Lattice Semiconductor Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 13 weeks ended April 1, 2017; comparisons are with the 13 weeks ended April 2, 2016. This differs from the request metadata’s “2016 Q1.” Figures below are unaudited and in U.S. dollars.
Business context
Lattice supplies semiconductor devices and intellectual property for smart-connectivity applications. Its reported business includes IP and semiconductor devices. Revenue is concentrated in Asia and includes substantial sales through sell-through distributors.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $104.6 million | $96.5 million |
| Gross profit / gross margin | $60.8 million / 58.2% | $57.1 million / 59.2% |
| Operating loss | $0.7 million | $13.4 million |
| Net loss | $7.3 million; $0.06 per share | $19.7 million; $0.17 per share |
| Operating cash flow | $7.7 million | $23.1 million |
- Revenue increased about 8%. Product revenue was $92.7 million, up from $88.2 million; licensing and services revenue was $11.9 million, up from $8.3 million.
- GAAP gross margin declined 1.0 percentage point. Product gross margin was 55.1% versus 55.8%; licensing and services gross margin was 82.0% versus 95.2%.
- Operating expenses were $105.3 million versus $109.9 million. Lower R&D and restructuring charges were partly offset by $1.7 million in acquisition-related charges, principally costs for the pending Canyon Bridge transaction.
- Cash and cash equivalents were $97.5 million, and short-term marketable securities were $12.0 million, totaling $109.4 million at quarter-end, down $7.4 million from year-end. Cash from operations included $10.0 million received from a patent sale.
- Accounts receivable fell to $66.1 million from $99.6 million; inventory was $77.8 million, and months of inventory on hand increased to 5.3 from 4.3.
- Term-loan principal was $331.4 million at April 1. The variable-rate loan carried a 5.97% effective rate and matures in 2021. Lattice repaid $10.8 million of debt during the quarter and made a further $13.7 million excess-cash-flow payment after quarter-end. The company reported compliance with its restrictive covenants.
Material changes and management commentary
- Mobile and Consumer revenue rose 28%, mainly due to higher volume for a major handset program; management said production appeared to have peaked in Q4 2016 and expected related revenue to decline in future quarters as the device completed its lifecycle.
- Communications and Computing revenue fell 9%, as a large customer’s prior-year purchases did not recur. Industrial and Automotive revenue increased about 2%.
- Licensing and services revenue rose 44%, predominantly due to a patent sale. However, the patent sale’s costs reduced that category’s gross margin. HDMI royalties were not recognized in the quarter because the founders had not finalized a new royalty-sharing agreement.
- Management stated that financial resources should cover working-capital needs for at least 12 months. It discontinued forward-looking revenue and gross-margin guidance after announcing the proposed acquisition.
- Management expected significant R&D investment to continue at approximately the Q1 percentage of revenue. It also cited expected downward pressure on product selling prices and potential gross-margin fluctuations from product, customer, and end-market mix.
Outlook, transaction, risks, and contingencies
- The proposed Canyon Bridge acquisition would pay $8.30 per share in cash, subject to closing conditions and regulatory approvals. Lattice withdrew and re-filed its joint CFIUS notice on March 24, 2017, to allow more review time. Completion was not assured.
- Key business risks include concentration in customers, distributors, and Asia; reliance on a limited number of wafer foundries and outsourced manufacturing providers; cyclical end markets; product acceptance and pricing pressure; and execution of the ERP-system transition. The company converted to the new ERP system at the start of Q2 2017.
- The top five end customers represented 37% of Q1 revenue, up from 27%; the largest represented 12%, up from 8%. Sell-through distributors accounted for 60% of revenue, versus 53%. Two distributor groups represented 67% of gross trade receivables at quarter-end.
- Pending legal matters included a Technicolor counterclaim concerning alleged breach of the HDMI Founders Agreement; the company could not estimate potential financial consequences. Merger-related stockholder suits were dismissed by stipulation, with courts retaining jurisdiction over potential mootness fees; any exposure was not expected to materially affect financial position.
- The company had a $28.0 million liability for uncertain tax positions, down from $29.6 million at year-end, and said $1.7 million of unrecognized tax benefits and $0.1 million of related interest and penalties could possibly be recognized within 12 months.
Important facts for investors to verify
- Subsequent status and regulatory outcome of the Canyon Bridge transaction, including CFIUS review and any transaction-related costs or termination provisions.
- Timing and terms of a new HDMI royalty-sharing agreement, including the effect on royalty recognition and future licensing revenue.
- Revenue trajectory of the handset program expected to decline, and whether new programs offset that decline.
- Distributor receivable concentration, inventory levels, and sell-through reporting as channel exposure remains high.
- Debt repayment requirements, variable interest exposure, and liquidity after required excess-cash-flow payments.
- ERP transition execution and any effects on operations, reporting controls, or financial results.