萊迪思半導體 (LSCC) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lattice Semiconductor fourth quarter conference call.

(Operator Instructions)

I would now like to pass the call over to Mr.

David Pasquale of Global IR Partners.

Sir, you may begin your conference.

Thank you, Operator.

Welcome everyone to Lattice Semiconductor's fourth quarter 2011 results conference call.

Joining us from the Company are Mr.

Darin Billerbeck, the Company's President and CEO, and Mr.

Joe Bedewi, Lattice's Chief Financial Officer.

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

If you've not yet received a copy of today's results press release, please e-mail Global IR partners at LSCC@globalirpartners.com, or you can get a copy of the release off the Investor Relations section of Lattice Semiconductor's website.

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

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 2012.

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 2010 Form 10K filed on March 11 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 Regulation G, regarding Generally Accepted Accounting Principles or GAAP.

At this time I'd like to now turn the call over to Mr.

Darin Billerbeck.

Please go ahead, sir.

Thank you, David.

Thanks to everybody for joining us on the call today.

Results for the fourth quarter were impacted by the same trends facing the broader semiconductor industry.

The broader market continued to be weak, and the communications business softened in December.

Even with the challenging environment, specifically in the second half of the year, we accomplished a tremendous amount in 2011.

Our major accomplishments in 2011 included -- we took great care in assembling our executive leadership team.

I'm confident in the team and our ability to grow the business.

We became the low-density leader with our innovative, low-cost, low-power products.

We broadened our MachXO2 product line.

This has been well received by our customers as we gained traction in multiple low-power and high-performance markets.

We launched ECP4, our low cost, low power 6-gig SERDES [drive] for the LTE COMs market.

We released two more versions of our Diamond software.

These releases continue to improve our product capabilities, while making our products easier to use.

We restructured the Company for cost efficiencies and to be closer to our customers.

This effort increases our competitiveness in a global market.

We established our R&D and operation teams in the Philippines.

This expansion aligns another low-cost, high-value site to our core competencies in the United States.

We completed our acquisition of SiliconBlue in December, which I will touch on in a minute.

Significantly, during this period of uncertainty, we grew our revenue 7% year-on-year.

Despite continued uncertainty, we remain focused on controlling our costs and our spending.

This included our restructuring efforts to streamline our company for long-term efficiencies.

We are supporting a healthy margin level, generating cash, and maintaining a strong balance sheet.

This gives us the flexibility to support our product portfolio, to launch new R&D initiatives, and to pursue external growth opportunities like SiliconBlue.

In terms of specific results for the fourth quarter, revenue of $70.2 million was down 14% from the $81.7 million in Q3 of 2011 and down 4% from $73.1 million in Q4 of 2010.

The revenue mix of new, mainstream, and mature was 50%, 27%, and 23% of revenue, respectively in Q4.

New products were down 10% quarter-on-quarter, reflecting the particular weakness in the COMs market.

Mainstream products were down 13% quarter-on-quarter.

Mature products were down 22% from the prior quarter.

The revenue mix of FPGA and PLD products was 31% and 69%, respectively.

The revenue decline was fairly broad-based.

On a geographic basis, revenue from Asia, including Japan, remained at 64% of the total revenue but declined 15% on an absolute dollar basis.

Revenue from North America increased quarter-on-quarter to 17% of revenue, compared to 16% in Q3, but declined 4% on an absolute dollar basis.

Europe was 19% of the revenue, compared to 20% of the revenue in Q3, but declined 20% on an absolute dollar basis.

On an end-market basis, communications decreased to 42% of revenue in Q4, compared to 44% in Q3.

Computing increased to 15% of revenue in Q4, as compared to 13% in Q3.

Industrial and Other came in at 30% of revenue in Q4, compared to 31% in Q3.

Consumer increased to 13% of revenue in Q4 from 12% in Q3.

Let me now take a minute to review our SiliconBlue acquisition.

We closed the $63 million all cash transaction on December 16.

The acquisition of SiliconBlue is aligned with our strategic long-range plan, and will help us to accelerate our growth strategy in the consumer market.

SiliconBlue further strengthens our product road map by adding a scalable, low-cost, low-power, non-volatile memory FPGA, along with key personnel and industry-leading customers.

I am also pleased that Kapil Shankar, SiliconBlue's Chief Executive Officer, has joined Lattice as our Corporate Vice President of our Consumer Business Unit responsible for the Company's consumer product lines.

SiliconBlue was a great deal for us as it met our previously stated acquisition criteria.

That criteria included strategic product alignment, R&D technology alignment, the right location with a valuation that made sense.

We are now shipping SiliconBlue 40-nanometer product.

Importantly, the complementary product lines give us the ability to offer a full range of functionality and price points to the consumer market.

SiliconBlue has shipped over 10 million units to consumer OEMs and has design wins at multiple tier one smartphone, tablet, and digital camera customers.

Our integration of SiliconBlue is progressing well, and we are optimistic about the upside benefits from the acquisition.

That concludes my initial comments.

I will now turn the call over to Joe.

For our discussion, results for the fourth quarter of 2011 reflect our acquisition of SiliconBlue Technologies.

As noted earlier, revenue for the fourth quarter was $70.2 million, a decrease of 14% from the prior quarter and 4% from the year ago period.

Gross margin for Q4 was in line with our original guidance at 57.7%, compared to 58.6% in the prior quarter and 62.7% in the year-ago period.

The decline was driven by absorption of fixed overhead, customer mix, and impact from the integration of SiliconBlue.

Total operating expenses for the fourth quarter came in at $34.8 million, which was lower than Q3 and significantly lower than our original guidance of $36.5 million.

Q4 includes the impact of SiliconBlue, which was not factored into our Q4 financial guidance at the end of Q3.

Our lower OpEx levels reflect our continued focus in Q4 on restraining operating expenses as we continue to manage our business in this uncertain environment.

We incurred approximately $1.1 million in restructuring charges in the quarter, compared to $1.8 million in Q3 2011.

As noted in the release, we expect to incur restructuring charges in Q1 related to our previously discussed transfer of our operations to our low-cost site in the Philippines.

Our operating expenses will be up in Q1 as we integrate our SiliconBlue acquisition, with Q2 then coming in lower than Q1.

Q4 net income was $40.9 million or $0.34 per diluted share, as compared to $13.3 million or $0.11 per diluted share in the third quarter, and compared to $13.9 million or $0.11 per diluted share in the year-ago period.

Restructuring charges of $1.1 million in Q4 represent $0.01 per diluted share.

The fourth quarter of 2011 also included $0.5 million of related acquisition cost.

In the fourth quarter of 2011, we recognized a tax benefit of $35.1 million or $0.29 per diluted share, related to the release of tax valuation allowance for certain deferred tax assets.

Based on an evaluation of the likelihood of use of these tax attributes due to the improvement in our operating results in 2011, and the implementation of a new global tax structure during the fourth quarter of 2011.

We anticipate completing the global tax restructuring during the first quarter of 2012, which will result in a tax provision of approximately $10.8 million or $0.09 per share.

At the current share price, we expect diluted share count to be approximately 120.6 million shares.

This share count reflects the retirement of approximately 2.8 million total shares purchased under our previously announced share repurchase program at a cost of approximately $16.4 million.

We concluded our stock repurchase program on October 20, 2011.

We generated an additional $10.3 million of cash from operations, ending the quarter with a cash, cash equivalents and short-term marketable securities balance of $210.1 million, and we continued to have no debt.

This reflects the acquisition of SiliconBlue for $63 million in cash.

Accounts Receivable at December 31 were $37 million, compared to the $53.5 million at the end of last quarter, and Day Sales Outstanding were 47 days, compared to 59 days last quarter and 51 days in Q4 2010.

Inventory at December 31, 2011 was $37.3 million, compared to $35.1 million last quarter.

This included the addition of $2.5 million from our SiliconBlue acquisition.

Months of inventory now stands at 3.8 months, compared to 3.1 months for the end of Q3 2011.

We spent approximately $4.3 million on capital expenditures and $4 million on depreciation and amortization expense during the fourth quarter.

Both were flat with Q3.

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

In summary, Lattice remains in a strong, clearly defined market position, with solid financials to support our business strategy.

We continue to focus on lowering our cost structure and accelerating our new products to market.

We are totally committed to delivering affordable innovation to our customers.

Regardless of today's environment, we remain confident in our long-term growth prospects and will continue to drive further R&D, sales, costs, and operations efficiencies.

Let me now turn to our first quarter 2012 expectations.

We expect revenues to be up approximately 1% to 5% as compared to Q4.

Q1 gross margins are expected to be approximately 57% plus or minus two points.

Total operating expenses are expected to be approximately $39 million, including approximately $0.8 million in restructuring charges and $0.9 million of acquisition-related costs.

As noted in our Press Release and mentioned earlier, income in Q1 will be affected by a Q1 tax provision of approximately $10.8 million, primarily associated with the completion of the Company's new global tax structure.

This concludes our prepared remarks.

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

(Operator Instructions) Ruben Roy, Mizuho.

First of all, could you just get into a little bit more of the SiliconBlue impact?

The acquisition closed on December 16; I'm just wondering if you can drill down into the impact from that to gross margin in Q4, and how you see that playing out in 2012?

We included the period since the close from December 16, through the end of the year, plus you have purchase accounting related results in there.

We're not specifically identifying SiliconBlue impacts, we're incorporating it into our whole.

So, there is two weeks of SiliconBlue impact in the fourth quarter, and the purchase accounting related impacts of intangibles, amortization and so forth, for acquisition related cost.

Okay, and I guess then, Joe, you are not going to separate out what SiliconBlue will contribute in Q1?

It--?

No, we're going to be integrating and moving forward with them.

They are rolling right into our consumer, mobile-type operation.

Okay.

It looks like you changed everything to GAAP reporting.

Is that how you want the models to look going forward?

We've always been reporting GAAP.

You've included some additional info though on stock comp historically, right?

We can take that offline.

Yes, let's do that because I think it's in-line with what we have reported in the past.

Okay.

I guess this is another one you might not answer, but can you just give us a little bit of guidance on the core business in terms of how it shaped up?

Obviously, with the pre-announcement things slowed down a little bit at the end of Q4, but thus far in Q1 have you seen any changes by end-market as you look at it--?

I think as we talked probably end of Q3 into Q1, most everyone thought that the market was slowing but not to the rate that it slowed in the COMs site, and I think what we all saw was more of the October taking off as a normal quarter, and then by November and December-ish time, it started to slowdown, significant slowdown in the COMs in December.

We were really curious with everybody else when they thought that would recover.

For us it looks like it's not fully recovered obviously in Q1, otherwise our revenue would be higher, but we do see the end, if you will, of the Q1 time frame.

At least that's where we're looking, and I think most of our competitors are seeing similar things in the COMs market.

Right.

Just one last one for Joe.

In terms of the OpEx commentary in Q1, obviously going up in Q1, but you said lower in Q2.

Can you just give us an idea of the magnitude of that -- or the delta there and how that plays out the rest of the year?

Right, as we integrate SiliconBlue, we expect to see OpEx drop between $1 million and $2 million.

Perfect.

Tristan Gerra, Robert W.

Baird.

This is [Nick Clare] calling for Tristan Gerra.

You briefly touched on this during the prepared remarks and in response to the last question, so maybe I can try and rephrase it.

¶ But looking at this quarter, you talked about the gross margin pressures and where they came from, and I know you are not discussing specifically SiliconBlue and maybe moving forward.

But had you seen during this quarter expectations moving forward any pricing changes from your competitors?

I don't into that we saw any of those directly that were different from any other quarter.

There's always pressure in those markets.

The question I think you're really alluding to is do we expect pricing pressure moving forward if the COMs market slows down, right?

I would anticipate -- I mean our goal has always been to be low power and low cost and focus on those things, so that we can live in a market regardless of the environment.

So, in some of those cases with the COMs market, I would expect it to get more aggressive through time.

But, that's what we're prepared to focus on, which is really that mid-range and below, low cost, low power.

Okay.

Last one, just because my line was cutting out a bit and I believe you mentioned it.

You expect to see a bit of, I think you said, $10.8 million or $0.09 per share in help for the tax restructuring in 1Q '12 as well, correct?

Yes, in Q1 2012, it will be a negative impact of $10.8 million.

Negative impact, okay.

So, we had the upside this quarter; we see the completion of our global tax restructuring in Q1, and that's the impact.

Okay, great.

Richard Shannon, Craig-Hallum.

I'll try my obligatory SiliconBlue question, love to see how close you'd like to be able to answer it.

I guess from a big picture point of view this year, any sense of the level of dilution you're expecting this year, EPS wise, any way you can help us think about that?

Let's do this, so I'll answer it slightly different.

Our expectation as we move to 40-nanometer on SiliconBlue, it gets very close to our corporate margin structures and so what we're trying to do is really drive to a 40-nanometer production rate, which is what we're trying to kind of close off in Q1.

But, it takes a little bit of time to get that flow through the system, if you will, but the goal on SiliconBlue is to get them to our corporate margin goals.

Okay.

I guess that leads into my second question which is you've given a gross margin number for the first quarter here.

I guess normalizing for everything but Silicon Blue, how would you anticipate that trending throughout this year?

I mean is this something that could get back up to the 59 range that you talked about last year or is this 57 a good starting point to think about?

The current forecast that we put out for Q1 -- this is a transition quarter, Q1, so we got SiliconBlue, integration of SiliconBlue.

We're going to start seeing benefits of our move to the low cost Philippines site, that will impact gross margins also as our complete operations function is there, so we expect to see some uplift.

That is highly dependent and the biggest variable in our gross margin is customer mix, so depending on the customer mix going forward, that's our biggest variable.

Right, so remember that we have a double counting in the operations team as we transition away from Oregon over to the Philippines, and that transition will be completed in Q1.

Okay, and the cost is all in COGS, not in OpEx then?

Correct.

Okay, very helpful then.

And the other thing is on that, remember we took the restructuring charges of the $0.8 million, most of that stuff is in there.

Got it, very helpful, thanks.

Next question, I'm not sure if one of the other guys asked this, I got cut off briefly, but how -- the conversations you're having with your larger communications customer, specifically on the wireless side.

What are they telling you is first quarter, do you expect that to be flat or even growing?

Or, what are your customers telling you about return to maybe normal, and I'll put quotes around that, normal rate of business that maybe you saw last year before?

Yes, they never tell you a lot.

We have some customers positioning for bigger Q2s and Q3s.

You never really believe it until you see backlog kind of thing, and then you have others that are slow to act, so you kind of get a mix in there.

For Q1 obviously, we forecasted the COMs market to be down, right, from what it would normally be.

But, my expectation is that you're going to see some rebound on that in the Q2 time frame.

At least from the things that we're seeing with the backlog and some of the other things that were focused on today, but that's never, again it's a very fickle market where they go up and down very quickly, so our expectations is Q2 should be a stronger COMs market.

Okay.

Maybe just two more quick questions for me.

Inventory in the channel, what's your feedback from the channel?

Are you sitting in a good position?

Is there some burn still to go on here, any thoughts on that?

Remember there's not a lot of inventory in the channel and at least the COMs customers that we're focused on, being pure inventory.

But, when you look at inventory overall, it's not at anything that's alarming for us, and in fact it's at healthy levels for the distributors.

And, remember our inventory actually went down slightly on some of our product lines, and we did that on purpose, right, as we start funneling through some of the product mix changes we want, and then some of the other cost elements that we're putting on.

We also have other cost things that we focus on throughout the year, like conversions to gold and things like that because those are pretty -- conversions to copper, sorry, from gold.

But we have a lot of those ops focuses for this year to drive the cost structures down.

Okay, perfect.

Sundeep Bajikar, Jefferies.

Just to complete the discussion on Q1 outlook, could you please share your views with us on expected sequential performance in industrial and computing markets, as well as consumer, I guess, while we're at it?

Yes, consumer is always kind of seasonable from Q4 to Q1, but we'll see how that goes.

And, are consumers really going to go with the products that we currently have in the market along with SiliconBlue, and we don't see anything that's abnormal in that market today.

I think when you talk about industrial, I think that's going to be hampered by the European situation.

It's interesting because there's different people calling it up and down.

I think for us we don't see it as abnormal today, but I wouldn't call it as a gross up or gross down in Q2 if that's what you're looking for.

Okay, that's helpful.

Then, within communications, how do you think about Lattice's exposure to end demand from Asia versus North America, versus Europe?

My understanding is you have the most exposure in Asia, but if you could just help give us a framework for that, that would be helpful.

Remember, our product mix, people want to focus a lot on the ECP3 product line which is more of the 3G build-out, but XO is in a lot of other product lines, it could be in LTE, it could be in everything else.

So, XO has a lot of COMs exposures worldwide, right?

Which is good in some cases because it takes some of the variability out.

ECP3 even though it's sold worldwide, can be a little bit more focused on Asia.

So, if Asia does slow down, then that can slow down a lot of things for everybody.

But, I would argue we're pretty global on that COMs thing with all of our product lines, and even including our 4K series, too.

There are some other products in there that are sold into the COMs market.

It's hard to tell today.

We're starting to see some customers pulling in in Asia; other customers are just holding.

So, I don't know that anybody knows at this point what's going.

Okay.

Now in terms of OpEx, last quarter I think you had provided guidance that OpEx would roughly be 40% of revenues in 2012.

Has that view changed after SiliconBlue?

We will get there as we move through 2012 and integrate SiliconBlue into the operations, so it really hasn't changed.

Q1 again being a transition quarter, we've got some higher levels of OpEx than we will as we move forward.

Okay, fair enough.

Then, finally on the tax rate, what should we assume for the full year 2012?

We're going to come into a rate between 11% and 14%, is where we'll end up.

Okay.

NOLs of course are still active, going forward.

Okay.

(Operator Instructions)

Nathan Johnsen, Pacific Crest.

Just wanted to come back, I think you guys mentioned that you expect OpEx to drop $1 million to $2 million.

Were you saying that you expect that to drop $1 million to $2 million by the end of 2012, or was there a different time frame there?

Then, on the SiliconBlue, in terms of the margin structure you talked about that being fairly dependent on the ramp at 40-nanometer.

I was wondering if you could talk about what that looks like in terms of the speed of that ramp, at what point do you see a meaningful portion of SiliconBlue being on 40-nanometer?

So, let's first talk about OpEx.

You are going to see OpEx, when Joe alluded to $1 million to $2 million, that's going to increment down over the year.

And, the reason for that is as we do integrations and get some of the efficiencies through SiliconBlue, that will help us as we drive that downward.

So, the OpEx thing is going to take us a few quarters as we drive it down.

Obviously, we want to do it as fast as humanly possible, but you also want to preserve the value.

On the SiliconBlue margin structure, the 40-nanometer is it for us, and we knew that going into this acquisition that 40-nanometer was the push that we needed to have, and we're going to do that digitally.

It's not the same market as you would take a normal FPGA, meaning that a lot of the conversion activity is part of SiliconBlue's effort, not necessarily always the customers.

Meaning, in a typical FPGA, you sell them an FPGA and if you want to convert, it takes a long time because they have to go through system validations and all this stuff.

The way that the SiliconBlue products are architected, it's easier to drop products in from new technology into older technology slots, so we expect that conversion to happen, not exactly digitally, but pretty close.

So, we're shipping that 40-nanometer today.

Our plans are to minimize if not zero out the 65-nanometer shipments in the next quarter.

Okay, great.

That's really helpful on the timing.

Then, just one last thing, I guess one more clarification.

You mentioned for industrials hard to see into Q2, but I guess I didn't get a good sense whether you were looking for industrial to be up or down in Q1.

For Q1, we're seeing it pretty flat right now.

We didn't see a big uptick or a downtick in the industrial, so we're calling it flat.

I think somebody before had asked -- when do we see the rebound?

And, that's super hard to tell right now.

I mean in Europe, who knows.

I think in the United States -- it feels fairly comfortable in the United States, but in Europe, I don't know.

Richard Shannon, Craig-Hallum.

I just had a quick follow-up.

You introduced the ECP4 a couple months ago now.

What's been your feedback as you've been talking to customers?

What's your feel for the ability to maintain or even gain share in this mid-density FPGA market?

The feedback has been really good.

I think it's a solid product that addresses -- it moves us up a little bit within the food chain, if you will, from the 3 gig to the 6 gig series.

We knew that was more of an LTE play with the higher performance of that product, so we're getting some pretty solid feedback from the customers.

I wouldn't expect to see a whole lot of volume of ECP4 this year because again, we're sampling, and those systems take awhile to get them designed in and then all of the validation and verification on our customer standpoint.

But, the good news is we're out there, and we have the next version of it.

And, it's a solid product offering, at least from a customer perspective and from our perspective.

Okay, great.

Greg Weaver, Invicta Capital.

I can understand -- appreciate that you don't want to give forward information on SiliconBlue, but could you give us a little snapshot of what they were before you bought them in terms of run rate margins or operating expenses?

Yes, we paid $63 million.

What we tried to do -- you will have to do the math on this, but we weren't out of line with any of the acquisitions of this type at this size with any of the multipliers on revenue.

So, we felt comfortable with this purchase, and we really don't want to give any guidance on that moving forward.

We're going to combine all this as part of our FPGA offerings.

Okay, thanks.

Bill Dezellem.

Speaking of new products, here earlier this week, you announced the ECP3 increment to that family.

Would you consider that to be a major product announcement, or is this just incremental in terms of what you need to do to remain competitive?

Yes.

It's really an expansion of the current ECP3 family offering.

There's a lower power version of the product that we're offering today, and then a higher performance version of that.

And, it specifically focused -- the higher performance version specifically focused on the video applications that we were going after.

And we did some packaging, we have some other packaging technologies that we're doing to give us smaller form factors overall.

So, they are a little bit tighter pitched smaller form factors, so it's an extension of what we have today.

It's not considered a major overhaul of the product line, if that's where you were headed.

And there are no more audio questions in queue.

Mr.

Darin Billerbeck, do you have any closing remarks?

Thanks for everyone that called in today and listened to our call.

And, we are going to continue to drive the business up and the costs down.

Thanks a bunch.

Ladies and gentlemen, this does conclude today's conference call.

We appreciate your participation.

You may now disconnect.

Presenters, please hold.