Lattice Beats, Gives Mixed Guidance

Lattice Semiconductor Corporation LSCC - Snapshot Report) reported second quarter results that beat the consensus revenue and earnings estimates by 9.6% and 3 cents, respectively. The peer group consists of Xilinx (XLNX - Analyst Report), which missed by 5 cents, and Altera Corporation (ALTR - Analyst Report), which reported in-line. Another logic player, Actel Corporation (ACTL) is expected to disappoint, as the company is seeing weakness in a particular product line. 

Revenue of $46.9 million was up 8.2% sequentially and down 19.2% year over year. The sequential increase was driven by the Chinese communications business and success of new products. Similar to many other semiconductor companies, such as Linear Technologies (LLTC - Analyst Report) and Intersil Corporation (ISIL - Analyst Report), Lattice also benefited from strength in the computing and consumer markets. These two end markets generated 12% and 14% of revenue, and grew 62.3% and 37.7%, respectively. The communications market (57% of total revenue) declined 2.1% sequentially, while industrial and other (17%) increased 2.2%. 

The newer FPGA products were up 11.6% sequentially and 29.9% year over year. PLD revenue increased 6.3% sequentially and declined 33.9% year over year. Total new products increased 25.8% sequentially and 73.0% from the year-ago quarter. Mainstream and mature products witnessed single-digit sequential and double-digits year over year declines. The new 90nm SERDES enabled products did not contribute to sequential growth, however they were up strongly from the year-ago quarter. 

Around 64% of revenue was generated in Asia, 20% in North America and 16% in Europe. 

Gross margin was 52.4%, down 14 basis points (bps) from 52.6% posted in the previous quarter. This was largely mix-related, as lower-margin new products grew, while mainstream and mature products declined. Also, lower-margin computing and consumer revenue increased more significantly than higher-margin industrial and communications. This was partially offset by higher volumes, cost controls and improved yields. 

Operating expenses of $26.3 million were lower than the previous quarter’s $26.7 million. The operating margin was -3.6%, up 535 bps sequentially from -9.0% posted in the previous quarter. The operating margin increase was attributable to lower R&D expenses, coupled with flattish COGS and SG&A (as a percentage of sales). 

The pro forma net loss was $1.3 million, or -2.9% of sales. This compares to loss of $3.6 million, or -8.3% in the previous quarter and income of $1.2 million, or 2.2% in the year-ago quarter. Including restructuring charges, stock compensation expenses and adjustments related to auction rated securities, the GAAP loss was $2.7 million (-$0.02 per share) compared to losses of $5.8 million (-$0.05) in the previous quarter and $13.6 (-$0.12) in the year-ago quarter. Special items reduced the GAAP EPS by $0.01. 

The balance sheet is debt free. Inventories decreased -7.2%, while inventory turns increased from 2.7x to 3.2x. DSOs went down from 53 to 52 days. The company ended with cash and marketable securities of $104.3 million, or $0.90 per share. 

Management guided for third-quarter revenues of -2% to +3% , gross margin in the 52%-54% range, and operating expenses of $29.2 million including $1.2 million for restructuring. The tax provision is expected to be negligible for another few quarters, as the company has significant NOLs carried forward.