萊迪思半導體 (LSCC) 2017 Q3 法說會逐字稿

Good afternoon.

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

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

(Operator Instructions).

Thank you.

Mr. David Pasquale of Global IR Partners, you may begin your conference.

Thank you, operator.

Welcome, everyone, to Lattice Semiconductor's third-quarter 2017 results conference call.

Joining us today from the Company are Mr. Darin Billerbeck, Lattice's President and CEO; and Mr. Max Downing, Lattice's 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 email 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.

Please note we have also published a PowerPoint presentation on the IR site to accompany today's call.

Before we 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 fourth-quarter 2017.

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 Form 10-K for the fiscal year ended December 31, 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 will also be presented within the requirements of SEC Regulation 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 a non-GAAP basis.

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

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

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

If we use any non-GAAP financial measures during the call, you will find the required presentation of, and reconciliation to, the most directly comparable GAAP financial measure 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.

Thanks, David, and thanks to everyone for joining us on the call today.

We saw many of you last month at our Analyst and Investor Day in New York City.

It was an excellent opportunity for us and the management team to outline the main investment themes that we had, along with our execution strategy; and, finally, add more color on our current financial plan.

We ended up at capacity with another 150 or so on the live webcast for that event.

And we were pretty encouraged by the high level of interest and the post-event feedback.

So thanks again for everyone who participated either in person or online.

So after reviewing the Q3 highlights, I will review some of the key Analyst Day points once again.

For the third quarter, product revenues increased in our three core markets compared to the prior second quarter.

Consumer was up, led by higher demand from smart devices and gains at Samsung Mobile.

Consumer is an area that continues to be a growth driver for us.

This growth more than offset revenue declines from DTV and anticipated declines from a top North America handset consumer OEM which we don't name.

Clearly these product declines and the continued delays in the next generation of HDMI were difficult on us, but we've moved on and we're focusing on business that are actually performing.

Comms and computing was up with some positive movement from our top Chinese customers and the imminent ramp of the Intel Purley server platform reference design.

And finally, industrial was also up, driven by continued momentum from our broader market growth including things like [Amathong] robotics win.

Underpinning our third-quarter product revenue was our FPGA revenue, which was actually up over 9% compared to Q2.

Our iCE family was up as growth opportunities more than offset the anticipated declines from our top North America handset consumer OEM.

Our XO product family was also up nicely with broad traction just about everywhere.

On a geographic basis, revenue was also up across the board over Q2.

One exception we noted in our press release was licensing and service revenue being lower versus Q2.

And that was due to a patent monetization transaction in Q2 that didn't repeat in Q3.

Since that customer was US-based, the US sales were obviously lower in Q3 than Q2.

Taken together, we are still positive in our business, future outlook, and what we're currently doing.

That leads us to the how part, and the how part was what we covered at our Analyst and Investor Day.

This is the part where you can see Lattice on a clear pathway to stability, growth, and profitability.

Page 6 of our Q3 PowerPoint provides a powerful visual of our core business.

Handset wins have gotten a lot of attention over the past few years.

These were important proof points for us in our FPGA solutions in lower-cost, lower-power consumer markets.

And these wins demonstrated that Lattice was more than capable of fast ramping, high-volume production demands for the world's top mobile and consumer OEMs.

These wins also prove that we can build the highest-quality, lowest-power, smallest FPGAs on the planet.

But while everyone was focused on mobile wins, we continue to build on decades of leadership in our control, connectivity, and computing applications.

This gives us stability and a level of predictability that we can plan around and grow consistently.

If you turn to slide 7, you can see how compelling edge connectivity has been a growth driver, led by things like backhaul to remote radio heads, and we see this connectivity as embedded in the cloud.

These devices are not independent.

These are controlled, connected devices that need the cloud's help for intelligence.

When you think of edge connectivity, think about intelligent cities.

I'm referring to cities where eventually everything will be interconnected with the cloud: things like sensor, traffic and street lights, to power and communication grid.

Our solutions are helping make this a reality.

We started back in 2006 and we've grown this business to nearly the same revenue level as our control business.

And we only expect further growth as we leverage our IP and solutions which we further strengthened through our strategic M&A about video; or, more importantly, about vision.

This is an exciting area for us with lots of opportunity, especially where interconnected devices need to detect, see, and interact.

We fully expect continued growth on this platform over time.

If you turn to slide 8, I want to talk a minute about another model: edge computing.

This is where we believe Lattice's accelerated long-term growth is going to come from.

More importantly, our technology and strategy is perfectly aligned with edge of the cloud opportunities.

These opportunities revolve around independent decision-making and learning.

I like to use the example of the autonomous car.

In the Internet -- in the intelligent city, what will happen is a car will enter a grid; it will begin to independently interact with its surroundings.

By this I mean if there's a stop sign or a speed sign, it will see it, process it, and act instantly and appropriately.

There's no time for cloud interaction, which is why they are called independent decision-making and learning devices.

This is important because it's the direction everything we interact with on a daily basis is moving toward.

So when we talk about the Internet of Things, there's edge devices that are controlled and connected.

And there are computing devices that are either not connected or the connection isn't needed except for updates.

This is what we call edge intelligence or edge intelligent devices.

So, one could say that Lattice is living on the edge.

However, Lattice is focused on both opportunities.

The first, connectivity, is really a growth extension of our base business.

The second, you can see on page 9, is the computing portion on the edge which is what's driving our longer-term growth opportunities.

We're winning in both areas, given the perfect alignment of our technologies and our solution on our existing silicon, places where billions of operations per milliwatts is extremely important, and more importantly, valuable.

The opportunities for Lattice are quite extensive.

You can see a few of the latest wins in the business highlights section of our Q3 earnings release.

Our goal is to focus on areas where we see the greatest return on investment and obviously the highest margin leverage.

As a result, we are exiting 2017 in a much stronger position than a year ago to achieve both end market and customer diversification.

Max will add detail; but our balance sheet has also improved as we focused on driving increased free cash flow, paying down our debt.

With revenue growth, margin stability, increased cash flow, and lower debt, we are confident we can extend Lattice's leadership and winning track record in the areas we play.

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

Max?

Thank you, Darin.

As part of our press release today, we have provided detailed reconciliations of our GAAP to non-GAAP financial measures.

For the third quarter of 2017, revenue was in line with our expectations at $92 million.

When compared to the second quarter, revenue decreased $2.1 million or 2.3%, primarily on declines in our licensing and services revenue, partially offset by silicon revenue growth.

GAAP gross margin for the third quarter was 58% compared to 54.4% in the second quarter.

This was at the high end of our expectations, and reflects the stability as we execute to our gross margin model.

Our margin improvement in the third quarter is largely the result of certain second-quarter period costs that did not recur in the third quarter.

You can see on slide 13 that we have consistently delivered in our target mid-50% gross margin range.

While there has been some variability, the consistency within our model range is a testament to our focus and our product portfolio.

Our diversification of both customers and end markets has helped us to mute dramatic adverse margin impact from our occasional handset wins.

Third-quarter operating expenses were $90.8 million on a GAAP basis and $44.6 million on a non-GAAP basis.

The increase in our GAAP basis operating expenses over the second quarter was due primarily to a $36.2 million intangible asset impairment charge.

This charge was related to our previously announced strategic decision to cease future investment in wired silicon product development as we concentrate our resources on higher potential growth opportunities.

Third-quarter non-GAAP operating expenses were down about 3% from the second quarter, primarily driven by our recent cost reduction efforts.

OpEx remains a primary focus area for us.

As you can see on slide 14, we have reduced our non-GAAP operating expenses by about $35 million per year, or 15%, since 2015.

In addition to the headcount and spin-out actions we have talked about, we have a number of other cost structure improvements that are underway and expected to benefit us in 2018, putting us on track to reach our non-GAAP operating expense goal of roughly $40 million per quarter, excluding mask costs, exiting the second quarter of 2018.

During the quarter we recognized a $4.6 million gain on the sale of certain property.

We had an income tax benefit of $300,000 on a GAAP basis and a benefit of $500,000 on a non-GAAP basis in the third quarter.

We expect our cash tax expense to be between $2.8 million and $3.5 million for the full year 2017.

Our GAAP net loss for the third quarter was approximately $43.1 million or $0.35 per basic and diluted share.

On a non-GAAP basis, our net income was approximately $5.3 million or $0.04 per basic and diluted share.

We ended the quarter with cash and short-term investments of approximately $108 million, up meaningfully from the $85 million that we had at the second quarter of 2017.

Cash provided by operating activities was $24.2 million in the quarter.

Accounts receivable was $79 million at the end of the third quarter compared to $87 million at the end of the second quarter.

Days sales outstanding improved by six days to 78 days in Q3.

Inventory at the end of the quarter was $77 million compared to $78 million at the end of the second quarter, with months of inventory on hand at six months at the end of the quarter.

We spent approximately $5.3 million on capital expenditures in the third quarter compared to $3.7 million in Q2.

Depreciation and amortization expense was $15.1 million in Q3 compared to $15.2 million in the prior quarter.

And interest expense for the quarter was $3.9 million.

That concludes the financial review portion of the call, and I'll now turn it back to Darin for our outlook.

Thanks, Max.

In terms of our specific expectations for Q4, revenue for the fourth quarter of 2017 is expected to be between approximately $92 million and $97 million.

Gross margin percentage for the fourth quarter of 2017 is expected to be approximately 56%, plus or minus 2%, on both GAAP and a non-GAAP basis.

Total operating expenses for the fourth quarter of 2017 are expected to be approximately $54 million, plus or minus 2%, on a GAAP basis and approximately $43 million to $45 million on a non-GAAP basis.

In summary, we are very optimistic about our business moving forward, and the ability to capture more than our fair share of growth opportunities we outlined earlier.

We remain focused on driving growth, increasing free cash flow, paying down our debt, and maximizing our shareholder value.

This concludes our prepared remarks.

Operator, we'd now be happy to take any questions.

(Operator Instructions).

Christopher Rolland.

This is David Haberle on behalf of Chris Rolland.

Nice job on the gross margin mix up there.

We just wanted to get some clarity on how that's changed since your Analyst Day, and why it's at the high end of the range there.

I think you mentioned some second-quarter period cost.

Was that the reason or was it the industrial mix up here?

It's a little bit of both.

We did have a little bit stronger industrial mix than we saw coming into the end of the quarter; but the real driver is non-recurrence of those period costs which were incurred in the second quarter.

All right, great.

And then on the industrial front, you guys had a pretty nice bounceback this quarter.

Maybe you can add a little color there as to what occurred in that business to provide the strong sequential growth.

I think it's a bit better than seasonal there.

Yes, a lot of it is just traction on our base products.

We saw a lot of the XO2, XO3, and some of the older products: XP2 and 4K.

And all of those are high-volume runners for us, and there was some solid growth there across the board just from a broad base.

And then we're starting to see some traction from ECP5, in which started in the market about two or three years ago.

So all of those things combined with some uplift I think in the economy helped us quite a bit.

Great.

And then last one for me here.

Can you guys talk about your views on USB Type C adoption and what your traction has been here?

I know you guys used to be pretty bullish on USB Type C products.

Yes.

That's been pretty dismal, to be honest with you.

We had some great opportunities, won a ton of design wins; and most of the people that we won the design wins never went to market, or delayed their interactions with the market.

So we saw very little actual revenue from that.

So we immediately switched gears to the other products that we had that were much more important to us.

Again, like ECP5 or XO3 or CrossLink.

And CrossLink, if you know, is in our video product.

So that's doing quite well.

In fact, it's got some pretty good growth trajectory on it.

And that's been one of our good products, if you will, from the mobile device bridging.

And again, that was built off the video premise that anything would need interfaces, and video or bridging would use that product.

So again, USB, bad; CrossLink and mobile interactions and bridging, good.

All right.

Thanks a lot for taking our questions.

Delos Elder.

I was wondering, first one here: could you talk about the status of the HDMI Consortium, where that stands today in terms of -- I believe you're working on an agreement there.

Yes, it's really the next amendment.

And what happens is every few years you sign a different amendment, and it takes seven of the founders to actually get to the agreement and they all have to agree.

And we've been struggling.

It's a standard process that happens.

And we don't recognize a big portion of the royalties based on that HDMI until there's an agreement.

And we don't see that agreement being signed this year.

And we expect that next year we would get the kickback from that revenue.

Great.

So in terms of just thinking about the licensing and service business going forward -- yes, how should we think about that in terms of modeling?

Yes, Delos, this is Max.

I think as we go forward into 2018, a couple of things: one, we will not have a recurrence of the patent monetization we saw in 2017.

And then secondly, the second big change there is that in 2018, for the HDMI royalties, under the new revenue accounting standards, we will be able to recognize the revenue for the 2018 royalties, even if the revenue sharing agreement is not signed, provided we can get our arms around a reasonable estimate of what our share will be.

So that's a little bit different than -- as it relates to the 2017 revenues, because the accounting standards will be different in 2018 than they are in 2017.

So, modeling the IP and services revenue, I think if you are somewhere in the 4% to 6% of total revenue range, you'll be okay.

Great.

And then I was wondering if you could characterize growth by segments in Q4.

Hold on a second.

Let me take a quick look.

We'd expect consumer to be up.

We expect communications and computing to be up.

And consumer will be up based on some of the Amazon, Samsung, (inaudible) handset and consumer devices, even at the expense of the handset win going down that we had before.

Communications will be up, primarily based on the strength of the server platforms and then ZTE coming back to a normal kind of communications level.

Industrial and auto we expect to be up, based again on some of the initiatives we have, things like color light, projection, broad market conditions, and robotics.

And then licensing and royalties, as Max talked about, we expect to be down.

Down for a couple of reasons: one is we had a reoccurring -- we won't have a reoccurring Technicolor settlement.

We also won't have the licensing royalties once again.

But then we also have Simplay Labs that's out of it, too.

So we are going to have two or three different things that will take the licensing and those things down.

But consumer, comms and computing, industrial, our main markets will be up.

Great.

And then finally, I was wondering, given the changes in the business, could you talk about expectations for seasonality over the course of 2018?

Yes.

We had that discussion, believe it or not, just the other day, and it's a lot harder to call than it once was.

Because when we had a lot of HDMI business, there was a certain seasonality going into Christmas and going into CES and those things.

With the digital TV business shrinking so much and the different ramp rates of the consumer mobile handsets being the two big OEM, and nobody else really as big of a factor, it really isn't as seasonal as it once was.

So the question for us walking into Q1 will be: is it going to be seasonably flat, up, or something else?

And we don't have projections out that far today.

But I think the seasonality of our business is going to change dramatically.

Because remember, in 2014 we also had comms that was primarily first, second, and third quarter up, and then consumer was typically Q3, Q4, so we would see this bizarre seasonality.

So it's hard for us to predict.

But I can tell you this: if you listened to the Analyst Day, the nice thing is we've got a stable business that we're focused on with these other initiatives which are our growth vectors.

And with the stability of the base business being a little bit more predictable than we had, we should be okay with the OpEx spending targets that we got.

So as long as we're hitting the target that we have, we should be able to be returning the right EPS that we're trying to achieve.

So, that's really it, is we're not going to see, I don't think, the big swings that we saw in the past and we've not included big handset wins out in our future.

So if those come along, those will be upside; then we won't be spending towards those.

Great.

Thank you very much.

(Operator Instructions).

Bill Dezellem.

Would you talk a little bit about the silicon image business, as it remains, and how it now fits with you strategically?

If you think about what I mentioned about vision and some of those things, especially with artificial intelligence, it fits quite nicely.

And the reason is all of the video IP that we got from that merger or that acquisition was super-important for us to be able to [deck] and also do recognition features.

The nice thing about that IP is we're able to put that on to an iCE device, being our smallest device, and actually do facial recognition for mobile handsets.

That's something nobody else on the planet can do.

So those are the types of opportunities that we have that have given us the capabilities both in our small, low-end products like iCE, and then our mid-range products like XO2.

In the higher-end detection, we can use more comprehensive or complex IP to run on our higher-end products like ECP5.

That gives us quite a bit more recognition and detection capability, but at a much higher value.

So again, from the lowest-end device that we sell for around $1 or less, to the higher end device which are double-digit, we've got some pretty good solutions that are all based on that video IP that we acquired.

From the actual business itself, it has gone down quite a bit.

However, we do have some new products that are HDMI 2 point -- whatever, I'm not supposed to give you the name of that.

But the next version of HDMI has an audio application to it that can be rolled out now.

So we do have products that are rolling out in the AVR equipment space that are based on the next generation of HDMI.

So you will start to see a lot of those products rolled out.

So we will continue to offset some of the declines with the new business that we have.

But the big TV volumes that we had, we're not going to be selling products for anymore; we will be selling IP.

That is helpful.

And --

Hey, Bill, real quick.

Before -- the other thing we should mention is on the wired business, that's really the discussion we had.

But there is a wireless aspect.

It's pretty big growth going between 2017 and 2018.

And that wireless aspect is a nice [one] because it's split between virtual reality phones, both the new ones and bigger ones that are coming on.

We also have projectors and stuff like that that we've always done with [YHD].

But more importantly, we're in one of the big handsets for the wireless USB.

So that's the connector to the camera to the phone in the Essential phone.

So that's been published, and we are the wireless USB connector in that.

So, the wireless has actually turned out to be a really, really nice business.

It's on a good growth trajectory; whereas the wired business, with the HDMI standardization, has been fairly disappointing for us.

And at one point, there was a thought that you could be migrating from the programmable components that Lattice traditionally had to the ASSPs that Silicon Image historically had.

To what degree is that developing or not?

Or where do you see that from a futuristic perspective?

So one of the products that we did outline was called CrossLink, which you've seen a lot of PR on.

CrossLink is a programmable ASP, one of our fastest-growing devices, and it's built around the MIPI standard to LVDS and some of the other things that we're doing.

And you'll see more products like that roll out from Lattice.

The issue we had is some of our fabric speeds on our older products weren't fast enough to be able to deliver the IP for solutions like 4K 60 or other things, so we're working on that.

However, that doesn't stop us because there are products that we are currently in using FPGAs inside of digital TVs based on the relationships.

So on one side in the lower end, we're able to take the IP we got from Silicon Image and automatically put that into our video bridging products.

On the other end of the spectrum, we do sell FPGAs now into the digital TV market in companies in Japan.

Great.

Thank you.

(Operator Instructions).

Charles Loving-DeCoster.

I'm calling in for Richard Shannon, and I just have a couple questions.

First one has to do with something you brought up called mask costs.

We were wondering what the mask costs are.

And we're not sure -- or why are they excluded from OpEx is I guess the question.

This is Max.

So mask costs are, generally speaking, the costs when we tape out a product, right?

What we spend with the fabs to do a tape out.

From the perspective of our expense profile, we do incorporate -- mask costs are part of OpEx spend, and will be recorded as such.

But when we're talking about our cost structure targets, we're excluding mask costs from those targets simply because they tend to be fairly variable from quarter to quarter, and not necessarily part of the underlying cost structure that we're really trying to drive down.

What we don't want to get into is a scenario where we're pulling in or pushing out mask costs unnaturally from when those projects are completed to retain some degree of predictability with OpEx.

So we're sort of forecasting those a little bit separately.

Does that make sense?

It does, thank you.

And I have one more question, if I could, regarding your communications and computing business.

Could you provide any color on what -- how much that business could grow in 2018?

It will be fairly modest growth.

Because, again, remember that we did have a peak of communications in 2014, and it's kind of tapered off after that.

However, there's a bunch of things that convoluted that in 2016 and 2017.

Remember there was a government thing on ZTE and Huawei, and so there was a lot of things that were moving around.

But I think we have reached stability of both of the Chinese customers today.

We expect that to grow probably in the teens, primarily driven by computing more than communications, because communications is going to come back up and kind of level off to the stable rate.

And then you'll see computing give it an uplift.

So we don't see that as dropping like other years, because in the past years you've seen communications drop pretty steadily.

And now we see this flattening and coming back in the teens growth for 2017 to 2018.

Great.

Thank you for answering the questions.

I appreciate it.

(Operator Instructions).

And there are no further questions at this time.

We'll turn back to Lattice CEOs for closing comments.

Okay.

Thank you, operator, and thanks again to everyone for joining us on the call today.

Clearly the past couple of years have been both interesting and challenging.

Our team stayed committed, made some tough decisions, and created a plan for ongoing success, including generating cash, paying down our debt, and increasing the shareholder value.

So I'm extremely proud of what the Lattice team has accomplished over the last couple of years.

It's been almost a year since we've talked to you guys.

So again, thanks for joining us today.

And, as always, we appreciate your support.

Thank you.

And this does conclude today's conference call.

You may now disconnect.