Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the 13-week quarter ended July 1, 2017, and the six months ended that date—not 2016 Q2 as stated in the request metadata. Comparative periods ended July 2, 2016. Amounts below are in U.S. dollars.
Business context and reporting period
Lattice develops semiconductor devices and intellectual property for communications and computing, mobile and consumer, industrial and automotive, and licensing markets. It reported one operating segment. The interim statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $94.1 million | $99.2 million | $198.7 million | $195.7 million |
| Gross margin | $51.2 million (54.4%) | $58.4 million (58.9%) | $112.0 million (56.4%) | $115.5 million (59.0%) |
| Operating loss | $8.7 million | $6.4 million | $9.4 million | $19.7 million |
| Net loss | $13.0 million | $13.8 million | $20.3 million | $33.5 million |
| Loss per share, diluted | $0.11 | $0.12 | $0.17 | $0.28 |
| Cash from operations | Not separately stated | Not separately stated | $11.5 million | $32.7 million |
At July 1, 2017, cash and cash equivalents were $74.4 million and short-term marketable securities were $10.5 million, totaling $84.9 million. Total debt carrying value was $302.3 million ($15.3 million current and $287.0 million long-term); term-loan principal was $308.5 million and its effective interest rate was 5.99%. The company repaid $33.7 million of debt during the first half. Current assets were $268.6 million versus current liabilities of $116.5 million. Management said available resources were sufficient for working-capital needs for at least 12 months.
Material changes versus the prior comparable periods
- Quarterly revenue decreased about 5%; first-half revenue increased about 2%. Product revenue declined, while licensing and services revenue rose, including revenue from patent sales.
- Quarterly operating loss widened despite a smaller net loss; first-half operating and net losses narrowed substantially year over year. Lower restructuring and R&D costs contributed to the first-half improvement.
- Gross margin fell 4.5 percentage points for Q2 and 2.6 points for the first half. Management cited sales mix, including greater lower-margin mobile and consumer sales and fewer higher-margin legacy products. Licensing and services margin also declined because costs associated with the patent sale were unusually high.
- Operating cash flow fell to $11.5 million from $32.7 million for the first half. Cash and marketable securities declined $32.0 million from year-end, primarily reflecting debt repayment and capital expenditure and software-license payments, partly offset by operating cash flow, which included $18.0 million of patent-sale proceeds.
- Customer and channel concentration increased: top five end customers represented 27% of Q2 revenue and 32% of first-half revenue; sell-through distributors represented 66% and 63%, respectively.
Outlook, management commentary, risks and unusual items
- Lattice discontinued forward-looking revenue and gross-margin guidance following the proposed acquisition announcement. It expects significant future R&D investment at approximately Q2 2017’s share of revenue (28.5%).
- A major mobile handset program appears to have peaked in Q4 2016; management expects related revenue to decline as the product completes its lifecycle. The company also cited product-mix and average-selling-price pressure on margins.
- A June 2017 restructuring plan includes workforce reductions, infrastructure-cost actions, and divestiture of non-core activities. The company had incurred about $2.4 million through July 1 and estimated total plan costs of $8 million to $19 million. Separately, it announced an agreement to sell assets including its Hyderabad subsidiary and Simplay Labs business to Invecas for $5.0 million, subject to closing conditions.
- The proposed Canyon Bridge acquisition would pay $8.30 per share in cash, subject to conditions including regulatory approvals and CFIUS clearance. Lattice withdrew and refiled its CFIUS notice to allow more review time. Completion was not assured; specified termination circumstances could trigger a $34.18 million fee payable by Lattice.
- Revenue recognition under the then-current policy generally followed resale to end customers for sell-through distributors. Lattice anticipated that the revenue standard planned for adoption in fiscal 2018 would accelerate recognition on qualifying shipments to those distributors; such distributors accounted for 66% of Q2 total revenue.
- Risks include reliance on a limited number of foundries and distributors, product and customer concentration, the handset program’s lifecycle, debt service and restrictive covenants, ERP implementation, and uncertainty around HDMI royalty sharing and recognition. A Technicolor patent-related counterclaim was pending; the filing did not provide a clear estimate of its likelihood or financial exposure.
- The new ERP system went live at the start of Q2 and materially affected internal control over financial reporting. Management reported disclosure controls effective and said implemented monitoring controls were functioning effectively.
Important facts for investors to verify
- Whether the Canyon Bridge transaction received required approvals and closed, and whether its terms or timetable changed.
- Subsequent performance of the major handset program, distributor inventories, and the company’s customer and channel concentration.
- Actual restructuring costs, completion and proceeds of the Invecas asset sale, and any related effects on revenue, costs, or staffing.
- Debt repayment requirements, variable-rate exposure, liquidity, and operating cash generation after the first half.
- Progress on HDMI royalty-sharing arrangements and the effect of the new revenue-recognition standard on distributor sales and reported results.