Business Context and Reporting Period
Lattice Semiconductor Corporation (Lattice) designs, develops, and markets high-performance programmable logic devices (FPGAs and PLDs). This Form 10-Q covers the quarterly period ended March 29, 2008. The company operates in a single industry segment with significant exposure to the communications end market, which accounted for approximately 54% of revenue in the quarter. The company is currently undergoing a leadership transition, with the resignation of its President and CEO scheduled for May 31, 2008.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Revenue | $56.6 million | $58.1 million |
| Gross Margin | 55.6% | 54.9% |
| Net Loss | $(3.3) million | $(4.4) million |
| Loss Per Share (Diluted) | $(0.03) | $(0.04) |
| Operating Cash Flow | $6.9 million | $(41.2) million |
| Cash and Equivalents | $70.1 million | $34.1 million (end of period) |
| Working Capital | $119.1 million | $110.5 million (end of prior year) |
| Debt (Convertible Notes) | $40.0 million (Current) | $40.0 million (Current) |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 2.6% year-over-year, driven primarily by a 29% decline in "Mature" product revenue, partially offset by a 133% increase in "New" product revenue.
- Improved Profitability: Net loss narrowed by $1.1 million compared to the prior year. Operating loss improved from $(7.2) million to $(4.5) million.
- Expense Reductions: Research and Development (R&D) expenses decreased by $4.3 million (19.7%) due to lower mask/wafer costs and headcount reductions from the 2007 restructuring plan. Amortization of intangible assets dropped significantly as certain assets became fully amortized.
- Restructuring Charges: The company recorded $1.8 million in restructuring charges, primarily for lease obligations and severance related to the CEO's resignation. This contrasts with a $0.1 million benefit in the prior year.
- Cash Flow Improvement: Operating cash flow turned positive ($6.9 million) compared to a significant outflow ($41.2 million) in the prior year, largely due to the absence of a $37.5 million advance payment to Fujitsu made in Q1 2007.
Outlook, Risks, and Unusual Items
- Liquidity Risk (Auction Rate Securities): The company holds $44.9 million in face value of auction rate securities that have experienced failed auctions. These are classified as long-term illiquid assets. An unrealized loss of $7.9 million was recorded in Accumulated Other Comprehensive Loss. Management views the decline as temporary, but a future "other than temporary" impairment charge could materially impact results.
- Debt Maturity: $40.0 million in Zero Coupon Convertible Subordinated Notes are classified as current liabilities because holders have the option to require repurchase on July 1, 2008. Management expects holders to exercise this right.
- Leadership Transition: The company is searching for a new CEO following the announced resignation of Stephen A. Skaggs. Additional restructuring charges of $0.9 million are expected in Q2 2008 related to this transition.
- Market Dependence: The company remains heavily dependent on the communications end market (54% of revenue) and export sales (83% of revenue), exposing it to global economic volatility and supply chain disruptions in Asia.
- Legal Proceedings: A patent infringement lawsuit filed by Lizy K. John is currently stayed pending re-examination by the USPTO. The potential exposure is not estimable.
Investor Verification Checklist
- Verify the status of the $44.9 million auction rate securities and the likelihood of an "other than temporary" impairment charge.
- Confirm the company's ability to fund the $40.0 million convertible note repurchase due July 1, 2008, given current cash balances.
- Monitor the progress of the CEO search and the impact of the leadership transition on strategic execution.
- Assess the sustainability of the 133% growth in "New" product revenue to offset the continued decline in "Mature" products.
- Review the outcome of the patent litigation with Lizy K. John once the USPTO re-examination concludes.