Business Context and Reporting Period
Lattice Semiconductor Corporation, a Delaware corporation, filed this Form 10-Q for the quarterly period ended June 27, 1998 (first quarter of fiscal 1999). The company designs and sells programmable logic devices, primarily addressing the in-system programmable (ISP) segment of the CMOS market. The company operates on a 52 or 53-week fiscal year ending on the Saturday closest to March 31.
Key Financial Metrics
| Metric (in thousands) | Q1 FY1999 (Ended June 27, 1998) |
Q1 FY1998 (Ended June 28, 1997) |
|---|---|---|
| Revenue | $48,028 | $61,620 |
| Cost of Products Sold | $19,109 | $25,028 |
| Gross Profit | $28,919 | $36,592 |
| Gross Margin % | 60.2% | 59.4% |
| Operating Income | $12,019 | $18,943 |
| Net Income | $9,816 | $14,168 |
| Diluted EPS | $0.41 | $0.60 |
| Cash & Short-term Investments | $274,949 | N/A |
| Net Cash from Operations | $10,883 | $22,188 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 22% to $48.0 million, driven by a decline in demand in Asia due to the regional economic crisis and reduced demand in computing and communications end markets.
- Margin Expansion: Despite lower revenue, gross margin percentage improved to 60.2% from 59.4%, attributed to favorable product mix changes and reduced manufacturing costs.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased by approximately $0.8 million (8%) due to lower sales commissions. Research and development (R&D) expenses remained flat in absolute terms but increased as a percentage of revenue (16% vs. 13%).
- Liquidity: Cash and short-term investments increased to $274.9 million from $267.1 million at the end of the prior quarter, supported by operating cash flow and proceeds from stock option exercises.
Outlook, Risks, and Contingencies
- Guidance: The company anticipates capital expenditures of $20 million to $25 million for the fiscal year ending April 3, 1999. Management believes existing liquidity and operating cash flow will fund needs for the next 12 months.
- Supply Chain Risks: The company relies entirely on third-party foundries (Seiko Epson and UMC) for wafer fabrication. Risks include production yield issues, delivery delays, and the recent fire at the UICC foundry (a joint venture with UMC), though management believes insurance and alternative capacity mitigate material adverse effects.
- Intellectual Property: The company faces potential patent infringement claims common in the semiconductor industry. A recent notification of a claimed infringement of a portfolio of manufacturing patents was received; no assurance exists that a license can be obtained on acceptable terms.
- Year 2000: The company has completed an initial assessment of Year 2000 issues and does not anticipate a material adverse impact, though risks remain regarding third-party systems.
- Stock Repurchase: The Board authorized the repurchase of up to 1.2 million shares. As of June 27, 1998, 45,000 shares were repurchased for approximately $1.2 million.
Investor Verification Checklist
- Verify the extent of the Asian economic crisis impact on future revenue projections.
- Confirm the status of the UICC foundry rebuilding and the sufficiency of alternative wafer capacity arrangements.
- Monitor the resolution of the recent patent infringement claim and potential licensing costs.
- Track the company's ability to maintain gross margins as product mix shifts and new products are introduced.
- Assess the impact of currency exchange rate fluctuations, particularly the Japanese yen, on wafer purchase costs.