Market Overview

Lattice Semiconductor Reports Second Quarter of 2018 Results

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Second Quarter 2018 Highlights:

  • Company continues to execute on business strategy; delivers
    improved results with revenue at $102.7 million
  • Gross Margin of 48.9% on a GAAP basis and 57.2% on a non-GAAP basis
  • Gross Margin on a GAAP basis adversely impacted by impairment
    charges related to discontinuation of non-core millimeter wave business
  • Net Loss of $0.16 per share on a GAAP basis and Net Income of $0.10
    per share on a Non-GAAP Basis

* GAAP represents U.S. Generally Accepted Accounting Principles.
Non-GAAP represents GAAP excluding the impact of certain activities
which the Company's management excludes in analyzing the Company's
operating results and in understanding trends in the Company's earnings.
For a reconciliation of GAAP to non-GAAP results, see accompanying
tables "Reconciliation of U.S. GAAP to Non-GAAP Financial Measures."

Lattice Semiconductor Corporation (NASDAQ:LSCC), a leading provider of
customizable smart connectivity solutions, announced financial results
today for the fiscal second quarter ended June 30, 2018.

Selected Q2 2018 Financial Results and Comparisons (in thousands,
except per share data)

       
GAAP — Three Months Ended Non-GAAP — Three Months Ended
June 30,
2018
  March 31,
2018
  July 1,

2017

June 30,
2018
  March 31,
2018
  July 1,

2017

Revenue $ 102,715 $ 98,623 $ 94,137 $ 102,715 $ 98,623 $ 94,137
Gross Margin % 48.9 % 57.3 % 54.4 % 57.2 % 57.6 % 54.6 %
Operating Expense $ 63,812 $ 57,316 $ 59,938 $ 39,945 $ 45,421 $ 46,009
Net (Loss) Income $ (20,223 ) $ (5,952 ) $ (13,022 ) $ 12,375 $ 6,118 $ 124
Net (Loss) Income per share, basic and diluted $ (0.16 ) $ (0.05 ) $ (0.11 ) $ 0.10 $ 0.05 $
 

Results for periods in 2017 presented in accordance with
ASC 605, which was in effect during that fiscal year.

Glen Hawk, Interim Chief Executive Officer, said, "We exceeded our
expectations for the second quarter of 2018. We are delivering revenue
growth and higher profitability on a non-GAAP basis by focusing on our
core business and further improving operational efficiencies. As an
example, after pursuing strategic opportunities, we discontinued our
non-core millimeter wave business, which was unable to achieve
profitability levels necessary to warrant further investment. We remain
committed to increasing shareholder value and are well-positioned for
the future as our control, connect and compute solutions are ideally
suited for the emerging IoT markets, particularly in the industrial
segment."

Max Downing, Chief Financial Officer, added, "The discontinuation of our
millimeter wave business resulted in $24 million of primarily non-cash
restructuring and impairment charges which impacted GAAP operating
expenses and gross margin. Non-GAAP operating expenses for the second
quarter were 12% lower, as compared to the first quarter of 2018, at
$39.9 million, as we continue to execute improvements to our cost
structure. Importantly, this does not yet reflect the expected $13
million annual operating expense reduction from the discontinuation of
our millimeter wave business, which will start to benefit us in the
third quarter. Our non-GAAP gross margin came in at the high end of our
expectations at 57.2% reflecting the acceleration of server related
sales and automotive and industrial applications. Another key takeaway
from the quarter is that we made a $10 million discretionary payment
against our corporate debt and continue to maintain a healthy balance of
$106 million in cash and short-term investments."

Business Outlook - Third Quarter of 2018:

  • Revenue for the third quarter of 2018 is expected to be between
    approximately $100 million and $103 million.
  • Gross margin percentage for the third quarter of 2018 is expected to
    be approximately 57% plus or minus 2% on both a GAAP and non-GAAP
    basis.
  • Total operating expenses for the third quarter of 2018 are expected to
    be between approximately $44 million and $47 million on a GAAP basis
    and between approximately $39 million and $41 million on a non-GAAP
    basis. Both GAAP and non-GAAP operating expenses will reflect the
    initial benefits of the millimeter wave discontinuance. These savings
    are expected to be offset primarily by $1.5 million in mask and
    associated project costs related to new product advancements.

* For a reconciliation of GAAP to non-GAAP business outlook, see
accompanying tables "Reconciliation of U.S. GAAP to Non-GAAP Financial
Measures."

Investor Conference Call / Webcast Details:

Lattice Semiconductor will review the Company's financial results for
the fiscal second quarter of 2018 and business outlook for the third
quarter of 2018 on Thursday, July 26 at 5:00 p.m. Eastern Time. The
conference call-in number is 1-888-684-5603 or 1-918-398-4852 with
conference identification number 6199158. An accompanying presentation
and live webcast of the conference call will also be available on
Lattice's website at www.latticesemi.com.
The Company's financial guidance will be limited to the comments on its
public quarterly earnings call and the public business outlook
statements contained in this press release.

A replay of the call will be available approximately two hours after the
conclusion of the live call through 11:59 p.m. Eastern Time on August 2,
2018, by telephone at 1-404-537-3406. To access the replay, use
conference identification number 6199158. A webcast replay will also be
available on the investor relations section of www.latticesemi.com.

Forward-Looking Statements Notice:

The foregoing paragraphs contain forward-looking statements that involve
estimates, assumptions, risks and uncertainties. Any statements about
our expectations, beliefs, plans, objectives, assumptions or future
events or performance are not historical facts and may be
forward-looking. Such forward-looking statements include statements
relating to: the expected $13 million annual operating expense reduction
from the discontinuation of our millimeter wave business will start to
benefit us in the third quarter; and the statements under the heading
"Business Outlook - Third Quarter of 2018." Other forward-looking
statements may be indicated by words such as "will," "could," "should,"
"would," "may," "expect," "plan," "project," "anticipate," "intend,"
"forecast," "future," "believe," "estimate," "predict," "propose,"
"potential," "continue" or the negative of these terms or other
comparable terminology; and our expectation that we will remain focused
on maximizing the leverage of our operating model and reduce our
outstanding debt balance. Lattice believes the factors identified below
could cause actual results to differ materially from the forward-looking
statements.

Estimates of future revenue are inherently uncertain due to such factors
as global economic conditions, which may affect customer demand, pricing
pressures, competitive actions, the demand for our Mature, Mainstream
and New products, and in particular our iCE40™ and MachXO3L™ devices,
the ability to supply products to customers in a timely manner, changes
in our distribution relationships, or the volatility of our consumer
business. Actual gross margin percentage and operating expenses could
vary from the estimates on the basis of, among other things, changes in
revenue levels, changes in product pricing and mix, changes in wafer,
assembly, test and other costs, including commodity costs, variations in
manufacturing yields, the failure to sustain operational improvements,
the actual amount of compensation charges due to stock price changes.
Any unanticipated declines in revenue or gross margin, any unanticipated
increases in our operating expenses or unanticipated charges could
adversely affect our profitability.

In addition to the foregoing, other factors that may cause actual
results to differ materially from the forward-looking statements in this
press release include global economic uncertainty, overall semiconductor
market conditions, market acceptance and demand for our new products,
the Company's dependencies on its silicon wafer suppliers, the impact of
competitive products and pricing, technological and product development
risks. In addition, actual results are subject to other risks and
uncertainties that relate more broadly to our overall business,
including those risks more fully described in Lattice's filings with the
SEC including its annual report on Form 10-K for the fiscal year ended
December 30, 2017, and Lattice's quarterly reports filed on Form 10-Q.

You should not unduly rely on forward-looking statements because actual
results could differ materially from those expressed in any
forward-looking statements. In addition, any forward-looking statement
applies only as of the date on which it is made. The Company does not
intend to update or revise any forward-looking statements, whether as a
result of events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.

Non-GAAP Financial Measures:

Included within this press release and the accompanying tables and notes
are non-GAAP financial measures that supplement the Company's
consolidated financial information prepared in accordance with U.S.
GAAP. The non-GAAP measures presented exclude charges and adjustments
primarily related to stock-based compensation, restructuring charges,
acquisition-related charges, amortization of acquired intangible assets,
impairment of intangible assets, inventory written off from the
discontinuation of the Company's millimeter wave business, and the
estimated tax effect of these items. These charges and adjustments may
be nonrecurring in nature but are a result of periodic or non-core
operating activities of the Company. The Company describes these
non-GAAP financial measures and reconciles them to the most directly
comparable GAAP measures in the tables and notes attached to this press
release.

The Company's management believes that these non-GAAP financial measures
provide an additional and useful way of viewing aspects of our
performance that, when viewed in conjunction with our GAAP results,
provide a more comprehensive understanding of the various factors and
trends affecting our ongoing financial performance and operating results
than GAAP measures alone. Management also uses these non-GAAP measures
for strategic and business decision-making, internal budgeting,
forecasting, and resource allocation processes and believes that
investors should have access to similar data when making their
investment decisions.

In addition, the Company uses Adjusted EBITDA in calculating the annual
excess cash flow debt payment. These non-GAAP measures are included
solely for informational and comparative purposes and are not meant as a
substitute for GAAP and should be considered together with the
consolidated financial information located in the tables attached to
this press release.

About Lattice Semiconductor Corporation:

Lattice Semiconductor (NASDAQ:LSCC) is a leader in smart connectivity
solutions at the network edge, where the "things" of IoT live. Our low
power FPGA, and video ASSP products deliver edge intelligence, edge
connectivity, and control solutions to the consumer, communications,
industrial, compute, and automotive markets. Our unwavering commitment
to our global customers enables them to accelerate their innovation,
creating an even better and more connected world.

For more information about Lattice, please visit www.latticesemi.com.
You can also follow us via LinkedInTwitterFacebookYouTube,
WeChatWeibo or Youku.

 

Lattice Semiconductor Corporation

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

       
Three Months Ended Six Months Ended
June 30,
2018
  March 31,
2018
  July 1,
2017
June 30,
2018
  July 1,
2017
Revenue $ 102,715   $ 98,623   $ 94,137   $ 201,338   $ 198,724  
Costs and expenses:
Cost of sales 52,467 42,102 42,928 94,569 86,683
Research and development 21,081 22,941 26,820 44,022 54,209
Selling, general, and administrative 21,068 27,043 21,938 48,111 45,843
Amortization of acquired intangible assets 4,523 5,636 8,737 10,159 17,251
Restructuring 4,376 1,029 1,576 5,405 1,642
Acquisition related charges 864 667 867 1,531 2,527
Impairment of acquired intangible assets 11,900       11,900    
116,279   99,418   102,866   215,697   208,155  
Loss from operations (13,564 ) (795 ) (8,729 ) (14,359 ) (9,431 )
Interest, net (4,968 ) (5,114 ) (4,656 ) (10,082 ) (10,224 )
Other (expense) income, net (348 ) 554   410   206   (77 )
Loss before income taxes (18,880 ) (5,355 ) (12,975 ) (24,235 ) (19,732 )
Income tax expense 1,343   597   47   1,940   565  
Net loss $ (20,223 ) $ (5,952 ) $ (13,022 ) $ (26,175 ) $ (20,297 )
 
Net loss per share, basic and diluted $ (0.16 ) $ (0.05 ) $ (0.11 ) $ (0.21 ) $ (0.17 )
 
Shares used in per share calculations, basic and diluted 124,843   124,076   122,390   124,460   122,095  
 
 

Lattice Semiconductor Corporation

Consolidated Balance Sheets

(in thousands)

(unaudited)

       
June 30,
2018
December 30,
2017
Assets
Current assets:
Cash, cash equivalents and short-term marketable securities $ 105,785 $ 111,797
Accounts receivable, net 76,566 55,104
Inventories 65,586 79,903
Other current assets 21,729   16,567
Total current assets 269,666 263,371
 
Property and equipment, net 36,418 40,423
Intangible assets, net 29,189 51,308
Goodwill 267,514 267,514
Deferred income taxes 192 198
Other long-term assets 20,225   13,147
$ 623,204   $ 635,961
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities $ 62,200 $ 64,821
Current portion of long-term debt 24,526 1,508
Deferred income and allowances on sales to distributors and deferred
license revenue
  17,318
Total current liabilities 86,726 83,647
 
Long-term debt 265,699 299,667
Other long-term liabilities 40,159   34,954
Total liabilities 392,584 418,268
 
Stockholders' equity 230,620   217,693
$ 623,204   $ 635,961
 
 

Lattice Semiconductor Corporation

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

     
Six Months Ended
June 30, 2018   July 1, 2017
Cash flows from operating activities:
Net loss $ (26,175 ) $ (20,297 )
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 22,425 30,497
Impairment of acquired intangible assets 11,900
Amortization of debt issuance costs and discount 1,058 1,354
(Gain) loss on sale or maturity of marketable securities (1 ) 200
Gain on forward contracts (36 ) (26 )
Stock-based compensation expense 7,200 6,772
Gain on disposal of fixed assets (93 ) (61 )
Gain on sale of assets and business units (300 )
Impairment of cost-method investment 493
Changes in assets and liabilities:
Accounts receivable, net (19,654 ) 12,846
Inventories 14,687 689
Prepaid expenses and other assets (7,891 ) 2,822
Accounts payable and accrued expenses (includes restructuring) 7,095 (13,554 )
Accrued payroll obligations (1,716 ) (1,894 )
Income taxes payable 851 (355 )
Deferred income and allowances on sales to distributors (7,342 )
Deferred licensing and services revenue (68 ) (330 )
Net cash provided by operating activities 9,582   11,514  
Cash flows from investing activities:
Proceeds from sales of and maturities of short-term marketable
securities
2,500 7,200
Purchases of marketable securities (9,603 ) (7,420 )
Capital expenditures (4,105 ) (7,035 )
Proceeds from sale of assets and business unit, net of cash sold 300
Short-term loan to cost-method investee (1,000 )
Cash paid for software licenses (3,981 ) (4,149 )
Net cash used in investing activities (15,189 ) (12,104 )
Cash flows from financing activities:
Restricted stock unit withholdings (1,369 ) (1,748 )
Proceeds from issuance of common stock 6,409 2,931
Repayment of debt (12,009 ) (33,679 )
Net cash used in financing activities (6,969 ) (32,496 )
Effect of exchange rate change on cash (540 ) 950  
Net decrease in cash and cash equivalents (13,116 ) (32,136 )
Beginning cash and cash equivalents 106,815   106,552  
Ending cash and cash equivalents $ 93,699   $ 74,416  
 
Supplemental cash flow information:
Change in unrealized (gain) loss related to marketable securities,
net of tax, included in Accumulated other comprehensive loss
$ (2 ) $ 71
Income taxes paid, net of refunds $ 2,057 $ 976
Interest paid $ 9,177 $ 12,094
Accrued purchases of plant and equipment $ 354 $ 2,216
 
 

Lattice Semiconductor Corporation

- Supplemental Historical Financial Information -

(unaudited)

         
Three Months Ended Six Months Ended
June 30,
2018
  March 31,
2018
  July 1,
2017
June 30,
2018
  July 1,
2017
Operations and Cash Flow Information
Percent of Revenue
Gross Margin 48.9 % 57.3 % 54.4 % 53.0 % 56.4 %
R&D Expense 20.5 % 23.3 % 28.5 % 21.9 % 27.3 %
SG&A Expense 20.5 % 27.4 % 23.3 % 23.9 % 23.1 %
Depreciation and amortization (in thousands) 10,069 12,356 15,201 22,425 30,497
Stock-based compensation expense (in thousands) 2,400 4,800 2,929 7,200 6,772
Restructuring and severance related charges (in thousands) 4,376 1,029 1,576 5,405 1,642
Net cash provided by operating activities (thousands) 7,124 2,458 3,849 9,582 11,514
Capital expenditures (in thousands) 2,301 1,804 3,661 4,105 7,035
Repayment of debt (in thousands) 11,134 875 22,899 12,009 33,679
Interest paid (in thousands) 4,757 4,420 7,069 9,177 12,094
Taxes paid (cash, in thousands) 2,017 40 754 2,057 976
 
Balance Sheet Information
Current Ratio 3.1 4.2 2.3
A/R Days Revenue Outstanding 68 61 84
Inventory Months 3.8 5.6 5.5
 
Revenue% (by Geography)
Asia 76 % 73 % 69 % 74 % 70 %
Europe (incl. Africa) 12 % 12 % 11 % 12 % 11 %
Americas 12 % 15 % 20 % 14 % 19 %
 
Revenue% (by End Market)
Communications and Computing 29 % 28 % 29 % 29 % 29 %
Mobile and Consumer 24 % 27 % 27 % 25 % 29 %
Industrial and Automotive 43 % 41 % 32 % 42 % 30 %
Licensing and Services 4 % 4 % 12 % 4 % 12 %
 
Revenue% (by Channel) *
Distribution 86 % 87 % 76 % 87 % 73 %
Direct 14 % 13 % 24 % 13 % 27 %
 
* During the first quarter of 2018, we updated our channel categories
to group all forms of distribution into a single channel. Prior
periods have been reclassified to match current period presentation.
 
 

Lattice Semiconductor Corporation

- Reconciliation of U.S. GAAP to Non-GAAP Financial Measures -

(in thousands, except per share data)

(unaudited)

                       
Three Months Ended Six Months Ended
June 30,
2018
  March 31,
2018
  July 1,
2017
June 30,
2018
  July 1,
2017
 
Gross Margin Reconciliation
GAAP Gross margin $ 50,248 $ 56,521 $ 51,209 $ 106,769 $ 112,041
Inventory write-off related to restructured operations 8,277 8,277
Stock-based compensation - gross margin 196   237   180   433   408  
Non-GAAP Gross margin $ 58,721 $ 56,758 $ 51,389 $ 115,479 $ 112,449
 
Gross Margin % Reconciliation
GAAP Gross margin % 48.9 % 57.3 % 54.4 % 53.0 % 56.4 %
Cumulative effect of non-GAAP Gross Margin adjustments 8.3 % 0.3 % 0.2 % 4.4 % 0.2 %
Non-GAAP Gross margin % 57.2 % 57.6 % 54.6 % 57.4 % 56.6 %
 
Operating Expenses Reconciliation
GAAP Operating expenses $ 63,812 $ 57,316 $ 59,938 $ 121,128 $ 121,472
Amortization of acquired intangible assets (4,523 ) (5,636 ) (8,737 ) (10,159 ) (17,251 )
Restructuring charges (4,376 ) (1,029 ) (1,576 ) (5,405 ) (1,642 )
Acquisition related charges (1) (864 ) (667 ) (867 ) (1,531 ) (2,527 )
Impairment of acquired intangible assets (11,900 ) (11,900 )
Stock-based compensation - operations (2,204 ) (4,563 ) (2,749 ) (6,767 ) (6,364 )
Non-GAAP Operating expenses $ 39,945 $ 45,421 $ 46,009 $ 85,366 $ 93,688
 
(Loss) Income from Operations Reconciliation
GAAP Loss from operations $ (13,564 ) $ (795 ) $ (8,729 ) $ (14,359 ) $ (9,431 )
Inventory write-off related to restructured operations 8,277 8,277
Stock-based compensation - gross margin 196 237 180 433 408
Amortization of acquired intangible assets 4,523 5,636 8,737 10,159 17,251
Restructuring charges 4,376 1,029 1,576 5,405 1,642
Acquisition related charges (1) 864 667 867 1,531 2,527
Impairment of acquired intangible assets 11,900 11,900
Stock-based compensation - operations 2,204   4,563   2,749   6,767   6,364  
Non-GAAP Income from operations $ 18,776 $ 11,337 $ 5,380 $ 30,113 $ 18,761
 
(Loss) Income from Operations % Reconciliation
GAAP Loss from operations % (13.2 )% (0.8 )% (9.3 )% (7.1 )% (4.7 )%
Cumulative effect of non-GAAP Gross Margin and Operating adjustments 31.5 % 12.3 % 15.0 % 22.1 % 14.1 %
Non-GAAP Income from operations % 18.3 % 11.5 % 5.7 % 15.0 % 9.4 %
 
(1) Legal fees and outside services that were related to our
proposed acquisition by Canyon Bridge Acquisition Company, Inc.
 
 
Lattice Semiconductor Corporation
- Reconciliation of U.S. GAAP to Non-GAAP Financial Measures -
(in thousands, except per share data)
(unaudited)
               
Three Months Ended Six Months Ended
June 30,
2018
March 31,
2018
July 1,
2017
June 30,
2018
July 1,
2017
 
Income Tax Expense Reconciliation
GAAP Income tax expense $ 1,343 $ 597 $ 47 $ 1,940 $ 565
Estimated tax effect of non-GAAP adjustments (2) (258 ) 62   663   (196 ) 360  
Non-GAAP Income tax expense $ 1,085 $ 659 $ 710 $ 1,744 $ 925
 
Net (Loss) Income Reconciliation
GAAP Net loss $ (20,223 ) $ (5,952 ) $ (13,022 ) $ (26,175 ) $ (20,297 )
Inventory write-off related to restructured operations 8,277 8,277
Stock-based compensation - gross margin 196 237 180 433 408
Amortization of acquired intangible assets 4,523 5,636 8,737 10,159 17,251
Restructuring charges 4,376 1,029 1,576 5,405 1,642
Acquisition related charges (1) 864 667 867 1,531 2,527
Impairment of acquired intangible assets 11,900 11,900
Stock-based compensation - operations 2,204 4,563 2,749 6,767 6,364
Gain on sale of business unit (300 ) (300 )
Estimated tax effect of non-GAAP adjustments (2) 258   (62 ) (663 ) 196   (360 )
Non-GAAP Net income $ 12,375 $ 6,118 $ 124 $ 18,493 $ 7,235
 
Net (Loss) Income Per Share Reconciliation
GAAP Net loss per share - basic and diluted $ (0.16 ) $ (0.05 ) $ (0.11 ) $ (0.21 ) $ (0.17 )
Cumulative effect of Non-GAAP adjustments 0.26   0.10   0.11   0.36   0.23  
Non-GAAP Net income per share - basic and diluted $ 0.10 $ 0.05 $ $ 0.15 $ 0.06
 
Shares used in per share calculations:
Basic 124,843 124,076 122,390 124,460 122,095
Diluted - GAAP (3) 124,843 124,076 122,390 124,460 122,095
Diluted - Non-GAAP (3) 125,620 125,144 124,527 125,432 124,276
 
(1) Legal fees and outside services that were related to our
proposed acquisition by Canyon Bridge Acquisition Company, Inc.
(2) We calculate non-GAAP tax expense by applying our tax provision
model to year-to-date and projected income after adjusting
for non-GAAP items. The difference between calculated values for
GAAP and non-GAAP tax expense has been included as
the "Estimated tax effect of non-GAAP adjustments."
(3) Diluted shares are calculated using the GAAP treasury stock
method. In a loss position, diluted shares equal basic shares.
 
 
Lattice Semiconductor Corporation
- Reconciliation of U.S. GAAP to Non-GAAP Financial Measures -
(in thousands, except per share data)
(unaudited)
               
Three Months Ended
September 29, 2018
   
Business Outlook - Third Quarter 2018 Low Midpoint High
 
GAAP Operating expenses $ 44,000 $ 45,500 $ 47,000
Cumulative effect of Non-GAAP Operating expense adjustments (4) (5,000 ) (5,500 ) (6,000 )
Non-GAAP Operating expenses $ 39,000 $ 40,000 $ 41,000
 
(4) Includes estimated Amortization of acquired intangible assets
and Stock-based compensation included in Operating Expenses

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