Good afternoon. My name First Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Please note that today's call is being recorded. A recording will be made available by dialing 40 45373406 and entering ID number 6887938 to listen.
Thank you. Mr. David Pasquale of Global IR Partners, you may begin your conference.
Thank you, operator. Welcome everyone to Semiconductor's first quarter 2018 results conference call. Joining us from the company today are Mr. Glenn Hawock, Lattice's Interim CEO and Mr. Max Downey, Lattice's Chief Financial Officer.
Both executives will be available for Q received a copy of today's results release, please email Global IR Partners using lsccglobalirpartnersdot com, or you can get a copy of the release off 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 second quarter of 2018. 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 and 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 31, 2017, and in 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 this call. Our prepared remarks principles or GAAP.
Some financial information presented by us during the call will be provided on both a GAAP and a non GAAP basis. By disclosing certain non 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 non GAAP measures to better assess information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. If we use any non GAAP financial measures during the call, You will find the required presentation of and reconciliation to the most directly comparable GAAP financial measure in the company's earnings press release. At this time, I would like turn the call over to Mr.
Glenn Hawk. Please go ahead, sir.
Thank you, David, and thank you to everyone for joining us on call today. This was another busy quarter for Lattice with many notable achievements and changes. Before jumping into our results, I would like to touch on 2 significant organization changes. First, in early March, we announced the retirement of Darren Billerbeck as President and CEO. Darren had served as as CEO for over 7 years and is credited with, among other things, doubling down on Lattice's core value proposition of small energy efficient production priced programmable FPGAs.
He drove Lattice's success foray into the mobile handset market, which prior to our entry was not a target area for FPGAs. This is proving foundational for Lattice going forward as customers in other consumer industrial and even automotive markets adopt mobile influenced architectures as well. Darren was a great eager, we will miss his insight and presence and wish him and his family the best. To the outside, CEO transition announcements can seem expected. In Lattice's case, this is a transition we were prepared for.
My hiring back in 2015 being part of the plan I appreciate the board's confidence in naming the interim CEO. I take this opportunity very seriously. Since joining Gladys a few years back, I have had the opportunity to work with our analysts and to meet many of our investors at conferences, non deal roadshows and one on one meeting. For those on today's call semiconductor industry experience. I was Vice President And General Manager of the NAND Solutions Group at Micron Technology, Vice President and General Manager of the Embedded Business Group at Mnemonics And General Manager of the Flash Products Group at Intel.
I was originally attracted to Lattice because the company has a unique opportunity to contribute to the expansion of intelligence beyond the cloud and into the Edge devices network to it. Having worked with the team for 3 years now, I am more confident today than ever in our ability to do that. We also In line with my last point is the 2nd change I would like to mention. Lattice announced in March the addition of 3 new highly qualified independent directors, The additions were part of an agreement, Lattice's Board of Directors reached with Lyon Point Capital, which at the time owned approximately 62% of Lattice's shares. Our Chairman noted as board as the company continues to execute on its strategy to return to growth, accelerate operating expense reductions and increase capital efficiencies in order to build value for the company and our shareholders.
Our board and management team continue to be fully aligned in this mission Our focus is on extracting skilled and highly motivated team members. We are excited about Lattice's future and thank you for your continued support. From a business strategy standpoint, the main points we outlined during our Analyst and Investor Day in New York City last October remain unchanged. Lattice benefits from decades of leadership in Control And Connectivity solutions led by our programmable logic devices and imaging products. Our edge computing solutions are laying the foundation for additional future growth.
As a result, we have the stability and growth of a well established semi conductor company, yet also the opportunities afforded to startup companies focused on machine learning and artificial intelligence. I noted a minute ago, we're also highly committed to further reducing our OpEx while increasing our free cash flow and paying down our debt. These are the keys to building value Lattice and our shareholders. In terms of our results for the first quarter, we achieved both revenue and gross margin above the midpoint of our expectations. Revenue increased to $98,600,000 compared to percent, as compared to an expected range of 54% to 58%.
The takeaway here consistent and predictable. When someone asks you about Lattice, we want you to be able to respond that Lattice is executing as planned and the company does what it says it will do. We are fully focused on execution and working hard to deliver greatness. For Q1 there were many bright spots with consumer, computing, industrial and licensing, all up compared to the prior Q4. The underlying theme was high level of customer effort with no single characterized a few years ago by by carving out and are adding to Lattice's foundation for sustained growth.
Among the key drivers in Q1 was our FPGA revenue growth which was up again In particular, the mock XO family demand growth was significant coming from in applications such as service for data centers, a traditional market for Lattice as well as mobile handset screen replacements, a new market for Lattice. Our ICE, XP and power manager families were also up modestly. Revenue from our Image ASSP product was down typical of Q4 In terms of specific expectations for the second quarter of 2018, Revenue for the 2nd quarter is For gross margin, we expect approximately 56% plus or minus 2% on both the GAAP and non GAAP
$5,000,000
basis. Let me now turn the call over to Max for details on our financial results. Max?
Thank you, Glenn. As part of our press release today, we have provided detailed reconciliations of our 18, revenue was in line with our expectations at $98,600,000. Compared to the 4th quarter, revenue was up 3,300,000 or 3.5%, primarily on increases in industrial and computing, which are consistent with the growth and drivers we saw in the fourth quarter as well. As you're aware, and as we discussed on the last call, the revenue recognition rules have changed effective with the beginning of 2018. Because our distributor revenue is now recognized on a shipment basis, our first quarter revenue benefited as expected approximately $8,300,000 of an increase in distributor inventory during the quarter.
This inventory growth is geared towards serving increasing demand for our products performing control applications in servers and broad market industrial, as well as connectivity applications in our consumer market. In addition, because of the new revenue recognition approximately $1,200,000 as a result of our ability to recognize the 2018 HDMI royalties despite the fact that the royalty sharing agreement with the founders has not been finalized. For the full year, we expect new revenue rules positively impact our to product revenue resulting from distributor inventory declines to be in the $3,000,000 to $6,000,000 ring On the licensing and services side, we expect the benefits of being able to recognize the 2018 HDMI Royalties to essentially offset the detriment of those royalties in 2018. To that point, I am happy to say that the HDMI founders have reached a tentative agreement regarding the allocation of the escrowed royalties for the fiscal year 2017. We expect this to be finalized and to collect the cash in the second quarter.
For the first quarter, our gross margin on This is a from the inventory cost reductions we spoke of in the fourth quarter as that inventory sells through. 1st quarter GAAP operating expenses were $57,300,000 compared to $51,900,000 in the fourth quarter. The quarter over quarter increase in GAAP operating expenses is due to we recorded in the fourth quarter and an increase in stock compensation related to the retirement of our CEO in the first quarter. On a GAAP On a non GAAP basis, the operating expenses quarter. This was about 2.4 expenses related improving our profitability remains a priority focus for both our board and management team, and we remain committed to achieving the cost structure targets previously outlined and continue $600,000 on a GAAP basis in the first quarter flat with the 4th quarter.
And looking forward, the enactment of the 2017 Tax Cuts and Jobs Act is not expected to result in a significant change in the U. S. Cash tax paid or effective tax rate given the company's net operating loss carryforward positions. Our GAAP net loss for first quarter was approximately 6 point $1,000,000 or $0.05 per basic and diluted share, an improvement of approximately $5,000,000 or $0.04 per basic and diluted share from the 4th quarter. We ended the quarter with cash and short term investments of approximately 111 $500,000 compared to $111,800,000 in the 4th quarter.
Net cash provided by operating activities $2,500,000 in the quarter. Net service payments were approximately $900,000 We remain committed to our Accounts receivable was $65,800,000 in Q1 compared to $55,100,000 at the end of the 4th quarter. Due primarily to increased distributor inventory to meet the near term demand in support of increasing server deployments and consumer applications. As a result of increased accounts receivable, our days sales outstanding increased to 61 days in first quarter of 2018 from 53 days in the 4th quarter. Inventory at the end of the quarter was $77,900,000, down approximately 2.5% compared to 79.9000000 at the end of the 4th quarter.
Months of inventory came in at 5.6 months at the end of Q1 compared to 5.4 months at the end of Q4. We spent approximately $1,800,000 on capital expenditures in the first quarter compared to $500,000 in the 4th quarter. Depreciation and amortization expense was $12,400,000 in Q1 compared to $12,300,000 in the prior quarter and interest expense for the quarter was $5,100,000. This concludes the financial review portion of the call.
And your first question comes from Christopher Rolland with Susquehanna International.
Hey guys, it's David Haberli on behalf of Chris. It's a real quick one to start out. Can you talk about your exposure to ZTE and how this might expect your outlook for 2Q 2018 and then the comps in for 2018. I think previously you guys had guided that you expected that end market to be up, but you were kind of banking a bit on ZTE and Huawei there. So any color there would be appreciated.
Hi, David, you bet. Remember that, we've reached a nice point at Lattice in terms of customer and market diversification. And so currently once again, we have no customers larger than actually 4% said 5% earlier, and ZTE is well under that. Yes, we do know that ZTD shipments that we planned for Q2 will be down. There's no doubt about that.
However, the overall situation still remains very dynamic and it's not to us, how this might impact Lattice's top line revenue overall. In these kind of situations, very often, the end market for these products remains robust and is serviced by other communications companies many of whom are also our customers. So, but that the fact that, they're low single digit percentages should give you an idea to our maximum exposure there.
Got it. Thanks. And then, Glenn, on the press release and your commentary, you talked a bit about kind of artificial intelligence and a launch of intelligence tools there. Maybe you can give us a little bit of color around the progress you're making in intelligence at the edge any color on design wins that you guys have in place or how we should think about the ramp of these products in 2018 and beyond would be helpful there too.
Yeah, you bet. And keep in mind that our pursuit of artificial intelligence is part of our larger initiative of pursuing, compute in edge devices, which is relatively new for Lattice. And this is not something that we expect to come on very quickly. A lot of companies that are pursuing artificial intelligence, have realized that it takes quite a bit of effort to get something as innovative as this off the ground. Now that said, we are pleased with the progress that we're seeing.
We are working with some early adopters to integrate AI into our current products. And this is pretty straightforward because when you look at what our products do with our customers today, especially those at the edge, we're already implementing bridging aggregation, sensors, etcetera, in products like smart speakers and the cameras and robots and drones, etcetera. So we're already in these small data stream so to speak. And so we are working with customers right now to take the next step and actually integrate AI into our products and those data streams. In addition to working with some very large early adopters that are are pursuing AI very aggressively.
We're also working with a lot of smaller companies too. And in fact, one of the nice wins that we have right now is in a smart coffee machine camera, where we are doing a neural neural computing based object recognition. And you'll be hearing more from us in this in the upcoming embedded vision summit in May in San Jose.
Great. And if I could just sneak one more in, I guess, for Max on the gross margin front here, I think a pretty impressive jump in good execution on the kind of 350 bps from Q4 to Q1 here. How should we think about 350 bps increase, if we were to like kind of bifurcate it between inventory cost reductions versus mix, versus other factors here, can you help us, can you provide any color there?
Yes. So the sizable majority of it is the cost reduction that we saw from Q4 and that flowing through this period. We did have a nice improvement in the overall customer and product mix. But contributing a meaningful portion of that increase, but the sizable component of it is the cost reduction from the fourth quarter flowing through.
Got it. Thanks for taking the questions and good execution on the quarter guys. Thank you.
Your next question comes from the line of Richard Shannon with Craig Hallum.
Hi guys. Thanks for taking my questions as well. That was your first question I'll ask is on the HDMI royalty agreement. Any details that can give us about the tentative agreement there and how should we think about modeling that revenue stream going forward?
Yes, I would say that the tentative agreement that we reached with respect is exclusively regarding the 2017 royalties and the collection of cash and sharing allocation of those royalties. That will not be reflected in our revenue in 2018. As we've talked about before, we've got the new accounting standards will not allow us to recognize the 2017 royalties in 2018. With respect to modeling that revenue, the licensing and services revenue going forward, we expect it to be in 3%, 3.5% of total revenue range. And that includes our ability to recognize the 2018 HDMI royalty even though that component of the agreement with the founders has not been finalized yet.
Okay. That is helpful.
Let's talk a
little bit about your, your industrial and automotive segment, clearly your best growing segment on a year on year basis, at least for the last couple of quarters. I know you addressed this to a good degree for your analyst went back I guess, October or September, October. Wondering if you can give us a bit of an update there in terms of, where you're seeing increased interest I know it's a fairly diverse customer base. And if you can wrap that into, if you see the kind of year on year growth rates you've been having the last couple of quarters, Or do you think you can keep that up?
Yes, you bet, Richard. It is, as you stated, the Industrial segment, it very diverse and there's a lot going on there. However, you can absolutely characterize where we're seeing some of the the traction in the control and the connect usage model, on things like, for the control usage model, we're seeing very nice traction in factory automation, as factories start to adopt, advanced robotic We're certainly benefiting from that. And from a Connect usage model perspective, we're seeing tremendous thing involving things in and around video displays. And the macro trend that we're seeing is that video displays of all sides from video walls all the way down to mobile handset screens, have to be connected to a very large number of different processors and other electronic devices and those protocols rarely match up nicely.
And we found a very good market there with our FPGAs because they're programmable and it allows our is to address many of those combinations that are required with a single product. Another example, I would say is smart speakers which I guess you could call more consumer, home automation. But I guess another example in the traditional industrial space is actually, outside of our business in our HDMI ASSP business, we are seeing very good traction in products that our use the HD based T protocol to pass HDMI over very long CAT V or CAP 6 cables. Okay, helpful. Maybe Sorry to answer the last part of your question.
And from it, we absolutely expect the growth rates in industrial that we've seen over the last several quarters to continue. It continues to look very strong for us, and we're very pleased with that segment.
Okay. If I can try to dig in, just a little bit more, if you're willing to go along with me here, talk about factory, factory automation and advanced robotics. Any way you can give us a sense or if you have a way of quantitatively answering the question, let's know to what degree, how big of a market that is for you right now?
Yes, you, Pat. And it all comes back to the very significant diversification we've achieved in both the customer and the market space right now. Not only are no customers larger than 4% actually this quarter, but from a market perspective, we are nicely diversified between industrial, as well as cons and compute and consumer. So even though factory automation is in industrial robotics are a big highlight for us, all of these types of examples that talking about are on the order of single digit percentages of our revenue type of important.
One last question for me. I'll jump out of the line here. You talked about trying to grow revenues in double digit you pretty much hit your number in the first quarter and at least relative to my model, you're going to be pretty close to my numbers for the second quarter. How should we think about that double digit kind of growth bogie? And if you could and Max, if you could specifically help us understand the puts and takes from the HDMI royalty as well as the revenue recognition rules and getting to that kind of a number, please.
On?
Yes. Well, I'll adjust the first part, which is the double digit growth and the maps follow-up at the HDMI World question. So, last fall when we talked about double digit growth, remember, we were talking about a return to a long term trend that Lattice seen historically. If you looked at our website over the last couple of years, we had a very nice graphic in there that we would add to each year, I think it was right 2010 or 2011 going forward that showed a nice double digit growth trajectory. And as we went through last year, as we did have a setback in our main message was, Hey, we are returning to a growth trajectory.
So, it was a long term trend we are referring to. And, we are very careful to not give annual guidance. We are giving quarterly guidance at this point in time. And I'll let Mac handle the HDMI question.
Yes. So with respect to the HDMI, discussion. And if you roll back the clock to the last earnings discussion that we had, you might remember Darren talking about the 2018, the 2017 HDMI Royalties and those not being able to be recognized as revenue in 2018 as we had expected them to previously. And we think that that's somewhere in the $6,000,000 to $8,000,000 range. So that won't be able to be recognized, but we will be able recognize the 2018 HDMI royalties.
As I said a little bit ago, we think the overall licensing and services revenue for the year will be somewhere around 3% to 3.5% of total revenue.
Got it. Perfect. Okay. Thanks guys. I appreciate it.
All for me.
Next question comes from David Duley with Steelhead.
Thanks for taking my question. I was curious Could you talk about you've listed a bunch of new applications and I kind of have an idea which we're going to grow most rapidly, but you could just rank your most exciting new applications, the top 3 of them for future growth. I'd appreciate it. And then along the same lines, you've talked about having design wins in these applications. How long is the duration of the design win to start to hit revenue ramp?
And then how once they ramp, how long did they last for? What's the tail?
Okay. You bet. And this is Glenn. I'll answer those in reverse order. The time from design win until production ramp and the duration of that ramp, it varies widely among our segments.
As you can imagine, consumer is very fast it can you can basically get into production sometimes within months. And those product cycles typically are on the order of a year or 2. Now that said, there are other elements of consumer that last much longer. The fast ones being things like mobile handsets, of course, but that's really just a minority of our business. The vast majority of our business is comprised of industrial and compute and communications, customers who take several years to go from a design in until production and then they typically remain in production many years after that point in time.
So that's a little bit of color on our design cycle and production durations. And the key takeaway there is that the majority of Lattice revenue is comprised of this very long term engagement based revenue outside of consumer. Now within that in terms of where are some of the revenue drivers, it does change versus time. What we're currently seeing is, one of the major highlights we have for the area is a data center servers. And we are different once again than other FPGA companies in that, we don't provide the very large FPGAs that accelerate the actual computing that's happening in the cloud, our FPGAs play more of a backplane control function and security and power up function, power management function within the servers.
And we have spoken on these calls over the last several quarters about the position that we had in the new reference design, formally called Pearly That ramp is going very well for us. And in fact, others in the industry are saying that it is well ahead of schedule and we're benefiting from that. One other comment on the data center servers is that because our FPGAs are so flexible, we don't only anticipate in those industry standard reference designs, there is also a large emerging, portion of the market where very large social media companies, for example, or retail companies will deviate from those standards so that they can get a competitive manage, they also use our FPGAs for similar functions. And we're benefiting from those build outs as well. So So, compute data center servers is certainly one of the highlights.
I mentioned factory automation already. I mentioned video plays. Smart speakers continue to be a strength for us. Those are some of the examples I would say.
And as a follow on, as far as the data center server design wins and ramp and whatnot, but so there's a new generation that's already ramping. How long do you think that those wins last, is that a 2 to 4 year kind of cycle or do you have to reinvent yourself after every 2 years how how would that area lag?
Yes. The timeline that we've been on and continue to focus on aligns with the major platform deployments that occur every optimistically 2 years. I think we're seeing that a lot of them are closer to 3, maybe not 4. But, we are engaged with those forms from a roadmap perspective and have been. And we do have plans to continue this for the foreseeable future.
Okay. And on the data center service, you mentioned you have at least the control security applications in boot up. Is there a potential to expand footprint or content into other niche applications in these servers?
Well, that has happened already actually. For example, on this current generation of reference designs, there are between 1 and 8 sockets available to Latticefpgas. That's up by 2x probably actually 4x from prior textures. Now time will tell if that trend is going to continue. But having the potential for 4 or 5 FPGAs in one server, quite pleased with.
So I think that the way I would look at it is the potential for growth in that area is really tied more to the end number servers that need to be shipped and what those servers are doing. The more complex operations they're doing, the more of our kinds of FPGAs they're going to need. We do an important function for our products and servers is not just things like power management, but as you know, security is becoming a much bigger concern And so with the products that we ship today as well as those that we have on the roadmap, we are certainly continuing to deliver more features that enable these authentication and other types of operations.
Okay. Thank you very much for that detail. Now one final thing from me is just on a revenue on an apples to apples basis between the March June quarter, there sounded like there were some one time events as far as inventory recognition or some of these new changes in accounting and whatnot. But can you just help me understand on an apples to apples basis how we should be looking at number sequentially.
So are you referring to March June quarters or are you referring to December March quarter?
March to June.
Okay. So March to June, we expect the impact from the new revenue recognition to be substantially less than what we saw in the first quarter, in the March quarter. We do expect a modest increase in distributor inventory build, which is a factor of what we see as solve growth in our backlog supporting the shipment forecast. And it's really the same fundamental drivers in servers and consumer as well as odd market industrial. And we're also seeing very strong in customer pull and sell through in those same markets.
So March to June quarter, we expect very small, apple difference in revenue as a result of the new revenue condition rules with respect to product revenue. We will continue to see that benefit on the licensing and services about the same amount that we saw in the first quarter.
So does that mean that the core business revenue was growing as you would have articulated, is the core business revenue growing sequentially between March June when we x out these impacts distribution and revenue rec changes?
Yes.
And your final question comes from the line of Mitesh Biscoe with Invesco.
Yes, thanks very much for taking my question. I'll do it if I can. Can you give us a sense of the delta of what was sold in the channel quarter over quarter I got it right early from the comments, it sounds about $8,000,000 more was sold into the channel buying this quarter.
That's right. It was so between December March quarter, we saw as expected, a distributor inventory growth of a little over $8,000,000, really to support increase in demand for control applications and servers and consumer connectivity as well as broad market industrial.
Got you. So it wasn't isolated to to buyers in China say stocking it before ZTE or anything like that?
No, no, not at all. It was some of some of it was in China. And but that's largely designed and dedicated to support the server ramp Glenn has spoken about.
Got you. That's all I had. Thanks very much.
Questions at this time. I will now turn the call over to Lattice's management for any closing remarks.
Okay. Thank you, operator. And thank you you again to everyone for joining us on today's call. We know how busy all of you are during the reporting season. In summary, the key takeaways from last Q1 call are that we're executing as planned and we're driving growth.
We have a stable core business with our control and edge connectivity applications. We are pursuing future growth initiatives like we talked about with edge computing and we're driving improved financial results through growth, the OpEx control and debt repayment. 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.