萊迪思半導體 (LSCC) 2004 Q1 法說會逐字稿

Good morning and welcome to today's conference call.

Copies of the Lattice Semiconductor first-quarter ending March 31, 2004 earnings press release may be obtained from the Company's Web site, which is www.lscc.com

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

A live broadcast and replay of the call will be available on the Lattice Investor Relations Web site, www.lscc.com.

At this time, I'd like to turn the conference over to the Chief Financial Officer, Jan Johannessen.

Please go ahead, sir.

Thank you and good morning, everyone.

Joining me on the call today are Cyrus Tsui, our CEO, Steve Skaggs, our President, and Roddy Sloss, our Vice President of Finance.

Before we begin, I would like to read a Safe Harbor statement and give a financial review of the first quarter.

Then Steve will provide a business review, followed by our second-quarter outlook.

We will then hold a 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.

Financial review -- revenue for the first quarter was $59.1 million, up 12 percent sequentially from the fourth quarter.

Proceeding with the rest of the statement of operations, gross margin for the quarter was 58.2 percent.

Quarterly R&D expense was $22.3 million, essentially flat with last quarter.

Quarterly SG&A expense was $13.1 million, $0.5 million lower than last quarter.

Other Income for the December quarter was -- Other Income for the March quarter was 3.1 million, substantially higher than last quarter due to the realization of a $2.5 million gain based on the sale of $9.2 million of UMC stock.

We reported no tax provision, intangible asset amortization of less than $18.7 million and the March quarter net loss was $16.5 million, or 15 cents per share.

On a non-GAAP basis, we had $2.1 million in income, or two cents per share.

These results were consistent with our previously announced guidance for the first quarter.

Turning now to the balance sheet, cash and short-term investments as of March, 2004 quarter increased by $20.8 million to approximately $299 million due to the previously mentioned sale of $9.2 million worth of UMC shares and $11.6 million of cash flow from operations.

Inventory declined $2.3 million to approximately $44 million and the inventory now stands at about 5.4 months on a constant-sales basis, close to our target of four to five months.

We spent $2 million on Capital Expenditures.

Depreciation for the quarter was $4.5 million.

I would now like to turn the call over to Steve Skaggs.

Thanks, Jan, and good morning, everyone.

Well, it was certainly a good quarter, particularly when measured from revenue growth standpoint, and we're pleased to benefit from strong PLD market conditions, a return to sequential growth from our base PLD products, and continued strength from our FPGA products.

Geographically, during the quarter, the Americas made up 36 percent of our revenue, Europe 24 percent, and Asia 40 percent.

All geographic regions grew on a sequential basis with both North America and Europe showing double-digit growth.

Revenue by end markets for the quarter was as follows -- communications made up 53 percent of our revenue; computing, 19 percent; and industrial/other, 28 percent.

The communications end market drove our topline growth last quarter, as our design-ins continued to move in production across the customer base.

Our growth in communications was broad-based.

However, we saw particular strength in the wireless segment.

During the fourth quarter, new products made up 13 percent of total revenue and grew just under 5 percent sequentially.

However, on a year-over-year basis, these products have grown by four times when compared to the first quarter of 2003.

New product design activity continues at a strong pace.

In this regard, design-ins of our new products established a new record last quarter, growing 17 percent sequentially and now represents 58 percent of our total design-ins.

This continued growth in design-in activity gives us confidence about the future growth trajectory of these new products.

Revenues from mainstream products made up 42 percent of total revenue, while mature products accounted for 44 percent of total revenue.

Both mainstream and mature products grew at double-digit sequential rates.

Many of you will recall that, over the last year, we've consistently stated that customer and channel inventory were at historical low levels and any pickup in demand would fuel both consumption increases and inventory replenishment.

Based on the performance of our business and in particular our mature product revenue growth, it's clear that last quarter this finally happened.

However, we do not believe that this is a sustainable trend.

Beginning this quarter, we will only break our revenue into two product segments, FPGA and PLD.

The PLD segment contains both the complex PLD and simple PLD products.

During the first quarter, PLD product revenue accounted for $47.4 million, or 81 percent of our revenue, and grew 12.5 percent sequentially.

FPGA product revenue was $11.4 million, or 19 percent of revenue, and grew 10 percent sequentially.

On a year-over-year basis, quarterly FPGA revenue grew by 35 percent.

Design activity for our new FPGA products also continues at a strong pace, causing us to be optimistic about future revenue growth in this area.

Design-ins for our new FPGA products in the March quarter grew over 40 percent on a sequential basis and when measured against the March 2003 quarter a year ago, new FPGA design-ins more than doubled in the last quarter.

I'd like to turn now to a discussion of our second-quarter outlook.

In my business review, I discussed our belief that the strong, sequential growth of our mainstream and mature products was influenced by inventory replenishment and is not sustainable.

On the other hand, we entered the second quarter with a sequentially higher backlog and believe our new and mainstream products will continue to benefit from our prior design activity and positive market conditions.

Factoring in both these assumptions together, currently we expect second-quarter revenue growth to be in the 3 to 5 percent sequential growth range.

For the rest of the P&L, we currently have the following expectations for the June 2004 quarter -- we expect gross margin as a percentage of revenue to be in a similar range as we reported in the March 2004 quarter; we expect operating expenses to be more or less flat to the March 2004 quarter, depending on new product development activities in the current quarter; we expect intangible asset amortization to decline approximately $1.5 million in the June quarter; we expect approximately $3 million of Other Income, including another gain on sale of foundry investments in the June quarter.

I will report no tax expense or credit and finally, we expect the share count to be relatively flat.

With that, I'd like now to open the call for questions.

Thank you, gentlemen.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Chris Danely of JP Morgan.

Can you just talk about your expectations by products?

In other words, do you expect the PLDs or FPGA to grow faster in Q2?

Last quarter, both product lines grew for us.

Historically, FPGA products have grown more rapidly than CPLD, and we don't really see that changing in the long run.

I mentioned that the mature products grew on a double-digit basis, and we don't expect that trend to continue because some of it was clearly due to inventory replenishments.

That impacts the PLD products more than FPGA, so yes, we do expect the FPGA products to grow more rapidly than CPLD products.

David Wu of Wedbush Morgan Securities.

Good morning, gentlemen.

Good quarter.

I wanted to ask you about two questions, really.

Number one, is the gross margin rebound from the previous quarter a function of the mix of business, i.e. mainstream mature products carry better gross margins?

Secondly, on the FPGA business, you mentioned about -- I guess these are design wins, right, up 40 percent quarter-on-quarter and over 2X last year.

What's the lag between design wins and going into production?

Roughly also, as you go into the new product transition coming up, is there a quarter or two where you could have these what I call transition issues?

The FPGA business, yes, I did mention the new design-ins, those relate to the new FPGA products being up 40 percent quarter-on-quarter and doubling on a year-over-year basis.

It really reflects the success we're seeing in the marketplace with our newest FPGA products that were introduced within the last year, year and a have.

Typically, the design cycle for FPGA products, in our experience, is 12 to 18 months, and that's dependent upon a variety of factors, most particularly the speed at which our customers deliver their systems into volume production.

So, in our experience, that can be the very variable.

At this stage in our FPGA evolution, we have a small business and a relatively narrow customer base, and that causes our FPGA revenue to be somewhat lumpy or non-linear.

I think, if you look at our FPGA growth over the past several periods, it has grown in a lumpy fashion, although I believe it has grown consistently and strongly over the last year.

So, we do expect that phenomenon to be with us as we go forward and continue to grow our business from this relatively small base.

So kind of bottom line, we expect those designs to continue to kick into volume revenue in kind of a nonlinear, lumpy fashion, but over time to continue to report, as I mentioned in the answer to the first question, continued growth from the FPGA business.

With respect to gross margin, last quarter, we gave a range of 57 to 58 percent gross margin.

It's difficult to pin down to the decimal point, from a forecasting standpoint, so the reported margin of 58.2 percent is essentially in line with that range, and we are consistent with our outlook and forecast.

Tristan Gerra with Schwab Soundview.

I was wondering if you could talk about the trend in leadtimes and whether you've seen any change since the previous quarter and what the supply outlook looks like for the next few quarters.

Thanks.

Last quarter, we were successful in meeting the vast majority of our customer requirements in the quarter, and we think we've done a good job of that.

We've got good support from our foundry partners on capacity and turnaround times from our wafers.

Obviously, we're working those issues but nonetheless, most of our deliveries were met.

Leadtimes are within our desired range.

For most products, leadtimes are either off the shelf or about two to three weeks, and that's where we want them to be.

Of course, there's always some products or certain line items, either because of demand or because they are newer and we are ramping production where leadtimes are longer than we would like to but I would say, for the vast majority of the product lines, leadtimes are well under control and we a strive to keep them at that level so that the customers can maintain the off-the-shelf ordering that they've grown accustomed to and like from PLD technologies.

So at this point, leadtimes are in good shape.

Cyrus is mentioning that fabric capacity is tightening up and I think will continue to do so, but I mentioned, last quarter, we were able to work with our foundry partners to get all of the wafers required to meet the demand for the quarter.

Jack Romaine of S.G. Cowen.

A couple questions for you -- -- on your SPLD business, I know you are not going to break this out anymore but you've had a couple of very strong quarters here.

Have you done end-of life on any products?

Are we seeing last-time buys here?

No, you're not, Jack.

Again, we believe that's a mature product line.

Obviously, there's not a lot of price pressure in the current environment in that product line at this point in the cycle, but really a lot of that growth is clearly inventory replenishments, as our customers' legacy systems are finally beginning to ship through a little bit more in volume and there's some restocking going on that, we believe, to support consumption, obviously.

You know, the long-term trend of the simple PLD business has been and will continue to be down, and we don't believe that kind of growth is sustainable in that business, as I think I clearly alluded to in my prepared remarks.

Okay.

On the Other Income line, can you break that between the sale of assets gain and the normal interest income and give us a little guidance on that line beyond the next quarter?

Yes, Jack, the Other Income for the March quarter -- about 2.5 million was the gain on the UMC share.

The balance was interest income and some expenses.

Going forward, at least for the next few quarters, we expect that to remain about the same.

(OPERATOR INSTRUCTIONS).

David Duley of Merriman.

I was wondering if you might talk a little bit about the low-power CPLD space and how your design-ins that you won a year ago, how they are progressing into production.

What area of the FPGA is doing well for you, which products?

Is it the FTSE or is it something else?

With regards to the low-power segment of the CPLD, we do believe that is an attractive segment, which is why we brought our product into that market about a year ago or so.

However, I will say it's a minority of the CPLD market, but we think it's an important segment and one that has the opportunity to grow with the marketplace.

It does require a specific architecture that's designed for low-power.

You know, if you looked at the CPLD markets in general, I think the low-power segment would probably represent the highest single growth opportunity in that marketplace.

So, we did recognize that.

Clearly, Xilinx has been successful in that segment over time, but we've introduced our MACH 4000z family into that segment and it's doing quite well, David.

It's generating designs; there's the normal 12 to 18 months design-to-revenue curve that one would experience in any new product family, but the product is winning designs, meeting our expectations and beginning to approach a revenue growth curve that satisfactory.

With respect to (indiscernible) PGA, really in that segment today, we have the FTSE products and the XP families that offer non-volatility as the key differentiating feature.

Both of those lines are successful for us and both are contributing to growth that we've experienced over the past year in the FPGA business that we've reported.

You know, again, we are early in the design cycle of those products, and designs are just now beginning to move into production and the business.

As I mentioned, because of the nature of the customer base for us, which is narrower than the industry at-large, the revenue growth for many particular product lines is nonlinear and lumpy.

We have discussed that in calls in the past and we don't see really a change in that picture until our business gets to be much larger.

One just kind of housekeeping question for me is what percentage of your wafers are 300 mm?

Do you have further plans to move in that direction more rapidly in the near-term here to take advantage of costs, or is that not the strategy?

You know, the strategy is and will be to move through 300 mm as economics dictate that.

You know, as you will recall, we made an announcement a month ago with Fujitsu about a new foundry relationship and new FPGA product families associated with that relationship.

Part of that announcement is a road map to 300 mm technology.

Today, we don't produce wafers on 300 mm technology because, at this point in the life cycle of the Company, we are really not producing the large FPGAs that demand that kind of technology to be economically viable.

We have plans to do so in the future and at that time, we will use 300 mm technology and that's in our road map, as we've discussed.

Bill Dezellem of Davidson Investment Advisors.

Thank you.

Relative to Research and Development as a percent or an absolute basis, in this quarter, it was 37.7, so call it 38 percent of revenues.

Can you give us some perspective over the course of the next three years how you would anticipate this to trend, print, probably as much from an absolute perspective as anything?

I would like some color on that, please?

Sure, Bill.

We've discussed again many times that we've viewed, during the downturn, R&D as a fixed expense, and we've sustained an investment in R&D basically by keeping our Human Resource capacity in the engineering field intact.

As we've discussed, that is predominantly focused on the development of next-generation FPGA families to really upgrade our FPGA product line and drive deeper into that attractive marketplace.

We think, strategically, that's kind of an important thing to do for the Company.

So, that being said, we will continue to view that as more of a fixed cost and focus on the execution and development our FPGA road map which you've all have got a taste of a month ago with our producer announcements, and we will have more detailed announcements for you as the year progresses and we introduce the specific families to market.

So, with regard to the trajectory of that expense, we see that expense being where it is for the next quarter and then bumping up as we get into the specific product activities, the masking and the wafer charges of the roll-outs of the FPGA families through the year.

Going forward, really the strategy becomes the same.

Your comments on the percent of revenue really depends on the growth that we are able to achieve on the revenue line as we move into the 2004/2005 and beyond period and hopefully do our job and take advantage of driving into the FPGA market, growing our share there and improving our revenue posture.

We would expect the percent of revenue that we spend in R&D to come down as that process unfolds.

Steve, on an absolute basis, relative to that number, you've mentioned here this year, as you come into the final window of making some of the FPGA announcements or introductions, that you will see that increase on an absolute basis.

Share with us what you would envision in a dollar amount in an absolute basis, say, as we move out into '05 and '06.

Does this move up a fair amount?

Really, (indiscernible) just trying to thinks strategically about this, or is it going to be relatively fixed in this area?

I think the headcount is relatively fixed, Bill, and that's the majority of the expense.

On the other hand, you have mass charges and wafer charges that vary, dependent upon your introduction and tape-out schedule for a given quarter.

We are going to drive to that based upon engineering priorities first and secondly, financial priorities.

So, I think you'll see a potential for that line item to move up and down to the tune of a few million dollars a quarter, depending on where we are with respect to tape-outs and wafers and product introductions.

That's helpful.

On a completely separate topic and then I'll get off -- other current assets were up $6 million sequentially, where most of the other balance sheet did not wiggle much sequentially.

What was behind that?

We will get back to you off-line, Bill.

We don't have that information at our fingertips.

Sumit Dhanda of Banc of America Securities.

Steve, a quick question for you -- you've talked about the fact that the growth rate that you saw in March was not sustainable.

I'm just curious in terms of the fact that your end markets actually started recovering a little later than some of the others.

Why are you a little more cautious about potentially the growth, going forward?

Well, you know, I think, in my prepared remarks, I talked about the fact that we've commented all through last year that inventories were at bare-bones levels and once M&M (ph) picks up a little bit, there would be an inventory replenishment cycle.

We do believe we're seeing that.

We also believe that our CPLD business, as we've talked about in the past, was more dependent upon volume shipments of systems.

I think you're seeing, particularly in the communication market, a return to more volume shipments of legacy systems in the com space, so clearly we benefit from that.

Really, our caution, if you could call it that -- I mean, I think having a gross posture is not particularly cautious -- but some of the impact has to do with the growth rate we experienced in our mature product line last quarter at about 44 percent of our business and that grew at double-digit sequential rates.

We just don't think that that's a sustainable growth rate, nor do we think it's responsible to forecast sustained growth in the mature business.

That's a business that really is going to be flat to down.

Those devices aren't being designed-in by our customers today.

Really, the demand for those products is totally dependent upon shipment of legacy systems and they inventory posture at our customer base.

Long-term, you'd expect that business to decline, as I mentioned.

So really, that is the scenario we factored into our growth forecast, as opposed to the more optimistic, "hope it continues" scenario, so we're not counting on a continuation of that type of growth in the mature business, and that's why we've come to the growth outlook that we suggested.

Now, of course, if it continues, there would be some upside, but we just don't think it's sustainable.

Okay, Steve, a quick follow-up to that, could you talk about what turns were last quarter and what the forecast turns requirement for this quarter?

Yes, turns last quarter were in the high 50s, and we expect them to be in the low 50s this quarter.

Thank you.

Mark Edelstone of Morgan Stanley.

Good morning, guys.

A question on distribution -- can you just talk about what you saw in the distribution in terms of demands then, as you went through the quarter and where days of inventory are now in distribution versus where they were at the end of Q4?

Yes.

Days of inventory in distribution are six weeks of product in the channels.

It's consistent, perhaps a little bit lower than it was at the end of last quarter, but not a substantial change.

With respect to trends in the distribution business, distribution kind of grew through the quarter but perhaps tailed off a little bit at the end of March, and it continues at that level in this quarter.

Steve, as you've kind of analyzed that, any thoughts behind why it might have trailed off?

It looks like Altera and Xilinx saw some of the opposite effect, where distribution was actually building momentum as they were exiting the quarter?

Yes, I think it's really dangerous to get into a week-by-week analysis of the business.

I don't want to do that.

That's kind of why we report quarterly numbers.

I think that the business does tend to normalize itself over periods of time, so I'm not sure I would read a whole lot into that.

You know, I have been pretty clear about our mature product growth and the fact that we don't think that would continue.

So you know, perhaps some of the distribution demand has been positioned with the mature products.

Again, that's not part of our guidance in this quarter but it is a little bit hard for me to parse it down to that specificity.

(OPERATOR INSTRUCTIONS) Taunya Miller of Ragen Mackenzie.

You guys had talked previously about some pricing pressure out there.

I was wondering if this trend has abated or if you're still seeing this out there in the marketplace.

If so, which product line is being more affected by this?

Sure.

We talked, last conference call, about having an aggressive pricing posture with respect to our new products and driving those in the marketplace, so we continue to have that posture with our new products.

You know, in general, given the fact that capacity has tightened up a little bit, we would expect to see some moderation of the pricing environment in the marketplace.

But typically, in our marketplace and most semiconductor marketplaces, there's an (indiscernible) that, for existing product lines, the prices will go down over time, and we really don't see a change to that scenario.

So, pricing perhaps is a little bit more benign, given the continuing tightening of capacity in our industry but really, I think it's pretty consistent with what we articulated just a month ago.

So we're not seeing any additional, unusual pricing pressure in the marketplace.

We are continuing to be aggressive in pricing our new products to drive the penetration of those products into the markets.

You know, we will continue to do so to grow our business.

Well, thank you for the insights there.

Bob Toomey of RPB Dain Rauscher.

Good morning.

How is (indiscernible), and then another question.

Jan, did you say Other Income would be -- the next couple of quarters would be in the 3 million range?

Is that what you meant?

Yes, that's correct.

Secondly, have you had any significant changes in your end customer mix that are notable?

No.

You know, if you go through the numbers, Bob, you'll find that communications for us as in end markets grew last quarter, as did industrial and other, so those two segments were contributors to the growth.

Data processing was down as a percentage of revenue but flat overall.

Really, most of the growth in the communication and industrial/other market was very broad-based, so we've seen no major change in our customer base.

On the contrary, what we've seen is relatively broad-based growth across the customer base.

Just one other question, if I might?

It has to do with -- you mentioned (indiscernible) inventories.

Did you say 5.4 months was above your range?

Do you expect to get that back down?

Well, our target on inventory here at Lattice for our product has been and continues to be four to five months.

We'd like to have ample availability of our products to service customer demand.

Currently, our inventory is at 5.4 months; it's been worked down over the last three or four years, you know, from basically 2001 when the revenue dropped off precipitously and obviously, the inventory doesn't go down dramatically.

We didn't do an inventory write-off at that time, as I think everyone knows, and we've been consciously and diligently working down our inventory balances back down to those targeted levels, and we're just about there.

A follow-up question from Tristan Gerra of Schwab Soundview.

Putting together the lower turns requirement for the second quarter, the backlog being up in your guidance, is it fair to assume that you are assuming that you are basically looking for a seasonally -- (technical difficulty) -- (indiscernible) and to the June quarter?

I didn't hear the last part of your question, Tristan, I'm sorry.

I'm sorry.

I was wondering if, based on the lower turns requirements for the second quarter and backlog being up, whether you're assuming a seasonally tougher end to the June quarter.

No, I think we are assuming two things; 1 is the continuation of the healthy PLD market -- well, three things -- assuming health continuation of the healthy PLD market conditions we're clearly seeing, we are assuming the continuation of growth of our new and mainstream products, given our design successes in those products.

However, we're not assuming a continuation of the above-average growth of our mature product lines, which we believe was partially due to inventory replenishment, which is a transitory phenomenon.

So, that's really the thesis behind our guidance.

Could you mention whether the backlog was up single of double-digit sequentially?

We don't give out that specific information.

A follow-up question from Chris Danely of JP Morgan.

Just two clarifications -- so book-to-bill was above one, right?

That's correct.

Great.

Then on the gross margins, when do you expect them to get back to the 60 percent level?

What sort of milestones I guess or assumptions are built in there?

We gave an outlook last time for the range of gross margins to be 57 to 58 percent.

We talked about driving our new products in the marketplace and having some yield issues to work through to improve the gross margins.

That's a phenomenon to improve yields that take some time; it's not something you work in a quarter.

So we are continuing to work on the operational aspects of improving our yields.

Pending the price environment not changing and our business growing, you know, we would see some gradual improvement in gross margin but at present, we are comfortable with where the margins are, plus or minus probably 30 to 50 basis points.

So, the range we still provided is kind of how we're thinking of our business at this timetable.

As I mentioned, we're going to be working on improving the yield throughout the year and you know, if the pricing environment is favorable, that will have a positive impact.

A follow-up from David Wu of Wedbush Morgan Securities.

Yes, Steve, you kind of suggested from your comments that we have a spread of gross margins, that the leverage to getting back to 60 percent is your new products, and that's (indiscernible).

Is that right?

That is part of the ability to improve our gross margins, David.

The aspect would be that there are some costs in manufacturing that are fixed in nature, so having a broader revenue base to spread those costs over it will be margin-enhancing.

So really those two things will be helpful in improving the gross margins.

From the Company's standpoint, where we are with our product cycles, we are comfortable with where the margin is.

(OPERATOR INSTRUCTIONS).

Bob Toomey from RBC Dain Rauscher.

Just a couple of other questions -- to follow-up on that last question, Steve, you look at the new product mix as a percent of your total revenue obviously driven by design-wins and your new products.

Would you expect that percentage to improve over the next three, four, five quarters as a percent of your total revenue?

Absolutely.

Okay.

My other question is, recently a director I think resigned from your company.

I wondered if you could comment on that.

Sure.

Larry Sonsini resigned from our Board.

Given that his position as a director and also as the head of our outside counsel caused him to be considered a nonindependent director, he and the Company didn't feel it was in the best interest of our governance standards to really have a preponderance of the Board being -- or to have nonindependent directors on the Board.

So his feeling was that he would better serve the Company as an outside counsel, as opposed to being a nonindependent director.

Okay, great.

While I've got you I'll ask one more.

Generally speaking, I mean, would you feel that, if global economy in semiconductor -- the demand is growing, particularly in your end markets, obviously that's a positive scenario for you.

Do you feel comfortable that you can continue to maintain growth -- a pace of the overall growth in your end markets?

Well, that's a two-part question.

Clearly, as the economy continues to be healthy and the PLD market continues to have positive wins behind it, we feel we can participate in that growth.

Great.

Thanks a lot, Steve.

(OPERATOR INSTRUCTIONS).

There are no further questions queued at this time, so Mr. Skaggs, I'll turn the conference back over to you for any additional or closing remarks.

Thanks, everyone.

Thanks for your attendance at this early hour.

Should anybody having any follow-up questions, please feel free to call us at the Company now or at any point in the future.

Thanks.

That does conclude today's conference call.

Thanks, everyone, for joining us.