Business Context and Reporting Period
Lattice Semiconductor Corporation, a Delaware corporation, filed this Form 10-Q for the quarterly period ended September 27, 1997. The company designs and sells programmable logic devices, primarily focusing on the in-system programmable (ISP) segment of the CMOS market. The company does not manufacture its own silicon wafers, relying instead on external foundries such as Seiko Epson and United Microelectronics Corporation (UMC).
Key Financial Metrics
| Metric | Q2 FY1998 (3 Months) | Q2 FY1997 (3 Months) | YTD FY1998 (6 Months) | YTD FY1997 (6 Months) |
|---|---|---|---|---|
| Revenue | $64.1 million | $48.6 million | $125.7 million | $96.8 million |
| Net Income | $14.9 million | $10.5 million | $29.1 million | $20.9 million |
| Diluted EPS | $0.62 | $0.46 | $1.22 | $0.92 |
| Gross Margin | 59.6% | 58.9% | 59.5% | 58.9% |
| Operating Cash Flow (YTD) | $27.9 million (vs. $21.3 million prior YTD) | |||
| Cash & Short-term Investments | $263.6 million (as of Sept 27, 1997) | |||
| Debt | No long-term debt reported; $10 million unused credit facility available. |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 32% year-over-year for the quarter and 30% for the six-month period, driven primarily by sales of new ISP products and favorable product mix.
- Profitability: Net income rose 42% for the quarter and 39% year-to-date. Gross margins improved slightly due to product mix shifts and manufacturing cost reductions.
- Expense Trends: R&D expenses increased 16% and SG&A expenses increased 25% year-over-year, reflecting investments in new technologies and sales force expansion. However, both categories decreased as a percentage of revenue.
- Liquidity: Cash and short-term investments grew by approximately $35 million since the prior fiscal year-end, fueled by operating cash flow and proceeds from employee stock option exercises.
Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects continued revenue growth dependent on the market acceptance of new ISP products. The company anticipates capital expenditures of $20 to $30 million for the fiscal year ending March 28, 1998, focused on facility improvements. Future success relies heavily on maintaining wafer supply commitments and managing the cyclical nature of the semiconductor industry.
Risks and Contingencies
- Foundry Fire (Subsequent Event): In October 1997, the company's joint venture foundry, United Integrated Circuit Corporation (UICC), was substantially destroyed by fire. The majority owner, UMC, stated the loss is fully insured and alternative capacity will be provided. Management does not expect a material adverse effect.
- Supply Chain Dependency: The company relies entirely on Seiko Epson and UMC for wafer fabrication. Disruptions, yield issues, or price increases could materially harm operations.
- Intellectual Property: The company received a letter from a competitor alleging patent infringement regarding product packaging. While a license was offered, there is no assurance of favorable terms.
- Currency Risk: Significant wafer purchases are denominated in Japanese yen; adverse exchange rate movements could impact results.
Investor Verification Checklist
- Verify the status of the UICC foundry reconstruction and the adequacy of alternative wafer supply arrangements post-fire.
- Monitor the resolution of the patent infringement claim regarding product packaging.
- Track the execution of the $90 million advance payment agreement with Seiko Epson and the remaining $53 million commitment to UICC.
- Assess the sustainability of gross margins given the cyclical nature of the semiconductor industry and potential price erosion.
- Review the company's ability to maintain yield rates and delivery schedules with external foundries.