Business Context and Reporting Period
Lattice Semiconductor Corporation (Lattice) designs, develops, and markets programmable logic products (FPGAs and PLDs) and related software. The company operates as a fabless semiconductor entity, relying on foundry partners (primarily Fujitsu) for wafer fabrication and third-party contractors for assembly and testing. The reporting period covers the fiscal year ended January 1, 2011 (Fiscal 2010).
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Revenue | $297.8 million | $194.4 million |
| Gross Margin | 60.4% | 53.7% |
| Net Income | $57.1 million | ($7.0 million) loss |
| Diluted EPS | $0.48 | ($0.06) |
| Operating Cash Flow | $79.3 million | $98.9 million |
| Cash & Short-term Investments | $238.2 million | $164.5 million |
| Long-term Debt | $0 | $0 |
Product Mix: PLD products accounted for 67% of revenue, while FPGA products accounted for 33%.
Geography: Export sales represented 88% of total revenue, with China accounting for 42% of total revenue.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 53% year-over-year, driven by a 91% increase in "New" product revenue and strong demand in the communications end market (49% of total revenue).
- Profitability: The company returned to profitability, posting a net income of $57.1 million compared to a net loss of $7.0 million in the prior year. Operating income improved from a loss of $8.3 million to $55.1 million.
- Gross Margin Expansion: Gross margin improved to 60.4% from 53.7%, attributed to higher production volumes absorbing fixed overheads and a favorable product mix shift toward higher-margin mature and mainstream products.
- Restructuring: Restructuring charges decreased significantly to $11,000 in 2010 from $3.7 million in 2009, as prior restructuring plans were largely completed.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management expects continued investment in R&D to maintain competitive positions. The company anticipates that a significant portion of revenue will remain dependent on the communications end market and the Asia Pacific region. A new CEO, Darin G. Billerbeck, assumed office in November 2010.
Key Risks:
- Concentration Risk: Heavy reliance on the communications market (49% of revenue) and the Asia Pacific region (88% of revenue).
- Supply Chain: Fujitsu is the sole source supplier for wafers for the company's newest FPGA and PLD products.
- Distribution Model: The company is transitioning to a "sell-through" distribution model, where revenue is recognized only upon resale to end customers, creating reliance on distributor reporting accuracy.
- Legal Proceedings: The company faces multiple patent infringement lawsuits (e.g., from Intellectual Ventures, Intellitech, Stragent) with unspecified damages.
Unusual Items:
- Auction Rate Securities (ARS): The company holds $11.6 million par value of ARS (student loan asset-backed notes) classified as long-term marketable securities due to illiquidity and failed auctions. The fair value was $10.2 million at year-end.
- ERP Implementation: The company converted to a new enterprise-wide financial reporting system in October 2010, which carries a risk of operational or reporting disruptions.
Investor Verification Checklist
- Verify the sustainability of the 60.4% gross margin given the cyclical nature of the semiconductor industry.
- Assess the impact of the "sell-through" distribution model on revenue recognition timing and backlog reliability.
- Monitor the status of pending patent litigation and potential financial exposure.
- Review the liquidity and potential impairment risks associated with the $11.6 million portfolio of illiquid auction rate securities.
- Confirm the stability of the supply chain relationship with Fujitsu as the sole wafer source for new products.