Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The filing is for the quarter ended March 31, 2018 (fiscal Q1 2018), compared primarily with the quarter ended April 1, 2017. This does not match the request metadata label “2017 Q1.” Unless otherwise indicated, amounts below are in U.S. dollars.
Business context and reporting period
Lattice develops semiconductor products, connectivity solutions, and intellectual-property licenses. It reported one operating segment. The unaudited results cover 13-week periods. The company adopted ASC 606 revenue recognition on December 31, 2017 using the modified retrospective method; prior-period figures were not restated.
Financial results and liquidity
| Metric | Q1 2018 | Comparable prior period |
|---|---|---|
| Revenue | $98.6 million | $104.6 million |
| Gross margin | $56.5 million; 57.3% | $60.8 million; 58.2% |
| Operating loss | $0.8 million | $0.7 million |
| Net loss | $6.0 million; $0.05 per share | $7.3 million; $0.06 per share |
| Operating cash flow | $2.5 million | $7.7 million |
- Reported revenue decreased 5.7%. Under the company’s comparison of Q1 2018 as if the prior revenue standard applied, revenue would have been approximately $89.1 million, reflecting the new standard’s roughly $9.5 million acceleration of revenue.
- ASC 606 increased reported Q1 2018 net income relative to the prior-standard presentation by approximately $5.7 million: the filing gives pro forma net loss of $11.6 million under the previous standard versus reported net loss of $6.0 million. The adoption also increased accounts receivable and created distributor-related deferred income and allowances; these changes affect period comparability.
- Cash and cash equivalents were $99.4 million, and short-term marketable securities were $12.1 million, totaling $111.5 million at March 31, 2018. Cash alone declined $7.4 million from year-end; cash plus marketable securities declined $0.3 million.
- Current assets were $280.6 million and current liabilities $66.1 million. The company reported $77.9 million of inventory, equivalent to 5.6 months on hand, and $65.8 million of net receivables. Days sales outstanding rose to 61 from 53 at year-end.
- Long-term debt was $299.0 million on the balance sheet, with $1.8 million current; the term loan principal was $305.9 million and carried a 6.59% effective rate. The loan matures March 2021, is variable-rate, and requires quarterly installments plus applicable excess-cash-flow payments. The company was in material compliance with its covenants.
- GAAP gross margin was 57.3%, down from 58.2%; product gross margin improved to 55.7% from 55.1%. Licensing and services gross margin was 100.0%, versus 82.0%, but licensing revenue was much lower. Excluding specified items, non-GAAP operating income was $11.3 million and non-GAAP net income $6.1 million; these are non-GAAP measures, not substitutes for GAAP results.
Material changes versus the prior period
- Product revenue increased to $95.1 million from $92.7 million, while licensing and services revenue fell to $3.5 million from $11.9 million. Prior-year licensing revenue included a patent-sale installment that did not recur.
- Industrial and Automotive revenue rose approximately 30% to $40.3 million, supported by robotics, video-wall demand, and broad customer growth. Mobile and Consumer revenue fell 16% to $26.7 million, including lower volume from a major handset provider. Communications and Computing revenue decreased 6% to $28.1 million.
- Research and development expense declined 16% to $22.9 million, primarily from restructuring and business-sale cost reductions. SG&A increased 13% to $27.0 million, including approximately $2.7 million of CEO retirement and transition costs, board-related costs, and higher legal expense.
- Restructuring expense was $1.0 million versus $0.1 million. The June 2017 plan had incurred approximately $9.0 million in total to date; expected total costs were $8 million to $12 million, with substantial completion expected by fiscal Q4 2018.
- Cash from operations decreased to $2.5 million from $7.7 million. Investing cash use was $10.7 million, including marketable-security purchases, capital expenditure, and software-license payments. Financing provided $0.3 million, versus $10.3 million used in the prior period.
Outlook, commentary, risks, and unusual items
- Management stated that available financial resources should meet working-capital needs for at least 12 months. It expected significant continued investment in R&D but gave no specific quarterly revenue or earnings forecast in the provided filing text.
- Management estimated ASC 606 could add $5 million to $10 million to distributor revenue recognized in 2018 compared with the prior accounting method. Until a new HDMI royalty-sharing agreement is signed, it estimated $1 million to $2 million of additional licensing revenue per quarter under ASC 606; the estimate may change when the agreement is finalized.
- Effective April 17, 2018, U.S. Commerce Department sanctions restricted sales to ZTE. ZTE represented less than 3% of Q1 revenue; management did not expect a material effect on total or Asia revenue.
- Distributors generated 87% of revenue; Arrow and Weikeng represented 30% and 26%, respectively. Distributor inventory and shipment timing, revenue estimates, and resale-report accuracy are important risks, particularly after the change to recognizing most distributor sales upon shipment.
- Asia generated 73% of revenue. The company also relies on a limited number of wafer foundries, and certain products have single-foundry sourcing, creating supply and continuity risks. Mix, pricing pressure, demand cycles, and inventory obsolescence may affect margins and results.
- Disclosure controls and procedures were deemed ineffective because a previously identified material weakness involving risk assessment and controls over significant unusual transactions had not been fully remediated. Management said remediation was ongoing; the financial statements were nevertheless considered fairly presented in all material respects.
- A Chinese VAT documentation audit had no recorded liability; the company estimated potential findings could range from zero to less than $2 million and did not expect a material financial-statement impact. No other quantified material legal contingency is clearly stated in the provided filing text.
- The quarter included $0.7 million of acquisition-related legal and professional charges tied to the terminated Canyon Bridge transaction. A CEO separation agreement also resulted in approximately $1.4 million of accelerated stock-compensation expense.
Most important facts for investors to verify
- Reconcile the filing’s reported revenue and earnings with the prior-standard comparison and understand the future effects of distributor inventory levels under ASC 606.
- Monitor the new HDMI royalty-sharing agreement, actual royalty collections, and whether the estimated royalty allocation differs from the amount recognized.
- Track distributor concentration, distributor inventory, receivable collection, and the rise in days sales outstanding.
- Review the debt’s variable interest rate, required excess-cash-flow repayments, and liquidity available after debt service.
- Confirm progress and testing of controls intended to remediate the material weakness, and monitor the disclosed VAT audit and other contingencies.
- Assess the impact of ZTE restrictions, end-market demand, foundry availability, and the remaining restructuring costs against management’s expectations.