萊迪思半導體 (LSCC) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

I will be your conference operator.

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

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions) As a reminder, today' conference will be available for replay approximately two hours after the conference has ended.

You may access the replay via telephone by dialing 706-645-9291 and entering conference ID number 34449450.

You may also access the replay online at www.lscc.com.

I would now like to turn the conference over to David Pasquali with Global IR Partners.

Thank you, operator.

Welcome everyone to Lattice Semiconductor's third quarter 2009 results conference call.

Joining us from the Company today 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 of of the Investor Relations section of Lattice Semiconductor's website.

Before I begin the formal remarks, I will review the Safe Harbor Statement.

It is our intention that this call will comply with the requirements of SEC Reg F-D.

This call call includes and constitutes the Company's official guidance for the fourth quarter of fiscal year 2009.

If at any time after this call we communicate any material changes to this guidance, we intend it 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 includes 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 & 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 our quarterly reports on 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 Reg- G regarding generally accepted accounting principles or GAAP.

Some financial information presented by us during the call will be provided on both a GAAP and 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 the 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 to data prepared in accordance with GAAP.

If we use any non-GAAP financial measures during this call, you will find that the required presentation of and reconciliation to the most directly comparable financial measure 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 continue to make progress in the third quarter in what appears to be a broader base recovery.

We continue to streamline our cost structure and focus our business to better compete in the market place.

As I have stated many times, Lattice's return to profitability is our number one priority.

We believe this goal is now in sight.

Where anchorage with the overall improving business on diamonds and believe the Company is now positioned to deliver stronger results.

In terms of Q3, revenue was above prior guidance at $49.1 million and up about 5% from prior quarter.

This is even after the approximate $2 million in reduction in revenue associated with the transition of certain distributors from a sell in to a sales force business model.

As previously stated, these changes are part of the revamping of our Asian distribution channels and were neccessary as they will improve transparency and visibility at our end customers going forward.

We expect the planned transition to be completed this year.

In the quarter, we saw strengths led by Asia and Japan combined with product revenue growth from prior wins at existing customers.

Revenue again remains strong to the end of the quarter with our terms business exceeding expectations.

In Japan, we started to ramp shipments under a significant prior win at one of the world's largest (inaudible) companies.

In China, telecom related revenue was again up year-over-year, although lower sequentially as expected due to the (inaudible) We continue to expect China to remain a healthy, steady growth market for us.

The US market appears to have stabilized and we show continued improvements of our server business.

We expect this strength to continue going forward.

In Europe, we saw some signs of improvement starting in September.

We're cautious in our expectations as it is clearly still too early to determine if this is sustainable or just near term inventory replenishments.

In summary, we see positive trends in all regions with the possible exception of Europe.

We continue to build backlog at a healthy level.

Let me now give you some color on the quarter.

The mix of new mainstream and maturing Q3 was 41%, 38% and 21% of revenue respectively.

This compares to new at 45%, mainstream at 37% and mature at 18% in the second quarter.

Revenue from FPGA products, represented 31% of the revenue in Q3 down 11.5% from Q2.

The decline quarter-on-quarter was attributable in part to the previously expected (inaudible) in the 3G build out in China and our distributor transition in Asia.

We anticipate that revenue from our FPGA products will resume growth in the coming quarter.

Within FPGA, it is also important to point out that Lattice was the first (inaudible) vendor to enter the low-cost FPGA with thirty market space and has been shipping this product for three years.

In Q3, revenue for our mid-range LatticeECP3 doubled.

ECP3 is our second generation low-cost (inaudible) and continues to lead the market with low cost and has the power consumption of competitive solutions in production today.

PLD products represented 69% of total revenue in Q3 up 14% compared to Q2.

We saw broad based strengths within our PLD families and across multiple end markets.

This increase in mainstream and mature revenues, 38% and 21% of total just mentioned, particularly benefited our PLD families.

Our XO family of products, we shall classified as new, showed good growth as well.

On a geographic basis, revenue from Asia and Japan was 68% of revenue in Q3 compared to 64% in Q2 with Europe at 17%.

Revenue from North America came in at 15% compared to 20% in Q2.

The reported decline in North America was primarily due to customer transitioning sourcing from the United States to Asia.

Overall, on a market basis, communications was 54% of revenue down from 57% in Q2 and 63% in Q1.

The 3G build up in China (inaudible) is the main factor for the decline.

Computing increased to 17% of total revenue from 12% in Q2 primarily driven by momentum in the server market.

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 third quarter was $49.1 million, up 4.7% from the prior quarter and while on a year-over-year basis revenue declined by 14.8%, our net loss during the same period improved to a loss of $4.1 million in Q3 2009 from a loss of $7 million in Q3 2008.

Gross margin for Q3 came in at 54.1%.

This was above our guidance and higher than the gross margin posted in Q2, primarily due to continued strict cost controls combined with a more favorable product mix.

Total operating expenses for the third quarter came in at $27.5 million, compared to $27.4 million in the second quarter.

This is an improvement compared to our guidance for ongoing OpEx of $28 million.

Mask, wafer and NRE costs were $1.9 million in Q3 compared to approximately $100,000 in Q2.

Offsetting the higher mask cost was a decrease in labor related costs primarily due to restructuring actions taken earlier in the quarter.

Third quarter GAAP net loss was $4.1 million or $0.04 a share as compared to $2.7 million loss or $0.02 a share in the second quarter.

On a non-GAAP basis, non-GAAP income for the third quarter of 2009 was $500,000 compared to a non-GAAP net loss of $1.3 million or $0.01 for the second quarter of 2009 and non-GAAP net income of $1.4 million or $0.01 cent a share for the same quarter a year ago when reported revenue stood at $57.6 million.

Our balance sheet remained strong with no long-term debt.

As of October 3, 2009, we had $115.1 million in cash, cash equivalents and short-term marketable securities.

GAAP cash flow from operations for the three months ended October 3, 2009 was $12.6 million.

Regarding the advance to Fujitsu, we collected the remaining of the receivable balance of $30 million after the close of the third quarter.

With the remaining advance credits of approximately $18 million expected to be consumed over the next nine months.

Not included in liquidity discussion I just went through are our auction rate securities with the fair value of $17.7 million.

Due to the I will liquid markets of these types of investments, they are classified as long-term marketable securities.

The auction rate securities markets remained weak with auctions that continue to fail and we experienced credit down grades of some of our auction rate securities holdings during the third quarter.

As a result, we we recorded an other than temporary charge in the third quarter of $1 million.

Most of this charge was related to our holdings of Ambac perpetual preferred shares.

Early in Q3 Ambac announced that they were suspending dividending on these shares.

Accounts receivable on October 3 were $28.2 million compared to $26.6 million at the end of the last quarter and day sales outstanding were 52 days compared to 51 days last quarter and 47 days in Q3 2008.

Inventory at October 3 was $27.1 million, compared to $28.1 million last quarter.

Months of inventory now stands at 3.6 months compared to 3.8 months at the end of the Q2 2009 and four months in Q3 2008.

We spent approximately 1.8 million on capital expenditures during the third quarter, up from $1.7 million in Q2 with quarterly depreciation expense at $2.6 million down slightly from the prior quarter.

This concludes the financial portion of the call and now I'll turn things back over to Bruno for the fourth quarter business outlook.

Please go ahead, Bruno.

Thank you, Michael.

Profitability remains our number one priority.

When we look at our business, this is the main driver as we develop and execute on our strategy, product roadmap and pursue new business opportunity.

In the last 15 months, we have taken costs out of our business model wherever possible.

At the same time, we have continued to invest in our future and have steadily improved both our service level and customer relationships by deepening our resources to where our customers are located.

A good example of this is a transfer I mentioned (inaudible) of our warehouse operations 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.

I'm pleased to report the transition went smoothly.

Overall, we are moving closer to profitability with our break even point now at approximately $50 million in revenue per quarter.

Based on recent customer and industry forecasts, while the semiconductor industry is not yet back in full growth mode, we believe the worst of the downturn is now behind us and we are confident in our business entering the fourth quarter.

Let me now turn to our expectations.

We are entering Q4 with an increased backlog with customer and design wins coming out of Asia, the US and Europe.

In terms of specific guidance, we are guiding for revenues to be sequentially up 6% to 10% including the expected reduction in revenue of approximately $1 million from changing certain distributors from a selling to a sales through business model.

Q4 margins are expected to be in the range of 53% to 55%.

Operating expenses are expected to be approximately $26 million.

Importantly, as noted in the press release, the company is expecting a return to profitability in the fourth quarter.

This is based on current views with respect to operating and market conditions which are subject to change and the absence of any impairment charges related to other than temporary decline in fair value of auction rate securities held in long term marketable securities.

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

This concludes our prepared remarks.

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

(Operator Instructions) And your first question comes from Richard Shannon with Northland Securities.

Hi, guys, how are you?

Good, how are you, Richard?

Doing fine.

Very nice guidance for the fourth quarter.

I guess that's probably my first question here.

Bruno, I'd love to get your thoughts on how you handicap the various end markets that lead into your fourth quarter guidance and if you could, specifically reference directionally where you think initiatives like China 3G wireless, your flat panel display design you talked about and your computing market and I think you have some server wins there, if you could reference those, that would be great, please.

So let me just address those.

Let's start with the server market.

This has been our strength in the US, which is not necessarily, by the way, reflected in the US numbers because as you are aware, a lot of American companies are using manufacturers in Asia, so while we're seeing the orders coming in our Asian numbers.

So we will continue to see some strengths reflected in the backlog on that piece of the business.

The flat panel win that we had in Japan started to ramp in Q3 and I think it will continue, also, to ramp in Q4, but I guess the -- it's going to really -- the -- I would say the demand is going to be really a function of the acceptance or the new model of TV using, this back light display in the marketplace, okay.

So today it's probably about 30% of the flat panel display that are sold with this feature which provides better, I would say, quality, so that's,I would say the caveat on that.

In China, I think we are now down to a more normalized level after, the big push in the first half of the year with the 3G deployment, we are obviously expecting to see some growth in China, fairly broad based.

Okay.

And, Bruno, did I hear in your prepared comments referring the server opportunity expect that one how some strength in the fourth quarter as well?

We are seeing some strength there.

To follow up on the topic of the flat panel display design win, you're -- obviously that's in the consumer space and that's, if I'm calculating my numbers correctly for the third quarter, your consumer revenues were down a little bit.

Can you tell us what was going on in that end market if flat panels were strong?

It's a variety of different programs.

The flat panels actually went up quarter-over-quarter.

We had some consumer-based laptops that there was a transition in Q2 from one model to another model that spiked our revenue up a little higher in Q2.

It returned to more normalized level in Q3 and that was the -- probably the main reason for the slight decline there.

The flat panels themselves actually were strong and we're continuing to ramp.

To follow up on that comment, Michael, I know that last year you -- in the third quarter you benefited quite nicely from a design win that I think was on laptops into your consumer segment.

Is that something that's still active for you and do you --

Yes, it's active.

It's active as Michael just said.

I mean we've -- we managed to engage and now we're on the next generation platform which has been a change in product which is why we had a bit of an uptick in Q2 because we see that new model being ordered, two different products.

Okay.

Great.

And just two quick last questions for me.

Your gross margin guidance up a little bit here.

It seems like in the third quarter it was a mixed shift towards PLDs with the higher range here, does that indicate that the mix should to be similar in the fourth quarter or is this a result of lower costs or how should we think about gross margins both for the fourth quarter and -- for the fourth ever fourth quarter and beyond.

Our more broad based products which are our PLD products are sold almost entirely to distributors.

Earlier in the year there were a lot of distributors reducing their inventory sometimes quite dramatically.

So it impacted us a little bit more in that area than the end market revenue really had.

Now that we're returning to more regular run rates where they're replenishing the inventory as they sell it, our PLDs are being stronger and they are higher margin than some of our new products that are earlier in the yield curve.

Okay.

And then lastly, Michael, what's your expectation for shares outstanding in the fourth quarter, based on -- because you're going to be profitable in the quarter?

It's going to be approximately 115 million shares.

It will depend on the exact profitability and the treasury stock calculation I have to do.

We don't have a tremendous amount of options outstanding, so it won't be too much of a difference.

Okay.

Great.

That's all for me.

Congratulations, guys.

Thank you.

(Operator Instructions) And your next question comes from the line of David Duley with Steelhead Securities.

Congratulations on a nice quarter and guidance.

Thank you.

I just had a couple and you kind of already addressed this, but just a little bit more clarification.

You know, you look at the detail breakout and I think your FPGA revenue was down sequentially and so I think new products were somewhat flattish.

I'm sure that these were -- or down a little bit too.

I'm sure these were related.

Can you help me understand why PLDs were so strong and FPGAs weren't quite as strong or how you want to look at that?

Yes, Bruno looked at this in his prepared remarks.

It's a combination of two things, one, we sell a fair amount of our FPGAs into the communications market and with the pause in the stimulus package in China, as everybody expected that was down a little bit in Q3.

The other thing is that the transition of our distributors in Asia also impacted that.

So the two of those combined really is what -- what caused that drop.

And also like Bruno said in the prepared remarks, we expect that to resume growth in Q4.

And which one of those distribution impact or the -- which one had a bigger impact, I guess, on what you might have thought the revenue should have been without those events, the lack of revenue in the 3G roll out in China or the lack of revenue because of changing distribution?

I'm just trying to figure out kind of what the impact was.

Yes, the 3G roll out pause was probably greater than the impact from the distributors, but they were both the significant cause for the decline.

So I'd weight it more towards the 3G.

Okay.

And as you said, you expect growth in both those segments going forward?

Yes.

Now, I don't recall how you positioned this, but what-- to hit the mid-point of your guidance, what turns levels are you thinking you should have and how does that compare to the quarter that just ended?

We have higher than normal backlog at the beginning of the quarter, so that's part of the reason why the range starts at 6%.

So I would say with normal terms -- turns, we should be in the range that we have in our guidance.

And the range has guided upper and lower bounds for reasonable expectations of slightly lower to slightly higher terms.

Okay.

And, I'm sorry if you've already mentioned it, but I don't -- what roughly percentage of revenue comes from turns historically?

I'm just trying to --

Normally it's been up to over 50% of our revenue comes from turns.

Recently, because of the uncertainty and the lack of visibility by our customers, it's been actually a lot higher percent in terms of backlog.

This quarter, it's less than 50% would have to come to terms.

We have a much stronger backlog coming into the start of this quarter.

And if you did -- since you have a strong backlog, if you experienced the same amount of turns that you typically would experience, would we see upside to the revenue range that you just gave us?

If we have higher than our expected level of turns, the answer to that would be yes, but barring any backlog being canceled.

But sometimes you enter a quarter with higher backlog and your turns are down a little bit.

It just means the customers have better visibility and they place their orders with you a little earlier.

That's why it's a dangerous metric to try and play and look at book to bill ratios when a lot of your business comes from broad-based distribution network.

But I guess the implication of your backlog being up, that's an indication of everyone in the food chain thinking that they have a little bit better visibility into the outlook.

That's probably the case, yes.

One final question from me is how -- as far as the option rate securities you're carrying these things at this level that you just talked about which you marked down again.

What is the conclusion?

How do these things get unwound and end up back in cash or do you just keep right -- what is the outcome of all of these auction rate securities that seem to be parked on people's balance sheets under long-term assets?

How do you get your money back?

We have several different categories of auction rate securities.

Some are not marked down as much which are student loan backed ones and others are more commercial paper related and those have had much higher mark downs.

We don't need immediate cash and we would be willing to sell them at a reasonable price for them and we're just waiting for some of the markets to come back.

We are seeing signs on the student loan back portfolio that they're slowly being bought back at par.

A lot of these are paying penalty rate interest as the auctions fail and to the best interest of the people that issued them, if they can, to buy them back.

Okay.

Thank you.

Your next question comes from the line of Bill [Dzellum] with Titan Capital Management.

Thank you.

I just want to follow up on a question that David was asking relative to FPGA and new products.

You detailed the issues with the FPGA in response to his question and the opening remarks, but I think I missed new product revenues also being down a bit.

Is that essentially the same answer or is there something slightly different there?

We have -- FPGA is revenue, but we do also have as we qualified also in the prepared remarks something which is qualified as PLD which is our XO product which is also part of our new product revenue.

So I would say to answer your question, a large portion of our FPGA business is classified as new product and in the PLD, our XO business is also classified as new products.

So overall, while our FPGA business was down about 11% sequentially, our overall decline of new product was only 2.6%.

Which that would -- that would indicate that the XO had done quite well in that new product category to offset --

Yes, that's correct.

We said that in the prepared remarks.

We said we actually have seen good growth on the XO product which is more broader based products, very successfully in the server space, so also in the consumer applications, so, yes, we saw strength in the XO space, yes.

Okay.

Thank you.

And I apologize for missing that in the opening remarks.

And then a couple of other questions.

The -- first of all, the accounts payable and accrued liabilities grew reasonably significantly in the third quarter versus the second.

I think something like an $8 million increase.

What am I missing in terms of not understanding that jump?

Some of it was just timing related.

We had some things as we continued to ramp up production, our assembly and (inaudible) waiver purchases were higher and the other part were some of our mask expenses were closer to the end of the quarter, so we accrued them as being payable and we'll pay them off in Q4.

Thank you.

And then finally, since both you and your two main competitors announced an outlook of a positive 6% to 10% sequential growth, I presume that we should look at your -- at your outlook as really being market related strength rather than anything design specific wins to Lattice?

Well, I think obviously we've got strong design wins and a good pipeline and that is one of the things that's allowing us to grow.

And like Bruno mentioned in the outlook, we have about a million dollars more revenue that we're -- we're not going to recognize in Q4 related to transitioning the distributors -that we started in Q3 and completed in Q4 from a sell in to a sell through model.

So we'd be slightly stronger with our revenue if that million was recognized in the quarter.

So I think that, yes, one, the market for (inaudible) logic is doing good in Q4 and, two, we're doing well against our competition and considering we're smaller, I think we're doing very well in winning some key programs for us.

And finally, is there a quarter that is visible to you in the future here where you will see your revenues take a greater than market jump as a result of new product wins?

I think it's difficult to predict at this stage, but we -- if you, I think, compare us to the rest of the semi industry, I think we are doing better.

So anyway, it is difficult to predict, you know, what is going to happen in the coming quarters, but I think the key here is we were starting to see a lot of our design wins paying off, especially with our new ECP3 and also the effort we've put into relaunching the XO and that's starting to pay dividends for us.

Also, remember, in the third quarter, we had a $2 million revenue impact because of this distributor transition from sell in to sell through which, by the way, was a $1 million additional impact in Q4 in revenue will be pretty much done, so we will have converted pretty much our entire distribution channel in Asia from a sell in to a sell through which is a benefit for us-- much better control of the business and greater -- with our end customers.

Thank you both.

(Operator Instructions) And your next question comes from T.

J.

Solid with Potomac Capital Management.

Hi there.

Two questions.

The first just clarifying.

The $50 million break even per quarter rate, does that already reflect the million and a half dollars of savings and expenses that you're expecting?

Yes.

That's at our current operating expense run rate.

It will vary a little bit off of $50 million depending on if we had high mask expenses or more regular mask expenses are but approximately $50 million is a run rate for break even.

Okay.

And then can you refresh my memory on the thoughts on a stock buy back given the cash-- the market cap, the outlook for resumption of growth and profitability.

I would think it would make a lot of sense at these levels to create some value.

We do have an active stock buy back program going on now and we continue to examine the range at which it's programmed at.

It is something that both Management and the Board discuss on a regular basis.

And if we enter into a stage where business is much more stable and we're profitable and are growing and there's no other more attractive use of the cash, I agree, stock buy backs are a good thing to consider.

How much stock was bought back this quarter?

Very little to none because of the price for most of the quarter for the stock.

Okay.

Thank you.

(Operator Instructions) And I would now like to turn the conference back to Mr.

Guilmart for any closing comments.

Thank you.

That will conclude our conference call for today.

Thank you all for joining and we look forward to touching base next quarter.

Thank you.

Ladies and gentlemen, this does conclude the Lattice Semiconductor third quarter 2009 earnings conference call.

You may now all disconnect.