million synergy goal?.

Correct..

If my math is right, that’s only a 9% incremental difference which is less than the $10 million to $15 million OpEx cut you’re planning.

Would you reconcile those numbers for us? Is that $10 million to $15 million in addition to the synergy savings or is there some double counting?.

Yes. No, it’s in addition to the synergy savings. The way we look at the synergy savings, that’s an infrastructural savings, meaning I put the two companies together. I have savings related to infrastructure, I can take those cuts, those are long-term real cuts. The additional cuts are driven by business environment.

So the business environment looks less than robust moving forward. We’re evaluating programs and looking at where we can best utilize our cash. That’s going to result in an additional savings beyond the $42 million..

That is helpful.

And then continuing down that path, given that you are already approaching the $42 million, would it be reasonable to think that number might be conservative and will ultimately end up being higher?.

It’s possible. We’re in the middle of the evaluation Bill. No, we’re not going to come off the synergy numbers of $42 million and then the other number is an initial first pass related to where we’re at on the programs related to our slowed projects.

So slow to still, our slow -- strategic long way plan is still in process but we think we’ve got savings related there..

Yes, but Bill, lets be straight up here, right? There’s only a certain amount of synergies you get before they’re actually restructuring. And so there’s a point where we know what we’re going to get out of the synergies, there’s upsides and there’s stuffs that were like, hey wow, we didn’t see this.

And so you’re going to push those synergies as hard as you can for the efficiencies of the company [ph]. After that though, as Joe alluded to, you’re going to start killing programs and you’re going to start saying look, I’m not going to do this and I’m not going to do that.

And what's the impact on revenue, and can I afford to do it? If we’re really at a lower number then we’re going to have to look not at synergy and [indiscernible], but at OpEx reductions.

And we have the benefit of being able to fold the two companies together and there is some revenue related synergies out there that we haven’t taken into account, and that translates into potential reduction in R&D because we’ll synergize the way we run that program. So there’s good news there.

So we’re not necessarily killing program specifically, we maybe rolling them in and extending the timeframe, that kind of stuff..

That’s actually a great segue to my next question, which is R&D being around 37% of revenues.

Would you talk just in a broader sense about how you’re viewing, where R&D ultimately should be in your model and the degree to which programs that maybe previously made sense under the Lattices solo heading no longer due, because they get crowded out by better competing projects from the Silicon Image side..

Yes, I mean if you look at the model, R&D should be roughly around 18% to 20% depending on where you are and what you’re doing, I mean that’s the bottom line. And so that’s what Joe and I have put in our models as we walk through it, and the rest of the stuff you make up the rest with SG&A and everything else.

But the bottom line that we look at is, there’s going to be opportunities where, there’s always opportunities in consumer that outrage the revenue opportunities because of their speed and their size and those are things that operate your base line like an FPGA base line in industrial and consumer. So you can't just go, lets okay all in, in consumer.

Because you’re kind of building that base of products within industrial and communications, albeit they take longer to grow, they’re not as fast, but they’re also what pager builds everyday when the lumpiness for consumers comes in and out.

So what we’re trying to do is we’re trying to basically position the company what we’re structured for our base line revenue plus a little bit of consumer. And then when these big hits come in, it’s a big deal but you’re not adding resources to support those. Because those come from your basic R&D capabilities and the products.

Now on the consumer side the products are typically less expensive than the products that you’re going to build on the communication side, which is why three years ago we said the last product that we’re going to build on the communications for a while would be ecp5. A cost reduction of small product.

In the industrial front, the nice thing about that is, you don’t have to build the silicon for industrial, we basically layer IP on to existing silicon from the other market.

So we can develop a strategy where you spend 40%, 50% of your R&D dollars in consumer, the rest of it has to be layered through industrial on communications, but we always have that baseline that you can fall back on..

And we’re in a good position, because we’ve driven XO2 and XO3 products to the market. They’re new products that are out there in the market and ramping very well. EC3, EC5 still very solid in the comp space. So we’ve got a sweet spot right now as we go forward in terms of spending.

But we’re going to allocate resources to those core products also because we’re not given up on industrial; we’re not given up on communications..

Right, and to be specific on XO2, XO2 was available in production in 2011. And in 2011, and it just past XO and revenue shipments this last quarter. So that gives you an idea.

You complete this big investment and now it takes you this long just to ramp those products, but its good because its stable and that’s a long-term growth and it has very solid margin..

That is really helpful. and if you would allow one more question that, I don’t think was specifically addressed earlier with any questions. And we’re hoping you will embellish and discuss the quote in the press release that, relative to the many high potential growth opportunities that you already have in place..

Yes, I mean, those are all the ones that we always talk about. Remember when we started, it used to be like one big win at one customer, and now there’s multiple types of those size wins at multiple customers.

And I’m not going to comment on the specific, you guys know who we chase right? We’re chasing the S7, just like everybody else on the plant is and we chase every other giant phone guy out there. The nice thing is we have a lot of good discussions with them.

And as we look through this we have a lot more opportunities today than we ever had in the past..

Thank you both..

Yes..

Your next question comes from Mike [indiscernible] Capital..

Hi, Mike..

Joe, thanks for letting me ask a question. When I’m looking at your third quarter guidance and then the full year guidance and I kind of back out the implied fourth quarter. The OpEx is down to about $46 million, which is a big step down from the third quarter $60 million, and that drives a very profitable fourth quarter.

I’m just wondering how confident are you in that $46 million of OpEx for the fourth quarter?.

So it’s based on the synergies that we’re recognizing and the timing of those synergies as they roll through. So we’re pretty confident..

Okay.

So that give us a decent run rate as you exit the year in earnings, so that’s kind of a good run rate to use going forward?.

Yes, there’s variability in that, obviously because there are some assets coming in and assets are a couple of million bucks a pop. So, I think you want to keep it somewhere between $45 million and $50 million..

Okay. Well, if you keep growing the revenue that will be fine. Thank you. I appreciate that..

Thanks Mike..

[Operator Instructions] Your next question comes from Todd Morgan with Jefferies..

Thank you. Just two clarifications if I may, you talked about the -- around $250 million in midpoint of graphics, I think you’re saying that the potential $10 million to $15 million or so of run rate OpEx cuts that you’re investigating would be a reduction to that number, whatever you’d actually realize in the period.

Is that correct?.

The $42 million in synergies is something that we targeted before. Any other reduction, the $10 million to $15 million above that -- is above that.

Is that the question?.

I think that’s right, yes..

Okay, good. That’s what it is..

Okay..

So we’re going to hit the $41 million, above that is program driven type cuts and operational spending cuts based on revenue..

Okay, great. And then secondly, I think if we go back to a quarter or so, you certainly talked about your expected pick up from FPGA is going to smartphones in China in the second half of this year.

And I was just asking to kind of look back at some of your comments here, I was just tying to understand if you’re thinking at this point that that original outlook is potentially a little bit different [indiscernible] a little bit different than you had seen or if you’re still kind of on track for the kind of type of growth that you had anticipated earlier in this year?.

Yes, the design wins; we hit the mark on all the design wins. The issue is that, a lot of the customers that we got designed into haven’t done particularly well in the market. And I think that’s an artifact of Apple and some of the other big OEMs really winning more share than these guys.

I mean, our highlight for the thing -- our two highlights I alluded to earlier are really Huawei and Letv which one is a wireless WiHD solution that we have and the other one we’ve got five or six different design winds in those. Both of those are material in Q3 and Q4, and there are some other ones sprinkled [ph] in there.

They aren’t as big obviously as that, so we did hit the mark all the way on the design end. We did not hit the mark on the revenue because they just haven’t -- our end customers haven’t done as well as we thought they would do.

So that’s one of the reasons why we took some of the revenue down in Q3 and Q4 from the original $45 million, the consumer mobile up took in revenue didn’t occur as fast as we thought, because they didn’t do as well in the market..

Okay, that’s helpful then. Thanks. Good luck..

Yes..

[Operator Instructions] At this time there are no questions..

Okay. So I’m going to go ahead and close this. So when I look back at where we are today versus where we were beginning 2012, it still is about the same and it really shouldn’t. As we started 2012, we forecast $67 million in revenue, we just bought Silicon Blue.

The only capabilities we had were FPGA capabilities and we’re a distant third place horse in that two horse FPGA race. Our only hope is to grow on a market they ignored called the consumer. Now after the Silicon Image acquisition, we almost doubled our revenue and quadrupled our capabilities.

From FPGAs to Video IP standards expertise to DTV and AVR leadership products to millimeter-wave technology. Not to mention we are the leaders in IP sales, we’re collecting reoccurring royalties on HDMI/MHL.

All of these capabilities enable us to have broader, deeper discussions with our existing customers while opening up new opportunities at new customers. In 2012, we’re focused on one big win at one big customer, now we have multiple big opportunities at multiple customers, each one by themselves making significant difference in our growth trajectory.

That’s the beauty of having the right products for the consumer marker all the while keeping your baseline revenue growing over time, structure for the downturn, leverage during the upturn.

We continue to be keenly aware and actively confronting the challenge presented by the fact that our revenue is lower than we expected at the beginning of this acquisition. Our plan is pretty simple; structure the company to achieve 20% operating income at the new lower base and create more leverage as we grow.

We’ve already auctioned $33 million in run rate synergies in 2016 which equates to about two thirds of the EPS we achieved in 2014 and there’s some more to do. We expect to meet the $42 million synergy target. What does all that mean? We’re solidly focused on doubling our EPS in the next two years just like we said.

The only difference we’re going to do that at a lower top line in the near-term, but we still expect to grow on the long-term. Thanks for your support through this process..

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