Good afternoon ladies and gentlemen. Today's conference call is being recorded and will be made available by dialing 4 4 5373406 Conference ID 6,199,158. Will also be made available on the Lattice website, www.lscc.com. I would now like to turn the call over to Mr. David Pasquale.
Thank you, operator. Welcome everyone to Lattice Semiconductor's second quarter 2018 results conference call. Joining us from the company today are Mr. Glenn Hawkes, Lattice Interim CEO and Mr. Max Downing, Lattice's Chief Financial Officer.
Both executives will be available for Q And A after the prepared comments We would also like to welcome Dougherty and Company analyst, Charlie Anderson, who recently initiated coverage on Lattice. If you have not yet received a copy of today's results release, please email Global IR Partners using lsccglobalirpartners.com, or you can get a copy of the release off of the Investor Relations section of Lattice Semiconductor's website. Before we begin the formal remarks, I'll review the safe harbor statement. It is our intention that this call will comply with the requirements of SEC Regulation FD. This call includes and constitutes the company's official guidance for the fiscal third quarter of 20 team.
If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public form such as a press release or publicly announced conference call. The matters that we discuss today, other than historical information, include forward looking statements relating to our future financial performance and other performance expectations. Investors are cautioned that forward looking statements are neither promises nor guarantees. They involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities And Exchange Commission, including our Form 10 K for the fiscal year ended December 30, 2017, and our quarterly reports on Form 10 Q.
The company disclaims any obligation to publicly update or revise any such forward looking statements to reflect events or circumstances that occur after this call. Our prepared remarks also will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles or GAAP Some financial information presented by us during this call will be provided GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance for results and underlying trends. Management uses operational goals. Non GAAP information If you use any non GAAP financial measures during the call, you will find the required presentation of and reconciliation to the most directly comparable GAAP Hawk. Please go ahead, sir.
Thank you, David, and thank you to everyone for joining us on our call Day, we are pleased to report that for the second quarter of 2018, results exceeded our expectations revenue, for margins and for operating expense reduction. As I stressed a few months ago, we continued to execute to our strategy focusing on our core business, delivering revenue growth, doing what we say. Underlying the solid quarterly results were both strong fundamentals in our target markets and actions to reduce spending. We saw broad strength in industrial markets from end applications such as video displays and factory automation Strength in our compute market continues to be driven by increased data center server demand. Communications was up despite limited revenue from ZTE due to the US Commerce Department ban, which has recently been lifted.
As a expected consumer was down on declining sales into mobile family remains our workhorse and continues to deliver solid revenue. We are also seeing our 1st year of meaningful revenue contributions from new products such as CrossLink and ECP5 variant. Also contributing to the quarterly results were benefits of our operational efficiency efforts which Max will discuss momentarily. I would like to elaborate on one important action in this category. Results, but will be realized in Q3 and going forward thereafter.
Last week, on July 18, we announced the discontinuance of our millimeter wave business, we did not achieve or see a path to the revenue levels necessary to justify further investments of approximately $13,000,000 per year. We pursued a number of strategic alternatives for this business but non proved viable. We took this action, but we'll continue to support customers during the transition period. We stated in our press release and I will reiterate here that we do not expect this to cause a significant impact to our 2018 revenue expectations given strengths we have been reporting in multiple markets for discontinuance is directionally aligned with our commitment to further improve our financial performance and sharpen our focus on business. For our future success, operational efficiencies will help us become more profitable but growth will come from delivering on innovations to capture these appelling opportunities.
For example, we are pleased with the reception from the Q2 launch of our Lattice since AI stack, which, as the name implies, enables our silicon products for artificial intelligence. Princing. In Q2, we also began limited sampling of a new product with advanced security features, important for data centers as well as IoT. Progress on 28 nanometers is on track, and we expect to tape out a platform for multiple families later year. In terms of our expected to be between 57%, plus or minus 2% on both a GAAP and a non GAAP basis.
Total operating expenses for the 3rd quarter are expected to be between $44,000,000 $47,000,000 on a GAAP basis and between $39,000,000 $41,000,000 on a non GAAP basis. A revenue driven focus efficiencies and a business mix that de emphasizes handsets and pivots to less volatile and higher margin markets such industrial, automotive and the emerging trends associated with AI and IoT. Let me now turn the call over to Matt for details on our
of our decision to discontinue the Millimeter wave business. This action will result in a $13,000,000 reduction to our annual operating expenses primarily through reduced R and D headcount. This benefit will start in the third quarter and is factored into our outlook. Our second quarter operating expenses included a full structuring and impairment charges that were recorded in the second quarter of 2018. These charges include approximately $8,000,000 in inventory write Town that is recorded in cost of sales, approximately $12,000,000 in impairment of acquired intangible asset dollars that is recorded as a component of GAAP operating expenses and severance and other asset write offs amounting to approximately $4,000,000 that are recorded as restructuring charges as a component of GAAP operating expenses.
We expect this action to have cash impact in the third quarter of approximately $4,200,000 to $4,500,000. Moving on to our 2nd quarter financial results. Our revenue for the second quarter was just above our expectations at $102,700,000 compared to an expected range of 98 to $102,000,000. Compared to the first quarter, revenue was up $4,100,000 or 4.1% primarily on increases in industrial and computing, which are consistent with the growth drivers we have seen in previous quarters. We also experienced an increase of approximately $1,000,000 on licensing and services revenue related to royalty audit settlements.
We saw approximately $4,000,000 in increased revenue This is about $2,000,000 more than we expected. This inventory growth is to serve increasing demand for our products, performing control applications and servers, as well as connectivity applications in our consumer by approximately 1%. Specifically, we expect the full year benefit product revenue resulting from distributor inventory growth to be in the $3,000,000 to $6,000,000 range. And for licensing and services, we expect the full year benefit to be insignificant During the second quarter, we did collect that we were unable to recognize as revenue because of the new revenue rules. Our 3rd quarter revenue guidance of $100,000,000 to $103,000,000 reflects sequential strength in both communications and computing.
We see industrial and auto staying relatively flat and our consumer market down sequentially. We expect our distributor inventory to decline quarter over quarter as our sell through continues to grow and outpaces our shipments in the 3rd quarter. Gross margin on a GAAP basis was Our second quarter GAAP gross margin includes approximately shutdown at the millimeter wave business. Our non GAAP gross margin held strong at 57.2% as compared to an expected range of 54% to 58%, reflecting better than expected end market mix, including higher than expected licensing and services revenue. Our 3rd quarter guidance was 57 plus or -2 percent, which is a departure from our traditional 56 percent plus or -2 guidance reflects both the strength in our industrial and automotive end market and our confidence in margin expansion initiatives that we have underway.
2nd quarter GAAP operating expenses were $63,800,000 compared to $57,300,000 in the first quarter. The quarter over quarter decline includes $4,000,000 in restructuring charges and $11,900,000 in impairment charges related to the shutdown of our millimeter wave business. On a non GAAP basis, operating expenses were $39,900,000, down 12% from $400,000 in the first quarter. This is under our 2nd quarter guidance of $43,000,000 to $45,000,000, The quarter over quarter decline in expense, which were related to CEO and Board transitions. In addition, headcount and other spending controls contributed approximately $2,000,000 in cost share improvement.
And finally, we saw a quarter over quarter decline of approximately $1,500,000 related to cyclical declines and project related timing. Our 3rd quarter non GAAP operating expense guidance of $39 to $41,000,000 reflects the initial benefits of the millimeter wave discontinuance, offset primarily by $1,500,000 in masks and associated project costs related to new product development. Our GAAP net loss for the second quarter was approximately $20,200,000 or $0.16 per basic and diluted share. This includes the $24,000,000 or $0.19 per share in restructuring and impairment charges associated with the shutdown of our millimeter wave business. On a non GAAP basis, 2nd quarter net income was $12,400,000 or $0.10 per basic and diluted share, an improvement of approximately $6,300,000 or $0.05 per basic and diluted share from the 1st quarter.
In alignment with our goals to de lever our balance sheet, we made debt principal payments of approximately $11,100,000 during the quarter. Including a of progress that we've made. Our key profitability and leverage metrics are consistently improving, but more importantly, we have established a solid foundation to leverage this momentum as we go forward.
Questions
Your first question comes from the line of Charlie Anderson with Dougherty and Company.
Yes, thanks for taking my questions and congrats on the solid performance guys. So I wanted to start with, a lot has changed since the year started, obviously, ZTE ZT out, etcetera, changes in operating expenses. So I wonder maybe if you wouldn't mind just sort of recalibrating us on the year to that you can. And then I've got a few follow ups.
Yes, Charlie. Thanks for the question. This is Glenn. As you know, we do not provide full year guidance. We provide quarterly guidance and, Max has given that out.
We are very, very pleased by the progress that we've made so far in the first half of the year, and we're looking forward to a strong Q3 as well.
Well. Okay. Great. As it relates to ZTE, maybe you could add a little color on, I think you gave last quarter kind of roughly where they were as a customer? Do they come back in a similar way?
They come back in a different way? What are you seeing there? And just in terms of tariff type impacts in general, what are you guys seeing there?
Yes. Well, the, I would separate out a little bit the ZTE issue versus the tariff impact to address the latter first. From a tariffs perspective, our products are not affected, to date. And we were in a similar boat as other semiconductor companies with that regards for the most part. With regards to ZTE, in a situation like this where, they're reengaging, so to speak, a lot of times, some of the initial signals that you tend to be a little lumpy and you try to smooth those out with the supply chain concerns and things like that.
In this case, we're in pretty good shape because the products that they buy our products that we sell to other customers as well. And so we are able to meet most of their needs, but certainly not all as they start to make decisions about the rate at which they would like to restock, so to speak. We mentioned last quarter that we didn't have any any customers larger than 4%. I think larger than 5% is where we're at this quarter. We don't see that changing going forward.
ZTE should fit within that box. It is noteworthy because ZTE had traditionally been our top 5 customer rarely, I'll say never, the top for sure. But they're in that ballpark, so it is significant.
Great. And then Max, You gave guidance on a number of fronts on Q3. I'm just curious maybe if you could fill in a few blanks for us on interest expense, share count, and tax rate, directionally, anything changed in there from Q2?
Our dilution is typically about half a point per quarter, 2% a year on the share count. And that's kind of what I would how I would think about it. With respect to tax rate, given the relatively small dollar amount involved with our tax expense. I tend to not focus as much on rate at this point as I do on overall tax expense. And I think of it this way.
I think our full year tax expense will be right around $3,000,000 to $3,500,000 for the year with cash tax being a little bit north of that, but not much. And then on interest I would expect it to be fairly consistent with where it was in the first half, maybe inclining a bit as LIBOR as live bar grows.
Okay, great. Thanks so much.
And your next question comes from the line of Christopher Lalor with Susquehanna, IG.
Hey guys, it's David Haberle on behalf of Chris. I guess to start out, after you guys announced your departure for millimeter which just sounds like the economics just weren't justifiable at this point. As you think about the business, are there any other areas that you cut as a cost saver where the economics just good enough right now or are we kind of running with the core business at this point?
Yes, David, this is Glenn. For the most part, you're correct. That was certainly one of the larger, areas of spending that we took action on Other than that, it's small project level pruning, if you will. But we're pretty comfortable with what we're investing in right now for the most part.
Got it. And then I think earlier in the year, you guys had kind of set a goal to get to $40,000,000 a quarter in OpEx, excluding mass costs in the second half of the year. So how should we think about that goal now that millimeter wave is at? Do we just kind of take 3 off of that and say about $37,000,000? What should our kind of OpEx target look like going forward here?
Excluding max cost?
Yes. David, I think, where we can go from here I think that there is more room over the sort of midterm horizon. And I would expect us to drive our normalized run rate to be 3% to 4% down from where it is today.
Got it. Thanks. And then I guess one last one from me. Once again, nice progress on the industrial and automotive front. It continues to be a winner for you guys.
Can you guys talk about the like what the contribution, the revenue contribution is from automotive right now in that segment? Is there any design win traction happening now that's going to kind of ramp meaningfully in the next year or 2? Are we wait and see? How is that part of that business?
Yes, you bet, David. And I think that this is an area that will provide more color on going forward. Historically, Lattice has combined those 2 segments industry on auto. And as we focus on them, clearly, we're seeing that they behave a little bit differently. As you've noted in our results, industrial, we're showing meaningful in revenue, especially year over year, typically those design wins come online much sooner than some of those in auto.
So as things currently stand to answer your question, virtually all the improvements that we're we're talking about today, revenue wise have come from the industrial side of that. Automotive, and the reason we keep emphasizing that, it is a forward looking type of a comment. The design wins are we're very pleased with the design win progress, but it will take some time before that actually shows up in terms of real
next question comes from
on gross margins, a nice result in the 2nd quarter and a nice guide here. Max, I think you mentioned something regarding having confidence in some of your, I'm trying to find my notes here. Confidence in expansion opportunities underway. Wondering if you can help us understand what exactly that means. Yes, Richard.
The as you know, we've been looking at cost structure and margin expansion opportunities for a while. In part, as a result of the investments that we've made in our systems and tools, we have much more intense visibility into the data at product level, customer level, etcetera. And that's helping us really zero in on refinements in the sales channel pricing, as well as some supply chain enhancements that'll deliver margin expansion for us. And we expect to focus on that over the long term horizon and leverage as stated continue to improve.
Given those activities as well as what I think most people assume are a healthy mix of gross margins that come from your automotive industrial bucket, which is, seems to be probably the best growth rate you have Any, any ideas on how you would have us thinking about where gross margins can go several quarters out?
Yes. We're only guiding the 3rd quarter at this point. I do think that we feel obviously very comfortable with our guide and in stepping up and raising our guide from our traditional range of 56 plus or minus 2. The we do in the near term see some period costs that we will have as we pursue these initiatives, saving money, cost money sometimes, and But we think that'll fall within the guided range. And as we get closer to realizing upside benefits from that, we'll talk about those at that time.
Okay. Fair enough. I look forward to that update. Last question for me. I know you've talked about this maybe 2 or 3 quarters ago, including profile at the Analyst event last fall, but maybe Glenn, if you can update us on your thought process and breadth of the product lines you expect to have a 20 nanometer
Yes, Richard, real quickly clarification, 28 nanometers is what we're focused on. And what we're pursuing and has been several years in the works, quite frankly, is a new platform that we'll be deploying that will enable us to just very efficiently, continue both continue our our very important product lines, successful product lines today from EXO to the ECP line and the ice line. And that that platform, it's not just about the silicon technology and the design, but also the software. A big portion of our R and D effort goes into developing the software that customers need to use our products and the IP. And this is just a much more reusable platform for us You might have remembered from last fall that I clarified that after several acquisitions that Lattice had made we really wound up with 4 very different, technology platforms.
The original Lattice 1, one from Silicon Blue, and 2 from Silicon Image. So this is really, going to help us in terms of R And D efficiency going forward.
Excellent. I think that's all from
me guys. Thank you. I'll step out of line.
Your next question comes from music Biscuski with Demesco.
Hi, thanks for taking my question and congratulations on the quarter. Can you give us any approximation of how much was sold into or out of the channel as you did for the last quarter?
So in the 3rd quarter, what do we expect with respect to channel inventory?
No, just for this quarter, how much, you're trying to look at underlying sales here. How much was $5,000,000 or $8,000,000 or anything like that, how much more sold into the channel or sold out?
In the 2nd quarter. You. Okay. Yes. So channel inventory inclined about $4,100,000 in the 2nd quarter.
We did have sell through growth consumption growth of about 9% from the from first quarter to 2nd quarter. And then we expect in the third quarter, that kind of sell through consumption growth to continue and then our channel inventory to decline in the 3rd quarter about $3,000,000 to $4,000,000. Does that answer your question?
Got you. That's perfect. And just taking a step back, you know, very understandable in the first quarter that sales are going to bump up as people are buying ahead of ZTE, and then second and third quarter come in continually strong from that. Can you give us any more granular detail of where you're seeing, the strength and markets and what type of products are selling. So
Yes. I'm sorry, was the question more for Q2 or for Q2 or just in general.
Really, for Q2 and generally as you like.
Okay. Yes, I think, certainly, for Q2 and relative to the prior quarter and certainly relative to the prior year, as we mentioned, Industrial is clearly a bright spot we're seeing a pretty broad based increase. Some of the noteworthy end applications include things like factory automation and robotics. In particular. Another area that's really in the industrial space is what you would call video walls.
A lot of our products are ideal for mixing and matching video displays and sensors. And so that's going very well for us. Believe it or not, in communications, despite some of the shortfalls from ZTE. Communications was actually up, thanks to strength from some of our other communications customers. And another bright spot continues to be into what we call the computing segment, which is in particular, data center servers.
The, the, we're very pleased with the reception of our products onto servers that are using the Intel Pearly platform and others. Great.
Thanks so much.
And our next question comes from the line of Charlie Anderson with Donorgincoast.
Yes, thanks.
I just had a quick follow-up on Millimeter wave. I wonder Glenn if you could speak to Is there any potential to monetize the patents there? I know Cybean was pretty early innovator there. So, as you went through the process, I wonder if you evaluated that in that's a possibility here on out? Thanks.
Yes, Charlie. We've certainly looked at everything that we have and how we can get the best value for our shareholders One thing I'd like to point out is, is we did actually monetize some of those patents the prior year in Q1 and Q2 of 2017. I believe the total was around $18,000,000 for the 2 quarter combined. So we had taken that action earlier, but you're right. We do still have patents and other assets that we will pursue, monetizing.
And there are no further questions at this time. I would like to turn the call to CEO, Glenn Hawke, for closing remarks.
Thank you, operator, and thank you again to everyone for joining us on today's call. We appreciate you taking the time, especially during the reporting, the busy reporting season to hear an update on Lattice. We're excited about our results our progress and our outlook. In summary, the key takeaways from our call are that we are continuing to execute to our business strategy We're achieving the operating efficiency improvements that we had mentioned. We're delivering higher non GAAP profitability.
We're actively paying down corporate debt we're further enhancing shareholder value. And as I mentioned, we're pursuing some innovations to take advantage of some of the key market trends that we see going forward. Again, we appreciate your continued support and encourage you to reach out with any additional follow-up questions you may have. Operator, that concludes today's call.
This concludes today's conference call. You may now disconnect.