Lattice Semiconductor Corporation (NASDAQ:LSCC) Q1 2023 Earnings Call Transcript

Lattice Semiconductor Corporation (NASDAQ:LSCC) Q1 2023 Earnings Call Transcript May 1, 2023

Lattice Semiconductor Corporation beats earnings expectations. Reported EPS is $0.51, expectations were $0.5.

Operator: Hello and welcome to the Lattice Semiconductor First Quarter 2023 Earnings Call. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Rick Muscha, Senior Director of Investor Relations. Please go ahead.

Rick Muscha: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice’s President and CEO; and Sherri Luther, Lattice’s CFO. We will provide a financial and business review of the first quarter of 2023 and the business outlook for the second quarter of 2023. If you have not obtained a copy of our earnings press release, it can be found at our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are predictions based on information that is currently available and then actual results may differ materially.

We refer you to the documents that the Company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the Company’s official guidance for the second quarter of 2023. 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 forum such as a press release or publicly announced conference call. We will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the Company’s performance and underlying trends.

For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at latticesemi.com. Let me now turn the call over to Jim Anderson, our CEO.

Jim Anderson: Thank you, Rick, and thank you everyone for joining us on our call today. We delivered strong results in Q1, with record quarterly revenue, which grew 22% year-over-year and non-GAAP net income growth with 36% year-over-year. While we’re certainly not immune to any macro-economic challenges impacting the industry, growth in our core strategic markets is driven by growing demand for our leadership product portfolio, strong customer momentum, and solid execution. Let me touch on a few Q1 highlights. In addition to the strong revenue growth, we expanded non-GAAP gross margin by 260 basis points year-over-year to a record 70.3%. We achieved record non-GAAP operating profit of 41%, which was an increase of 470 basis points year-over-year.

We further expanded our product portfolio with a recent launch of the sixth device family based on our Nexus platform. Then we launched enhanced versions of multiple software solutions stacks as we continued to expand our software portfolio. Let me now provide an overview of our business by end market. In the communications and computing market, revenue was down 9% sequentially and up 4% on a year-over-year basis. As we expected, the sequential decline in revenue in this segment was primarily due to softer industry-wide server and market demand. However, we continue to see this segment as a long-term growth driver for the company, as it includes multiple growth vectors, such as content expansion and data center servers, new greenfield client computing designs and growth in wireless infrastructure and data center networking.

Turning now to the industrial and automotive market, revenue increased 21% sequentially and was up 55% on a year-over-year basis. Q1 growth reflects strong customer adoption of Lattice solutions in new design wins across a broad range of applications, including industrial automation and robotic, as well as automotive ADAS and infotainment systems. I’ll now provide some product roadmap highlights. We’re pleased to announce that MachXO5-NX began production shipments in Q1, which is our fifth Nexus device family to enter production. We also recently introduced MachXO5T-NX, the sixth family built on the Lattice and Nexus platform. This device family provides advanced system control and multiple applications, including data center networking, machine vision, and industrial IoT.

Overall, we continue to be pleased with the broad adoption of our Nexus-based products and our commitment to continued investment and expansion of our Nexus platform has further strengthened our leadership position in the small FPGA segment. We also continue to be pleased with progress on our new Lattice Avant™ platform, which launched in early December. Avant is targeted at mid-range FPGG applications and doubles our addressable market and creates new greenfield revenue opportunities for Lattice as it ramps over the coming years. Customer engagement and momentum continues to grow and we look forward to launching two new Avant device families later this year. Turning now to our software strategy, as we’ve discussed over the past few years, software is a key component of our strategy and we’ve been increasing investment in our software portfolio.

These investments are driving faster customer adoption of Lattice products. Over half of our new silicon design wins are now enabled by at least one of our software solution stacks, which increases the value that we’re delivering to our customers and the long-term stickiness of our products. In Q1, we expanded the capabilities of three of our solution stacks and we expect our expanding software portfolio to remain a key driver of customer enablement and momentum. In summary, while we’re certainly not immune to macroeconomic challenges impacting the industry, Lattice continues to be well positioned in long-term secular growth markets with an expanding product portfolio, accelerating customer momentum and strong financial execution. We look forward to sharing more about our future plans at our Investor Day on May 15.

I’ll now turn the call over to our CFO, Sherri Luther.

Sherri Luther: Thank you, Jim. We are pleased with our strong financial results in Q1 with record profitability driven by double-digit revenue growth and continued growth margin expansion. We continue to focus on cash generation while investing in our long-term product roadmap. We also returned capital to our shareholders through our 10th consecutive quarter of share buybacks. Let me now provide a summary of our results. First quarter revenue was a record $184.3 million, up 5% sequentially from the fourth quarter and up 22% year-over-year. Q1 was the 12th consecutive quarter of sequential revenue growth. Revenue continued to grow year-over-year in our two strategic market segments of industrial and automotive and communications and computing.

Our non-GAAP growth margin increased 30 basis point to a record 70.3% in Q1 compared to the prior quarter and was up 260 basis points compared to the year ago quarter. Both the sequential and year-over-year increases in gross margin continue to be driven by strong execution on our gross margin expansion strategy, which is now in its fifth year. Non-GAAP operating expenses were $54 million compared to $52.5 million in the prior quarter and $47.2 million in the year ago quarter. Both R&D and SG&A expenses increased sequentially as we continue to make investments in our product portfolio, customer support and demand creation. Our non-GAAP operating margin increased 80 basis points to a record 41% in Q1 compared to the prior quarter and was up 470 basis points compared to the year ago quarter.

We continue the balance operating margin expansion with investments that will drive Lattice’s long-term revenue growth. Q1 non-GAAP tax expense increased to $3.2 million, primarily due to tax reform changes related to the capitalization of R&D costs. Q1 earnings per diluted share was $0.51 compared to $0.37 in the year ago quarter, which represents 37% year-over-year growth, which is faster than the rate of revenue growth. Cash generation continues to be a priority. We ended the quarter with $112 million in cash after repurchasing 119,000 shares or $10 million in stock, and we also paid down $25 million on our credit revolver. Subsequent to the end of the quarter, we paid down an additional $60 million on our credit revolver. Let me now review our outlook for the second quarter.

Revenue for the second quarter of 2023 is expected to be between $183 million and $193 million. Gross margin is expected to be 70% plus or minus 1% on a non-GAAP basis. Total operating expenses for the second quarter are expected to be between $56 million and $58 million on a non-GAAP basis. In closing, I’m very pleased with our strong financial results and continued execution despite the macroeconomic challenges impacting the industry. We are looking forward to our Investor Day on May 15th when we will share our plans of how we continue to build long-term shareholder value. Operator, we can now open the call for questions.

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Q&A Session

Operator: Our first question today is coming from Matt Ramsay from TD Cowan. Your line is now live.

Matt Ramsay: Yes. Thank you very much. Good afternoon everybody. Jim, I wanted to start my first question, I think in Sherri’s script she mentioned 12 consecutive quarters of sequential revenue growth, which is remarkable and when you guys just put up 22% growth in Q1, which is a lot better than the industry’s doing, let’s say. If you could talk to us a little bit about the drivers of the growth now as you continue to consolidate share in the low tier FPGA market, and then in particular, do you feel comfortable, one of the questions I get as you’ve gone put up this much growth, do you feel comfortable with where distributor and channel inventory is and the inventory levels? So we can still see further growth going forward at maybe a similar pace. Thanks.

Jim Anderson: Yeah, thanks for the question, Matt. Yeah, so we’re quite pleased with the results that we saw in Q1 in particular, the year-over-year growth of 22%. We feel like a good start for the year, especially considering over the last two years, we’ve grown at over 20% per year and like I said, 12 consecutive quarters of growth. So we feel good about that. I attribute it to really two things: number one, from a market perspective, we positioned the company and I think the right long-term secular growth markets and we have really strong Lattice-specific growth drivers within those markets. And then number two is product portfolio expansion. Right now, we’re in the midst of, I would say, the largest product portfolio expansion the company has ever done in its history.

And so I think both of those have just positioned us really good for growth. On the first one, just a little bit more color on — from a market perspective, we’re certainly pleased with our continued progress in the Industrial and Automotive segment, Industrial robotics, industrial automation, automotive electronics like ADAS and infotainment systems. All of those applications are really good applications for Lattice devices. The power efficiency that we bring, the flexibility, the increasing software content that we’re delivering to our customers, all of those help us bring really unique and I think, compelling solutions to our customers and that growth that we’re seeing in those segments really driven by design wins that we’ve accumulated and driven over the last one, two, three, four years in those design wins entering production.

So we’re quite pleased with the growth that we see in that segment. And even comms and computing, even though we saw some sequential decline in that segment, we again chalked up growth on a year-over-year perspective from that segment, and I think that stands out relative to the industry. And there again, we see growth in content expansion in servers, good growth in data center networking, wireless infrastructure, so a number of specific growth vectors there. And then like I said, on number two on the product expansion, we continue to expand out our small FPGA platform of Nexus. Just got our fifth device family into production, Number six, we just launched and Avant is still ahead of us in terms of revenue ramp. We’re just kind of just getting started with Avant this year.