萊迪思半導體 (LSCC) 2009 Q2 法說會逐字稿

Good evening.

My name is Kara, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Lattice Semiconductor second-quarter 2009 conference call.

(Operator Instructions).

As a reminder, this call will be available for replay beginning at 8PM Eastern Time today through 12.59PM Eastern Time on August 6, 2009.

The conference ID number for the replay is 19724416.

Again, the conference ID number for the replay is 19724416.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you.

I would now like to turn the call over to David Pasquale of Global IR Partners.

Sir, you may begin.

Thank you, operator.

Welcome, everyone, to Lattice Semiconductor's second-quarter 2009 results conference call.

Joining us today from the Company are Mr.

Bruno Guilmart, the Company's President and CEO, and Mr.

Michael G.

Potter, Lattice's Corporate Vice President and Chief Financial Officer.

Both executives will be available for Q&A after the prepared comments.

If you have not yet received a copy of today's results release, please 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 Semiconductors' website.

Before we begin the formal remarks, I will read the Safe Harbor statement.

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 2009.

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 2008 Form 10-K filed on March 9 and in 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 will be presented within the requirements of SEC Regulation G regarding generally accepted accounting principles, or GAAP.

Some financial information presented by us during this call will be provided on both a GAAP and on a non-GAAP basis.

By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the Company's performance for results and underlying trends.

Management uses non-GAAP measures to better assess operating performance and to establish operational goals.

Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP.

If we use any non-GAAP financial measures during the call, you will find that the required presentation of and reconciliation to the most directly comparable GAAP financial measure is in the Company's earnings press release.

I will now turn the call over to Mr.

Bruno Guilmart.

Please go ahead, sir.

Thank you, David, and thank you, everyone, for joining our call today.

We continued to make progress in the second quarter as we executed on our focused product strategy under our improved operating structure.

As a result, we achieved revenue growth that came in above [our quarterly] revised guidance.

Specifically, revenue was $46.9 million, up 8% from prior quarter.

We saw strength led by China, combined with strong new product revenue growth from prior wins at existing customers.

Revenue remained strong to the end of the quarter, with our turns business exceeding expectations.

Equally important, even in a tough ongoing environment we were able to narrow our GAAP net loss and maintain a strong balance sheet.

Our organization at all levels is focused on our goal of returning to sustained profitability as soon as practical.

Later in the call, I will review a series of additional steps we will be taking to address our profitability goal and to better serve our customers.

Let me now give you some color on the quarter.

New products continued to show strong growth in the quarter, contributing about 45% of total revenue, up from 21% a year ago.

This shift has been a focus for our Company and part of our refined business strategy.

Clearly, we are making progress, but there is room for further improvement.

The remaining mix in Q2 had mature at about 18% of revenue and mainstream at approximately 37%.

Revenue from our non-volatile products grew 40% quarter on quarter and 80% year on year, led by our XO and XP2 families.

Computing demand drove our XO performance, with growth in consumer driving our XP2 performance.

Revenue from our new SERDES-based products was flat quarter on quarter but almost double year on year due to higher demand in communications and computing.

On a geographic basis, growth in Asia was strongest, led by communication in China.

Revenue from Asia, including Japan, was 64% of revenue in Q2, up from 59% in Q1.

In addition to strength from communications in China, we benefited from an uptick in business in Taiwan and Japan.

Revenue from North America came in at 20%, with Europe at 16%, down from last quarter 21% of total revenue.

Europe remains the weakest of our regions in terms of recovery.

Lattice, like most others in the industry, expect an easing of demand out of China moving into the second half of the year compared to heightened levels we saw in the first half of the year.

We continue to view China as a long-term opportunity with considerable growth potential and unmet demand in front of us.

We were early in establishing our China-based R&D center and we have proven our ability to win significant designs and revenue in this important region.

We are committed to the region and well positioned as we move forward.

Overall, on a market basis, communication was basically flat in dollar terms compared to Q1, but came in at 57% of total revenue versus 63% in Q1.

Within communications, continued weakness in the US and Europe was a drag on the strength we saw in China.

Computing increased to 12% of total revenue from 8% in the prior quarter.

We saw some signs of recovery in the US computing market, with momentum in the server market.

Computing as a whole, however, was still below year-ago levels.

Industrial represented about 17% of total revenue, essentially flat compared to Q1.

Finally, consumer was 14% of total revenue, up from 11% in the first quarter.

We continue to gain momentum with multiple customers around the world.

I will now turn the call over to Michael for a more detailed financial review.

Michael?

Thank you, Bruno.

As noted earlier, revenue for the second quarter was $46.9 million, up 8% from the prior quarter and ahead of prior guidance.

And while on a year-over-year basis revenue declined by 19%, our net loss during the same quarter improved to a loss of $2.7 million in Q2 2009 from a loss of $13.6 million in Q2 2008.

Gross margin for Q2 came in at 52.4%.

This was above our guidance and slightly higher than the gross margin posted in our Q1 2009, primarily due to continued strict cost controls combined with a favorable product mix.

This includes the impact of the distribution transition which occurred in Q2 in our greater China region.

We saw the benefits of lower costs and improved yields across most high-density products.

Total operating expenses for the second quarter came in at $27.4 million compared to $27.8 million in the first quarter.

Second-quarter GAAP net loss improved to $2.7 million or $0.02 per share as compared to the $5.8 million loss or $0.05 per share we posted in the first quarter.

Our balance sheet remains strong, with no long-term debt.

As of July 4, 2009, we had $104.3 million in cash, cash equivalents and short-term marketable securities.

Cash flow from operations for the three months ended July 4, 2009, was $33.6 million, which includes collecting $30 million from Fujitsu during the quarter.

Regarding our remaining cash advance to Fujitsu, the balance totaled $53.9 million at the end of Q2 compared to $88.3 million at the end of last quarter.

In addition to the $30 million received in the second quarter, we anticipate that we will receive another $30 million cash payment from Fujitsu in the fourth quarter of 2009.

The remainder of the advance will be returned to us in the form of wafers and other services until completely utilized.

Not included in the liquidity discussion I just went through are our auction rate securities with a fair value of $18.4 million.

Due to the illiquid market for these types of investments, they are classified as long-term marketable securities.

The auction rate securities market remains weak, with auctions that continue to fail, and we experienced credit downgrades to some of our auction-rate securities holdings during the second quarter.

As a result, we recorded a charge in the second quarter of approximately $536,000.

However, on a positive note, we realized a gain of approximately [$169,000] on redemption of some of our student loan-backed auction rate securities.

Accounts receivable at July 4 were $26.6 million compared to $25.3 million at the end of last quarter, and days sales outstanding were at 51 days, an improvement compared to the 52 days recorded last quarter.

And we had 45 days sales outstanding Q2 2008.

Inventory at July 4 was $28.1 million compared to $30.3 million last quarter.

Months of inventory now stands at 3.8 months compared to 4.4 months at the end of Q1 2009 and 4.6 months at the end of Q2 2008.

We spent approximately $1.7 million on capital expenditures during the second quarter, up from Q1, with the quarterly depreciation expense at $2.7 million down slightly from the prior quarter.

This concludes the financial review portion of the call.

I will now turn things back over to Bruno for the third-quarter business outlook.

Please go ahead, Bruno.

Thank you, Michael.

We expect continued improvements in the broader market in Q3 based on our increased backlog, combined with customers and design wins coming out of Asia, the US and Europe.

Of note, we had some significant consumer-related wins.

As an example, one win was at one of the world's largest flat-panel companies.

This was a displacement of a competitor in an existing product, and we expect strong revenue growth at the customer starting in Q3.

Let me now speak to our continuing actions to attain our goal of profitability and our efforts to better serve our customers.

First, we are implementing a workforce reduction that will affect approximately 8% of our employees worldwide as we redeploy our resources to better serve our customers in the market in which we now operate.

We expect this reduction in force to result in a charge of about $1.2 million in Q3 while saving us about $1.5 million per quarter going forward or about $6 million annually starting in the fourth quarter.

We will continue to actively evaluate our cost structure on an ongoing basis as we seek to further increase operating efficiencies.

Secondly, we are transferring our warehouse operation from corporate headquarters in Hillsboro, Oregon, to Singapore.

With over 60% of our business today in Asia, this move gets us closer to our customers.

We also expect this move to reduce our customers' costs and delivery time.

We expect approximately $1 million in freight savings annually and expect a reduction in inventory levels over time by around five to seven days.

Subject to all pending necessary regulatory approvals, the transfer of the warehouse operations is scheduled to start in August and should be completed by the end of 2009.

Finally, as we continue the streamlining of our distribution network, which we began in Q2, we are transitioning two distributors from a sell-in to a sell-through model.

This will provide us higher visibility and transparency with our end customers.

We expect the change in business model will result in approximately $2 million reduction in revenue in the third quarter.

In terms of specific Q3 guidance, as noted a minute ago, we are entering Q3 with a stronger backlog than the prior quarter.

Visibility is improving as we move through the year, but still not great.

As we look to Q3, we are guiding for revenue to be sequentially down 2% to up 3%.

This includes the expected reduction in revenue of approximately $2 million due to the distributor transition I mentioned a minute ago.

Q3 gross margins are expected to be in the range of 52% to 54%.

Operating expenses are expected to be approximately $29.2 million, including $1.2 million in restructuring costs.

The increase over Q2 is primarily attributable to higher [mask] costs.

In closing, we remain optimistic in our ability to execute on the Company's continuing growth, cost structure improvement and focus on profitability.

This concludes our prepared remarks.

Operator, we will now be happy to take any questions.

(Operator Instructions).

Richard Shannon, Northland Securities.

I apologize if I've missed some of your commentary.

I'm kind of switching between calls here.

But I guess the first question I had was, looking at your segmentation by markets, it looked like your computer and consumer markets did quite well sequentially.

The telecom looks like it did kind of a flat quarter.

I'm kind of curious, what was the driver of those two markets that appeared to do pretty well sequentially?

As I've explained, we've got some pretty good momentum going, especially in the US, on the computing side within the server market.

So that is one element why we've done well sequentially.

We have also done well in consumer, as we saw higher demand from one consumer customer we do have in the US.

And as I've mentioned also, we have had a major win with a significant -- with a major, I would say, flat-panel manufacturer in Asia.

And that also, although it was small revenue in the second quarter, that has contributed to the segment doing quite well.

The reason for communication being flat is basically communication continued to be, I would say, so-so in US and Europe.

And in Asia, especially in China, we started to see the slowdown of the buildup that had started earlier in the year for the 3G deployment.

So essentially, in terms of dollars, if you want, the communication segment was flat, although it decreased in revenue because -- I'm sorry, decreased in percentage because our revenue was higher than in Q1.

Okay.

And maybe I will dovetail those comments into your guidance for the third quarter.

Some of these key drivers here with consumer and computing in China specifically, how do you see those playing into your overall guidance of, what was it, down 2% to plus 3%, as I recall?

So to give you a little bit of color, as you know, we do about half of our business in turn, so we don't have full visibility on what is going to happen in the third quarter.

But I think that we will continue to see some strength in computing and consumer, and communication will be a -- I would say will see a tapering off of -- definitely with the 3G deployment in China.

So I can't comment more than that for the time being.

Fair enough.

And did you mention the level of turns you are required to get to midpoint of your guidance for this quarter?

The level of what?

The level of turns, I think.

Oh, turns, yes.

Our backlog is stronger at the beginning of Q3 than it was at the beginning of Q2.

Typically in the last while, we have been at 50% or maybe a little bit less in terms of backlog.

So we needed over 50% of our revenue to come from turns.

We are closer to 60% in backlog at the beginning of this quarter.

So it is less than what it's been recently for turns necessary to make the forecast.

Great.

And then the last question for me, Michael, probably one for you.

You discussed the 8% reduction in workforce.

Can you dovetail that into your overall cost structure and what you think your new breakeven point when all these changes come to fruition?

It is a little bit variable, depending on if we are doing tapeouts and masks during a quarter.

But essentially, we moved our breakeven point from the mid- to highest 50s down to the low 50s.

So it's -- call it $51 million, $52 million, depending on masks and tapeout, and before maybe it would've been $57 million, $58 million.

And I assume that is on an earnings basis, correct, Michael?

That is on a GAAP basis, yes.

So it will be slightly less than that on a non-GAAP if you take out stock comp, which some analysts do in their models.

And is the cash flow breakeven point similar to the non-GAAP numbers, or how does that differ?

We are already above cash flow breakeven at the level of revenue we are doing now.

And even last quarter, we were above cash flow breakeven.

Okay, great.

That'll do for me.

I will jump off the line.

(Operator Instructions).

Bill Dezellem, Tieton Capital Management.

To make sure that we are clear here, the distributor change that you are anticipating or that you discussed for the third quarter is distinctly separate from the distributor change that was discussed on the first-quarter call.

Is that correct?

That is correct.

I think I had mentioned in the last call, in Asia, we had, I would say, an untraditional way of doing the distribution business.

Unlike Europe and US, where it's a sell-through model, we ship [on debit].

So in Asia, in order to improve our transparency and get better visibility at the end customers, we started to convert or to terminate, in some cases, some distributors and put some new ones in place so that we can implement a similar model than the one that we have in the US and Europe.

So we did two in greater China in Q1, and we are continuing that, actually, in this quarter.

There will be a conversion of one in Europe, which is the only one left, and one in Asia, in greater China, actually.

And what was the -- I'm sorry, go ahead.

It's an ongoing effort.

Thank you.

And what was the impact in the first quarter relative to what you had expected the impact to be from the distributor changes?

The impact actually was in the second quarter.

We started the ground work for it in the first quarter, but actually did it in the second quarter.

My apologies.

That was simply my error.

The second quarter was not impacted by revenue.

Originally, we had given guidance of potentially down minus 5 for the quarter because we were concerned how smoothly the transition would go.

It actually went quite well.

Our advanced work bore us quite good fruit there.

And the impact for us, because we had terminated a distributor in that case, bought inventory back and then resold it, was in gross margin.

So we had about what we expected to get for impact.

Our revenue was higher than we expected, so we got more of the total impact in Q2.

And that was slightly over $700,000 impact on our gross margins in Q2.

The transition that we're talking about coming in front of us is a transition of converting an existing distributor which is sell-in to sell-through.

And that will impact revenue as opposed to impacting gross margin.

We're just terminating a distributor and changing to a new one, then.

I know it is a little bit confusing, but we're working hard to get through this in the most orderly and least disruptive fashion we can to our customers.

And it is giving us very good visibility from the first one we did in what our real end customers and what our real product mix is.

And relative to this process, I think that, Bruno, you had mentioned that it was an ongoing process.

Does that imply that we should expect this -- you to do another one or two each quarter for a few quarters to come, or how do we look at this from a bigger-picture perspective?

What I can tell you is that we will have converted the entire greater China, pretty much the entire greater China market, which is our key market in Asia.

Right now, it is difficult to predict anything.

And we will have to evaluate -- we have to evaluate as we move on.

But right now, there is no current plans.

And to be honest with you, the number of distributors we could convert and the percentage of revenue is going down pretty rapidly with the ones we are working through right now.

So there is not really very many big distributors left that would fall in that category.

And then to make sure that we are understanding correctly, since $2 million is roughly 4% of the second-quarter revenues, your revenue guidance for the third quarter, because it includes that $2 million impact, if in fact you were not having that impact, are we to understand correctly that you would be providing revenue guidance of positive 2% to roughly positive 7% sequentially, Q3 versus Q2?

That is approximately right, yes.

And then are you anticipating any gross margin impact from the changes that you're going to execute in the third quarter?

Not directly from the distributor transition.

That is why our guidance has gone up from 52% to 54%, which has been more of our run rate recently.

It was lower last quarter because we did have that impact from the buying back and then reselling of the inventory.

(Operator Instructions).

It appears that there are no further questions in the queue.

I would like to turn the call back to management for any prepared remarks.

I just want to say thank you, everybody, for joining the call today.

And we are open for any follow-up questions if you need to contact us.

If not, we look forward to talking to you at our next quarter's conference call.

Thank you.

We actually do have a question that's just come in to queue, from [Joanna Linsley] with Robert W.

Baird.

Thanks for letting me sneak one in.

When I look at your operating expense guidance, excluding the restructuring costs, it is about $28 million for third quarter.

How can we expect that to fall out between SG&A and R&D?

It will be approximately the same as the prior quarter, except R&D will be the difference between the $28 million and the $27.4 million.

And that is mainly because of masks and tapeout expenses that we are anticipating in Q3.

Okay.

And then when we look at the $1.5 million in savings that we will have in OpEx post this restructuring plan, is that going to come off of the $28 million base that we're going to see in third quarter, or what --

Yes.

Okay.

So use $28 million of the baseline $1.5 million per quarter coming off of that starting in fourth quarter?

It will be transitioning and be more full in the fourth quarter.

Some of it will be in cost of goods sold, because we are taking some operational streamlining as well.

But the majority of it will be in operating expenses.

John O'Brien, Ragen MacKenzie.

I didn't -- I got on the call late, so I apologize.

But I didn't hear whether or not you said how much you spent in CapEx in the quarter.

I was wondering if we could get that number.

About $1.7 million.

Bill Dezellem, Tieton Capital Management.

A couple of additional questions.

The first one is, you had specifically in the press release called out the fact that you saw strength in your business through the end of June.

Is the implication that things continue to be strong here in the third quarter?

I think we gave guidance on the range we expect in Q3.

So we expect it to be down 2% to up 3%.

And that is with us basically transitioning and having $2 million less revenue in the quarter because of the transition.

So I guess compared to prior historical results it is not strong, but compared to recent results it is a good start.

What happened in the end of the quarter last quarter was, typically, as you get right near the quarter end, people manage their inventory levels and orders slow down.

And that didn't happen in Q2.

That is helpful.

And is it also historically the case that the third quarter is usually flat to down for the Company?

It is a little bit hard to draw direct historical parallels right now because the world is still in the midst of either recovery or the late stages of a recession, depending on which economist you believe.

So traditionally, yes, Q3 has been weaker, particularly when Europe was a bigger part of our business.

It is traditionally a weak quarter in Europe because of vacation shutdowns and such.

But it is hard to say where normal seasonality would be right now in this environment.

And then your mature revenues have been declining as a percent of total revenues for several quarters now.

Where are you anticipating they will ultimately settle out relative to the -- what is it, 18% or so that they are at now?

We expect mature revenue to continue to decline.

I think it is normal and natural for that type of revenue to decline.

The most noteworthy thing about recent quarters is that our growth in our new product revenue has gotten ahead of and exceeded our declines in our mature product revenue, and that has allowed us to grow our top line.

So I would expect it to continue to go down.

Q2 was at a much reduced rate compared to the prior quarter.

And we think that that rate of decline will be more stable going forward than it was at the beginning of the downturn, but it will continue to go down.

By the way, our mainstream product in dollars were flat, and we do reclassify our products periodically between new, mature and mainstream.

And did we hear you say that the mainstream products were flat in terms of revenues in Q2 versus Q1?

Yes.

We had a pretty significant decline in the previous quarter, but we were flat this quarter.

So it is actually quite encouraging.

And the mature products were down, which highlights just how strong the new products were.

Yes.

The mature products, there is a steady decline, although the rate of decline is slowing down as the base is becoming smaller and smaller.

Management, that was the final question in the queue.

You may proceed with your closing remarks.

Well, I gave my closing remarks already.

I think if I do them again we will get more questions.

So thank you, and I look forward to talking to everybody at our next quarter's conference call.

Thank you for participating in today's Lattice Semiconductor second-quarter 2009 conference call.

This call will be available for replay beginning at 8PM Eastern Time today through 12.59 PM Eastern Time on August 6, 2009.

The conference ID number for the replay is 19724416.

Again, the conference ID number for the replay is 19724416.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you for your participation.

You may now disconnect your lines.