Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 weeks ended April 2, 2016 (fiscal Q1 2016), not 2015 Q1. It compares with the 13 weeks ended April 4, 2015. Financial statements are unaudited. The prior-year quarter included Silicon Image for only about three weeks, versus a full quarter in 2016, limiting comparability.
Business context and results
Lattice provides semiconductor devices and intellectual property for connectivity markets. Its March 2015 acquisition of Silicon Image expanded its consumer connectivity and licensing activities.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $96.5 million | $88.6 million |
| Gross margin | $57.1 million; 59.2% | $47.8 million; 54.0% |
| Operating loss | $13.4 million | $26.9 million |
| Net loss | $19.7 million; $0.17 per share | $53.3 million; $0.46 per share |
| Operating cash flow | $23.1 million | $(0.02) million |
Revenue increased about 9%. Licensing and services revenue rose to $8.3 million from $2.9 million, largely reflecting the full-quarter inclusion of Silicon Image. Product revenue was $88.2 million versus $85.7 million. GAAP results remained loss-making; the prior-year loss included $18.2 million of acquisition-related charges and a $21.0 million tax valuation-allowance charge.
Margins, costs, liquidity and debt
- Gross margin improved 5.2 percentage points. Management attributed the increase to lower purchase-accounting effects on acquired inventory and a greater contribution from high-margin licensing and services. Product gross margin was 55.8%, versus 52.5%.
- R&D was $32.6 million, up 18%, and SG&A was $23.6 million, up 12%; the full-quarter inclusion of Silicon Image was a principal factor. Amortization of acquired intangibles was $8.7 million, restructuring charges $5.4 million, and acquisition-related charges $0.1 million.
- Cash and cash equivalents were $104.6 million and short-term marketable securities $11.9 million, totaling $116.5 million. Cash increased $20.0 million during the quarter; operating cash flow was partly offset by capital expenditures and software-license payments.
- Inventories rose to $82.6 million from $75.9 million; inventory on hand increased to 6.3 months from 4.8 months. Overall days sales outstanding remained 80 days.
- Term-loan principal was $346.5 million, with a 6.06% effective variable rate and a March 2021 maturity. The company reported compliance with restrictive covenants; the facility requires quarterly installments and may require substantial excess-cash-flow repayments. Interest expense was $5.0 million.
- Non-GAAP operating income was $6.0 million versus $6.7 million; non-GAAP net loss was $1.0 million versus non-GAAP net income of $3.9 million. These measures exclude items including restructuring, acquired-intangible amortization, stock compensation and acquisition-related charges.
Changes, outlook and notable matters
- End-market revenue shifted: Communications and Computing fell 18% to $33.0 million, reflecting more moderate China 4G LTE demand and lower demand at a major server manufacturer. Mobile and Consumer rose 27% to $24.9 million, and Industrial and Automotive rose about 17% to $30.3 million. Licensing and services reached $8.3 million.
- Asia represented 68% of revenue; the Americas rose 56% to $15.0 million, while Europe declined 3%. Resales through sell-through distributors represented 53% of revenue versus 48%; the top five end customers accounted for about 27% versus 35%.
- Management gave no specific quarterly revenue or margin guidance in the supplied text. It said resources were expected to meet working-capital needs for at least 12 months, and anticipated continued significant R&D investment. It cautioned that product mix, pricing pressure and cost reductions could affect future product margins.
- Two restructuring efforts were expected to be substantially completed by fiscal Q2 2016. Estimated total costs were $17–21 million for the acquisition-related plan and $7–10 million for the separate workforce reduction; costs incurred through April 2 were $16.9 million and $7.8 million, respectively.
- After quarter-end, Lattice agreed to sell Qterics on April 17 and completed the sale April 27. Qterics had contributed 0.4% of quarterly revenue.
- Legal matters include Lattice’s patent-infringement action against Technicolor and a possible counterclaim concerning HDMI adopter fees; the company could not estimate the likelihood or financial effect. The China antitrust investigation concluded without monetary penalties, subject to a settlement agreement with CVIA.
- Key risks include dependence on a limited number of foundries, distributor-channel and inventory exposure, competitive and cyclical end markets, acquisition integration, substantial debt, and possible reductions in HDMI agent functions and royalty allocations. Management said disclosure controls were effective; integration of Silicon Image systems and controls was expected to continue through year-end 2016.
Important facts for investors to verify
- Whether elevated inventory and channel balances convert to end-customer demand without excess or obsolete stock.
- Progress, remaining costs and realized savings from restructuring and Silicon Image integration.
- Debt repayment requirements, variable-rate exposure, and cash available after required payments.
- Outcome and potential financial consequences of the Technicolor dispute and HDMI fee discussions, including any change to adopter fees or royalty shares.
- Accounting and financial effects of the completed post-quarter Qterics sale, which are not quantified in this filing.