Business Context and Reporting Period
Lattice Semiconductor Corporation (Lattice) designs, develops, and markets high-performance programmable logic products, including Field Programmable Gate Arrays (FPGAs) and Programmable Logic Devices (PLDs), along with 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 2, 2010.
Key Financial Metrics
| Metric | Fiscal 2009 (Ended Jan 2, 2010) | Fiscal 2008 (Ended Jan 3, 2009) |
|---|---|---|
| Revenue | $194.4 million | $222.3 million |
| Gross Margin | 53.7% | 53.8% |
| Net Loss | $(6.96) million | $(38.21) million |
| Operating Loss | $(8.25) million | $(20.24) million |
| Cash from Operations | $98.9 million | $26.4 million |
| Cash and Short-term Investments | $164.5 million | $65.9 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 85% of total revenue, with China accounting for 43% of total revenue.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 12.5% year-over-year, driven by a decline in Mature and Mainstream product sales, partially offset by a 44% increase in New product revenue.
- Improved Profitability: Net loss narrowed significantly from $38.2 million to $7.0 million, primarily due to reduced operating expenses and a $60.0 million cash repayment from foundry partner Fujitsu.
- Expense Reduction: Research and Development (R&D) expenses decreased to $56.1 million (from $68.6 million) and Selling, General, and Administrative (SG&A) expenses decreased to $52.5 million (from $58.7 million) due to restructuring plans implemented in 2008 and 2009.
- Liquidity Improvement: Cash and cash equivalents increased by approximately $98.6 million, bolstered by the Fujitsu repayment and strong operating cash flow.
Guidance, Outlook, and Risks
Outlook: Management expects revenue to increase in the first half of 2010 compared to the first half of 2009, citing better-than-expected trends in the Asian communication market. The company is restructuring its distribution channels in the Asia Pacific region from a "sell-in" to a "sell-through" model, which will impact revenue recognition timing.
Key Risks and Contingencies:
- Auction Rate Securities (ARS): The company holds $24.1 million in par value of ARS, which are illiquid due to failed auctions. These are carried at a fair value of $12.9 million. Further impairment charges may be required if the market does not recover.
- Customer Concentration: The communications end market represents 56% of revenue. Sales to ASTI Holdings Ltd. accounted for 16% of revenue in 2009.
- Supply Chain: Fujitsu is the sole source supplier for wafers for the company's newest FPGA and PLD products.
- Legal Proceedings: A patent infringement lawsuit filed by Lizy K. John is pending; the litigation is stayed pending patent re-examination.
Investor Verification Checklist
- Verify the liquidity status and potential further impairment of the $24.1 million portfolio of auction rate securities.
- Monitor the transition of distribution channels from "sell-in" to "sell-through" and its impact on revenue recognition visibility.
- Assess the sustainability of revenue growth in the communications sector, particularly regarding the China 3G build-out which contributed significantly to 2009 results.
- Review the status of the pending patent litigation with Lizy K. John.
- Confirm the execution of the Singapore operations center transfer and its effect on future operating costs.