SOURCE: Lattice Semiconductor Corporation

January 25, 2007 16:15 ET

Lattice Semiconductor Reports Fourth Quarter and Year End Financial Results

2006 Revenue Grows 16%; Annual FPGA Revenue Up 25%

HILLSBORO, OR -- (MARKET WIRE) -- January 25, 2007 -- Lattice Semiconductor Corporation (NASDAQ: LSCC) today announced financial results for the fourth quarter and year ended December 31, 2006.

For the fourth quarter, revenue was $61.8 million, an increase of 15 percent from the $54.0 million reported in the same quarter a year ago, and a decrease of three percent from the $63.5 million reported in the prior quarter.

PLD revenue for the fourth quarter was $50.0 million, a 13 percent increase over the same quarter a year ago, and essentially flat with prior quarter revenue of $50.2 million. FPGA revenue for the quarter was $11.8 million, up 20 percent from the $9.9 million reported in the same quarter a year ago, and down 11 percent from revenue of $13.3 million reported in the prior quarter.

For the year 2006, revenue was $245.5 million, an increase of 16 percent from the $211.1 million reported in 2005. Revenue from FPGA products was $48.9 million and increased 25 percent from 2005. Revenue from PLD products was $196.5 million and increased 14 percent from the prior year. Revenue from New Products increased 86 percent year over year.

Net income for the fourth quarter was $0.9 million ($0.01 per share), as compared to a net loss of $23.0 million ($0.20 per share) reported in the same quarter a year ago, and essentially flat with prior quarter net income of $0.9 million ($0.01 per share). These results include non-cash amortization charges, stock-based compensation expense and restructuring charges, which total $3.8 million and $15.7 million for the fourth quarters of 2006 and 2005, respectively, and $3.9 million for the third quarter of 2006. Excluding these charges, net income for the quarter was $4.8 million ($0.04 per share), as compared to a net loss of $7.3 million ($0.06 per share) for the comparable quarter a year ago, and net income of $4.8 million ($0.04 per share) for the third quarter of 2006. The Company believes exclusion of these charges more closely approximates its ongoing operational performance.

Net income for 2006 was $3.1 million ($0.03 per share), as compared to the net loss of $49.1 million ($0.43 per share) reported in 2005. These results include non-cash amortization charges, stock based compensation expense and restructuring charges, which total $14.7 million and $28.1 million for the years ended 2006 and 2005, respectively. Excluding these charges, the net income for 2006 was $17.8 million ($0.16 per share) as compared to a net loss of $21.0 million ($0.18 per share) for 2005.

"We made significant progress against our key business goals during 2006," said Steve Skaggs, Lattice's President and Chief Executive Officer. "First, we delivered a full-year profit for the first time since 2000. This was a direct result of our operational restructuring implemented a year ago, which reduced annual operating expenses by about $30 million, combined with industry-leading revenue growth. Second, we brought three 130nm product families to volume production and introduced three new 90nm FPGA families during the year. It is particularly satisfying to see that these new product families continue to be well received by customers worldwide. We also gained market share during 2006 and continue to see increasing customer design activity with these new products, which, despite current negative short-term market trends, we believe will position us well for the future."

Fourth Quarter Business Highlights:

--  Received the prestigious "Product of the Year" award from Electronic
    Products magazine for the revolutionary LatticeECP2M™ low cost 90nm FPGA
    family with embedded SERDES I/O and PCI Express support;
    
--  Announced availability of PCI Express Intellectual Property cores for
    the LatticeECP2M and LatticeSC™ FPGA families;
    
--  Announced availability of high-performance Serial RapidIO Intellectual
    Property cores for the LatticeSC family of 90nm Extreme Performance™
    FPGAs;
    
--  Introduced an updated version of our design tool suite, ispLEVER6.1,
    supporting Lattice's latest 90nm FPGA families;
    
--  Received certification of our quality systems to the Automotive
    Industry Quality Standard ISO/TS 16949;
    
--  Announced automotive grade, AEC-Q1000 certified versions of the
    ispMACH 4000Z CPLDs;
    
--  Expanded our family of in-system programmable, zero-delay, single-
    ended clock buffer devices with the E2CMOS-based ispClock™5300S family
    of devices.
    
Business Outlook - March 2007 Quarter:

--  Sequential quarterly revenue is expected to decline 2%-7%;
    
--  Gross margin percentage is expected to be flat, plus or minus 1%;
    
--  Total operating expenses are expected to be approximately $36 million,
    which includes an estimated $1.3 million of stock-based compensation
    expense (inclusion of stock-based compensation in operating expenses adds
    significant uncertainty to our estimates of expenses due to the effect of
    the volatility in our stock price, which we can not predict);
    
--  Intangible asset amortization is expected to be approximately $2.7
    million; and
    
--  Other income is expected to be approximately $3.5 million.
    
Discussion of Non-GAAP Financial Measures:

Management evaluates and makes operating decisions using various performance measures. In addition to our GAAP results, we also consider adjusted net income (loss), which we refer to as non-GAAP net income (loss). This measure is generally based on the revenue of our products and the costs of those operations, such as cost of products sold, research and development, sales and marketing and general and administrative expenses, that management considers in evaluating our ongoing core operating performance. Non-GAAP net income (loss) excludes amortization of intangible assets, stock-based compensation and restructuring charges. Intangible assets relate to assets acquired through acquisitions and consist of technology purchased in connection with the acquisitions. Stock-based compensation charges are related to the adoption of SFAS No. 123(R) effective January 1, 2006, and include expense for items such as stock options granted to employees, purchases under the employee stock purchase plan and deferred stock compensation issued in connection with acquisitions (prior quarters have been reclassified to be consistent with the current quarter presentation). Restructuring charges consist of expenses incurred under our corporate restructuring plan, and include items such as separation packages, costs to vacate space under long-term lease arrangements, the cost to write-off an intellectual property license and other related expenses.

Non-GAAP net income (loss) is a supplemental measure of our performance that is not required by and not presented in accordance with GAAP. Moreover, it should not be considered as an alternative to net income (loss), operating loss or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with our net income (loss), which is our most directly comparable GAAP financial result. For more information, see the consolidated statement of operations contained in this earnings release.

On January 25, 2007, Lattice will hold a telephone conference call at 2:00 pm (Pacific Time) with financial analysts. Investors may listen to our conference call live via the web at www.lscc.com. Replays of the call will also be available at www.lscc.com. On March 15, 2007, we plan to publish a "Business Update Statement" on our website. Our financial guidance will be limited to the comments on our public quarterly earnings call and these public business outlook statements.

The foregoing paragraphs contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. With respect to particular forward-looking statements in the "Business Outlook - March 2007 Quarter" section of this release, Lattice believes the factors identified below in connection with each such statement could cause actual results to differ materially from the forward-looking statements.

Estimates of future revenue are inherently uncertain due to the high percentage of quarterly "turns" business. In addition, revenue is affected by such factors as pricing pressures, competitive actions, the demand for our products, and the ability to supply products to customers in a timely manner. Actual gross margin percentage and operating expenses could vary from the estimates contained herein on the basis of, among other things, changes in revenue levels, changes in product pricing and mix, changes in wafer, assembly and test costs, variations in manufacturing yields, and changes in stock-based compensation charges due to stock price changes.

In addition to the foregoing, other factors that may cause actual results to differ materially from the forward-looking statements herein include the Company's dependencies on its silicon wafer suppliers, technological and product development risks, and the other risks that are described from time to time in our filings with the Securities and Exchange Commission. The Company does not intend to update or revise any forward-looking statements, whether as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Lattice Semiconductor Corporation provides the industry's broadest range of Programmable Logic Devices (PLD), including Field Programmable Gate Arrays (FPGA), Complex Programmable Logic Devices (CPLD), Mixed-Signal Power Management and Clock Generation Devices, and industry-leading SERDES products.

Lattice continues to deliver "More of the Best" to its customers with comprehensive solutions for system design, including an unequaled portfolio of high performance, non-volatile and low cost FPGAs.

Lattice products are sold worldwide through an extensive network of independent sales representatives and distributors, primarily to OEM customers in communications, computing, industrial, consumer, automotive, medical and military end markets. For more information, visit http://www.lscc.com/.

Lattice Semiconductor Corporation, Lattice (& design), L (& design), E2CMOS, ExtremePerformance, ispLEVER, ispClock, LatticeECP, LatticeECP2, LatticeECP2M, LatticeSC, LatticeMico32, MachXO, ispMACH, ispPAC and specific product designations are either registered trademarks or trademarks of Lattice Semiconductor Corporation or its subsidiaries in the United States and/or other countries.

GENERAL NOTICE: Other product names used in this publication are for identification purposes only and may be trademarks of their respective holders.

                    Lattice Semiconductor Corporation
                   Consolidated Statement of Operations
                  (in thousands, except per share data)


                           Three months ended              Year ended
                     -------------------------------  --------------------
                     December   September  December   December   December
                        31,        30,        31,        31,        31,
Description            2006       2006       2005       2006       2005
                     ---------  ---------  ---------  ---------  ---------
                    (unaudited)(unaudited)(unaudited)(unaudited)

Revenue              $  61,832  $  63,456  $  53,991  $ 245,459  $ 211,060

Costs and expenses(5):
 Costs of products
  sold                  26,872     27,764     27,494    106,727     95,925
 Research and
  development(2)        20,272     20,905     23,836     81,968     97,231
 Selling, general
  and administrative    14,960     15,207     13,217     58,450     57,541
 Amortization of
  intangible assets(1)   2,666      2,657      3,531     10,806     14,392
 Restructuring
  costs(3)                  (7)       102     11,936        311     11,936
                     ---------  ---------  ---------  ---------  ---------

Total costs and
 expenses               64,763     66,635     80,014    258,262    277,025
                     ---------  ---------  ---------  ---------  ---------
Loss from operations    (2,931)    (3,179)   (26,023)   (12,803)   (65,965)

Other income, net        4,230      4,324      2,829     16,951     17,079
                     ---------  ---------  ---------  ---------  ---------

Income (loss) before
 (benefit) provision
 for income taxes        1,299      1,145    (23,194)     4,148    (48,886)

(Benefit) Provision
 for income taxes          362        248       (204)     1,055        233
                     ---------  ---------  ---------  ---------  ---------

Net income (loss)    $     937  $     897  $ (22,990) $   3,093  $ (49,119)
                     =========  =========  =========  =========  =========

Basic net income
 (loss) per share    $    0.01  $    0.01  $   (0.20) $    0.03  $   (0.43)
                     =========  =========  =========  =========  =========

Diluted net income
 (loss) per share    $    0.01  $    0.01  $   (0.20) $    0.03  $   (0.43)
                     =========  =========  =========  =========  =========

Shares used in per
 share calculations:

Basic                  114,509    114,376    113,619    114,188    113,525
                     =========  =========  =========  =========  =========

Diluted(4)             115,906    115,670    113,619    115,019    113,525
                     =========  =========  =========  =========  =========


Notes:
  (1) Intangible assets subject to amortization aggregate $15.6 million,
  net, at December 31, 2006 and relate to the acquisition of Cerdelinx
  Technologies, Inc. on August 26, 2002, the acquisition of the FPGA
  business of Agere Systems, Inc. on January 18, 2002 and the acquisition
  of Integrated Intellectual Property Inc. on March 16, 2001. These
  intangible assets are amortized to expense generally over three to seven
  years on a straight-line basis.

  (2) With the adoption of SFAS No. 123(R) effective January 1, 2006,
  deferred stock compensation expense attributable to research and
  development activities previously recorded to Amortization of
  intangible assets has been reclassified to Research and development
  expense. 2005 amounts include $0.2 million and $1.8 million of deferred
  stock compensation expense for the quarter and year ended
  December 31, 2005, respectively.

  (3) Represents costs incurred under the corporate restructuring plan,
  which was implemented in the fourth quarter of 2005. These costs
  primarily relate to separation packages and costs to vacate space under
  long-term lease arrangements.

  (4) For the quarter and year ended December 31, 2006 and the quarter
  ended September 30, 2006, the computation of diluted earnings includes
  the effects of stock options, as they are dilutive. For all other
  periods, the effects of stock options are excluded, as they are
  antidilutive. The effects of Zero Coupon Convertible Notes are excluded
  in the computation  of basic and diluted earnings per share, as the
  contingent conversion features were not triggered for any of the periods
  presented.

  (5) As a result of the restructuring implemented in the fourth quarter of
  2005, the Company realigned certain departments and job responsibilities
  in 2006. Due to these changes, the Company reviewed its historical cost
  center allocations and has reclassified these to reflect
  post-restructuring operations. Amounts previously reported in prior
  quarters of 2006 have been reclassified to be consistent with the
  approach applied in the fourth quarter of 2006.



  Reconciliation of GAAP Net Income (Loss) to Non-GAAP Net Income (Loss)
                                  (unaudited)

                           Three months ended              Year ended
                     -------------------------------  --------------------
                     December   September  December   December   December
                        31,        30,        31,        31,        31,
                       2006       2006       2005       2006       2005
                     ---------  ---------  ---------  ---------  ---------

GAAP net income
 (loss)              $     937  $      897 $ (22,990) $    3,093 $ (49,119)
Reconciling items:
    Amortization of
     intangible
     assets(1)           2,666       2,657     3,531      10,806    14,392
    Stock-based
     compensation(2)     1,161       1,117       183       3,623     1,819
    Restructuring
     charges(3)             (7)        102    11,936         311    11,936
                     ---------  ---------- ---------  ---------- ---------
Non-GAAP net income
 (loss)              $   4,757  $    4,773 $  (7,340) $   17,833 $ (20,972)
                     =========  ========== =========  ========== =========



Reconciliation of GAAP Net Income (Loss) per Share to Non-GAAP Net Income
                              (Loss) per Share
                                (unaudited)


                           Three months ended              Year ended
                     -------------------------------  --------------------
                     December   September  December   December   December
                        31,        30,        31,        31,        31,
                       2006       2006       2005       2006       2005
                     ---------  ---------  ---------  ---------  ---------
Basic and diluted:
GAAP net income
 (loss)              $     0.01 $     0.01 $   (0.20) $     0.03 $   (0.43)
Reconciling items:
    Amortization of
     intangible
     assets(1)             0.02       0.02      0.03        0.09      0.13
    Stock-based
     compensation(2)       0.01       0.01        --        0.04      0.02
    Restructuring
     charges(3)              --         --      0.11          --      0.10
                     ---------- ---------- ---------  ---------- ---------

Non-GAAP net income
 (loss)              $     0.04 $     0.04 $   (0.06) $     0.16 $   (0.18)
                     ========== ========== =========  ========== =========

Shares used in per
 share calculations:
    Basic               114,509    114,376   113,619     114,188   113,525
                     ========== ========== =========  ========== =========
    Diluted(4)          115,906    115,670   113,619     115,019   113,525
                     ========== ========== =========  ========== =========

Notes:
  (1) Relates to intangible assets acquired through our acquisition of
  Cerdelinx Technologies, Inc. on August 26, 2002, the acquisition of the
  FPGA business of Agere Systems, Inc. on January 18, 2002 and the
  acquisition of Integrated Intellectual Property Inc. on March 16, 2001.

  (2) With the adoption of SFAS No. 123(R) effective January 1, 2006,
  deferred stock compensation expense attributable to research and
  development activities previously recorded to Amortization of intangible
  assets has been reclassified to Research and development expense. 2005
  amounts includes $0.2 million and $1.8 million of deferred stock
  compensation expense for the quarter and year ended December 31, 2005,
  respectively.

  (3) Represents costs incurred under the corporate restructuring plan,
  which was implemented in the fourth quarter of 2005. These costs
  primarily relate to separation packages and costs to vacate space under
  long-term lease arrangements.

  (4) For the quarter and year ended December 31, 2006 and the quarter
  ended September 30, 2006, the computation of diluted non-GAAP earnings
  includes the effects of stock options, as they are dilutive. For all
  other periods, the effects of stock options are excluded, as they are
  antidilutive.  The effects of the Zero Coupon Convertible Notes are
  excluded in the computation, as the contingent conversion features were
  not triggered for any of the periods presented.



                    Lattice Semiconductor Corporation
                        Consolidated Balance Sheet
                              (in thousands)


                                         December 31,    December 31,
                                             2006            2005
             Description                --------------  --------------
                                           (unaudited)

               Assets
Current assets:
   Cash and short-term investments       $      233,208  $      264,192
   Accounts receivable, net                      22,545          23,577
   Inventories                                   38,816          28,581
   Other current assets                          35,474          24,614
                                         --------------  --------------
      Total current assets                      330,043         340,964

Property and equipment, net                      46,696          45,450
Foundry investments, advances and other
 assets                                         109,964          79,432
Goodwill and other intangible assets,
 net(1)                                         239,203         250,011
                                         --------------  --------------

                                         $      725,906  $      715,857
                                         ==============  ==============

    Liabilities and Stockholders' Equity

Current liabilities(2):
   Accounts payable and other accrued
    liabilities                          $       85,016  $       52,121
   Deferred income and allowances on
    sales to distributors                         6,230          10,449
   Other current liabilities                     10,480          10,000
                                         --------------  --------------
      Total current liabilities                 101,726          72,570

Zero Coupon Convertible Notes due in
 2010                                            99,120         123,500
Other long-term liabilities                      15,488          21,703
                                         --------------  --------------
Total liabilities                               216,334         217,773

Stockholders' equity                            509,572         498,084
                                         --------------  --------------

                                         $      725,906  $      715,857
                                         ==============  ==============

Notes:

    (1) At December 31, 2006, includes approximately $223.6 million in
    goodwill and $15.6 million of other intangible assets, net, related to
    previous acquisitions. The other intangible assets will be amortized to
    expense generally over three to seven years. Goodwill is not amortized
    effective with the March 2002 quarter.

    (2) Amounts have been reclassified to be consistent with the current
    period.



                     Lattice Semiconductor Corporation
              - Supplemental Historic Financial Information -


Operations Information                 Q406       Q306       Q405
                                     --------   --------   --------
    Percent of Revenue(1):
        Gross Margin                     56.5%      56.2%      49.1%
        R&D Expense                      32.8%      32.9%      44.1%
        SG&A Expense                     24.2%      24.0%      24.5%
        Restructuring Expense               -        0.2%      22.1%


    Depreciation Expense ($000)         3,292      3,151      3,047
    Capital Expenditures ($000)         2,730      2,728      3,327

Balance Sheet Information
    Current Ratio(1)                      3.2        5.9        4.7
    A/R Days Revenue Outstanding           33         33         40
    Inventory Months                      4.3        4.0        3.2

Revenue % (by Product Family)
    FPGA                                   19%        21%        18%
    PLD                                    81%        79%        82%

Revenue % (by Product
 Classification*)
    New                                    15%        17%         9%
    Mainstream                             53%        50%        53%
    Mature                                 32%        33%        38%

Revenue % (by Geography)
    Americas                               24%        26%        28%
    Europe (incl. Africa)                  20%        21%        23%
    Asia (incl. ROW)                       56%        53%        49%

Revenue % (by End Market)
    Communications                         45%        52%        49%
    Computing                              15%        15%        18%
    Other                                  40%        33%        33%

Revenue % (by Channel)
    Direct                                 66%        64%        65%
    Distribution                           34%        36%        35%


New:        LatticeSC, LatticeECP2/M, LatticeECP, LatticeXP, MachXO,
            FPSC, ispXPLD, ispGDX2, Power Manager, ispClock

Mainstream: ispMACH 4000/Z, ispXPGA, ispGDX/V, ispMACH 4/LV, ispLSI 2000V,
            ispLSI 5000V, ispMACH 5000VG, and Other

Mature:     ORCA 2, ORCA 3, ORCA 4, ispPAC, ispLSI 8000V, ispMACH 5000B,
            ispMACH 2LV, ispMACH 5LV, All 5-Volt CPLDs, all SPLDs

Note:

  (1) Amounts have been reclassified to be consistent with the current
  period.