Lattice Semiconductor's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Lattice Semiconductor (LSCC)

Lattice Semiconductor Corporation (NASDAQ:LSCC)

Q4 2013 Earnings Conference Call

February 6, 2014 17:00 ET

Executives

David Pasquale - Global IR Partners

Darin Billerbeck - President and Chief Executive Officer

Joe Bedewi - Chief Financial Officer

Analysts

Richard Shannon - Craig Hallum

Sundeep Bajikar - Jefferies

Matt Dhane - Tieton Capital Management

Tristan Gerra - Baird

Operator

Good afternoon. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the Lattice Semiconductor Fourth Quarter 2013 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)

This call will also be available for replay beginning at 6 o’clock Eastern Standard Time today through 11:59 Eastern Standard Time on February 20, 2014. The conference ID number for the replay is 34244513. The number to dial for the replay is 800-585-8367.

I will now turn the call over to David Pasquale of Global IR Partners. You may begin your conference.

David Pasquale - Global IR Partners

Thank you, operator. Welcome everyone to Lattice Semiconductor’s fourth quarter and full year 2013 results conference call. Joining us today from the company are Mr. Darin Billerbeck, the company’s President and CEO; and Mr. Joe Bedewi, 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 e-mail 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.

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 first quarter of fiscal 2014. 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 to 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 fiscal year 2012 Form 10-K and our quarterly reports on Form 10-Q. The company disclaims any obligation to publicly update or revise any such forward-looking statements to reflect events or circumstances that occur after this call. Our prepared remarks also will be presented within the requirements of SEC Regulation G, regarding generally accepted accounting principles or GAAP.

At this time, I would like to now turn the call over to Mr. Darin Billerbeck. Please go ahead, sir.

Darin Billerbeck - President and Chief Executive Officer

Thank you, David and thanks to everyone for joining us on the call today. With four consecutive quarters of revenue growth and our highest revenue levels in the past decade, 2013 was a great year for Lattice. We created a new fast growing market for our innovative low-power, low-cost FPGAs. We diversified our customer base while we continued to create compelling and defendable solutions in our traditional markets. We have made the jump from being a predictably slow 30-year-old CPLD company, to being an agile first mover in the exciting world of the internet of things.

We drove FPGAs in the consumer markets and executed our plan to ramp our products faster than ever before. The consumer mobile adoption of FPGAs was a defining moment for Lattice. Like we said at the last call, we changed the perception of FPGAs being big, expensive and power hungry. Our customers continue to see our tiny, affordable and ultra low-power FPGAs as offering time-to-market advantages and lower risk than using a traditional ASIC. The important differentiator of being reprogrammable also allows designers to quickly install even last minute design problems. From smartphones to tablets to anything with a battery, there is a world of opportunity for FPGAs, especially in the internet of things.

I was just in Asia last week and expect to see continued growth as we move through 2014. The pace of innovation shows no sign of slowing as also seen at CES last month. All things connected is becoming many things connected to the phone. The wearable trends are a reality as multiple suppliers enter that market. Smaller, lighter, zero-power connected devices create more opportunity for Lattice. And we don’t just focus on the consumer mobile market. It is clear that FPGAs are a perfect bridge in a world where connectivity and interfaces are critical and changing constantly.

What we deliver in the consumer mobile market, is quickly being adopted in the industrial, scientific and medical market. From video surveillance, to human/machine interfaces to small hand held medical devices, the opportunities abound and all can use the same best base technology we are building for the consumer mobile market. The communications and computing markets also remained important priority. Every product we have can be sold into communication infrastructure.

Our highest end products are squarely focused on providing solutions in the HetNet space. But once again small form factors, low power and affordability are must. In the computing space the trend stay also favors Lattice with the cloud embracing all things micro. From microservers to microserver farm the opportunities for smaller pitch packages, lower power FBKs continues to increase. I can tell you today that we accomplished what we set out to do and more in 2013. I am proud of our team’s accomplishments and thank our employees and partners worldwide. The impact of our success is seen in our improved results. We delivered revenue growth in each quarter of 2013, which for the full year up over 19%, the $332.5 million. Importantly our gross margin remains very healthy at 53.6%. We achieved a net income of $0.19 per share compared to a net loss for the full year of 2012.

Let me give you some additional data points about the year before turning the call over to Joe. Revenue from new products was up over 145% in 2013 to $152.4 million. Revenue from mainstream products declined about 8% to $143 million, while revenue from mature products declined 40% to $37.1 million. These results are consistent with the market trends in the first three quarters and this is also – this also reflects the mix shift in our business.

On a geographic basis, revenue from Asia, including Japan, increased 29% and represents 74% of the total revenue. Revenue from the Americas comprised 12% of the total revenue, was down about 5%. Revenue in Europe accounted for 14% of the total revenue, was down 2%. We are seeing signs of improvement in Europe. We expect Europe to continue to struggle in the near-term. On an end-market basis, industrial and other was about 23% of the total revenue in 2013 compared to 32% in 2012. Computing was 9% of revenue in 2013 as compared to the 13% in 2012 On a dollar basis they declined over 20%, 14% respectively year-after-year.

Communications represented 38% of revenue in 2013 compared to about 42% in 2012. On a dollar basis, communication revenue increased more than 8% year-over-year. Consumer increased to 30% of revenue in 2013 from 13% in 2012. On a dollar basis, consumer revenue increased 180% year-over-year. As noted earlier this reflects our successful strategy of ramping our ICE and XO2 product families into a market that did not exist in the past.

That concludes my initial comments. I will now turn the call over to Joe. Joe?

Joe Bedewi - Chief Financial Officer

Thanks Darin. Darin covered the full year highlights. Let me quickly run through Q4 for you. Revenue for the fourth quarter was $89.5 million, an increase of 2.7% from the third quarter and an increase of 36% from $65.9 million in the fourth quarter of 2012. Gross margin for Q3 was 54.3% compared to 53.2% in the prior quarter and 54.2% in the fourth quarter of 2012. Our gross margin improvement is largely driven by sustained product cost reduction. The Fujitsu process transition initiated in Q3 had a minor negative impact to Q4 gross margin. We expect costs associated with this transition to impact margins through the first half of 2014.

Our long-term gross margin target remains in the mid-50% range. Operating expenses for the fourth quarter came in at $40.4 million. This is approximately $3 million above the Q3 level and our Q4 guidance. Our fourth quarter OpEx increase was primarily driven by variable compensations resulting from higher than expected revenue in gross margin. In addition, we incurred approximately $800,000 in increased mass cost during the quarter. I want to point out that even with the fluctuations during the year our total OpEx for fiscal year ‘13 came in at $151 million, which is down $8.7 million from fiscal year 2012. The OpEx average was $37.9 million per quarter in 2013.

Net income for the quarter for the fourth quarter was $6.5 million or $0.06 per basic and diluted share as compared to net income of $8.8 million or $0.08 per basic and diluted share in the third quarter and a net loss of $7.2 million or a loss of $0.06 per basic and diluted share in the year ago period. We keep our 2012 loss included restructuring charge of $5.4 million. Q4 ’13 financial results included approximately $1.1 million of income tax expense resulting in an effective tax rate of 14.7% for the quarter and an annual effective tax rate of 15.7%. For the quarter, diluted share count was approximately 117 million shares. We repurchased approximately 830,000 shares at a cost of $3.7 million in Q4 and a total of 1.41 million shares and a cost of $6.1 million in 2013.

Operating cash flow were $56.5 million for the full year 2013 compared to $4.3 million for the full year of 2012. We ended 2013 with cash, cash equivalents, and short-term marketable securities of approximately $216 million continue to have no debt. Accounts receivable at year end were $50.1 million as compared to $53 million at the end of last quarter. Day sales outstanding were 50 days compared to 55 days last quarter.

The inventory at year end was $46.2 million compared to $42.3 million last quarter. This increase was fully expected and is due to increased this in our XO and XP family inventory in anticipation of end of life orders and an increase in ECP3 inventory related to specific future demand. As demonstrated throughout the past year, we continue to effectively manage our lead times, forecast demand for customer programs that are ramping and ongoing.

Months of inventory now stands at 3.4 months compared to 3.1 months at the end of Q3. We spent approximately $2.3 million on capital expenditures and incurred $5.6 million in depreciation and amortization expense during the fourth quarter compared to $3.4 million and $5.2 million respectively in Q3.

This concludes the financial review portion of the call. I am going to turn it back to over to Darin for the first quarter business outlook. Darin?

Darin Billerbeck – President and Chief Executive Officer

Thank you. Joe. In summary, Lattice exited the year on a high note and we expect to see continued demand strength as we move through 2014. We continue to focus on sustainable growth driving operational cost efficiencies, improving our profitability and increasing our shareholder value. In terms of our specific expectation for the first quarter of 2014, we expect revenue to be flat plus or minus 2% related to Q4. Q1 gross margins are expected to be approximately 53% plus or minus 2 points. Total operating expenses are expected to be approximately $38.5 million.

This concludes our prepared remarks. Operator, we’ll now be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Richard Shannon with Craig Hallum. Your line is open.

Richard Shannon - Craig Hallum

How are you, Darin, Joe and you guys doing?

Darin Billerbeck

Good, how are you doing Richard.

Richard Shannon - Craig Hallum

Doing just fine, I apologize for any extraneous noise I am in the airport, but there in a plane produce don’t hear. So dare with you when I get through these questions. I want to ask you first of all the fourth quarter had a very nice revenues obviously very strong in comms and industrial, I guess I would have expected gross margins maybe a little bit better than that, curious whether is there any customer mix coming from large customers in comms or something, help us understand why that wasn’t up maybe a little better?

Darin Billerbeck

You hit it right on the head, it’s a mix in large customers in comm something we talked about in the past.

Richard Shannon - Craig Hallum

Okay and Joe if you could repeat for us quickly the commentary end of your prepared remarks about the gross margin impact in the first half, was there also any impact during the fourth quarter as well?

Joe Bedewi

Well, you are talking about the Fujitsu transition, yes. We had a very small impact in Q4 to gross margin and negative impact to gross margin related to that transition of that process and we will expect the see some impact through the first half of the year.

Richard Shannon - Craig Hallum

Okay, perfect, guys that went by a little bit from me, couple of more questions on the outlook here, very nice guidance usually down quarter for you, curious if you can kind of give us a sense of the moving parts in terms of the end markets like customer and communications specifically?

Darin Billerbeck

Yes, communications looks a lot stronger than what we would have forecasted throughout Q4 and also in Q1 and that’s primarily due to the build out in China as everybody is aware of. So, we see a lot of strength there. People are obviously building ahead of that. And we also expect to get a little bit about that from consumer, but not too much. So, we are kind of looking at everything holding flat with comps being up a little bit.

Richard Shannon - Craig Hallum

Okay. Okay, fair enough. And looking out beyond the first quarter relative to the OpEx number you just gave us, I know you talked about gaining operational efficiency, can we expect the OpEx to be roughly similar levels even with good growth hat hopefully you can get through the rest of the year?

Darin Billerbeck

Yes. We should maintain the levels that we are targeting for Q1 throughout the rest of the year or slightly.

Richard Shannon - Craig Hallum

Okay, perfect. One last question for me, I will jump on the line, I wonder if you could kind of give us expense as you look at throughout this year about your positioning with your largest OEM, I know you did – I think you did very well with them last year, any sense of positioning with some important platforms maybe coming out with this year?

Darin Billerbeck

Yes. I mean, it’s hard to tell, which platforms you win and which ones you don’t, right, but last year we did really well. This year we feel very confident about everything we will be moving into the consumer market for next year. You obviously want to grow that market, but we can’t comment on specific customers nor can we comment on any models that we service.

Richard Shannon - Craig Hallum

Okay, that’s fair enough. I will jump in the line and congratulations on very nice numbers.

Darin Billerbeck

Thanks, Richard.

Operator

(Operator Instructions) Your next question is from Sundeep Bajikar with Jefferies. Your line is open.

Sundeep Bajikar - Jefferies

Hi guys. Nice job on the quarter. First of all, can you give us some color in terms of what portion of the smartphone, overall smartphone market shipments, Lattice captured last year with ultra low-power FPGAs, just give us some framework also to think of the trajectory of that penetration as we move through this year?

Darin Billerbeck

If you assume that where – there was about somewhere between 800 million – and 800 million and 1 billion smartphone shipped in that year. We are probably somewhere between about 8% to 10% of that and we would expect that we should be able to grow that.

Sundeep Bajikar - Jefferies

Okay, great. On the communications side, can you tell us what types of Lattice products actually drove the strong sequential growth here in the fourth quarter? And perhaps also just compare these Lattice products to competition in terms of both average selling prices as well as power consumption?

Darin Billerbeck

There was ECP3 product, type products that drove the communications growth in Q4. And clearly, they are considerably lower than competition in terms of ASPs. We had XO2 growth there also. So those are the two products that we leverage our glue logic kind of aspect to what we do with comps market. That answered what you are talking or do you want more detail.

Sundeep Bajikar - Jefferies

I think that’s great. So I guess what I want to follow up on is back on the smartphone market or mobile in general, as you see a penetration increasing with low cost ultra low-power FPGAs, are you seeing sort of any noticeable impact on average prices just in that market?

Darin Billerbeck

Yes. I mean the key of that market obviously is as you try to take whatever features that you offered in the last go-round, you try to harden as many as you can and offer another product with even more capability and more features trying to hold the ASP by providing more value. But as you know, different smartphone models depending if they are high-end or mid-range, the ASPs will decline. They have to offer, what we call the plethora of products from the big ones to the small ones -- in the blended ASP, we assume to remain about the same. So our goal is not only to be able to keep that blended ASPs but to increase the share of wallet inside by taking on more opportunities than just the ones that we have.

Sundeep Bajikar - Jefferies

Great, okay. And then just last the one from me, I think you mentioned a number of additional new markets that you are potentially targeting with the low power FPGAs, can you just give us sense of kind of the most exciting or sort of top two targets that you have here going through the year?

Darin Billerbeck

Well, I think there is one, that’s obvious, right, which is wearables, where these super tiny devices that are sub-1.5 millimeter squared, right, fit in nicely in the very low power. So wearables is one big one. We also find ourselves underneath in these kind of bizarre ones like when you swallow video cameras, right. So there is a lot of little medical centers out there too that are pretty interesting. So we are finding a lot of different customer applications that we never even thought of for tiny and for low power. So the consumer is one consumer, consumer mobile and then we are looking out in the medical field too. And those are slower, but their adoption seems to be a lot quicker than it was in the past.

Sundeep Bajikar - Jefferies

Great, thank you very much.

Operator

(Operator Instructions) Next question is from Matt Dhane with Tieton Capital Management. Your line is open.

Matt Dhane - Tieton Capital Management

Great, thank you. I was curious what led to your revenue outperformance in Q4 relative to your initial expectations heading into it?

Darin Billerbeck

Couple of things, one was a New Year – a Lunar New Year shift where people saw Lunar New Year this year a little sooner than last year so they actually pulled in some material through distribution, which they didn’t really think about until the last three or four weeks of the quarter which is hard for us to forecast. The other one is just the uplift in comps and a slight higher than what we anticipated growth rates in consumer. So consumer a little bit comms pretty significant which we have traditionally the last two years, the comms have been down in Q4, so we predict this to be slightly down and it comeback and was very strong and this DNA was actually quite a bit stronger than we thought, all kind of loaded up in the last couple of weeks.

Matt Dhane - Tieton Capital Management

Great, I was also curious, I’ve heard a lot of commentary and discussion about Chinese comms infrastructure build out really accelerating here. What’s your expectations around that and how do you expect that the benefit you?

Darin Billerbeck

Typically we obviously don’t give guidance beyond Q1, but we see it probably first half strength income is comm that deals like about what is about the traditional growth base it had in the past. Beyond that, I really don’t have a lot of idea, I would expect to fallout, basically fall down a little bit but we haven’t seen any indications nor do our customers give us any forecast thus far out.

Matt Dhane - Tieton Capital Management

Great, thank you.

Operator

Your next question is from Tristan Gerra with Baird. Your line is open.

Tristan Gerra - Baird

Good afternoon, sorry if I missed it earlier in the call, but could you give us some granularity about the various end market trends built into your Q1 guidance?

Darin Billerbeck

I don’t know if we gave that exactly, but comms will be – we expect comms continued strength that we saw in Q4 and consumer to comeback a little bit and everything else roughly the same.

Tristan Gerra - Baird

Great, thank you.

Operator

Your next question is from Richard Shannon with Craig Hallum. Your line is open.

Richard Shannon - Craig Hallum

Hi, guys.

Darin Billerbeck

Hi Rich, airplane yet...

Richard Shannon - Craig Hallum

No, I should be good for a little bit here, just a follow-up on a couple of previous answers here on the first on the wearable theme, I would be curious if you could delineate for your kind of product categories you’re seeing interest when we might see that – when we might see that – when you might start shipping and when it might partially be materially?

Darin Billerbeck

We don’t want to give away somebody’s ramp rate obviously right, but I would expect wearables to start shipping for sure right. So that’s not – and next year probably in the middle of the year you would start to see some of those shipments. And they will just be like smartphones. The adoption rate will probably be small, low at first and then it will take off as people see the value on it. And there is all different wearable right there and you have seen a lot of the traditional CES offerings that are out there. But we are seeing some of that can be included in clothing, it can be included in your shoes, there is a lot of stuff we’re seeing all over the place that very innovative approaches, but that the question will be the adoption at the consumer – adoption for consumers do they really value them.

Richard Shannon - Craig Hallum

Got it, okay, and then another follow-up from me Darin. You talked at times of over the past year plus about opportunities in sensor hubs in general what were you – where are you seeing in 2014 taxable year?

Darin Billerbeck

Yes and you got to be careful about sensor hubs because they are hubs that control 9 or 10 different sensors and down to (indiscernible) hubs that just control three or four to became an input to something else. There is a sensor fusion aspect of it, I think what you will see us play is more in a smaller version of hubs probably in the lower end sounds where it’s not a sophisticated and an FPGA can take over the horsepower what may be a microcontroller did in the past, but our plan is not take a head to head with the big microcontroller sensor hub.

Richard Shannon - Craig Hallum

Okay, that’s a great perspective. That’s all for me guys. Thank you.

Darin Billerbeck

Alright.

Operator

(Operator Instructions) There are no further questions at this time. I will now turn the call over to Lattice’s President and CEO, Mr. Darin Billerbeck for any closing remarks.

Darin Billerbeck - President and Chief Executive Officer

Okay, thanks everyone for joining us on the call. Obviously, 2013 was a terrific year for us. We executed on a lot of fronts. We made a new market for ourselves and then we executed on the volume ramps that we needed to from an operational standpoint. We held as firmly as we could our OpEx and this year we are really focusing a lot on that. And we have a lot of challenges obviously to make 2014 better than 2013, but we look forward to it and we are excited about it. And we will see what happens quarter-by-quarter. So thanks again for joining us on the call.

Operator

Ladies and gentlemen, this concludes today’s conference call. And you may now disconnect.

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