萊迪思半導體 (LSCC) 2003 Q4 法說會逐字稿

Welcome to today's conference call.

Copies of the Lattice Semiconductor fourth quarter ending December 31, 2003 earnings press release may be obtained from the Company's Web site, which is www.LSPC.com.

This conference is being recorded and broadcast live over the Internet by CCBN.

A live broadcast and a replay of the call will be available on the Lattice Investor Relations Web site, which again is www.LSCC.com.

This conference is being recorded.

Now at this time, I would like to turn the conference over to the President, Mr. Steve Skaggs.

Please go ahead, sir.

Thank you.

Good afternoon, everyone.

Joining me on the call today are Cyrus Tsui, our CEO, Jan Johannssen, our Chief Financial Officer, and Rodney Sloss, our Vice President of Finance.

Before we begin I would like to read a Safe Harbor statement, then I will provide a summary of our deferred income accounting review, followed by a fourth quarter financial and business review, then conclude with our first quarter 2004 outlook.

We'll then hold a brief question-and-answer session.

This conference call may contain forward-looking statements within the meaning of the federal securities laws, including statements about our future quarterly financial results, revenues, customers, product offerings, and our ability to compete.

Investors are cautioned that actual events and results could differ materially from these statements as a result of a number of factors, including -- the possibility that further accounting adjustments may be required; the effectiveness of changes to our internal controls, as well as general economic conditions; overall semiconductor market conditions; market acceptance and demand for our new products; our dependencies on our silicon wafer suppliers; the impact of competitive products and pricing; technological and product development risks.

We do not intend to update or revise any forward-looking statements.

Turning now to the review of the deferred income accounting.

We recently completed a detailed review of our deferred income accounting.

This review, conducted under the direction of our audit committee and supported by our independent auditor and outside legal counsel, was initiated by management in mid-January.

Deferred income is the balance sheet accounts which represents the estimated future gross margin, including credits (indiscernible), related to inventory held by the Company's distributors that is expected to either be resold to end-users or returned to the Company for credit.

As such, the calculation of deferred income relies on a number of estimates and judgments.

During 2003, our distributor inventory levels reached a multiyear low.

After review, we have concluded that our deferred income account fell slightly below the level that was required to support the inventory on our distributors' shelves as of March 2003.

Or in other words, it became over-depleted.

The account remained below the required level in the June quarter, and then fell substantially below the required level in the September quarter.

We have determined that the deferred income account became over-depleted during the first quarter due to a small error in the estimate we use to calculate revenue from distributor retail reports.

Although in retrospect this estimate has turned out to be slightly off for 2003; however, it was consistent with the estimates we used historically.

We have also included that several specific nonrecurring transactions combined to substantially over-deplete the account during the third quarter.

During January, senior management was made aware by an individual in our finance department of inappropriate accounting entries he made during the June and September quarters to restore the deferred income account by offsetting accrued expenses to the balance that was originally reported for those quarters.

Had management been aware of the situation in a contemporaneous manner, rather than making the offsetting entries to accrued expense, we would have recorded a change in accounting estimate and restored the deferred income to a proper balance.

Therefore, we are now restating our first, second and third quarter financial statements to correct this error and reflect a change in estimate.

Our press release details the specifics of the restatement for each affected quarter.

However, I will point out that there is no cash impact.

Additionally, during our review we refined our estimates of deferred income, and have used this more conservative estimate to recalculate the restated deferred income balance for each quarter of 2003.

Finally, we have already implemented certain internal control and system enhancements and will implement other audit committee directives that have resulted from this review.

I will now turn to a financial and business review for the fourth quarter of 2003.

Revenue for the fourth quarter was $52.8 million.

As the third quarter revenue has now been restated, I will not provide our usual sequential growth calculations, as I believe they are no longer meaningful.

During the fourth quarter, CPLD product revenue accounted for $35.5 million, or 67 percent of revenue.

FPGA products contributed $10.4 million, or 20 percent of revenue.

Finally, low-density SPLD products accounted for $6.8 million, or 13 percent of revenue.

Additionally during the fourth quarter, new products made up 14 percent of total revenue.

These products have grown nearly fivefold on a year-over-year basis when compared to the fourth quarter of 2002.

To remind you, new products consist of our new FPGA, new CPLD families, manufactured on .18 micron and advanced process technologies, as well as our PowerManager mixed-signal products.

This new product growth was driven by our FPGA product families and our MACH 4000 CPLD product family.

Additionally, customer design activity with our new products continued at a brisk pace during the quarter, giving us confidence that these products continue to be well-received in the market.

Notably, during the fourth quarter new product design-ins represented the majority of our total design-ins for the first time.

Revenue from mainstream products now makes up 42 percent of total revenue.

To remind you, our mainstream products consist of our 3.3 volt CPLD products and our ORCA 3 FPGA products.

Revenue from mature products made up the remaining 44 percent of total revenue.

To remind you, mature products consist of our 5 volt CPLD products, our ORCA 2 FPGA products, and our simple PLD products.

Geographically, during the quarter the Americas made up 36 percent of the revenue, Europe 22 percent, and Asia 42 percent.

Revenue by end market for the quarter was as follows -- communications, 51 percent; computing, 21 percent; and industrial/other, 28 percent.

Revenue mix by channel for the fourth quarter was direct 61 percent and distribution 39 percent.

For the United States.

Proceeding with the rest of the statements of operations, gross margin for the quarter was 54.9 percent lower than our announced expectations of approximately 59 percent.

The declining gross margin was due to one-time items and lower gross margins on our new products.

The one-time charges in aggregate represented 2.9 percent of revenue.

Gross margins were lower on our new products due to lower than anticipated yields and lower than anticipated selling prices.

Quarterly R&D expense was $22.4 million, $1.2 million higher than last quarter, due to increased spending on new product development activities.

Quarterly SG&A expense was $13.6 million, $1.4 million higher than last quarter, due primarily to increased spending on professional services.

Other income for the December quarter was $421,000 and reflects interest income on our cash balance, less amortization of issuance costs on our convertible notes.

We reported no tax provisions.

Intangible asset amortization was $18.7 million for the December quarter.

Total quarterly net loss was $25.2 million, or 22 cents per share.

On a non-GAAP basis the loss was $6.6 million, or 6 cents per share.

This non-GAAP presentation excludes the impact of intangible asset amortization.

These non-cash charges have been highlighted here, as they are not expected to continue at these levels beyond the June 2004 quarter, and are currently expected to be eliminated in 2007.

We believe the exclusion of these charges more closely approximates our earnings performance.

A reconciliation of non-GAAP to GAAP results accompanies the financial tables in our earnings release.

Turning now briefly to the balance sheet.

Cash and short-term investments as of the December 2003 quarter decreased by $1.0 million to approximately 278 million.

Inventory declined slightly to $46.6 million from the 47.9 million reported last quarter.

Cash flow from operating activities was $0.8 million, while we spent $1.8 million on routine capital expenditures.

Depreciation for the quarter was $4.6 million.

I would like to talk briefly about our Fujitsu announcement.

I'm sure many of you saw a joint press release we made with Fujitsu on Monday evening.

Essentially, this announcement formalizes the business partnership we have jointly developed over the last few years with Fujitsu.

Our agreement provides us access to advance 130 and 90 nm process technology, and jointly developed 130 nm embedded Flash technology.

Additionally, we plan to invest between 100 million and $200 million in Fujitsu's new 300-mm wafer fab, which is currently scheduled to begin operation in the spring of 2005.

Presently, we contemplate making this investment in stages through 2005, and structuring the investment as an advanced payment for production wafers.

We plan to use the process technology covered in our agreement to manufacture our new FPGA products.

In this regard, we have also announced the planned 2004 FPGA roadmap, which consists of three new innovative FPGA families.

The first family, the ultra-high-density LatticeSC family, based on 90-nm technology, will offer up to 10 million system gates and 10 megabits of RAM, embedded RAM, along with optimized embedded system functions and high channel count, high-speed SERDES I/O.

The second family, the nonvolatile, infinitely reconfigurable LatticeXP family, based on 130-nm embedded technology, implements an 80 percent die shrink over our first-generation nonvolatile FPGA family.

And the third family, the LatticeEC family, based on Fujitsu's production-proven low-k copper 130-nm process, will be our vehicle to enter the low-cost FPGA arena.

We expect products from all these families to be released to market during the current calendar year.

Finally, I would like to close with a discussion of our first-quarter 2004 outlook.

We currently expect revenue to grow 10 to 13 percent on a sequential basis.

We believe this growth is due to several factors -- first, the general recovery in the PLD market; second, a long-awaited recovery in the communications end market; third, a specific improvement in our business as our new product design wins begin to move into production.

We expect this first quarter revenue growth to be driven by both CPLD and FPGA products.

For the rest of the P&L, we currently have the following expectations for the March 2004 quarter.

We expect gross margin as a percentage of revenue to be between 57 and 58 percent.

We expect operating expenses to be approximately 34 to $35 million.

Further, we expect intangible asset amortization to be approximately $18.7 million, and we expect approximately 2.5 to $3 million in other income, including a gain on sale of foundry investments.

We will report no tax expense or credit.

Finally, we expect the share count to be relatively flat.

With that, I would like now to open the call for your questions.

(OPERATOR INSTRUCTIONS).

David Wu, Wedbush Morgan.

A couple of questions, please.

On your new products, you mentioned three families -- the SC, the XP and the EC.

I assume that the SC, which is on the 90-nm product, is your flagship product.

And I was wondering why you were only looking to get to 10 billion system gates on such advanced technology.

Does it mean that you actually (technical difficulty)

I'm sorry.

I'm not hearing the full question.

Mr. Wu, please continue with your question..

Mr. Wu has disconnected.

We will now move to Sumit Dhanda.

A couple of questions.

If I look at your business on an apples-to-apples basis, it seems like most of the sequential ramp in revenues -- actually, this came from the SPLD product line.

First of all, is that accurate?

And if so, why was that the case?

I don't believe that's true at all.

We stated the FPGA business was $10.4 million, and that represents (technical difficulty) business.

I'm hesitant to provide sequential growth comparisons, as I said, because we are restating our revenue.

So I won't do that.

But I think those of you who follow the Company should have an accurate record of product revenue by family.

So I would encourage you to look at that;

I think you'll find that the FPGA business has grown rather nicely.

Okay (technical difficulty) can take that off-line.

The other question I had was, in terms of the one-time charge you had to your gross margin last quarter, could you go into some detail as to what that charge related to?

Sure, I would be happy to.

As I mentioned, the gross margin was negatively impacted due to some one-time items.

Just to give you a little bit more insight into those -- first, we made a one-time sales allowance to accommodate a major customer during the quarter; second, we refined our distributor inventory costing to a more conservative methodology that had an impact as a charge; third, we took a catch-up charge to account for amortization of an OEM software contract we entered into Q3, but did not begin the amortization to Q4.

So there was a double-dip on that charge in Q4.

The final question I had for you -- it seems like you restated your net revenues by about $10.5 million or so, but the impact on COGS is slightly less than 2 million.

Could you explain sort of that discrepancy?

Sure, I'd be happy to.

We did adjust the deferred income balance, as I mentioned.

The way you do that is to adjust both revenue and cost of sales.

As I mentioned in my prepared remarks, deferred income represents the gross margin and the credits that may be due on inventory held for our customers by our distributors.

So that's why you are really seeing a discrepancy; the adjustment includes both the gross margin and credits on the deferred income adjustment, which is why you would calculate a gross margin that is higher than what you would expect to see, I think.

Mark Edelstone with Morgan Stanley.

Mr. Edelstein, your line is open.

Yes, can you hear me?

I can hear you.

I think your volume is a little soft, but I can hear you.

Okay, sorry.

Hopefully this will work.

The question really is related to the new products that you talked about.

Can you give us, I guess, a little bit of sense as to where the product areas are that you are seeing the lower than expected yield?

And also, where sort of the rationale behind the lower than expected ASPs on some of those new products?

As I mentioned, in general the gross margin on our new products was lower than those of our other products.

It's reflective of lower yields, and thus higher costs and a more aggressive stance with regard to (indiscernible) in the marketplace.

As you know, as newer products ramp into production volume we expect (indiscernible) force to leap learning curve benefits and improve our yields, and that is typical of new products.

And we would not anticipate anything different in this case.

On the other hand, we believe it is important to continue to drive our new products into the market, and thus we will continue to maintain an aggressive posture.

So if the pricing environment remains as it is, we would anticipate our margins to remain more or less where they are at present.

As the industry prices firm, we could see some margin improvement.

Just as a follow-on, then.

With the Fujitsu relationship that you have now, I think I heard you say that basically the three new product families would ramp up into production at Fujitsu in the spring of 2005 in this new fab.

I assume that between now and then Fujitsu will be making these products in their existing facilities.

Is that correct?

Yes.

I think you're mixing two things, Mark.

We did announce a relationship with Fujitsu.

We also announced a roadmap to our FPGA products.

We have not made the formal introduction of those families, and thus, don't have really any architectural details to provide.

But we do anticipate products from those families to be released to market, that is to say, to be released to volume production during the current calendar year.

I also spoke about an intention to invest in a new 300-mm wafer fab that would begin operation in 2005.

So really, those are two separate events -- one is the foundry relationship that covers 90-nm, 130-nm and embedded 130-nm Flash technology at Fujitsu's existing fab, and the roadmap announcement of our FPGA's; and then separately, the plans to invest in partnership with Fujitsu to support a 300-mm foundry that is scheduled for operation in spring of 2005.

This is Cyrus.

Yes sir.

Your question was (indiscernible) the product families are going to be manufacturing the existing fab or the new fab.

Currently, our current plan is the 130-nm devices all will be manufactured in the existing fabs. 90-nm, depends on the density of the devices, ultimately will be moved to the new fab.

So 90-nm and below is what we targeted for the development there in the new fab area.

Thank you for clearing that up for us.

One last final question, Steve.

As you ramp up the facilities that you are investing in with Fujitsu in the 2005 and beyond timeframe, how should we expect that over time to impact your gross margin model?

Does this take you back into your roughly 60 points of gross margin, or is there a different model we should think about thereafter?

I think at this time, Mark, it's premature to speculate on that.

Mark, if we just look at -- the equation is two major variables, right?

One is the ASP, one is the cost.

So forget about ASP, which is basically market-driven.

From a technology point of view -- from a technology point of view, you're going from 8-inch to 12-inch; you're roughly (indiscernible) to see about 2.2 X the sort of a year increase.

So it all depends on what is the cost differential between the 8-inch and 12-inch.

And then it will impact your -- what is your basic cost for those devices.

And that model also is quite dependent on the size of the die.

The bigger the die, the more advantageous it is to use the bigger wafer.

(OPERATOR INSTRUCTIONS).

David Wu.

Actually, the question really was on the SC, XP and EC, all these three families.

If I were to look at your SC family, you're using 90 nm to get up to 10 million system gates.

And I see that your competitors' existing product lines in that same category of system density are using 130 nm.

So I was wondering, by using 90 nm, are you trying to aim at a lower-cost segment?

Or how do you position that product against the existing products out there like the Stratex or Vertex 2 Pro?

And the second thing I was wondering about -- is the EC also a .13 micron, which is the entry-level product?

And I guess -- in the answer to your previous questions, it sounded like 57, 58 is what one should expect for calendar 2004.

Did I read that correctly?

David, I guess you asked a lot of questions.

So first, the EC product line is on 130-nm technology.

The SC product line on 90 nm is driving both towards high gate counts in a cost-effective manner.

So that's our chosen technology vehicle to deliver that product as we continue to expand our offering in the embedded system function arena of the FPGA market.

With respect to your last question, that is a correct read.

Your assumption should be gross margins to be in the current level that they are, given the caveats that I mentioned in the remarks to the prior question for the current, foreseeable future.

David Duley, Merriman Curhan Ford.

Real quick, just talking about the FPGA product line, my recollection was about 9.2 million in the September quarter, and we just got about 10.4.

Is that roughly about the right expectation?

(multiple speakers)

Hold on.

As Steve mentioned before, the Q3 number is no longer valid.

So the number you quoted was the number prior to restatement.

So that's for your own record.

And for the record, the number we are saying for this quarter is correct.

The previous quarter is whatever number you want to use.

And one question from me regarding the restatements was, did the restatements involve specific product lines?

Because it does seem like the comparisons sequentially are all kind of skewed.

I'm just trying to understand -- that might help us all understand why that is.

The restatement did not involve particular product lines.

The numbers published in the supplemental historic financial information which states the older product lines, which were the product lines that the Company has offered for the longest period of time which we thought was most appropriate to reflect that in the supplemental information that was provided.

Regarding the Q1 guidance, could you just give us your kind of outlook there?

It seems like that's pretty darn strong.

What segments do you see that are leading you to believe that the revenue will be up 10 to 13 percent?

We're here at March 24th, so we have a reasonable perspective on the quarter.

This is not the first quarter earnings release, although it is March; this is the fourth quarter earnings release.

But I would harken back to my original comments that we believe there is a general recovery in the PLD market, that there is a recovery in the communications end market.

And we believe we are experiencing a specific improvement in our business as our new product design wins move into production.

I think the time to assess the quarter is once we have rolled up the numbers for the quarter, which we would typically do in our first quarter release, in approximately a month.

I guess this kind of new -- it may not be new information, but I think it's new for you guys to say there's a full-blown recovery in the communications space.

So that's good news.

Anyway, thanks a lot.

Sumit Dhanda, Banc of America.

A couple of quick follow-ups.

First of all, could you talk a little bit about the weakness in Asia?

It seems like sales there declined.

And then the second question relates to the June quarter.

It seems like you are towards the end of the first fiscal quarter.

Could you give us an idea of how you think June might shape up here?

We are giving guidance for one quarter on this call, so I'll preclude giving guidance for the June quarter at this time.

With respect to Asia, Asia represented 42 percent of our business.

Asia actually grew from the quarter.

I think you are now using the restated percentage, so I would again ask you all to focus on the Q4 number which is stated in the release.

Q3 has been lowered, and thus a lot of the percentage comparisons between Q4 and Q3 really have lost meaning, which is why I did not give them in the prepared remarks.

I guess my question, Steve, related to 28 percent last quarter, December quarter, versus 35 percent a year ago where there was no restatement.

I don't know where you're getting the 28 percent.

I know our published tables -- it says 42 percent for the fourth quarter, 47 percent for last quarter, and the restated fashion -- which is off a low number, now a restated number -- and 35 percent from a year ago.

So Asia is and continues to grow for us as a geographic region.

Danny Quah, JP Morgan.

My question is on the gross margin trends.

Can you help me reconcile why the drop in the third quarter?

And maybe on a pro-form basis comparison, how that increased in the fourth quarter?

And kind of, I guess, for the first quarter, based on a pro forma comparison, we're not looking for any increases in gross margins?

Is that how I should look at that?

No.

Let me just reiterate the statements I made on gross margin.

Gross margin for the fourth quarter was 54.9 percent.

That number was low during the quarter for two reasons -- one, there were several one-time items which I have already explained in detail that combined to lower our gross margin by 2.9 percentage points in the quarter; additionally, gross margins on our new products were lower than anticipated, and that accounts for the other part of the drop, approximately 1 to 2 percentage points.

And then I articulated where we thought that would be going forward.

Obviously, the one-time items won't reoccur in the first quarter, and thus we get to an outlook of between 57 and 58 percent for the first quarter in gross margins.

We further discussed our belief that for the foreseeable future the margins will stay in that range.

And for the third quarter last year, gross margins were lower due to, I guess, returns from the 50s?

That is our restated figure, where we have lowered revenue by the amount that is articulated in our press release.

We have also lowered cost of sales.

It was pointed out before by somebody on the call that if you calculate the gross margin by taking the change in cost of sales and the change in revenue, you get a rather high percent.

I believe it's about 80 percent, roughly.

And that is because we needed to account both for the gross margin on the deferred income balance that was increased in the restatements, and -- and I'll emphasize -- the estimated credits that our due the distributor on the balance.

And for the first quarter -- my last question -- for the first quarter '04, what's the turns expectation you would be looking for here?

I believe about 60 percent.

(OPERATOR INSTRUCTIONS).

Joe McKay, UBS Financial Services.

You talked a little bit about the production ramp up at the Fujitsu plant, and it becomes operational next spring.

How fast does that come on board?

Again -- and I addressed this in an earlier question -- our agreement with Fujitsu covers production process technologies in an existing fab.

So the ramp of that will be dependent upon the introduction of our new products later in the year and how successful those are in the marketplace.

Separately, there are plans that we plan to support with Fujitsu to migrate to a 300-mm fab in the spring of 2005.

And again, the ramp up of that will depend upon the successful completion by Fujitsu of that fab and the product development and introduction activities at that time.

David Duley.

Could you just give us a little bit more flavor on what the backlog is currently doing and how bookings look in the current quarter?

It has improved, obviously, since our guidance is up.

I believe the book to bill for the fourth quarter was well above one, and the backlog is up nicely.

The percentage term the backlog might be at?

We don't disclose that, and we never have disclosed that figure.

Gentlemen, there appear to be no further questions at this point.

I would like to turn the conference back to you.

Great.

Thanks, everyone.

Please call the Company if you have further questions.