At this time, I would like to welcome everyone to the Lattice Semiconductor Third Quarter 2009 Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to David Pasquale with Global IR Partners.

Welcome everyone to Lattice Semiconductor's third quarter 2009 results conference call. Joining us from the company today are Mr. Bruno Guilmart, the company's President and CEO; and Mr. Michael G. Potter, Lattice's Corporate Vice President and 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 where you can get a copy of the release off of the Investor Relations sections of the Lattice Semiconductor's website. Before we begin the formal remarks, I will review the Safe Harbor statement. It is our intention that this call will comply with the requirements of SEC Reg FD. This call includes and constitutes the company's official guidance for the fourth quarter of fiscal year 2009. If at any time after this call we communicate any material changes to this guidance, we intend such update will be done using a public form, such as a press release or publicly announced conference call. The matters that we discuss today other than historical information includes 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 2008 Form 10-K filed on March 9 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 the events or circumstances that occur after this call. Our prepared remarks also will be presented within the requirements of SEC Reg 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 on 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 the results and underlying trends. Management uses non-GAAP measures to better assess 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'll find that the required presentation of and reconciliation to the most directly comparable GAAP financial measure in the company's earnings press release. I will now turn the call over to Mr. Bruno Guilmart. Please go ahead, sir.

We continued to make progress in the third quarter in what appears to be a broader based recovery. We continued to streamline our cost structure and focus our business to better compete in the marketplace. As I have stated many times, Lattice's return to profitability in our number one priority. We believe this goal is now in sight. I am encouraged with the overall improving business environment and believe the company is now positioned to deliver stronger results. In terms of Q3, revenue was above prior guidance at $49.1 million and up about 5% from prior quarters. This is even after the approximate $2 million in reduction in revenue associated with the transition of certain distributors from a sell-in to a sell-through business model. As previously stated, these changes are part of the revamping our Asia distribution channels and were necessary as they will improve transparency and visibility at our end customers going forward. We expect the planned transition to be completed this year. In the quarter we saw strength led by Asia and Japan combined with product revenue growth from prior wins at existing customers. Revenue again remains strong through the end of the quarter with our turns business exceeding expectations. In Japan, we started to ramp shipments under a significant prior win at one of the world's largest flat panel companies. In China, telecom-related revenue was again up year-over-year, although lower sequentially as expected due to the pause in China's 3G build out. We continue to expect China to remain a healthy, steady growth market for us. The US market appears to have stabilized and we saw continued improvements of our server business. We expect this strength to continue going forward. In Europe, we saw some signs of improvement starting in September. We are being cautious in our…

As noted earlier, revenue for the third quarter was $49.1 million, up 4.7% from the prior quarter. While on a year-over-year basis revenue declined by 14.8%, our net loss during the same period improved to a loss of $4.1 million in Q3 2009 from a loss of $7 million in Q3 2008. Gross margin for Q3 came in at 54.1%. This was above our guidance and higher than the gross margin posted in Q2, primarily due to continued strict cost controls combined with a more favorable product mix. Total operating expenses for the third quarter came in at $27.5 million compared to 27.4 million in the second quarter. This is an improvement compared to our guidance for ongoing OpEx of $28 million. Mask, wafer and NRE costs were $1.9 million in Q3 compared to approximately $100,000 in Q2. Offsetting the higher mask costs was a decrease in labor-related costs, primarily due to restructuring actions taken earlier in the quarter. Third quarter GAAP net loss was $4.1 million or $0.04 a share as compared to $2.7 million loss or $0.2 a share in the second quarter. On a non-GAAP basis, non-GAAP income for the third quarter of 2009 was $500,000 compared to a non-GAAP net loss of $1.3 million or $0.01 for the second quarter of 2009 and non-GAAP net income of $1.4 million or $0.01 a share for the same quarter a year ago when reported revenue stood at $57.6 million. Our balance sheet remained strong with no long-term debt. As of October 3, 2009, we had $115.1 million in cash, cash equivalents and short-term marketable securities. GAAP cash flow from operations for the three months ended October 3, 2009 was $12.6 million. Regarding the advance to Fujitsu, we collected the remaining of the receivable balance of $30 million after…

Profitability remains our number one priority. When we look at our business, this is the main driver as we develop and execute on our strategy, product roadmap and pursue new business opportunity. In the last 15 months, we have taken costs out of our business model wherever possible. At the same time, we have continued to invest in our future and have steadily improved both our service level and customer relationships by redeploying our resources to where our customers are located. Good example of this is a transfer I mentioned on the Q2 call of our warehouse operations from corporate headquarters in Hillsboro, Oregon to Singapore. With over 60% of our business today in Asia, this move gets us closer to our customers. I'm pleased to report the transition went smoothly. Overall, we are moving closer to profitability with our breakeven point now at approximately $50 million in revenue per quarter. Based on recent customer and industry forecasts, while the semiconductor industry is not yet back in full growth mode, we believe the worst of the downturn is now behind us and we are confident in our business entering the fourth quarter. Let me now turn to our expectations. We are entering Q4 with an increased backlog combined with customer and design wins coming out of Asia, the US and Europe. In terms of specific guidance, we are guiding for revenues to be sequentially up 6% to 10% including the expected reduction in revenue of approximately $1 million from changing some distributors from a sell-in to a sales-through business model. Q4 gross margins are expected to be in the range of 53% to 55%. Operating expenses are expected to be approximately $26 million. Importantly, as noted in the press release, the company is expecting a return to profitability in the fourth quarter. This is based on current reviews with respect to operating and market conditions, which are subject to change and the absence of any impairment charges related to other-than-temporary decline in fair value of auction rate securities and in long-term marketable securities. In closing, we remain optimistic in our outlook and in our ability to execute on the company's continued growth, cost structure improvement and focus on profitability. This concludes our prepared remarks. Operator, we would now be happy to take any questions.

(Operator Instructions). Your first question comes from Richard Shannon with Northland Securities.

Very nice guidance for the fourth quarter, I guess that's probably my first question here. Bruno, I'd love to get your thoughts on how you handicap the various end markets that lead into your fourth quarter guidance, and if you could specifically reference directionally where you think initiatives like China 3G wireless, your plat panel display design when you talked about it and your computing market, I think you have some server wins there, if you could reference those, that would be great, please?

Let me just address those. Let's start with the server market. This has been our strength in the US, which is not necessarily, by the way, reflected in the US numbers because, as you are aware, a lot of American companies are using Compaq manufacturers in Asia, so we are seeing the orders coming in our Asian numbers. So we will continue to see some strength. It's reflected in the backlog on that piece of the business. The flat panel win that we had in Japan started to ramp in Q3. I think it will continue, also, to ramp in Q4. I would say the demand is going to be really a function of the acceptance or the new model of TV using this backlight display in the marketplace. So today it's probably about 30% of the flat panel display that are sold with this feature, which provides better quality, so that's the caveat on that. In China, I think we are now down to a more normalized level after the big push in the first half of the year with the 3G deployment and we will anticipate again to see some broad-based growth in China.

Did I hear in your prepared comments specifically referring the server opportunity, you expect that one to show us some strength in the fourth quarter as well?

We are seeing also some strength there.

To follow-up on the topic of the flat panel display design win, obviously, that's in the consumer space and if I am calculating my numbers correctly for the third quarter, your consumer revenues were down a little bit. Can you tell us what was going on in that end market if flat panels were strong?

It's with a variety of different programs. Flat panels actually went up quarter-over-quarter. We had some consumer-based laptops that there was a transition in Q2 from one model to another model that spiked our revenue up a little higher in Q2. It returned to more normalized level in Q3 and that was probably the main reason for the slight decline there. The flat panels themselves actually were strong and we're continuing to ramp up.

To follow up on that comment, Michael, I know that in the third quarter you benefited quite nicely from a design win that I think was on laptops into your consumer segment. Is that something that's still active for you?

Yes, it is active. As Michael just said, I mean we've managed to still engage and now we're on the next generation platform, which has been a change in product which is why we had a little bit of an uptick in Q2 because we see that two models being ordered, two different products.

Two quick last questions for me. Your gross margin guidance is up a little bit here. It seems like in the third quarter it was a mixed shift towards PLDs with the higher range here. Does that indicate that the mix ought to be similar in the fourth quarter or is this a result of lower costs or how should we think about gross margins both for the fourth quarter and beyond?

Our more broad-based products which are our PLD products are sold almost entirely to distributors. Earlier in the year there were a lot of distributors reducing their inventory, sometimes quite dramatically. So it impacted us a little bit more in that area than the end market revenue really had. Now, that we're returning to more regular run rates where they're replenishing the inventory as they sell it, our PLDs are being stronger and they are higher margin than some of our new products that are earlier in the yield curve.

What's your expectation for shares outstanding in the fourth quarter because you're going to be profitable in the quarter?

It's going to be approximately 115 million shares. It will depend on the exact profitability and the treasury stock calculation I have to do. We don't have a tremendous amount of options outstanding. So it won't be too much of a difference.

(Operator Instructions). Your next question comes from the line of [David Dooley with Steelhead Securities].

You kind of already addressed this, but just a little bit more clarification. You look at the detail breakout and I think your FPGA revenue was down sequentially, and so I think new products were somewhat flattish or down a little bit too. I'm sure these were related. Could you help me understand why PLDs were so strong and FPGAs weren't quite as strong or however you want to look at that?

Bruno talked about this in his prepared remarks. It's a combination of two things. One, we sell a fair amount of our FPGAs into the communications market, and with the pause in the stimulus package in China, as everybody expected that was down a little bit in Q3. The other thing is that the transition of our distributors in Asia also impacted that. So the two of those combined really is what caused that drop. Also like Bruno said in the prepared remarks, we expect that to resume growth in Q4.

Which one had a bigger impact, I guess, on what you might have thought the revenue should have been without those events, the lack of revenue and the 3G rollout in China or the lack of revenue because of changing distribution? I'm just trying to figure out what the impact was.

The 3G rollout pause was probably greater than the impact from the distributors, but they were both the significant cause for the decline. So I'd weight it more towards the 3G.

As you said, you expect growth in both those segments going forward?

Yes.

I don't recall how you positioned this, to hit the midpoint of your guidance, what kind of turns levels are you kind of thinking you should have and how does that compare to the quarter that just ended?

We have higher than normal backlog at the beginning of the quarter. So that's part of the reason why the range starts at 6%. So I would say with normal turns, we should be in the range that we have in our guidance. The range has got up and lower bounds for reasonable expectations of slightly lower to slightly higher terms.

I'm sorry if you've already mentioned it, what roughly percentage of revenue does comes from turns historically?

Normally, it's been up to over 50% of our revenue comes from turns. Recently, because of the uncertainty and the lack of visibility by our customers, it's been actually a lot higher percent in turns and less in backlog. This quarter it's less than 50% would have to come in turns. We have a much stronger backlog coming into the start of this quarter.

Since you have a strong backlog, if you experienced the same amount of turns that you typically would experience, would we see upside to the revenue range that you just gave us?

If we have higher than our expected level of turns, the answer to that would be yes, barring any backlog being canceled. Sometimes you enter a quarter with higher backlog and your turns are down a little bit, it just means the customers have better visibility and they place their orders with you a little earlier. That's why it's a little bit of a dangerous metric to try and play and look at book-to-bill ratios when a lot of your business comes from broad-based distribution network.

I guess the implication of your backlog being up, that's an indication of everyone in the food chain thinking that they have a little bit better visibility into the outlook.

That's probably the case, yes.

As far as the option rate securities you are carrying these things at this level that you just talked about, which you marked down again, what is the conclusion? How do these things get unwound and end up back in cash or what is the outcome of all of these auction rate securities that seem to be parked on people's balance sheets under long-term assets? How do you get your money back?

We have several different categories of auction rate securities. Some are not marked down as much, which are student loan backed ones, and others are more commercial paper related and those have had much higher markdowns. We don't need immediate cash and we would be willing to sell them at a reasonable price for them. We're just waiting for some of the markets to come back. We are seeing signs on the student loan back portfolio that they are slowly being bought back at par. Lot of these are paying penalty rate interest as the auctions fail and it's to the best interest of the people that issued them, if they can, to buy them back.

Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

I just want to follow-up on the question that David was asking relative to FPGA and new products. You detailed the issues with the FPGA in response to his question and the opening remarks, but I think I missed new product revenues also being down a bit. Is that essentially the same answer or is there something slightly different there?

FPGA is part of the New revenue, but we do also have, as we qualified also in the prepared remarks, something which is qualified as PLD, which is our XO product, which is also part of New product revenue. So I would say to answer your question, a large portion of our FPGA business is classified as New product, and in the PLD, our XO business is also classified as New products. Overall, while our FPGA business was down about 11% sequentially, our overall decline of new product was only 2.6%.

That would indicate that the XO had done quite well in that New product category to offset.

That's correct. We said that in the prepared remarks. We actually have seen good growth on the XO product, which are more generic, broader based products, very successfully in the server space, so also in the consumer applications. So, yes, we saw strength in the XO space.

I apologize for missing that in the opening remarks. A couple of other questions. First of all, the accounts payable and accrued liabilities grew reasonably significantly in the third quarter versus the second, I think something like an $8 million increase. What am I missing in terms of not understanding that jump?

Some of it was just timing related. We had some things as we continued to ramp-up production, our assembly and test and wafer purchases were higher, and the other part was some of our mask expenses were closer to the end of the quarter. So we accrued them as being payable and we'll pay them off in Q4.

Finally, since both you and your two main competitors announced an outlook of a positive 6% to 10% sequential growth, I presume that we should look at your outlook as really being market-related strength rather than anything design-specific wins to Lattice?

I think, obviously, we've got strong design wins and a good pipeline. That is one of the things that's allowing us to grow. Like Bruno mentioned in the outlook, we have about $1 million more revenue that we're not going to recognize in Q4 related to transitioning the distributors. We started in Q3 and completed in Q4 from a sell-in to a sell-through model. So we'd be slightly stronger with our revenue if that $1 million was recognized in the quarter. I think that, yes, one, the market for programmable logic is doing good in Q4, and two, we're doing well against our competition. Considering we're smaller, I think we're doing very well in winning some key programs for us.

Finally, is there a quarter that is visible to you in the future here where you will see your revenues take a greater than market sort of jump as a result of new product wins?

I think it's difficult to predict at this stage, but if you compare us to the rest of the semi industry, I think we are weathering better. So anyway, it is difficult to predict what's going to happen in the coming quarters, but I think the key here is we are starting to see a lot of our design wins paying off, especially with our new ECP3 and also the effort we've put into relaunching the XO. That's starting to pay dividends for us. Also, remember, in the third quarter, we had a $2 million revenue impact because of this distributor transition from sell-in to sell-through which, by the way, with $1 million additional impact in Q4 in revenue will be pretty much done. We will have converted pretty much our entire distribution channel in Asia from a sell-in into a sell-through, which is a benefit for us, a much better control of the business and greater visibility with our end customers.

(Operator Instructions). Your next question comes from PJ Solit with Potomac Capital Management.

Two questions. The first is just clarifying the $50 million breakeven per quarter rate, does that already reflect the $1.5 million of savings and expenses that you are expecting?

Yes. That's at our current operating expense run rate. It will vary a little bit off of $50 million depending on if we have high mask expenses or more regular mask expenses, but approximately $50 million is a run rate for breakeven.

Can you refresh my memory on these thoughts on a stock buyback given the cash, most of the market cap, the outlook for resumption of growth and profitability? I would think it would make a lot of sense at these levels if it creates some value.

We do have an active stock buyback program going on now and we continue to examine the range at which it's programmed at. It is something that both management and the Board discuss on a regular basis. If we enter into a stage where business is much more stable and we are profitable and are growing and there's no other more attractive use of the cash, I agree, stock buybacks are a good thing to consider.

How much stock was bought back this quarter?

Very little to none because of the price for most of the quarter for the stock.

(Operator Instructions). I would now like to turn the conference back to Mr. Guilmart for any closing comments.

Thank you. That will conclude our conference call for today. Thank you all for joining and we look forward to touching base next quarter. Thank you.

Ladies and gentlemen, this does conclude the Lattice Semiconductor third quarter 2009 earnings conference call. You may now all disconnect.