Lattice Semiconductor Corporation (LSCC) Q2 2016 Earnings Report, Transcript and Summary

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 released, please e-mail Global IR Partners using LSCC@globalirpartners.com, where you can get a copy of the release off of the Investor Relations section of Lattice Semiconductors website. Please note we have published a PowerPoint presentation on the IR site to accompany today's call. Before we begin the formal remarks, I'll 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 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 January 2, 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 today's 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 asses our 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 that the required presentation of in reconciliation to the most directly comparable GAAP financial measure is in the Company's earnings press release. 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 an accepted stage for accelerated growth in Q3 and Q4 due to our design wins in the consumer multiple segments. Revenue came out as expected, gross margin was slightly above the high end of the expectations; OpEx was lower than Q1 but higher than we wanted, for sure. We continue to advocate on our plan to significantly reduce OpEx as we expect to end Q4 in the low 40s. With a significant revenue ramp in Q3 and Q4, we will leave Q4 at a run rate at 2017 as a solid financial year of further revenue growth and increased earnings. From our level, our Q2 takeaways are: we're executing on our Tier I OEM ramps. We had high expectations early in the year around various consumers OEM wins. We won where we said we would, and those wins are ramping as expected. So we saw a small benefit in Q2, and we will see a 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 requirement 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 in 50% more than that at times, but it does reinforce to our customers that not only do we have a great programmable low power small form factor device but you can also count on us to deliver them in high volume, high quality. Finally, these wins validate the strength of our FGA 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, we'd focus on integration, with revenue synergies starting later in Q4. Everyone was aware that the top line suffered and some of the business dropped off a cliff in Mobile and HD TV market in the high end was in thaw. The important thing is we're now seeing the other end, expected revenue synergies that we planned for; these are coming in the form of diverse wins we leverage our broader stronger solutions portfolio. Many of these wins are multi-year deal that helps us stabilize our base business off the consumer. The highlight of our integration is cross-market, which we mentioned in our Q2 press release. We're very excited about this product, it's the industry's first programmable AFFP interface bridge for mobile and sensors and display. We are leveraging the flexibility and vast time-to-market of FPGA and the power and functionality of optimized video IP and an AFFP to create the new product class called programmable ASSP, or PASSP. Crosslink is the first product in the new category. Aloha video interface bridge with the highest bandwidth, lowest power, and the smallest footprint. It's terrific for virtual reality headset, drones, smartphones, tablets, cameras, wearables and other human machine interfaces. Interest was high out of the box, we've 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 XO 3 design wins at that the two largest North American servers [ph]. These ones are significant as we've proved that we can continue to provide the lowest cost for IO devices as low voltages and some of the smallest form factors in the industry. Even in the server and computing market, things are getting smaller; our XO2 by the North American coms processor technology company eating out the customers internal solutions for IO expansion bridging and group logic. Again about a better value for the buck or in this case, a better value for higher IP [ph]. In Asia-Pacific, we're gaining traction across the board in mobile servers, drones, displays and virtual reality. So some of these markets aren't big yet, there are some interesting trends going on here; high speed, high resolution in camera technologies in this space will be driving the next-generation of standards. So primary expectation here is double what you see in HD TV market. Video is everywhere which will progress video expertise to transmit and receive along with bridging devices to connect things and are compatible, we have all of that. We also had several major wins in automotive. The great products that are ideal for video and historic connectivity solutions; along with our traditionally bridging products. The good news here is that all the non-consumer products maintained are automotive capable and perfect for video solutions. Those solutions can be found in infotainment and in area where video capture and analytics are helping drivers to see better while parking and operating safely; after all, as far as I'm going to have fewer cameras and less video moving forward. Finally, we get out of the question about competition all the time. For winning new designs and gaining from our aggressive replacement strategy, a few areas we recently displaced the competition are in the end-market like servers, timing controllers are various interfaces that displays. Our strategy is to continue to 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 wanted to be. We continue to bear unforecasted expenses from the HDMI agency and professional services. These are which we can't 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've 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 and all aspects of our OpEx overtime. No more excuses on why we miss out that. Let me now turn the call over to Max for details on our financial results. Max?

Thank you, Darin. As part of our press releases today, we've provided detailed reconciliations of our GAAP to non-GAAP financial measures. For the second quarter of 2016, revenue was in line with our expectation at $99.2 million. When compared to our 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, still quite strong and consistent with our expectations. Our gross margin did degrade slightly from the first quarter, principally as the 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 and 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 was $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 choose to take out a full production mass during the quarter. And third, we incurred incremental project specific professional service cost in legal IT and accounting. For the 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 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 basics and diluted share. On a non-GAAP basis, our net income was approximately $164,000 or $0 per basic and diluted share. For the quarter, basic and diluted share account 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 in advance of consumer shipment 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. I will 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 2016 is expected to be approximately 52%, plus or minus 2% of both the GAAP and non-GAAP basis. Total operating expenses for the third quarter is expected to be approximately $57.9 million, plus or minus two on a GAAP basis and approximately $45 million plus or minus two on a non-GAAP basis. As noted earlier, we are committed to driving OpEx lower and focused on exiting this year as a low target level run rate. We are confident that we can achieve our goal 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 a momentum we anticipated we would clarify 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 spending. All of our efforts in 2016 will translate into more leverages 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 about various shareholders that they don't see loud out and above enough, I can tell you more trying to avoid just 2015 and early part of 2016 took a ton of heavy lifting to get us where we are today. And he also took more of my focus than the clock. All that being said you can expect to see us more visible in the second half of 2016; we will be at Jefferies in Chicago in August, Credit Suisse in New York in September, and plan to head Boston, Delaware, as well. We are understandably excited about our business and outlook and looking forward to sharing our story in person for the coming month. That concludes our prepared remarks. Operator, we will now be happy to take any questions.

[Operator Instructions] Your first question comes from the line of Tristan Gerra from Baird. Your line is open.

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

Can you hear me?

We can hear him now.

Question on the Q3 revenue guidance. It we exclude our assumption of your small sales 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 is apparently bringing a little bit of that in terms of year-over-year comps?

So the core business is actually fairly stable, Tristan, and a lot of the growth is from our continuing mobile rent. Is that what you were alluding to, or what was your question specific?

Yes, 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 for 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 is there anything in the core business that is declining, if you could bring any color around this.

I think throughout the year, if you look at our midpoint guidance, and you look at kind of the 40/60 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 have put in -- we've put in a fairly conservative plan on the 110 to 115, so the only other softness that's in there is really the DTV, 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 doesn't -- the sustain is growing slightly and then the consumer players on top of that.

Okay, thanks for the color. So if I -- you know, I mentioned the press release that your FPGA shipment taking home 1 million units a day, in Q2, in the past, the decline was less classified than PGA. Is that a number that you provide for a PGA unit including any ice folding and if you could give it, and if not, could you give us what year-over-year comps look like?

Yes, so I think there's a little bit of confusion on what FPGA and not. Both ice and XO2 are considered FPGA, but they can also be categorized as more of an advanced DPLD, we categorize as FPGAs and that's for when we look at the consumer FPGAs market we believe that we were able to create. iCE has been one of the big driver of that unit volume for the last three to four years, back in Samsung we were shipping on those types of volumes, and very consistent with what we're shipping today. So it's not that different and we can hit some time to time -- you can hit 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 pulled through. So what you ship to build the inventory and the inventory they need -- can the not exactly linear there's days where it has a million and a half but I gave you on the numbers million, kind of average actually Q2 above the average we were per day in Q2.

Great, thank you.

[Operator instruction] Your next question comes from the line of [indiscernible]. Your line is open please go ahead.

Good evening. Thanks for taking my question. So a couple of questions for me first, so industrial surprised upset, so if you can provide some color on what's driving the up performance in that segment. You know judging by your gross margin guidance, I first thought that we would expect that somewhat 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 simply inventory is coming back to normal levels but are you seeing a recovery may be driven by somewhere trend on their way up.

Yes, I think -- I think we started to focus on industrial about three to four years ago, where we really went out and just double the opportunity funnel if we could and that should translate into more business, that's one of the things we did. the second one is we're getting a little help from the macro environment and there are some one out of production and conversions that we're going through also, but we actually modeled in for Q3 to be flat, European just to be flat, but we are seeing some support from the macro and the design lines and we believe in artifact of the past two or three years. so I mean next end to that I think industrial is up primarily because of our focus on it, and because we're finally getting some macros, we knew it wouldn't stay at that giant rate we saw in Q1, remember Q1 had a big spike and we didn't think it was going to be continued and it hasn't.

Okay. So if we can summarize to a few words you would expect this trying to be sustainable at least for a few quarters.

Yes, I mean I think it's just depends a lot on the macro, I think three is something that is going to involve in a little bit, might be a Brexit thing but we haven't really seen any indication that from our data. Yes I would say it's going to grow maybe at whatever the market rate is, little faster for us because I think that the design momentum and some of the macro stuff that helped us, we were pretty lean for many, many years. If you go back, our numbers fell off almost $10 million in a quarter as we go back to 2015, from where we originally anticipated.

Correct. OK, that's very helpful. My second question it's related to licensing those app [ph] in the quarter against a price to the upside. Just wondering if this is associated with any type of catch up payments. On the H.D.M.I. side. And or if -- I probably missed it in your commentary but simply there something else happening that we should be able to see licensing to grow you know over this year.

Yes, the way it works is there's a -- there's a very stable loyalty business that we have and it's been stable for the last year and a half, two years and it's pretty stable all the time, there's a pattern cells business which essentially had zero pattern cells this year so we don't have any pattern cells take in. so that with all the upside if we did something and going to be up-side to the plan, but I think where you're eluding to there's a flexible or kind of a moving part in there called a IP core cells and I think it is going to be upside to the plan, and that IP core cell is about taking the core developed from an HTMI you know whether it's -- I won't give you the number but different numbers of HTMI course that we sell various companies and those are large companies that one are IP because it's best in class, and so those things become a little bit skeptical over time and so there's quarters where it's lower than it is other quarters and Q2 was higher than it was in Q1.

Okay, I think those are all the questions for me guys, thanks lot.

Your next question comes from the line of [indiscernible]. Your line is open, please go ahead.

Great thank you. I was curious want to talk about the large OEM ramp that is 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.

You -- would you like to add any color around that.

No. that's the simplest answer I can give you.

Okay, I won't push, also want to ask about obviously Altera was taken on by Intel about I guess it's eight to nine months ago now, what benefit are you seeing from that combination, are you seeing benefits from that.

Yes we are. I mean there -- I look at as some industry, maybe even pension but there's like Tikhon's [ph] where you've got a zillion different displays out there, different sizes, and then you got a Tikhon [ph] to keep on highly controller and what ends up happening with the displays is they're trying to manage those displays and they could be different sizes that are seconds or thirds or something and put FPGA programmable logic device in there and they can't manage that. So we actually displace you know one of the suppliers and our Tikhon technology on with some of the display panel themselves, there's opportunities within that interfaces with the panel, and then finally in the server market reaction is up with quite a few design wins, and the server market just because you know I think they -- 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 maybe in the server market they could be in the high end market it could be distracted but when you talk about pure server IO expansion we have the best product on the planet.

Great, thank you.

[Operator Instructions] Your next question comes from the line of Pardee Ho from Everbright Securities. Your line is open please go ahead.

Hi, Darin and Max, how are you? Congratulations on the resell and I guess my question gets are kind of along the lines of a previous analyst. So I understand that your strategy is different from Altera and -- but I would like to know your opinion on how FPGA. Plus a CPU could benefit -- intelligent at applications. Thank you.

You are talking about FPGA plus ASP a program.

CPU.

Think about it this way you know David Rutledge [28:40] thoughtful times about -- computing and it's a perfect place where you can take a smaller microprocessor or even microcontroller and we have tons and tons of IOs or different acceleration that you need, because remember FPGA acceleration better than anything, what people are starting to find 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 with the cross-link product and that's a prime example of that were the high speed interfaces for all of those things but it also has a programmable logic so they can connect to any interface to any interface at the high state. So we're already beginning to do those much more specific than an ARM 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 ID is so significant that it's difficult to be able to do it in an FPGA pure fabric, right so you have to do an IP plus fabric to make the thing 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 it.

[Operator Instructions] Our next question comes from the line of David Duley from Steelhead. Your line is open please go ahead.

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

Primarily digital TV being soft and consumer mobile not be as large as we originally anticipated.

And the on the consumer mobile front is that just the big winners in as large as we thought -- add up to as much or you know any color that you can help us understand what the delta is would be appreciated.

It's just for the timing of the ramp, more than anything I think -- I think what's happening is there's timing elements that are forecast that ahead of time, you know for multiple of our wins and it looks like some of the ramps are pushing put for them we thought, so still should be holistic from a total perspective that will be the same but the timing is pushed up.

Okay. And if you have any 10% quarter customers in Q2 and will you have 10% customers in the third and fourth quarter.

First for the second quarter No we did not and for the third and fourth quarter most likely we will, Yes.

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

Sure absolutely consumer will be up that's obvious, communications will be an actually industrial should be up, Q3 verses Q2.

So basically all the segments are going to be up the consumer is going to be up the most.

Yes likely, I mean some of them are more slight than others but we're not expecting any of them to be down.

Okay, that's it for me thank you.

[Operator Instructions] And 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 for everyone for joining us on the call today, you know a lot of this is a great company, were there is great people, more capabilities and more companies are sized. We continue to be committed turning of capabilities in the growth and to deliver increase profitability. We can't do everything but we can do we have to do well. the size scale of our product portfolio given the considerable competitive advantages in the market adding to this our imaging expertise we tend to be crucial for the new virtual an augmented reality world where high performance video is and will continue to be the killer application, same solutions are also proving to be highly attractive in the automotive and also in other growth market, in the end is not rocket science it's all about the growing revenue and increasing earnings per share which is exactly what we're focused on. Thanks again for joining us again today. We appreciate your support as always. Thanks.

Thank you for participating. That does conclude today's conference. You may now disconnect.