Good afternoon. My name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lattice Semiconductor Second Quarter 2013 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). I will now turn the conference over to David Pasquale of Global IR Partners.

Thank you, operator. Welcome everyone to Lattice Semiconductor's second quarter 2013 results conference call. Joining us today from the company are Mr. Darin Billerbeck, the company'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 e-mail 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. Before we begin the formal remarks, I'll read the Safe Harbor statements. 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 third quarter of fiscal 2013. 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 2012 Form 10-K and our quarterly reports on Form 10-Q. The company disclaims any obligation to publicly update or revise any such forward-looking statements to reflect events or circumstances that occur after this call. Our prepared remarks also be presented within the requirements of SEC Regulation G, regarding Generally Accepted Accounting Principles or GAAP. I'd like to now turn the call over to Mr. Darin Billerbeck. Please go ahead, sir.

Thank you, David, and thanks everyone for joining us on the call today. This is another strong quarter for us, and is a direct result of our solid executions to our strategic long range plan. We achieved the highest quarterly revenue in the past decade, reflecting the expansion into the consumer mobile market, and more specifically, into smartphone opportunity. We also saw an improvement in the broader communications and automotive markets, in both Asia and North America. Q2 revenue was $84.7 million, up 19% from Q1. This was at the high end of our guidance for growth of 15% to 20%. Our margins came in above the high end of our prior guidance, and we doubled our EPS compared to Q1. Based on all financial measures, this was a great quarter for us. We remain confident entering Q3, based on existing customer backlog, our inventory levels, and the strength of our balance sheet. Today, we have design wins at multiple mobile handset companies. Our challenge is to replicate our key wins (inaudible) various other OEMs, both large and small. The mobile market is quickly moving to a cost versus performance focus. This focus favors companies that have affordable innovation in their DNA. At Lattice, we have been living and breathing this for years. We have the smallest FGPA form factors on the planet, and you could do some really amazing things for your customers. Additionally, what we learn in the consumer mobile market can be applied to broader markets, like industrial, medical and automotive. The key will be taken what we learn from our smartphone solutions, and leverage that into all things connected. The communications market seems to be making a comeback. New orders and buffer stock are being put in place for buildout in the markets outside the United…

Thanks Darin. As noted earlier, revenue for the second quarter was $84.7 million, an increase of 19% from the first quarter, and an increase of 19.6% from $70.8 million in the year ago period. Gross margin for Q2 was 53.3%, compared to 53.6% in the prior quarter, and 52.3% in the year ago period. Gross margin was above the high end of our guidance. Margins continue to be strong due to volume driven cost reductions along with mix. As noted during prior calls, we expect margins to continue to fluctuate throughout the year, due to our increasing penetration in the consumer segment. We expect to offset some of this impact through continued cost reductions in operations. Our long term gross margin target remains at the mid-50% level. Total operating expenses for the second quarter came in at $38.1 million. This included approximately $1.4 million in R&D variable costs related to program timing, and $0.7 million in variable spending, primarily related to sales increases. Our guidance for Q3 is for OpEx to come down to $36.9 million. We remain committed to lowering costs wherever and whenever possible. Our baseline OpEx model of $35.5 million per quarter on average was initially set assuming a quarterly revenue level of $70 million to $75 million. As we are now running closer to $85 million, we will experience higher variable spending. Expenses that are driven by higher revenue levels. In addition, during Q3 we will incur a $0.8 million in expenses related to our San Jose facility move, which occurred early in the quarter. This move was necessitated by the impending term of our existing San Jose lease. We will continue to invest R&D dollars on both quick turn product development, as market opportunities arise, and long term product development. Net income for the quarter…

Thanks Joe. In summary, we are optimistic entering Q3. The year has gotten off to a good start, with a strong first half. We are successfully managing existing high volume programs, while gaining traction and expanding our customer base. We are broadening our business with wins in the consumer mobile markets, and wins in other broader markets. We remain fully committed to keeping our costs in check, but as I noted earlier, we will invest R&D dollars, where we can gain new capabilities to support customer roadmaps and pursue broader opportunities. We continue to invest, where the winning formula is all about low cost, low power, affordable innovations and small form factors. In terms of our specific expectations for third quarter 2013, we expect revenues to be flat, plus or minus 2% compared to Q2. Q3 growth margins are expected to be approximately 52%, plus or minus two points. Total operating expenses are expected to be approximately $36.9 million, including approximately $0.8 million in expenses associated with our Q3 San Jose office move. That concludes our prepared remarks, operator, we will now be happy to take any questions.

(Operator Instructions). Your first question is from Ian Ing from Lazard Capital Markets. Please go ahead with your question.

Yes hi, good afternoon everyone.

Hey Ian.

How are you doing Ian?

Yeah, noticed your commentary on design wins at multiple handset companies, so congrats on that. Could you perhaps talk about how that adds to the OEM diversity? Is it diversity by application or by region or program timing or size of the OEM, things like that?

Probably all of those things. If you think about the applications that we service today. Some are specific to customers, and other ones are more generic that we provide those solutions, where we do the design surfaces and all this, and we are finding it, winning it at one big OEM, which you guys are aware of, has helped us to actually take that proof of solution to other customers, and then many times, they will want to customize, so with FPGAs you can do that. So we are really looking at expanding more than just to the specific OEMs, also in the smartphone, but also in the tablet markets. So many of the applications within that smartphone, also can apply to the tablets.

Okay great. Then for Joe, the gross margins, pretty good for June, guided down sequentially at the midpoints. Trying to understand the trend there, it seems like the mix is pretty unfavorable already, given consumer and communications are strong, but industrial is yet to ramp?

True, that's very true. We had -- mix changes is really what's going on. We are offsetting those mix changes with cost savings. Last quarter we guided 51 plus or minus 2. This quarter it's 51, plus or minus 2. We think we are right in that ballpark still. Cost savings continue to flow through. Mix is our biggest issue at this point.

Are you losing any cost savings from June going into September? I mean --?

Actually no, we are still holding strong on the cost savings.

Okay, I think I understand that. Then your commentary on OpEx. It sounds like let's say, for September $36.9 million. Let's take out the building move, like at $36.1 million. Is that sort of OpEx going forward plus some R&D dollars if needed that sort of moves around from there, is that sort of the right framework?

That's the way to think about it. The $36.1 million reflects the fact that we are at about 83 revenue if we go flat in that ballpark. So you see some uptick from our standard run rate that we targeted because of that, that's variable spending related. In Q2, we obviously had the mass charges that we had talked about, as well as some other opportunistic R&D spends related to product development.

Okay. Thanks a lot. I will be in the queue.

Thanks.

Your next question is from Tristan Gerra with Baird. Please go ahead with your question.

Hi good afternoon, and congrats on the strong outlook. I think you mentioned during your prepared remarks that consumer would be about flat, could you give us a little bit of visibility in terms of the end markets trend sequentially in your September quarter guidance?

Yeah, and I think Tristan, we are probably aligned. I think if you look at the smartphone industry itself, I think it didn't grow may be as fast as people thought, through Q2, Q3 and possibly even Q4. I think it has slowed down a little bit, which means, we would have expected, if it had ramped like a hose and everybody was growing, like it did in the last couple of years, we would have done actually better in Q3. But I think it softened a little bit, as I think you alluded to and others have alluded to, which is why I think it's flattening out.

And what about the other end markets in Q3?

Some of them will go up, right? I mean, we would expect that comms, for instance, is kind of starting to move up a little bit, and I think everybody knows why that is, because there is some buildout in Asia. So I would expect that to help quite a bit. But again, the cyclical nature of the last two or three years has been, comms has been down in Q4, so I think this is kind of bucking the trend, if you really do get the buildout there. Industrial, automotive and those things are primarily driven in North America and Europe, I don't expect those to snap back quickly, I think that will be a long slow path out of the lows they have today. But I would expect comms and consumer still to be fairly strong; because even though consumer is softer than what I think everybody thought. It's still a very big market.

Okay, that's useful. Then one last question, any additional color you could provide on your cost reduction opportunities in operation and maybe quantify what the opportunity is?

Well, I mean, the cost reductions for us are pretty straightforward, right. Wafer costs, that's typically driven by volumes. The higher the volumes, the lower the cost, and then you can amortize more units we ship for less absorption per unit kind of thing. But I think bigger than anything, the packages are becoming a pretty big portion of the overall costs, so we are really focusing on the package, driving a lot of things to streamlined approach, so we can get the best benefit for the economies of scale.

Great. Thank you.

Your next question is from Richard Shannon with Craig Hallum. Please go ahead with your question.

Hey Darin and Joe, how are you doing?

Good Richard.

Maybe just a follow-up on gross margins. If I heard you correctly on the mix you are talking about comms maybe even up a little bit, and consumer being flattish. I am not sure I understand how gross margins are going to be down relative to the first quarter, unless -- perhaps there is a mix shift going on within your communication space. Can you help us understand that a little bit better?

You hit it right there. There is a mix shift between the communications base, in terms of the volume of what we are selling, to the particular customers we are selling them to. That's really it.

Okay. Fair enough. A follow-up question on the smartphone topic brought up by a couple of previous questions here. I think I asked you last quarter, (inaudible) goal of signing up new OEMs in the mobile space here by the end of the year, and I think you are hoping to get three of the top five. How are you performing relative to that expectations, are you already there by now, can you just give us some update there?

I think we are making solid progress, but I want to remind everyone, the first progress that we made at the biggest OEM, are serving today. It takes time, right, because they have to learn how to design and you start kind of at the derivative products outside, and then you move into the center. So I feel very comfortable about the development and executions of the design surface that we were providing, and there are some that are further along than others, but we are having some very interesting dialog with a lot of the top OEMs now that they are starting to see the used models of flexibility and also the ability to add features at the last minute to some of the smartphones. So that's a huge benefit for us, as people embrace the fact that it's a new way to create solutions.

Okay, and Darin, to follow-up to that specific comments, how does that lead into sustainability of these customers continuing to use your iCE products over time?

So let's think of -- think of what we do, is we create design functions for them, that enables them to have new features. And each one of the smartphones, if you look at like the younger generation if you will of smartphone users, they are looking for the next big thing, and if you look at the new offerings out there, I won't name specific things, but you can use. There is visual gesturing there is all these features that are out there that enable us to do things that we couldn't do in the past, and that's the attraction; because in the smartphone, a lot of people have smartphone today, and in the market, some people claim it's saturated. I don't think it is, but as you go through that learning, features are what differentiates. And I think when people are half way through that development cycle, if they're having additive features, we give them that opportunity to do that at the last minute, versus, oh wow, now I have to spend another ASIC and I have to delay the entire project. I think that's the value proposition, and the fact that our form factor being real estate on the board, the fact that most people can't figure out where our product is, because we can't put our mark on it. It's kind of cool.

True. And Darin, specific to that last point, these R&D variable costs you refer to, are those the -- those are the things you are referring to as helping your customers to get to that finish line quickly then?

Yes, prime example. I will give you a prime example of something happened. So we are learning and we are not experts obviously of the consumer mobile market today. We are learning as we go in, and we are doing designs services for different areas, in other areas, people do it themselves. But we had one specific area where people said, hey, if you build these features and add these products, that's really a good solution for us long term. So that's where we spend additional R&D products, we are accelerating that product development, and our expectations is at least to sample one of those products this quarter. So that's how quick you can turn these things, and you are positioning not for something that's going to ship in Q4, you are positioning for design wins for early next year. So that acceleration gets you into the loop of their design cycle, so you have a better chance of winning.

Got it. Guys, I will jump out of the line and requeue here. Thank you.

Your next question is from Sundeep Bajikar with Jefferies. Please go ahead with your question.

Hi guys. Nice job on the quarter, back on smartphones. Can you give us some more color in terms of any additional major design wins that Lattice has secured, and would start shipping or has already started shipping, in addition to the Samsung Galaxy Note II and the Galaxy S4? For example, we have seen teardowns from Chipworks showing a Lattice FPGA in the Galaxy S4 Mini. If possible, maybe tell us what that Lattice part is in the Mini, and whether your Q3 guidance accounts for that opportunity?

Yes, the guidance does account for those opportunities, and the feature sets that those provides. In some cases, it's nice that when they have a platform and they do a derivative of that platform, that they continue to use those solutions. In some cases, they may actually use a different product of ours, if it's a cross production, they may move iCE product families to different versions of our families, either higher or lower. It's the high end product, they may use a higher density, low end and they user a lower density. We do have a couple of different design wins that we are expecting to ramp in the second half of this year. It won't be as big as what we are seeing today, but the first [extantiation] that we are expanding the customer base.

Great. Really appreciate that. Then just you mentioned that you just taped out a new consumer mobile product. If you could share some more detail on that, it will be great. If it is a cost shrink or if it's a load transition in particular, that would be interesting to know?

It's actually not a cost reduction of what we have from a silicon perspective, but it will be a cost reduction from an overall solution, based on the integration of the functionality it will do on their board. Which is one of the value propositions that we are trying to bring, which is suck in more stuff off of your board, do it in an FPGA, the overall bill of material cost for you will be less, therefore this is a better value for you. If you take the solution that's out there, our solution, combine them and put them into a smaller piece of real estate, it will be a cost reduction to our customer.

Okay, great. Then one question back on gross margins. If at all possible, you could give us a bridge for gross margins, changes from the first quarter to the second quarter. In terms of some of the qualitative effects that you have described, I think that would be extremely helpful.

So sales margin there was a big impact or negative for us from Q1 to Q2. It was about 0.5. and that was offset, for the most part by cost savings that we saw in assembly costs, test costs, and a little bit on wafers. It's really that simple. We have been driving these cost reductions, we are seeing them come to fruition. We have got continued reductions that we see happening to this next quarter coming up, that's baked into our guidance also, and mix continues to be our biggest variable.

Great. Thank you very much.

(Operator Instructions). Your next question is from David Duley with Steelhead Securities. Please go ahead with your question.

Yeah. thanks for taking my question. Just one housekeeping, did you have any 10% customers during the quarter?

We don't report 10% until annual. We do it on an annual basis in our K.

Okay. And the reason you weren't buying stock back this quarter? You do have a buyback in place, can you just talk about what you are thinking with your buyback?

We have a buyback in place that has specified thresholds, and we didn't hit the thresholds this quarter.

Okay. And you mentioned you are really focusing in on the cost of the package. For Lattice, what percentage of the iCE total cost is, the backend test and assembly, or packaging costs? What sort of opportunity is there for savings, I guess is what I am trying to get at?

On the bigger guys lists, on the smaller guys, it's smaller, right, because your silicon costs is still low to begin with, right. And we have an internal goal that we'd look at, and we are just trying to really be very innovative about the approaches, because big high I/O packages are very-very expensive the way that they are building it today. If we are going to have to either figure out a better way to build that, so that we can have cheaper I/Os; because this is all about small lots, big I/Os in the markets that we plan, right, because we are the low lot guys, and so that's what we are trying to accomplish as we go through those, and so our challenge is a little bit different than some of the big guys, who may be selling some of these very-very large, very innovative packages, for a lot higher prices than we do. So cost is everything there.

Does that mean you are moving away from wire bonding or flip chip, because those are more high costs? Are you going to stick more moving from copper to gold -- gold to copper, excuse me?

Yeah. I mean, copper is an obvious, right. I mean, everybody moves from gold to copper. Flip chip, you got to be careful with that, because there is quite a bit of different flip chips that are out there and people are deploying. Some are cheap, some are very expensive. So there is a lot of things. But I think today, wire bonding is one of the cheapest technologies you can use, because the equipment sets are fully depreciated and there is a huge amount of volume running through. So to be innovative, you are really going to have to think differently than that.

Just to be clear, we moved to copper on virtually all of our products. That was a big cost savings that we had at the end of last year.

Okay. Final thing from me, is when you look at your consumer business, you know, the $25 million run rate. How should we look at this on an annual basis, if we are going to -- let's say at $100 million run rate, kind of growth rate we attach to the segment of your business going forward?

Well again, we are pretty immature in this market. If you think about it, and people will claim, you are kind of a one horse wonder today, which is why we have been trying to really differentiate and push ourselves to broaden that market base. Not what we are doing today. So the overall consumer market isn't just smartphone. For the consumer market, when we talk about consumer, we talk about two different consumers. There is consumer mobile, which is battery powered stuff that really wants low power, and really inexpensive type of devices, that's smartphones, that's tablets, that's anything [connected]. It could be car-nav, it could be all that other stuff that you have on, GPS related bike parts, right. So that's the kind of thing that we are doing. In the consumer, there is a whole another market, which is things like your LCD-TV or LCD panel or any consumer appliance, right. So as we move through this consumer mobile, you are going to start seeing connectivity between consumer mobile and consumer. So that's a big bridging and [geologic] function that we believe that we are well fitted to do.

Okay, just one final one for me. As far as the customers in the handset space, you've ramped up with one big customer, or are we ramped up with two customers at this point?

The primary ramp that we have today is one big customer. But we are bringing others online, as we are moving through the second half of this year.

Thank you.

Your next question is from Bill Dezellem with Tieton Capital Markets. Please go ahead with your question.

That's Tieton Capital Management. I want to follow-up on that last question, and if you are bringing on additional smartphone customers in the second half of this year. Clearly that's not happening to a large degree in the third quarter with the roughly flat guidance. So would it be fair to surmise that just directionally, we should see a nice increase in revenue in the fourth quarter, is that the right mindset to be thinking?

You got to be a little careful, because as you look at consumers, it's slightly different than comms. Like comms in the past, let's call it a couple of years has been really dismal in Q1 and Q4 and really nice in Q2 and Q3 and (inaudible). This year it seems as so, comms got backend loaded because of some pushouts to some infrastructure buildouts. So comms is kind of pushing that way. Consumer is cyclical, depending on who you get in; because everybody runs a slightly different cycle. There is people that announced in April, there is people that announced in September, and there's people that announced whenever their phone's ready. So, if you give into a big one, it has a material impact on what you're doing. If you get into smaller ones, which is kind of how we started in the big one. You start small, you start building your capability. They start to embrace the technology, and the next thing you know, you go from a derivative to a platform and then you're in everything. So as we walk through the next generation of these guys, I think we are going to follow the same formula, which is, they start out a little smaller than people think, but then once they understand the capability, once they go mainstream, then those ramps become (inaudible).

I guess the follow-on question could be, when would you anticipate going mainstream with the next smartphone customer?

Again, that's like giving you forward-looking guidance, but we are working on it, that's all I can tell you. We are working aggressively to win big in some of the largest OEMs. We are also looking at diversifying the base by winning the small guys; because if you win the small guys, even though they are not as big, they all add up to a lot; and if you look at the consumer market, mobile markets, specifically the handsets, there is probably three or four guys that are gigantic and then there is a lot of guys that are going to either be gigantic or be gone.

Then, a completely unrelated topic. Inventory was about $6 million higher in the second quarter than the first quarter, and on the surface, it seems as though you did have enough inventory to run at this quarter's run rate at the end of Q1. So question is, why, given that, are you running at a higher inventory level now, than at the end of the first quarter?

It continues to be built for future demand, with a large chunk of it. We also did some opportunistic build with inventory, to help on the wafer costs, and the backend cost for us. So we are building, because we have the opportunity to do that to get some cost reductions in there. We took it, and we are building for future demand.

Then building for future demand, that's one indication to us, that a more significant ramp is not multiple quarters in the future, how about if I phrase it that way?

That's a hard one to say, because the ramps could be substantial and that inventory could get utilized within the quarter very easily. So can't really comment on that perspective, but we are staging inventory as we said we would in the past, because the dollars associated with staging that inventory are not as great as the risk of not hitting a ramp. These are all standardized parts that are usable across multiple customers

That's helpful. Thank you both.

(Operator Instructions). Your next question is a follow-up from Ian Ing with Lazard Capital Markets. Please go ahead sir.

Hello again. In the press release, you have got a distribution agreement with Future announced here, so is that a channel to serve some existing customers right away, or do you have to get everything lined up, basically train the FAEs and then go after design wins and then get revenue?

So the distribution channel is kind of moving around a little bit, I think on every line, and the intent for that was -- we have known Future a long time. Future has a different reach than some of our current distributors, specifically in some of the industrial areas, you can say lighting and automotive and all those other things. So it's a global agreement with them, worldwide agreement, and our expectation is really focused on design wins today, which is really -- what we call demand creation. So that's where we are starting, and yeah, we are going to have to go to the exact process. They are not unfamiliar with FPGAs. The nice thing for them, they signed two different companies that do programmable logics very quickly, which enables a bigger field of the FAEs to help support both companies.

Okay great. Then lastly, could you give us a sense of the China Telecom deployments, where you are favorably exposed now, because I know it has moved around a bit like where you are and where you aren't? I mean, if you look at Alterra commentary, they talked about China Mobile TD-LTE happening second half this year. China Telecom, they are still doing 2G and 3G deployments, and perhaps just the wireless and wireline exposure you can talk a bit about?

Yeah, so a lot of people think, just because it's super high end that Lattice doesn't plan, that's not necessarily true. In fact, there is communication, that we will have three different suppliers on each board, and there is reasons why that, because of the function they are looking for. Sometimes cost structures and other things. So we, in the 2G and 3G stuff, yeah, we do grow a lot with them, but we also grow with LTE, because we still do glue logic and some of the bridging functions that they need in the communications. It's typically considered control versus data. Our competitors do a lot of data plane things, and we do a lot of control plane. So that's why everybody benefits when they do build those, whether it's 2G, 3G or LTE.

Okay. Thanks.

(Operator Instructions). And at this time, we have no further questions. I will turn the call back to Mr. Billerbeck for closing comments.

Okay, again I just appreciate everybody for joining us on the call today. Solid quarter for us. Clearly, you're hearing a lot about consumer mobile, which is a good thing. But I don't want you to think that that's the only thing that we are doing, because we still play heavily in a broad market, with broad applications, with a broad portfolio of products. We are still very committed to comms, both from a glue logic and bridging function, but also for our control plane, which is what you hear, the ECP2, 3 family and then the Future products that we have. So I just appreciate that you guys are along for the ride with us, and we are changing the company, and we are really focused in the areas where we want to win, and we are providing products to do it. So thanks again, we will talk to you guys next quarter.

Thank you everyone for joining today's conference. You may now disconnect.