萊迪思半導體 (LSCC) 2010 Q4 法說會逐字稿

Please stand by for realtime transcript.

Good afternoon.

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

At this time I would like to welcome everyone to the Lattice Semiconductor fourth quarter 2010 conference call.

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

After the speakers remarks there will be a question-and-answer session.

(Operator Instructions)I would now like to turn the call over to our host, Mr David Pasquale.

Sir, you may begin your conference.

Thank you, Operator.

Welcome, everyone to Lattice Semiconductor's fourth quarter 2010 results conference call.

Joining us from the Company today are Mr Darin Billerbeck, the Company's President and CEO, and Mr Michael G Potter, Lattice's Corporate Vice President and CFO.

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

It 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 Semiconductor's website.

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

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 first quarter of fiscal 2011.

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 a 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 2009 Form 10-K filed on March 10 and 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 reg G, regarding generally accepted accounting principles, or GAAP.

I would like to now turn the call over to Mr Darin Billerbeck.

Please go ahead, sir.

Thank you, David, and thanks to everyone for joining us on our call today.

This is my first quarter since joining Lattice as President and CEO.

I'm excited to be part of the Lattice team and look forward to the challenge of profitably growing our Company.

One of the most frequent questions I get asked has to do with my observations since joining Lattice.

My response is I'm highly impressed with the people, not just those in the US, but our workforce globally.

Additionally, I am impressed by our overall market lineup including the recently launched MachXO2 family.

Last, but not least, I am pleased by the previous changes we made to our distribution network that will create more sales opportunities.

Lattice is clearly well-positioned for the next 12 to 18 months in the low density PLDs and midrange FPGA markets.

We have a strong lineup of low-cost, low-power and high convenience products.

This is evidenced by the early wins from our non-volatile MachXO2 and broad acceptance of our midrange LatticeECP3.

An area where we will see upside and we will focus on is improving the efficiency of our R&D processes.

This is not an issue of spending more on R&D, but getting more of the money that we spend.

For Lattice, it's about delivering solutions defined as a combination of the right software and hardware that delight our customers.

On budget and on schedule.

Another thing that we have learned working at large companies and small innovation companies is that one size does not fit all when it comes to company wide processes and systems.

At Lattice, we will balance a laser focus on where we went, followed up with timely decisions, crisp executions, and no bureaucracy.

In terms of specific results for the fourth quarter, revenue of $73.1 million was down 5% from $77.1 million in Q3 2010, while up 33% from $55.1 million in Q4 2009.

Gross margin came in at 62.7%, compared to 59.1% in Q3 2010 and 55.3% in Q4 2009.

The fourth quarter was in line with guidance as strength in the consumer industrial and other end markets was offset by the weakness in communications markets.

As a some customers adjusted their short-term inventory.

Our turns in Q4 2010 came in as expected on a dollar basis with higher-than-expected contribution from mature products.

Turns in non-communications areas, including industrial and some military, also came in as expected.

As noted in our release, revenue and margins benefited from higher sequential sales and our mature product category.

This segment has more recently had several strong quarters of growth with the exception being Q3.

It is reasonable to expect further fluctuation in mature products as mature products typically decline over the long run.

Let me now give you some additional color on the quarter.

The revenue mix of new, mainstream and mature was 43%, 30%, and 27% of revenue respectively in Q4.

This compares to new at 46%, mainstream at 32% and mature at 22% in Q3.

While new products were down 10% quarter on quarter, on a full year basis they grew 91%, out pacing the Company's overall growth of 53%.

The growth in our new products was driven by our midrange LatticeECP3 FPGA's and our non-volatile LatticeXP2 and MachXO families, which grew over 90% and 88% perspectively on a whole year basis.

During the quarter we shipped our 50 millionth MachXO device.

The MachXO family is seeing widespread adoption across all of our markets and is our largest product family by revenue.

In November, we announced our non-volatile MachXO2 family.

MachXO2 extends the value proposition of MachXO with a 3X increase in logic density, a 10X increase in embedded memory, and more than 100X reduction in static power.

In addition, several popular functions such as user flash memory, I2C, and SPI have been hardened into the MachXO2 devices, further reducing customers power consumption and cost.

We believe that XO2 will deepen the XO family penetration in the system control market and accelerate the family's initial progress in the consumer market.

With its increased integration, small footprint, low-power and low cost, we believe that the MachXO2 family can also increase our available market by pushing further into ASICs and ASSPs.

Customers' reaction to our MachXO2 has been positive and samples are already shipping.

In October we announced, in addition to our mixed signal product offerings, the platform manager family.

The platform manager will simplify board management design by integrating programmable analog and digital logic to support many common functions such as power management, digital housekeeping, and glue logic.

By integrating these functions, platform manager devices cannot only reduce the cost of these functions compared to traditional approaches, but it can also improve system reliability and provide a high degree of design flexibility that minimizes the risk of circuit board [resets].

Revenue from FPGA products represented 33% of the total revenue in Q4, compared to 32% in Q3, but down slightly on an absolute dollar basis.

On a year-over-year basis, FPGA products were up about 46% on an absolute dollar basis.

PLD products represented 67% of the total revenue in Q4, compared to 68% in Q3, down approximately 7% on an absolute dollar basis.

PLD product revenue was up 26%, compared to Q4 2009 on a dollar basis.

On a geographic basis, revenue from Asia, including Japan, decreased to 66% of the total revenue, compared to last quarter of 69%.

Revenue from North America increased slightly quarter over quarter to 15% of revenue, compared to 14% in Q3.

Europe increased coming in at 19% of revenue, compared to 17% of revenue in Q3.

On an end market basis, communication was 46% of revenue in Q4, compared to 50% in Q3.

The decline was expected and factored into our prior guidance.

We view this as a temporary pause and expect the comm segment to start rebounding in early 2011.

Computing declined slightly to 13% of revenue in Q4, compared to 14% in Q3.

Growth in storage was offset by a decline in servers.

Industrial and others came in at 29% of revenues in Q4, compared to 26% in Q3.

The increase reflects a sequential increase in sales for mature products.

Consumer increased to 12% in Q4 from 10% of revenue in Q3.

The increase was due to our focus on the consumer market.

We see consumer market as a growth segment for us, especially for our MachXO family.

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

Michael?

Thank you, Darin.

As noted is earlier, revenue for the fourth quarter was $73.1 million, a decrease of 5% from the prior quarter and up 33% from the year ago period.

This is within our prior guidance for a decline of 2% to 7% sequentially.

Gross margin for Q4 was 62.7%, compared to 59.1% in the prior quarter.

This was above the high end of our guidance, reflecting the impact of higher sequential sales in our mature product category as the mix of our business was different than anticipated when entering the quarter.

Total operating expenses for the fourth quarter came in at $32.4 million, compared to $30.7 million in the third quarter.

This was less than we guided due to the shift in timing to Q1 2011 from Q4 2010, of some of our MachXO2 product math cost , which taped out in early January.

As a result, OpEx is expected to move up in Q1 to approximately $36.5 million.

The majority of the additional expense, about $3 million, relates to the full family production tape out of our MachXO2 family, the remainders from timing of headcount taxes and several small projects occurring in Q1 2011.

We do not expect the level of tape out expenses to recur in any other quarter in 2011, although we are working on several new products that will have R&D tape outs during the year.

Q4 net income was $13.9 million, or $0.11 per share, as compared to $15.4 million, or $0.13 per share in the third quarter and compared to $5.6 million, or $0.05 per share in the year ago period.

All per share amounts are on a fully diluted basis.

At the current share price, we expect diluted share count to be approximately 121 million shares.

The share count reflects our purchase of approximately 371,000 shares valued at approximately $2 million under our $20 million, 1-year share repurchase program.

The program continues to be active.

Moving on, our balance sheet was further strengthened in the quarter.

We generated an additional $15 million of cash from operations, ending the quarter with a cash, cash equivalents, and short-term marketable securities balance of $238.2 million and we continue to have no debt.

Not included in the liquidity discussion I just went through is the remaining balance of our auction rate securities with a fair value of $10.2 million.

Due to the illiquid market for these types of investments, auction rate securities continue to be classified as long-term marketable securities.

Accounts receivable at January 1 were $41.2 million, compared to $49.2 million at the end of last quarter.

And day sales outstanding were 51 days, compared to 57 days last quarter and 55 days in Q4 2009.

As noted on prior calls, although our actual collection times have not materially changed, the DSO metric has been and will continue to be impacted by our transition to higher sell through transactions which cause higher gross billings.

Inventory at January 1, 2001 was $37.3 million, up from $31.7 million last quarter and up from $25.9 million in the year ago period.

Months of inventory now stands at 4.1 months, compared to three months at the end of Q3 2010 and 3.2 months in Q4 2009.

The majority of the increase is in new products.

As we release the full family of ECP3 into production in 2010, we have been building initial stocking positions needed to meet expected future demand.

Some additional inventory was built in our MachXO line in Q4 in order to serve potential turns business.

Overall inventory in our base products matches our current short-term forecasts.

We expect our inventory to be back in balance in the first half of 2011.

We spent approximately $5.3 million on capital expenditures during the fourth quarter, up from $3.9 million in Q3 with a quarterly depreciation and amortization expense at $3.8 million, compared to $3.7 million in Q3.

The majority of the CapEx spending was on test equipment in order to meet our demand for newer products.

This concludes the financial review portion of the call.

I will now turn things back over to Darin for the first quarter business outlook.

Please go ahead,

Thank you, Michael.

In summary, we feel very positive about Lattice and its prospects.

I'm excited about the sales momentum of the XO2 family and it builds on the success of our XO2 product with its initial customer orders already in place.

This new family makes our portfolio of solutions stronger as we work to meet our customer needs.

We also plan to further strengthen our competitive position as we work to improve the efficiency of our R&D processes.

Now let me turn to our first quarter expectations.

We expect revenues to increase 2% to 7%.

Q1 gross margins are expected to be in a range of 60% to 62%.

Total operating expenses are expected to be approximately $36.5 million, as noted by Michael earlier.

Finally, while Lattice has routinely provided mid-quarter updates in the past, we do not plan to going forward unless there's material deviation from the guidance that we are providing today.

This concludes our prepared remarks.

Operator, we are now happy to take any questions.

(Operator Instructions)We will pause for just a moment to compile the Q&A roster.

And our first question comes from the line of Richard Shannon with Northland Capital.

Hi, guys.

How are you?

Good, thanks, Richard.

Congratulations on a very first nice first quarter guidance here.

I guess I had a couple of questions about the guidance in terms of the revenues.

I wonder if you could handicap the moving parts by end market.

Any changes that are materially different from than the midpoint of your guidance?

Any ones that are going to be better or worse would be great to know.

So, Richard, I would say that we expect coms to come back somewhat in Q1 compared to Q4.

And I would say we expect a lot of the growth to come from our newer products.

I don't think were going to have a material change in the end markets from our normal pattern compared to what we've had in the past.

Our backlog is reasonably strong entering the quarter, stronger that how we entered the quarter for Q4 and we expect turns as a percent of our business to be about the same as we had in Q4.

So, it looks like a reasonably good quarter with mix not too different than what's normal for us.

Okay.

Your seasonality with just the consumer markets, would be down the first quarter.

Obviously you've talked about new products targeting that area.

How do you expect the consumer to do in the first quarter?

Is that at least in line with the mid point of your guidance or how should we think about that?

I don't think we see any big differences between Q4 and Q1 as far as you're talking about consumer or --

Consumer specifically, yes.

We're not seeing a whole lot.

Typically it depends on seasonality, but you've got a lot of build up actually in Q3.

Seasonably Q4 kind of slows down a little bit because of Christmas and those things.

Q1 typically is a little bit stronger or flat in some cases, but then it also is dictated by the lunar new year and so we've got all that factored in already and were looking at it as being fairly consistent and flattish to what we're seeing today.

All right.

Great.

And just in terms of product age in the first quarter as well.

Obviously mature did a lot better than I was thinking.

Is that expected to be kind of flattish or upwards or is that going to kind of give up some gains after the fourth quarter, which did very well?

I think in terms of total revenue, we don't see a big change in the mature.

But, we think that as a percent of revenue, we are going to have more sales of our newer products in Q1.

The percent of revenue may come down.

Hence, our margin target that we said between 60% to 62%, versus the 62.7% we did in Q4.

Okay.

That gets me into my next question.

On the gross margins, I know you've been talking about as your consumer oriented products ramp out here, to maybe see the gross margins come downwards over time.

Obviously you seeing that in a little bit longer-term perspective.

I guess I was a little bit surprised to see it at this level going forward.

What should we be thinking about maybe an exit point this year?

Any ideas?

I know you kind of were in the 59 range in the first part of last year.

Kind of curious of where we should think about as the consumer ramps in here.

Yes.

We don't give guidance for 2011 past Q1, but we have talked about in the past that as a model, internally we model in the high 50s for expectations for gross margin.

That's more of a future number.

Obviously, we're going to fight as long and as hard as we can to keep margins as high as we can.

If you look at the expected mix with the strong growth and acceptance of our newer products.

And our push to get into more of the consumer space.

We just feel that gross margin profiles are more likely to be in the high 50s than the low 60s we have enjoyed recently.

And Richard, to add on to that, anytime you enter consumer markets or lower margin markets, it really does put pressure on you to have the cost reduction strategies and we will really be focused on all of that in our operating expenses and costs.

That's really the trick, is keeping the margins up.

Okay, one last question from me and I will jump out of line.

In terms of OpEx, understandable the mass shift costs into the first quarter.

How should we think about OpEx on a dollar basis going forward?

I want to make sure I did the math because you were mentioning some numbers there, about a $3 million number.

Is this something on a GAAP basis we should expect, say 32, 33 or lower than that going forward as to any large mass costs that come in over time?

Well, I said that the mass expenses in Q1 were about $3 million.

So, we're not expecting to have mass expense is anywhere near that level for the rest of the year.

So, I guess we haven't given guidance past Q1, but you can use that kind of a guide post for what you should use for your model going forward.

Remember that we do have higher expenses the first part of the year because of the timing of payroll taxes, and a lot of our expenses in OpEx are driven by salary.

The other thing, Richard, is we taped out multiple products at a time, which is why those mass charges are higher than what you normally would see.

Right?

Part of our -- yes.

Okay.

Great.

Thank you.

I will jump out the line and congratulations, guys.

Thanks.

(Operator Instructions)Our next question comes from the line of [Ahmed Bagicar] with Morgan Stanley.

Hi, guys.

Thanks for taking my question.

Could you talk a little bit about what you see happening in the 3G wireless business?

Your biggest competitors have talked about sort of seeing a decline in their business at China Mobile.

Do you see a similar effect?

What can you say about inventory adjustment that you saw in this area?

So, if you look at the coms business in general, there's a lot of elements to it depending on where you play.

So, remember that we are playing really in kind of a mid-density, FPGA com segment.

Because of that, I think that our -- we see a different actual end customer demand then maybe others do, which is why we didn't see such a dramatic inventory shift.

We saw kind of a short-term inventory shift.

And our forward-looking for at least this quarter, we see things as a fairly flattish if you will between Q4 and Q1, so we're not seeing the significant deltas.

On the other hand, we also have to consider that maybe there is other forces at play in Q3 and Q4 due to some of the constraints in the market.

So, people may have been trying to get as much material as they could because they were constrained.

So, you may see some of the inventory positions in other places of that coms market that maybe we didn't see because we haven't changed our lead times.

We haven't changed any of that through the last couple of quarters, which feels for us flattish to fairly consistent.

But we expect it to recover in the mid part of next year.

Great.

That's very helpful.

Shifting gears, looking forward into LTE, if we assume volume deployments for LTE maybe two or three years away, then it seems like you would have to win LD sockets starting perhaps later this year to potentially play into that build.

Is it fair to assume that you'll start competing for those sockets with the next version of ECP3 sometime this year?

Absolutely.

I think that ECP3 was a great product for us as far as establishing in the mid range FPGA and the low power portion and low cost portion of what we're trying to do.

I think the follow-on to that product is also very competitive, as will be our future product line in this market segment.

So, we feel very comfortable with where we are on the current rollouts.

And we feel comfortable that we can win the sockets in the future with our product road maps.

The advantage we have now, Ahmed, is that we've had a couple of generations of the ECP family that's done well in the midrange FPGA market.

So, our larger customers have experience with our products and they can design using expected specifications as they are coming forward.

So, we're comfortable with the prospects we have in the market we are targeting.

Great.

And then one last question for me.

If you could, give us a few examples of some new devices in which you might have won design wins for with the XO2, especially the low power version?

Potentially things that you could not target previously would be very helpful.

I think there's a lot of -- there's a lot of, let's just call them different applications.

They could be things from gaming, communications, professional music, multi-function printers, LEDs, networks, mobile emergency, all sorts of things.

It's a very broad market because it's an incredibly low-power, low-cost solution that people are using in a variety of different applications.

So, those are just a few of the ones that we have today and we expect to get many, many more as we are rolling out these products.

Today we're really sampling, so we're really setting up all of the design wins.

We expect to be in production this year.

Thanks a lot, guys.

Yes.

(Operator Instructions) We have a follow-up question from Richard Shannon with Northland Capital.

Hi.

Maybe a couple of questions extra here.

Alterra Xilinx have talked about their latest products down on the 28-nanometer node and I know it's only been a few days in some cases here, but I would love to get your assessment on the competitive dynamics.

It seems like Alterra may have put a little bit more emphasis on their midrange products than they historically have.

They did mention Lattice specifically in our call earlier this week.

I'm kind of curious about your assessment of what you've seem so far from them and does that imply any increased competitive risk going forward?

As always, we look at the market segments we play in and the competitive threats that are out there.

And what we try to do is balance our strategy with the investments that we want to make and where we want to make them.

So, any future technology investment that we make, albeit 28 or whatever nanometer technology that you want to be on, we typically look at that versus the capability of the process, the capability that it could give us both in performance cost and power, versus the timing of the size of the density or the sweet spot that we're going after.

So, today we feel very comfortable with the road map that we have.

We feel very comfortable that some of the solutions and the architectures that are in the competitive landscape are really targeted maybe a little bit different segment than we are, albeit we know that we're going to have overlap.

Our challenge with our technology is really driving that super, super low cost design architecture that really does give us an advantage.

And as we move towards our future design, we know the markets, as Michael said, we have a lot of sockets, a lot of understanding of what we're trying to do and we're aligned with some of the real big guys in the market segments that we compete in.

I think it's always great to have competition because it drives you to do even more innovation and try to be not necessarily one generation ahead, but the right time, with the right product, with the right features.

And in our case it's really about being good enough in green.

So, we're really going to look at those things through time and make sure that we're always close enough to where we've got the wins that we need to sustain the growth that we're looking for.

Obviously, we look at that in very good detail and we use that as part of our strategic planning processes.

Great.

I appreciate the feedback there, Darin.

Thanks a lot.

(Operator Instructions)Their seem to be no further questions.

Do you have any closing remarks?

No.

I just want to thank everybody for joining us on the call today and onwards.

Thanks much.

And this concludes today's conference call.

You may now disconnect.

Thank you for participating.