Lattice Semiconductor Corporation (LSCC) Q4 2008 Earnings Report, Transcript and Summary

Good evening. My name is Kara and I will be your conference operator today. At this time, I would like to welcome everyone to the Lattice Semiconductor fourth quarter 2008 conference call. (Operator Instructions) I would now like to turn the call over to Rob O’Brien, Interim Chief Financial Officer. Sir, you may begin. Robert W. O’Brien, Jr.: Thank you and good afternoon, everyone. This is Rob O’Brien. Joining me on the call today is Bruno Guilmart, President and CEO. Before we begin, I’d like to read a safe harbor statement and then give a financial review of the fourth quarter. After that, Bruno will provide a business review followed by our first quarter 2009 business outlook. We’ll then hold a question and answer session. I’ll now begin by reading 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 first quarter of fiscal 2009. 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 publically announced conference call. The matters that we discuss today other than historical information include forward-looking statements related to our future financial performance and other performance expectations. Investors are cautioned that forward-looking statements are neither promises, nor guarantees that 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 2008 Form 10-K filed in March of 2008 and our quarterly report on Form 10-Q. The company disclaims any obligation to publically update or revise 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. Such 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 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 and reconciliation under the most directly comparable GAAP financial measure in the company’s earnings release. Now, what I’ll do is go over the financial review for the fourth quarter. Revenue for the fourth quarter was $50 million. That’s down 14.3% from revenue of $57.6 million in the prior quarter and down 5.8% from $53.1 million reported in the same quarter a year ago. Gross margin for the fourth quarter came in at 48.7% which was below our guidance and under the gross margin posted in the third quarter which was 54%. The sequential decline in gross margin was primarily due to a charge to cost of sales for the obsolescence of selected inventory parts and to a lesser extent, product mix. Bruno will provide guidance later in this call. We anticipate that the gross margins will return to recent historical levels next quarter. Total operating expenses excluding intangible assets, amortization and restructuring expenses for the fourth quarter came in at $29.4 million, $2.7 million lower than the $32.1 million reported in the third quarter. The lower quarter-over-quarter operating expenses were primarily the result of reduced labor costs related to our 2008 restructuring plan initiated at the end of the third quarter. Quarterly R&D expense came in at $15.5 million which was lower than the $17.5 million reported last quarter and quarterly SG&A expense came in at $13.9 million. That was lower than the $14.5 million reported in the third quarter. The company reported a $0.3 million restructuring charge for the fourth quarter primarily related to the cost associated with the 2008 restructuring plan that I just mentioned and is now substantially complete. Intangible asset amortization was $1.4 million for the fourth quarter and will be $228,000 in Q1 of 2009 after which we will no longer incur this charge. In the other income category, in our income statement, you will see a $-7.6 million and $-1 million for the fourth and third quarter, respectively. During the current quarter, we recorded an $8 million retirement charge compared to last quarter’s charge of $1.4 million. Both charges were related to an other-than-temporary decline in fair value of auction rate securities. I will provide more detail on our auction rate securities later during this call. We recorded a tax provision of $102,000 during the fourth quarter primarily the result of income at our foreign operations. The company has the benefit of significant net operating loss carried forth and therefore, we do not expect to pay U.S. federal income taxes in the foreseeable future. The fourth quarter GAAP net loss was $14.4 million or $0.12 per share as compared to a $7 million loss or $0.06 per share we posted in the third quarter. The fourth quarter results include total charges of $10.7 million for an impairment charge for other-than-temporary decline in fair value investments, the amortization of intangible assets, a restructuring charge and stock-based compensation expense. If I exclude these just mentioned charges and expenses, our non-GAAP net loss was $3.7 million in the fourth quarter and it compares to a $1.4 million positive income posted in the third quarter and a $1.7 million loss posted in the comparable fourth quarter last year. In Q4 of 2007, you also have to adjust out the goodwill and permit charges that we took. Our liquidity position remains strong and I’d like to summarize a couple points as it relates to Lattice. First, GAAP cash flow from operations for the three- and twelve-month period ended January 3, 2009 was $2.4 million and $26.9 million respectively. Included in these amounts are draw-downs from our cash advance to our foundry partner Fujitsu of $3.3 million and $16 million, respectively. Second, as of January 3, 2009, we had $69.5 million in cash and cash equivalents in short-term marketable securities. Third, we have a remaining benefit of our cash advance which is a total of $91.6 million at the end of the fourth quarter. Of this amount, $60 million is recorded as an other receivable. Fujitsu has agreed to pay us in two installments of $30 million in Q2 and Q4 of 2009. The remainder will be returned to us in the form of wafers and other services that we will completely utilize. When I add these items just mentioned up, our total liquidity position remains strong at $157 million at January 3, 2009. We have no long-term debt. In addition, not including the $157 million, we have auction rate securities that I mentioned earlier in the call with a fair value of $19.5 million which represents approximately a 50% discount to par. Due to the liquid markets for these types of investments, these auction rate securities are classified as long-term assets under long-term marketable securities. The auction rate securities market remains weak with auctions that continue to fail and we expect downgrades to our auction rate securities holdings. As a result, we recorded an additional other-than-temporary charge in the fourth quarter of $8 million. For the year, we have charged off a total of $19.7 million. Accounts receivable at January 3 were $26.4 million compared to $29.9 million at the end of last quarter and days sales outstanding was 48 days. That’s up 1 day from last quarter but better than the seasonal comparable Q4 2007 50 days. Inventory at January 3 was $32.7 million, a decrease of $3.1 million from September 27. This represents our lowest levels since Q1 of 2006. Months of inventory now stand at 3.8 months compared to 5.1 months at the end of Q4 of 2007. We spent $1.6 million on capital expenditures during the fourth quarter and the quarterly depreciation expense of $3.3 million down slightly from the prior quarter. Deferred income at January 3 was $5.7 million. That’s down $1 million from the prior quarter. This concludes the financial review portion of the call and I will now turn things over to Bruno for a business review.

Thank you, Rob. It is clear that we are in very challenging times, not just for the year, or the semiconductor industry, but for the entire world wide economy. In the midst of uncertainty, I am pleased by both Lattice Semiconductor’s credit position and our ability to manage our cash flow even in this difficult revenue environment. Our strong balance sheet has given us the ability to ascertain different ways of increasing shareholder value. For example, last quarter, we announced that our Board of Directors had authorized a $20 million share buyback program. We’re also ready to focus on optimizing our supply chain. Our analysis has found several ways to bolster costs of the supply chain and simultaneously increase our commitment to our customers. The dedication by our product operations team has been well and we initially announced last year to reorganize our business to better reflect our strategy going forward and achieve greater efficiencies. Let me give you a quick update on some of those initiatives. Our high-density team is finishing the work that will focus them on specific vertical markets where we believe our different shared technology strengths will leave us in a favorable position going forward. Our low-density and mixing-up team is working to increase sales through deeper partnerships with our sales channels and is also developing a product roadmap that will re-assert our commitment to markets where we have historic strengths and leadership positions. Our R&D team and our global centers of excellence are leading a rhythm of functions and focusing on the development of the most efficient and profitable accounts. Let me now give you some more color on our business this quarter. There were no material changes between any market segments on a sequential basis this quarter indicating to us that the softness we are seeing is across all markets. Last quarter, our industry saw another slight increase in its share of revenue as several military and aerospace accounts increased their purchases. Consumer saw a slight decline in its share of revenue as several American consumer companies scaled back. Consumer, however, as an expense, had the strongest year-over-year dollar growth of any segment growing 15%. This increase was driven by the success of the isp2-type product in that market. Revenue for [inaudible] was down. The performance in the Americas was better than other areas. The Americas posted only a single digit quarter-on-quarter decline where Europe and Asia each saw double-digit declines. In the face of a systematic industry decline, we did have some bright spots. As an example, in our largest chain of Japanese communication accounts, we are up over 15% quarter-on-quarter with double-digit gains in both our high-density and low-density products. Looking at revenue by life cycle, new products continue to claim an increasing share of our revenue. While our revenue from all product categories declined quarter-on-quarter, new product grew 3 points to 33% of revenue. Our new 30 Gbps ECP/2MX quick quill grew 10% quarter-on-quarter. Last quarter, ECP/2M showed particular strength in the Americas and in Asia. In November, the ECP/2M FPGA Infinity was again recognized by the technical community when it won a prestigious EDN China award as a leading programmable logic product. Despite poor performance on our SD products, we also were recently recognized by the technical community winning Product of the Year – Best System Interconnect Element from the EN-Genius Network. Our XP2 non-volatile FPGA grew over 5% last quarter driven by its adoption in the consumer segments. Our MachXO non-volatile PLDs also posted slightly better growths last quarter continuing to get traction in both the Americas and Asia. Revenue from our mainstream products declined 17%, dropping from 44% to 42% of revenue. These declines were primarily attributable to lower demand for our 190 nanometer PLDs and our older SDSC products. Matching product revenue fell 18% quarter-on quarter and now it counts for 25% of operating revenue. Because of the lack of visibility in the markets, we have chosen to broaden the range of our revenue guidance on projects that tend to be 20% down on a sequential basis. We expect gross margins to trend to more recent historical levels of 52%-54%. We are planning an OpEx of approximately $28 million. First quarter ’09 is the last quarter of our intangible asset amortization. We will have a charge of $228,000 this quarter and then it will go to $0 in the second quarter 2009. As I conclude my remarks today, let me reemphasize several points. First, though the direction of the market isn’t clear, we face it with a solid balance sheet with strong liquidity and no debt and with a demonstrated ability to manage our cash flow despite revenue challenges. Second, it is our intent to capitalize on these downturns. Several of our key product lines offer strong value to customers. Our MachXO non-volatile family will be in profit mode and has versatile features such as embedded memory and PLS which are broadly attractive. Our ECP/2M family is the lowest cost FPGA which offers a relatively competitive price point. We believe that the completion of our high-density product focus and strengths of our low-density shareholder relationships will strongly position Lattice to emerge stronger and more competitive. Operator, you may start the question and answer session.

(Operator Instructions) At this time, I am not showing any questions. You may proceed with your presentation and any closing remarks. We do have a question from the line of Dan Berkley with O’Conner. Dan Berkley - O’Conner: What’s the timing during the second and fourth quarter of the Fujitsu receivables and what was the thought process on taking in the second and fourth quarter?

The timing was early in the second and fourth quarter, roughly in the April and October time frame. The rationale for holding back a portion, by the way, of that money was it was a better use of cash going forward, at the same time, maintaining strategic relationships with Fujitsu as our sole source for all of our advanced technologies. Dan Berkley - O’Conner: So making some assumptions on high levels of burn, you could have over $50 million of cash or I’m sorry, 30 plus the 50, $80 million of cash sometime in the middle of the June quarter, what are the priority uses of cash?

As you have probably also seen, we’ve announced our share buyback program for $20 million in December. So as we move forward, we may use some of that cash for that purpose, but the bottom line is given the current environments, we believe having a strong balance sheet is critical and we want to keep flexibility going forward with having plenty of cash given the current environment that we’re in. Dan Berkley - O’Conner: I assume if it wasn’t in the press release you didn’t buy back any stock in the December quarter.

No, we did not.

(Operator Instructions) There are no questions at this time, sir.

Okay. That concludes the call. Thank you, everybody.