Robert O’Brien – Interim CFO
Lattice Semiconductor Corporation (LSCC) The Wall Street Analyst Forum Call Transcript November 18, 2008 8:20 AM ET
Good morning. In our attempt to adhere to the published schedule, I'd like to introduce the first company in today’s program. Before I do that, I’d like to review a couple of administrative remarks associated with today’s program. As most analysts and portfolio managers here know, each company will conduct a 40-minute presentation and question-and-answer session, typically 25 to 30 minutes of presentation and 10 to 15 minutes of question-and-answer session.
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The first company in this morning’s program is Lattice Semiconductor Corporation. They are a global programmable logic company with over 750 employees and $225 million in annual revenue. Lattice has recently restructured to focus on identifying and pursuing programmable logic opportunities where it has sustainable and differentiated market positions. As part of the restructuring, Lattice had lowered its quarterly GAAP breakeven to $57 million, which the company has achieved in nine of the last 12 months.
Going forward, Lattice is building point of strengths, including embedded non-volatile technologies, low power green products, efficient SerDes implementations, and programmable mixed-signal leadership. There is a solid foundation upon which to build. Over the last ten years, Lattice has sold over 1 billion PLDs and FPGAs. Its New products are the fastest growing in the industry and liquidity is strong. So – wherever you are, you should chit-chat for me. I’d like to introduce Robert O'Brien, Interim Chief Financial Officer, and he is accompanied by Bruno Guilmart who is the Chief Executive Officer of the company.
Good morning. I’d like to draw your attention to our Safe Harbor statement. And I’ll give you a few minutes to read that through, maybe just one minute should be enough. Okay. Let me start with an overview of Lattice Semiconductor. We are actually headquartered in Hillsboro in Oregon, near Portland. The company was founded in 1983, and we have 750 employees around the world. Our annual revenue is about $225 million. And we do have a global presence. We have R&D centers in four locations in the US and also in Shanghai, China. We are a fabless semiconductor company that we will do outsource all our manufacturing to sub-contractors in Asia. Therefore we don’t have our own manufacturing capability.
From a sales perspective, we’ve got 30 direct sales offices in US, Europe, and Asia, and we’ve also got 45 manufacturer’s reps and distis around the world. We’ve got all the world-class quality certification; ISO 9000, ISO/TS 16949, which are for automotive applications, and AEC-Q100. In the last ten years, we have sold over 1 billion programmable logic devices and FPGAs.
So the key message – the key takeaways for today is, especially in the current environment, we have very strong balance sheet. We’ve got strong liquidity. We’ve got $69 million of cash and equivalents. We are GAAP cash flow positive. We generated $25 million of cash year-to-date. And we’ve got about $163 million of total liquidity. And I’ll come back and speak of that in the next couple of slides.
We’ve also taken a number of steps in the last quarter to address our cost structure. And we now have a new cost structure in place, where – which will enable us to break even at about $57 million per quarter, which is a revenue we have achieved in nine of the last 12 quarters. It also will allow us to the flexibility and to provide to consumer (inaudible) not only intensive business, it will allow us to continue to invest for new products going forward.
Our New products also are continuing to gain traction. They grew 42% quarter-on-quarter and 110% year-on-year. And they are now larger than our Mature products. You will see in the coming slides that we categorize our products into three different buckets; Mature products, Mainstream products, and New products. Last quarter was the first time ever that our New products are larger portion of our revenue as our Mature products. We are focusing on programmable logic opportunities where we can have sustainable and differentiated market positions. And I’ll explain it a little bit later on what that means.
So, coming back to our liquidity, we’ve got $68.6 million of cash and cash equivalents, but we do also have $94.4 million in what we call a Fujitsu cash advance. Fujitsu is our foundry wafer fab supplier for all our advanced technologies and we do have prepaid silicon at Fujitsu. So when you combine this prepaid silicon that we have on our own cash and cash equivalents, we’ve got about $163 million of the total liquidity. And at the same time, we also have pretty strong cash generation from operations. In the last quarter, third quarter ’08, we generated $5 million of cash from operations and year-to-date of $24.7 million.
Balance sheet, little bit more granularity on the balance sheet. As you can see here, we have no debt on the balance sheet. If you want to reconcile the $163 million liquidity, you will find that the first line item here in cash and short-term investments of $68.6 million. Other current assets of $33 million include about $17 million or so of this Fujitsu prepayment. And then you can see here from the investments, advances, and other assets of $76.7 million. This is the Fujitsu prepayment that I was referring to. So if you add up these three numbers together, you’ll come to the $163 million of liquidity. Zero coupon convertible notes, as I said, no debt. This is because we paid in early July, so we have a very strong, very clean balance sheet.
Lattice is currently non-GAAP profitable. If you look at the third quarter ’08 here, we had an operating loss of about $6.2 million. And that was inclusive of $3.9 million of restructuring costs. And if we now rationalize everything on a, I would say, first restructuring on a normalized 13 weeks quarter of expense, it gives us the new cost structure, gives us the ability to break even at about $57 million of revenue on a GAAP net income basis.
But I don’t want to reemphasize that if we back off the amortization and restructuring, the non-cash equity compensation and impairments, the company has been non-GAAP net income profitable for the last three quarters.
This is just a graphical illustration of what I was mentioning regarding our breakeven points. We’ve restructured our cost structure to break even at $57 million. And as you can see from this slide, we achieved that level in nine of the last 12 quarters. And so we believe that we are better positioned going forward.
From a New product perspective, we have achieved 23% quarterly growth on a casual basis. As you can see, substantial growth on a year-on-year basis and we are seeing a lot more traction from these New products. And for the first time ever, you can see here the breakdown of Mature products I was mentioning, which tends to be products that are ten years or older; Mainstream products, which are usually products that have been developed in the last six or seven years or introduced to the market in the last six or seven years; and then New products, which are the products that have been introduced to the market in the last few years up to now. We now have for the first time a larger proportion of our New products than we have of our Mature products. So New products have crossed the tipping point and are now larger than the Mature products. And again, as I mentioned earlier, they grew 42% quarter-on-quarter and 110% year-on-year.
So where are we going as a company? We are focusing on identifying and pursuing programmable logic opportunities where we have sustainable and differentiated market positions. We have a number of platforms that have very good acceptance and traction in the market. And we intend to build on our strengths; for example, embedded non-volatile technologies, low power green products, efficient SerDes implementations, and programmable mixed-signal leadership. So these are the four areas where we are going to keep building on our strengths. And we remain committed to providing customers – our customers innovative products and excellent service. And we are committed to the programmable logic market. In the last year we have shipped over 90 million FPGAs and PLD products around the world.
In order to be a lot better focused, we have restructured the company to be a lot closer to our business. We have, obviously, corporate functions. But from a business perspective, we have two areas of focus; High Density Solutions and Low Density and Mixed-Signal Solutions. High density solutions tend to be more complex products, usually used in the communication – mainly in the communication market segments. Low density and mixed-signal solutions are used in broader range of applications such as consumer, computing, also communications.
So we have, I would say, put the structure in place so that we can have the proper focus, increased efficiency. We have a central R&D function that serves our two high density solutions and low density and mixed signal solutions. And we have a focus on manufacturing operations, as I mentioned earlier. We are a fabless company, therefore, this is really a supply chain, I would say, organization more than truly manufacturing as we do outsource pretty much all our manufacturings to sub-contractors in Asia. So this organization enables us to provide the right level of focus in key markets and applications.
From a product perspective, on the low density products, we have really two main product platforms. The 4000, which tends to be fairly simple products used in a number of applications and end markets, and we’ve introduced in April of this year a 4000ZE, which is a fairly low power version of what we had in the past. It has some enhanced features. And we’ll have a next generation Mach product in the coming quarters to address you in lower power requirements of some specific applications.
Then if we – the other hand of the spectrum, we have the XO [ph], which is slightly higher performance addressing, I would say, slightly different applications and market segments. We’ve introduced in 2005 the XO products. And we are going to introduce in the future XO+, which is going to be an enhanced version of our XO, and then XO2, which will have even added functionality and slightly higher density than our current XO product. So that’s the low density product roadmap, again addressing fairly broad number of applications going from communication, consumer, computing, and so on.
On the high density roadmap, if you are a little bit familiar with FPGAs in the ‘90s, they started as very generic products. And really the differentiation was based on the density. Again, if you are – programmable logic devices are devices that are programmable to address to program or customize with some number of logic functions using one piece of silicon. So there is a number of things that are part of this solution. There is a piece of silicon itself that you also need to have the software tools to program that silicon as well as IPs, intellectual property, which can be third-party IP or even our own IP dedicated for some applications. It’s fairly different, which is why these products usually have a fairly high density [ph] because of the software tools. If you (inaudible) to a DSP, if you had that one before, DSP is programmable by software via FPGAs. It’s the hardware that you provide. So it’s not – you know, it’s a very compact device.
In the 2000s, we started to see a little bit of differentiation on the FPGAs. They tend to be slightly less generic, but still very much generic, and categorized into three broad families with some DSP function, memory function, and also the density that how big –how much function that you think you can put in this chip, unless we are seeing happening in the kind of environment is lot more visualization focus on key vertical markets. A company of our size, it’s very difficult to address everything. So we need to remain extremely focused. And our strategy is to deliver optimized FPGA solutions for specific vertical markets that you are seeing here. So we are in the midst of finalizing, I would say, our plan and should be achieving very specific vertical markets that we are going to address from a two-door [ph] solution perspective.
So what that means is, as I mentioned earlier, provided the logic, FPGAs are a lot of things that are part of the solution. Right? Obviously, the silicon itself. And as we get more focus into some specific vertical markets, we will have market specific functions on silicon to, I would say, diversify or differentiate ourselves from the third generation FPGAs. But at the same time, we need to have very good system and [ph] that silicon to make it work. So it increases partnership with some semiconductor companies, increases also having the proper partnership with third-party intellectual properties, which can be software, soft vertical [ph] soft IPs, and also our own IPs. We do develop our own soft IPs that can be integrated into the FPGA design.
We do have the software tools, ispLEVER, which are the integral part of the solution to be able to have working products. And also very important going forward are our evaluation boards and also reference designs that will let the customers to always copy the entire applications and put that into their more specific applications. So this is really a, I would say, a competitive system that you really build around the silicon to address and make it successful in this vertical market.
So, as a summary, I just want to reiterate one more time that we’ve got a very strong balance sheet; $69 million of cash and cash equivalents. We are GAAP cash flow positive, $25 million year-to-date. And we have a total of about $163 million of liquidity. We have addressed our cost structure. We now have a cost structure in place that will enable us to break even at around $57 million per quarter. And we’ve achieved that revenue nine of the last 12 quarters. And this will give us the flexibility to adapt depending on the business condition as well as the continued investments going forward. Our New products are gaining traction. They grew 42% quarter-on-quarter and 110% year-on-year and they are now larger portion than our Mature products. And we are focusing on programmable logic opportunities where we have sustainable and differentiated market positions.
So that’s it for this little overview about Lattice Semiconductor. I’d be happy to open it for Q&A if you have any questions about our company or our business. Thank you.
How do you see your markets – your primary markets change in three to five years, and how would you get (inaudible)?
The end markets – so if you look at the –
Can I ask you to (inaudible) webcast –? If you don’t mind repeating your question if that’s for the webcast?
Okay. The question was, how do you see the end markets changing in the next three to five years. So if we look at the overall logic semiconductor trend, there are really three main areas. There is the ASIC piece of the business. The ASIC piece of the business stands for basically application-specific custom semiconductor products, which typically are developed for specific applications by specific customers. The real work [ph] is that you have to pay upfront very large NREs, non-recurring engineering charges, unless they can be quite high. They can be $20 million, $30 million, $40 million upfront. They offer you the ultimate customization because you can really (inaudible) your specific application and that’s about $20 billion a ton or so.
The next, I would say, market as we look at ASSPs, which are standard products customized to some application, which (inaudible) obviously you would only have to some level do comprise because they are developed by large companies to address specific applications within specific market segments. And then the programmable logic gives you – it gives you the smaller tons, about $3.8 billion or so ton. It gives you the flexibility, but typically at a higher price. So what we are seeing is that because of the non-recurring engineering charges in the ASIC markets becoming higher and higher, we see an opportunity for the programmable logic to grow and take portion of this space as well as if we get to the right price point also penetrate some more application-specific opportunities, which is what I was talking about in my presentation, instead of having a very generic product, try to be and target more specific market segments by having products that are dedicated to vertical market solutions revolution that we are seeing in the marketplace. And we believe that pretty sure [ph] the programmable logic space was very communication intensive. And we are seeing now a shift towards more communications. It’s a very important market segment for us. But we are seeing more, obviously, demand and traction into areas such as computing and also consumer – higher hand consumer like displays and so on. Okay? So this is what the dynamics I would say that we are seeing for – which is going to be reinforced in next three to five years. Yes?
Who are the competitors? And what’s your current market share? And what’s your projection for the next three years?
Okay. So the question was, who are our competitors and what’s our current market share and projection for the next three years. I can’t give you a projection for the next three years. But as far as competitors, the two large competitors in our space are Xilinx and Altera. And there is also another company called Actel, which is pretty similar to us in terms of size, likely smaller. And so that’s basically the, I would say, three, four major players in that space. Okay? As far as our market share, in terms of the low density products, that’s complex products. We are number two in terms of market share with roughly about one-third of the market. And we are smaller I would say in the FPGA space, which is a market we entered only fairly recently, in the last five, six, seven years, and it takes time to get into that space and build momentum. Yes.
What’s the one or two things that you keep you up in night?
Besides what’s in the news everyday, well, obviously the challenge – I mean, we have a challenging economic environment. And I think – I keep reinforcing to the entities [ph] is there is really not much that we can do about these outside forces, and it’s very important to stay focused on the business. And we have the balance sheet to weather the storm. We know these up-cycles, it will come back. It’s a matter of time. And for us, it’s really a matter now of focusing on our strategy and executing on having products which are going to be more focused going forward and emerge as a stronger company as ever. I mean, so this is really – this is the message. Obviously, there are a lot of challenges in the environment today in the economy, not only here in the US, but also in Europe and Asia, it’s everywhere. That keeps me awake at night basically. Okay. Thank you.
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