萊迪思半導體 (LSCC) 2016 Q2 法說會逐字稿

Good afternoon. My name is Shannon, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Lattice Semiconductor second-quarter 2016 results 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) It is now my pleasure to turn today's call over to Mr. David Pasquale. Mr. Pasquale, you may begin your conference.

Thank you, operator. Welcome, everyone, to Lattice Semiconductor's second-quarter 2016 results conference call.

Joining us today from the Company are Mr. Darin Billerbeck, Lattice's President and CEO; and Mr. Max Downing, Lattice's interim CFO. 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 email Global IR Partners using LSCC@globalirpartners.com, where you can get a copy of the release off of the investor-relations section of Lattice Semiconductor's website. Please note, we have published a Power Point presentation under the (inaudible) site to accompany today's call.

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 Regulation FD. This call includes and constitutes the Company's official guidance for the fiscal third-quarter 2016. 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 the risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended January 02, 2016 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. Some financial information presented by us during today's call will be provided on both a GAAP and 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 this 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.

At this time, 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.

The second quarter was all about modest growth, as we set the stage for accelerated growth in Q3 and Q4, due to our design wins in the consumer mobile segment. Revenue came in as expected. Gross margin was slightly above the high end of expectation. OpEx was lower than Q1 but higher than we wanted, for sure.

We continue to execute on our plan to significantly reduce OpEx, as we expect to end Q4 in the low 40s. With our significant revenue ramp in Q3 and Q4, we will leave Q4 to run rate that sets up 2017 as a solid financial year of further revenue growth and increased earnings.

From a high level, the big Q2 takeaways are -- we're executing on our tier-one OEM ramp. We had high expectations early in the year around various consumer OEM wins. We won where we said we would, and those wins are ramping as expected. We saw a small benefit in Q2, and we'll see higher contribution in Q3 and Q4.

We're excited about these ramps, given how much effort our Company put in behind winning and supporting this business. The path wasn't easy, but we did it.

This included establishing a dual-source manufacturing capability, along with meeting the most stringent quality requirements in the industry, all the while delivering on shipping more than a million units a day.

The million-units-a-day milestone isn't new for us. In fact, we shipped 50% more than that at times. But it does reinforce to our customers that not only do we have great, programmable, low-power, small-form-factor devices, but you can also count on us to deliver them in high volume at high quality.

Finally, these wins further validate the strength of our FPGA franchise, along with success in creating a new market, and our ability to deliver tailored solutions, even in the most price-sensitive applications.

Number two, increasing revenue momentum. When we acquired Silicon Image last year, we knew the first few quarters would focus on integration, with revenue synergies starting later in Q4.

Everyone is aware that the top line suffered, as Samsung's business dropped off a cliff in mobile, and the HDTV market in the high end has been soft. The important thing is we're now seeing the other expected revenue synergies we planned for.

These are coming in the form of diverse wins as we leverage our broader, stronger solutions portfolio. Many of these wins are multiyear deals that help us stabilize our base business outside of consumer.

A highlight of our integration is CrossLink, which we mentioned in our Q2 press release. We're very excited about this product. It's the industry's first programmable ASSP interface bridge for mobile image sensors and displays.

We are leveraging the flexibility and fast time to market of an FPJ and the power and functionality of optimized video IP in an ASSP, to create the new product class called programmable ASSP, or pASSP.

CrossLink is the first product in the new category, a low-cost video-interface bridge with the highest bandwidth, lowest power, and smallest footprint. It's perfect for virtual-reality headsets, drones, smartphones, tablets, cameras, wearables, and other human-machine interfaces.

Interest was high out of the box, and we already have design wins that will turn into production shipments early next year. If you want to know more about our programmable ASSP, go to the EE Journal article published in May with the subject, The World's Best Multiplexer.

Other examples of our success and momentum include multiple XO3 design wins at the two largest North American (technical difficulty). These wins are significant, as we prove that we can continue to provide the lowest-cost [per] IO devices, at low voltages, in some of the smallest form factors in the industry.

Even in the server and computing market, things are getting smaller. Our XO2 was selected by North American [palms] Processor Technology Company, beating out the customer's internal solution for IO expansion, bridging, and (inaudible) logic -- again, a better value for the buck, or in this case, a better value for IO, if you will.

In Asia-Pacific, we're gaining traction across the board in mobile, servers, drones, displays, and virtual reality. Though some of these markets aren't big yet, there's some interesting trends going on here.

High-speed, high-resolution camera technologies in this space will be driving the next generation of standards. The frame-rate expectation here is double what you'd see in the HDTV market.

Video is everywhere, which requires video expertise to transmit and receive, along with bridges devices to connect things that aren't compatible. We have all that.

We also had several major wins in automotive, great products that are ideal for video and display connectivity solutions, along with our traditional (inaudible) products.

The good news here is that all the nonconsumer products being taped out are automotive capable and perfect for video solutions. Those solutions can be found in infotainment and in areas where video capture and analytics are helping drivers to see better, while parking and operating the vehicle more safety. After all, cars aren't going to have fewer cameras and less video moving forward.

Finally, we get asked the question about competition all the time. We're winning new designs and gaining from our aggressive replacement strategies. A few areas we recently displaced the competition are in end markets, like servers, timing controllers, and various interface [displays].

Our strategy is to continue focusing on these areas, and other areas, as we solidify our position in the FPGA marketplace as a committed long-term supplier. How many standalone FPGA suppliers are left?

Our last takeaway from Q2 is our OpEx trend. OpEx is trending lower, but still not where we want it to be. We continue to bear unforecasted expenses from the HDMI [agency] and professional services, beneath of which we can escape at this time. However, we are committed to delivering double-digit reductions in Q3, with OpEx moving closer to the mid 40s, and then in Q4, OpEx moving closer to our target run rate in the low 40s.

We made significant progress this year on our fixed-cost structure. Our issue is about forecasting the variable side of the equation. Our goal is to infuse added predictability in our aspects of our OpEx over time. No more excuses on why we miss OpEx.

Let me now turn the call over Max for details on our financial results. Max?

Thank you, Darin.

As part of our press release today, we've provided you a detailed reconciliation of our GAAP to non-GAAP financial measures.

For the second quarter of 2016, revenue is in line with our expectations, at $99.2 million. When compared to the first quarter, revenue increased $2.7 million, or 2.8%, primarily on strength in our industrial end market, as well as increased licensing and services revenue.

Gross margin for the second quarter was 58.9% on a GAAP basis and 59.1% on a non-GAAP basis. While still quite strong, and consistent with our expectations, our gross margin did degrade slightly from the first quarter, principally as a result of less favorable product mix, as well as manufacturing efficiencies which were less favorable than the first quarter. These were partially offset by higher margins in our licensing and services business.

As we noted last quarter, based on the rebound in consumer revenue expected in the second half of 2016, we expect our gross margin for the full-year 2016 to be more in line with our long-term, mid-50% target.

Total GAAP operating expenses for the second quarter were $64.8 million and $50.8 million on a non-GAAP basis, which was $1.9 million over the high end of our guidance.

There are three primary drivers for our second-quarter operating-expense variance. First, we experienced a delay in the transition of our HDMI agency responsibilities to a third-party agent, which we had planned to execute in the second quarter.

Second, in order to accelerate the time-to-market for one of our wireless products, we chose to tape out a full production [mass] during the quarter. And third, we incurred incremental, project-specific profession-service costs in legal IT and accounting.

While our second-quarter operating expenses were higher than planned, we are making meaningful progress in driving our expenses down to exit 2016 with our OpEx infrastructure spending in the low $40-million range, as Darin mentioned.

Income-tax expense for the second quarter was $4.5 million on a non-GAAP basis and $2 million on a non-GAAP basis. We continue to expect our cash tax expense to be between $8 million and $10 million for the full year.

Our GAAP net loss for the second quarter was approximately $13.8 million, or $0.12 per basic and diluted share. On a non-GAAP basis, our net income was approximately $164,000, or $0.00 per basic and diluted share.

For the quarter, basic and diluted share count was approximately 119.4 million shares. Net cash provided by operating activities was $9.5 million during the quarter, and we ended the quarter with cash and short-term investments of approximately $119.3 million, as compared to $116.5 million at the end of Q1.

Accounts receivable is essentially flat with Q1, at $84.7 million. Day sales outstanding improved to 78 days in Q2 from 80 days in Q1. Inventory at the end of the quarter was $86.7 million, compared to $82.6 million at the end of the first quarter. Months of inventory came in at 6.4 months at the end of Q2, compared to 6.3 months at the end of Q1. This inventory level reflects our planned inventory build, in advance of consumer shipments in the second half of the year.

We spent approximately $4.4 million on capital expenditures in the second quarter, down from $5.7 million in the first quarter. Depreciation and amortization expense was $15 million in Q2, down from $17.3 million in the first quarter. Interest expense for the quarter was $5.1 million.

This concludes the financial-review portion of the call. We'll now turn it back to Darin for our outlook.

Thank you, Max.

In terms of our specific expectations for Q3, revenue for the third quarter of 2016 is expected to be between approximately $110 million and $116 million. Gross-margin percentage for the third quarter of 2016 is expected to be approximately (technical difficulty)%, plus or minus 2% on both a GAAP and non-GAAP basis.

Total operating expenses for the third quarter are expected to be approximately $57.9 million plus or minus [$2 million] on a GAAP basis and approximately $45 million plus or minus [$2 million] on a non-GAAP basis.

As noted earlier, we are committed to driving OpEx lower and focus on exiting this year at the low target level run rate. We are confident that we can achieve our goals, given the opportunities we've already identified, in areas that do not impact our ability to grow revenue or provide excellent support to our customers.

In summary, we entered Q3 with the momentum we anticipated when we put our plan together eight months ago. Growth is accelerating as anticipated in our core FPGA technology franchise. Our imaging portfolio is providing diversification and increasing revenue opportunities.

We are confident in our growth plan for the second half of 2016, along with our continued focus on reducing our overall spend. All of our efforts in 2016 will translate into more leverage as we move into 2017 and beyond.

If we simply just take what we believe we can achieve from a revenue perspective in Q4, our momentum positions us to potentially break the $500-million revenue threshold in 2017.

I've heard by various shareholders that they don't see Lattice out and about enough. I can tell you we weren't trying to avoid anyone. Just 2015 and the early part of 2016 took a ton of heavy lifting to get us where we are today. And yes, it took more of my focus than we thought.

All that being said, you can expect to see us more visible in the second half of 2016. We'll be at Jefferies in Chicago in August, Credit Suisse in New York in September, and plan to hit Boston, Philly, and Delaware, as well.

We are understandably excited about our business and outlook, and looking forward to sharing our story in person for the coming months.

That concludes our prepared remarks. Operator, we would now be happy to take any questions.

(operator instructions) Tristan Gerra, Baird.

Hi, Tristan, are you there? We can't hear Tristan, operator.

Tristan, your line is now open.

Can you hear me?

We can hear you now.

Great, hi. Question on the Q3 revenue guidance. If we exclude our assumption of your (inaudible) for the second half, in terms of Q3 contribution, we get to a yearly decline in revenue. Could you talk a little bit about what in the core business is apparently bringing a little bit of an upset, in terms of year-over-year comps?

Are you talking -- so the core business is actually fairly stable, Tristan, and a lot of the growth is from our consumer mobile wins. Is that what you're alluding to, or what was your question specifically?

So if I take the midpoint of your revenue guidance for Q3, which includes a new consumer design win, and if I remove what I believe is my estimate of this consumer design win for Q3 of this year, which wasn't in Q3 of last year, we actually get a year-over-year decline in revenue. So I was just curious to know what -- is there anything in the core business that is declining? If you could bring any color around this.

Well, I think throughout the year -- you know, if you look at our midpoint of guidance today, Tristan, and you look at kind of the [$460 million] guidance that we had put out originally, we're probably about 3% to 5% behind that, I would say, today, assuming that nothing is more optimistic than what we've put in -- we put a fairly conservative plan on the $110 million to $116 million.

So the only other softness that's in there besides some of the consumer (technical difficulty) is really the high end of the DTV business is soft. But I think if we look at the ramp of the consumer -- I can assure you that the base business is about the same, if not growing slightly. And then the consumer is layered on top of that.

Okay, thanks for the color. So if I -- you know, you mentioned in the press release that you're FPGA shipments are exceeding one million units a day [in] Q2. In the past, the iCE40 product line was not classified as FPGA. Is that number that you provide for FPGA units including the iCE40? And if you could -- and if not, could you give us what the year-over-year comps look like?

So I think what -- there's a little bit of confusion on what's an FPGA and not. Both iCE and XO2 are considered FPGA, but they can also be categorized more of an advanced (inaudible). We categorize them as FPGAs, and that's where -- when we look at the consumer FPGA market we believe that we were able to create, iCE has been one of the big drivers of that unit volume for the last three to four years.

Back in its heyday with Samsung, we were shipping on those types of volumes, and very consistent with what we're shipping today, so not that different. And we can hit peaks from time to time. You can hit peaks well above a million units a day, depending on it, as you're shipping these volumes. Because again, you have to ship into inventory, and that inventory gets pulling through.

So what you ship to build the inventory and the weeks of inventories they need for buffer can be not exactly linear as we walk through it. There's days where it can be as high as a million and a half. But what I gave you on the number, the million, is kind of an average, actually, in Q2. That's about the average we were doing per day, actually, in Q2.

Great. Thank you.

(operator instructions) Jorge Rivas, Craig-Hallum Capital.

Good evening. Thanks for taking my question. So a couple of questions from me. First -- so industrials were priced [at the] upside. So if you can provide some color on what's driving the outperformance in that segment. Judging by your gross-margin guidance, I first [thought] that we would expect that segment to decline sequentially. But I'm looking at your presentation online, and it seems to indicate that you expect that to grow again. So last quarter, we saw it was just simply inventories coming back to normal levels, but are you seeing a recovery maybe driven by some early trends that we are unaware of?

I think we started to focus on industrial about three to four years ago, where we really went out and said, let's just double the opportunity funnel, if we could, and that should translate into more business.

So that's one of the things we did. The second one is, we're getting a little help from the macro environment. And there's some line-item reduction stuff and conversions that we're going through also.

But we actually modeled in for Q3 to be flat, European (inaudible) to be flat. But we are seeing some support from the macro and the design wins, if you believe [artifact] of those last two to three years.

So I mean, mixed into that, I think industrial is up primarily because of our focus on it and because we're finally getting some macro as (inaudible). And we knew it wouldn't stay at that giant rate we saw in Q1, because remember Q1 had a big spike, and we did think it was going to continue, and it hasn't.

Right, okay. So if we can summarize in a few words, that you would expect this trend to be sustainable, at least for a few quarters?

Yes. I mean, I think it just depends allot on the macro. It could be some -- I think if there were something that was going to soften it a little bit, it might be the Brexit thing, but we haven't really seen any indication of that from our data. So yes, I would say it's going to grow maybe at whatever the market rate is and a little faster for us, just because I think that design-win momentum and some of the macro stuff has helped us. Because we were pretty lean for many, many years. If you go back, our (inaudible) numbers fell off almost $10 million a quarter, if you go back to 2015, from where we originally anticipated.

Correct, yes. Okay, that's very helpful. My second question is related to licensing that was up in the quarter. Again, surprised with the upside. Just wondering if this is associated with any type of catch-up payments on the HDMI side, or if -- I probably missed [it in] your commentary, but it seems like there's something else happening that we should be able to see licensing to grow year over year, this year. So if you can just --?

The way -- there's a fairly stable royalty business that we have, and it's been stable for the last year and a half, two years. And it's pretty stable. We can count on it all the time.

There's a patent-sales business, which essentially we've had zero patent sales this year, so we don't have any patent sales baked in. So that would all be upside, if we did something that's going to be upside to the plan.

But I think what you're alluding to is, there's a flexible, or kind of a moving part in there called IP core sales. And that IP core sales is about us taking the cores that we developed from an HDMI -- whether it's -- I won't give you the numbers, but different numbers of HDMI cores that we sell to various companies. And those are large companies that want our IP because it's best in class.

And so those things become a little bit cyclical over time. And so there's quarters where it's lower than it is other quarters. And in Q2, it was higher than it was in Q1.

Okay. I think those are all the questions from me now, guys. Thanks a lot.

Matt Dhane, Tieton Capital Management.

Great, thank you. I was curious. I wanted to talk about the large OEM ramp that's starting here in the third quarter. Should we expect, looking out beyond that, that the fourth quarter sees a further, even greater, more meaningful ramp than we're seeing here in Q3?

Yes.

Would you like to add any color around that?

No (laughter). That's the simplest answers I could give you -- yes, no.

Okay, I won't push right now, then.

(laughter)

I also wanted to ask about -- obviously, Altera was taken over by Intel about -- I guess it's eight, nine months ago, now. What benefits are you seeing from that combination? Are you seeing benefits from that?

Yes, we are. And there's -- I alluded to some in the script. Maybe you didn't catch them. But there's areas like T-CON, where you've got a gazillion different displays out there at different sizes -- and again, a T-CON is a timing controller.

And what ends up happening with these displays is, they're trying to manage those displays. And they could be different sizes that are seconds or thirds or something. And they'll put an FPJ, a programmable logic device, in there to manage that.

So we actually displaced one of these suppliers in our T-CON technology, along with some of the display panels, themselves. There's opportunities within the interfaces within the panels.

And then finally in the server market, we actually ended up with quite a few design wins in the server market, just because -- you know, I think -- it's not that they lost focus. We have a better product than they do, and I think that's really important for us, because as people start looking about who's going to be there long-term, they'll give the smaller guy a better opportunity when they know we're going to be there for the long term. And this is what we do.

Whereas other people may be in the server market, or they could be in the high-end comms market, and they could be distracted; but when you talk about pure server IO expansion, we have the best product on the planet.

Great. Well, thank you.

(operator instructions) [Purdy Ho from PS Securities].

Hi, Darin, and Max. How are you? Congratulations on the [resell]. And I guess my question is kind of along the lines of a previous analyst. As I understand it, your strategy is different from Altera and Xilinx, but I would like to know your opinion on how FPGA [plus ASP] could benefit in the artificial intelligence application. Thank you.

You're talking about FPGA plus ASSP, or programmable ASSP?

Plus [CPU].

Think about it this way. David Rutledge, who's our CTO, has talked multiple times about what he calls heterogeneous computing. And it's a perfect place where you can take smaller microprocessors, or even microcontrollers, and you have tons and tons of IO or different acceleration that you need. Because remember, FPGAs do acceleration better than anything.

And what people are starting to find is that if you can do acceleration at the lowest possible power, then they don't necessarily want to have that function integrated. And what we did with our first product that was part of our imaging/FPGA was this CrossLink product, and that's a prime example of that, where it's at high-speed interfaces for all of the [missy and LBDS things], but it also has programmable logic, so they can connect any interface to any interface at the high speed.

So we're already beginning to do those much more specific than an ARM processor plus flexible IOs. We're doing specific applications where we don't think that the volumes are high enough to dictate doing an ASSP, but then the IP is so significant that it's difficult to be able to do it in an FPGA pure fabric.

So you have to do hardened IP plus fabric to make these things work. And the acquisition of Silicon Image actually gave us the highest-performance video capability in the industry, which helps us quite a bit as we [walk through this].

(operator instructions) David Duley, Steelhead.

Thanks for taking my questions. I was just wondering, when you mentioned your annual goal, I think it was $460 million, and you're behind that goal by 3% to 5%, I guess, at the high end of that range, so that's roughly $10 million a quarter. What exactly is the delta from your original goals for the year to where you plan to come in at this point?

It's primarily digital TVs being soft and consumer mobile not being as large as we originally anticipated.

And on the consumer-mobile front, is that just -- the big win isn't as large as you thought, or a lot of the little wins didn't add up to as much? Any color that you could help us understand what the delta is would be appreciated.

It's just more of the timing of the ramp, more than anything. I think what's happening is, there's timing elements that are forecasted ahead of time, for multiple of our wins; and it looks like some of the ramps are pushing out more than what we thought. So still should be holistic. From a total perspective, it'll be the same but the timing is pushed out.

Okay. And did you have any 10%-quarter customers in Q2? And will you have 10% customers in the third and fourth quarters?

For the second quarter, no, we did not. And for the third and fourth quarters, most likely we will, yes.

Okay. And I think I understand how the end markets are going to look like in Q3, but just a little bit more color, if you could just talk kind of each piece of the end markets and what you would expect the sequential to be rolling into the third quarter would be appreciated.

Sure, absolutely. Consumer will be up; that's obvious. Communications will be up. And actually, industrial should be up, Q3 versus Q2.

So basically all the segments are going to be up, but consumer is going to be up the most?

Yeah, just slightly. Yeah, I mean, some of them more slight than others, but we're not expecting any of them to be down.

All right. Okay. That's it from me. Thank you.

(operator instructions) As there are no further questions on the phone lines at this time, I would return the call to the presenters.

Okay, thank you, operator. And thanks again to everyone for joining us on this call today.

You know, Lattice is a great company. We have great people and more capabilities than [more] companies our size. We continue to be committed to turning those capabilities into growth and to deliver increased profitability.

We can't do everything, but what we can do, we have to do well. The size and scale of our product portfolio gives us a considerable competitive advantage in the markets that we choose.

Adding to this our imaging expertise, which stands to be crucial for the new virtual- and augmented-reality worlds, where high-performance video is, and will continue to be, a killer application, these same solutions are also proving to be highly attractive in the automotive and also in other growth markets.

In the end, it's not rocket science. It's all about just growing revenue and increasing earnings per share, which is exactly what we're focused on.

Thanks for joining us today. We appreciate your support.

This concludes today's conference call. You may now disconnect.