Lattice Semiconductor Corporation (NASDAQ:LSCC) Q3 2023 Earnings Call Transcript

Lattice Semiconductor Corporation (NASDAQ:LSCC) Q3 2023 Earnings Call Transcript October 30, 2023

Lattice Semiconductor Corporation beats earnings expectations. Reported EPS is $0.53, expectations were $0.52.

Operator: Greetings, and welcome to the Lattice Semiconductor Third Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Muscha, Senior Director of Investor Relations. Thank you, Rick. You may begin.

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’ll provide a financial and business review of the third quarter of 2023 and the business outlook for the fourth 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 that 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 fourth 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 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.

James Anderson: Thank you, Rick, and thank you, everyone, for joining us on our call today. We delivered solid results in Q3 with quarterly revenue growth of 11% year-over-year, while maintaining healthy gross margins and operating margins. Today, Lattice has the strongest product portfolio in our history in terms of both hardware and software solutions, and we continue to expand our product portfolio at a rapid rate. We’re looking forward to the expected launch of the 2 newest members of our Avant mid-range FPGA family at the Lattice Developers Conference in December. Let me touch on a few Q3 highlights. In addition to the Q3 revenue growth, we achieved a record non-GAAP gross margin of 70.6%, which was an increase of 110 basis points year-over-year.

We expanded non-GAAP operating margin by 60 basis points year-over-year to 40.3%, and we generated 40% free cash flow margin. Let me now provide an overview of our business high end market. In the communications and computing market, revenue was up 6% sequentially and down 6% on a year-over-year basis. We’re pleased to see the sequential uptick in this segment given some of the macroeconomic challenges this end market has experienced over the past quarters. The sequential growth was driven in part by growth in data center servers for both general purpose and AI-optimized applications. And we expect growth in servers to continue into the current quarter, offset by softer demand in 5G telecom infrastructure. Over the long term, we continue to believe we are well-positioned for growth in this segment given our growing content for server in both general purpose and AI optimized data center servers as well as long-term growth opportunities in data center networking and telecom infrastructure.

Turning on to the industrial and automotive market. Revenue declined 5% sequentially and was up 28% year-over-year. While we’re very pleased with the year-over-year growth, we did experience sequential softness in this market, consistent with broader industry trends, and we expect this market softness to continue into the current quarter. However, we continue to expect this market to be a strong long-term growth opportunity for Lattice as we address growing applications in industrial automation and robotics as well as automotive ADAS and infotainment systems. I’ll now provide some product road map highlights. We’re driving the largest product portfolio expansion in the company’s history, which we believe continues to create new future revenue streams for Lattice.

We recently introduced CrossLink-NX, the seventh device family built on the Lattice Nexus platform. This newest device family is the industry’s first FPGA in its class with integrated USB functionality, which is applicable to many diverse use cases. We also continue to be pleased with the progress on our new Lattice Avant platform, which creates new greenfield revenue opportunities for Lattice. We look forward to further expanding the platform with the expected launch of 2 new Avant device families at our Lattice Developers Conference in early December. Software is a key component of our strategy, as our software accelerates customer adoption and they enable faster time to market for our customers while driving long-term multi-generations for our solutions.

Avant will also leverage the same stack that our customers are already using today on our current Nexus products, which enables faster customer adoption on our new Avant platform. We look forward to sharing new details about our software portfolio at our developers conference in December. Overall, I’m pleased with our continued execution. While we’re not amend to macroeconomic headwinds in our end markets, we’re excited about the continued rapid expansion of our product portfolio. And we believe that we continue to be well-positioned for long-term growth across our core markets. I’ll now turn the call over to our CFO, Sherri Luther.

Sherri Luther: Thank you, Jim. We are pleased with our solid Q3 financial results. On a year-over-year basis, we drove double-digit revenue growth, continued gross margin expansion and strong profitability. We generated a record level of cash from operations, continue to invest in our leadership product portfolio and returned capital to shareholders through our 12th consecutive quarter of share buybacks. Let me now provide a summary of our results. Third quarter revenue was a record $192.2 million, up 1% sequentially and up 11% year-over-year. Sequential growth in the quarter was driven by Communications and Computing. Year-over-year revenue growth was driven by Industrial and Automotive. Our non-GAAP gross margin increased 10 basis points in Q3 compared to the prior quarter to a record 70.6% and was up 110 basis points on a year-over-year basis.

Both the sequential and year-over-year increases in gross margin continued to be driven by our gross margin expansion strategy, which is in its fifth year. Non-GAAP operating expenses were $58.2 million compared to $58 million in the prior quarter and $51.3 million in the year ago quarter. R&D expenses increased both sequentially and on a year-over-year basis as we continue to make investments in our product roadmap. Our non-GAAP operating margin was 40.3% in Q3 and was up 60 basis points compared to the year ago quarter. Q3 earnings per diluted share was $0.53 compared to $0.48 in the year ago quarter, which represents 10% year-over-year growth. Driving strong cash flow generation continues to be a key focus area for the company. In Q3, we generated a free cash flow margin of 40% and returned capital to our shareholders by repurchasing $10 million in stock or approximately 110,000 shares in the 12th consecutive quarter of our share repurchase program.

We ended the quarter with $114 million in cash. Let me now review our outlook for the fourth quarter. Revenue for the fourth quarter of 2023 is expected to be between $166 million and $186 million. Gross margin is expected to be 70.5%, plus or minus 1% on a non-GAAP basis. Total operating expenses for the fourth quarter are expected to be between $57 million and $59 million on a non-GAAP basis. In closing, I am pleased with our financial results and continued execution. While we are experiencing softness in some of our end markets, we remain focused on driving profitable long-term growth. Operator, we can now open the call for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Mark Lipacis with Jefferies.

Mark Lipacis: I had a question on geographic trends. Can you talk about what you saw in the quarter geographically and how things are playing out so far in Q4? Would you expect those trends to continue in Q4?

James Anderson: Yes. Thanks, Mark. And I’ll also talk about it in the context of the end markets as well. So first of all, for Q3, first of all, we’re pleased with the revenue results in Q3, the sequential growth and the year-over-year 11% growth. In the Comms and Computing segment, if we look at Q3, did see sequential uptick in revenue. We were pleased with that. That was one of the main drivers of that sequential growth from Q2 to Q3 as data center servers, both general purpose servers as well as AI optimized servers. From a geo perspective, it would be very much the geo mix that you would expect for data center servers that go into both OEM server vendors as well as hyperscalers. Just as a reminder on that new generation of servers that’s starting to ramp here in the second half of the year and into next year.

We do have a significantly higher level of content and a new generation of servers. So that’s a tailwind that we saw from Q2 to Q3. We expect that to continue into Q4. Now we are seeing in Q4, although we see servers being sequentially up within that Communications and Computing segment, we do see some headwinds and softer demand in communication, specifically in 5G telecom infrastructure. And that’s both wireless and wireline infrastructure, we’re seeing lower demand. We view that as really from lower CapEx spending driven by lower CapEx spending from telecom operators. And that would be, the geography, that would be more from the European geography, some Asia as well. That’s softness around telecom infrastructure. And then net-net, for the Comms and Computing segment, we expect as we go into Q4 from a sequential basis, we would expect that segment to be flat to sequentially down with, as I said, with kind of server demand being up and 5G telecom infrastructure being down sequentially.

And then if I move over to the industrial auto segment, our other big segment, in Q3, first of all, we’re quite pleased with the year-over-year growth that we saw in Q3, 28% year-over-year. But towards the end of Q3, really in the last kind of 4 to 6 weeks of Q3, we started to see demand soften from our industrial and automotive customers. I would say that it was really localized to the Asia geography. And we expect that softness that we started to see at the end of Q3 extend into the current quarter, Q4. And that’s both a comment relative to the Asia geography as well as in Q4, the current quarter we’re starting to see demand softness in the Europe geography as well. And so we think that softening of demand that we saw towards the end of Q3 extends into Q4.

And the net then, is our Industrial and Auto segment, we’re expecting that to be sequentially down from Q3 to Q4. So hopefully, that gives you some callable both by segment but also to your question by geography as well.

Mark Lipacis: That’s very helpful. And if I may, on the follow-up, can you talk about Avant? It sounds like you’re queuing up 2 more products or products in that family to launch. How should we think about Avant relative to Nexus? And what do you think you really hit your stride on Avant in terms of revenues?

James Anderson: Yes. Great. Thanks, Mark. Happy to talk about Avant we are always — I’m excited about Avant. So first of all, just in general, we’re really pleased with the continued progress on a Avant overall. We launched that platform towards the end of last year. And just as a reminder, Avant is our new mid-range FPGA platform. It doubles our addressable market. And what we’re really excited about is it basically creates an entirely new greenfield revenue growth stream for the company. We feel really good about just the continued progress and execution on Avant. You asked relative to Nexus. When we look at the design win pipeline for Avant, it’s very strong. It continues to grow. And relative to Nexus in terms of kind of at the same relative point in time, the Avant pipeline is significantly larger, which we view as really positive.

In terms of revenue, we continue to expect a small amount of initial revenue from Avant this quarter Q4, as we’ve talked about in the past. It will be a small amount of initial revenue, but it’s an important milestone for us because it marks the beginning of that revenue ramp for Avant into 2024, ’25 and beyond. We’re also really excited about launching the next 2 device families in the Avant lineup. That’s the Avant-G and X. We’re expecting to launch that at the developers conference, Lattice Developers Conference in early December. So stay tuned. You’ll hear more about that at the developers conference. But what’s great about that is by the time of the developers conference, we’ll now have with the addition of G and X. We’ll have 3 device families, 3 different Avant device families in the hands of our customers that address a really wide range of applications across that mid-range FPGA market and a lot of diverse applications across our customer base.

And so really excited about that. And excited now once we put all the samples in the hands of customers to really focus on driving that revenue ramp as we move forward. And one other, I guess, note, as a reminder, on Avant is it does leverage the same software as Nexus. So we leverage the same software investments that we’ve been making on the Nexus platform. Avant takes advantage of those as well. So anyway, happy to certainly share more about Avant, the new versions, G and X, at the Developers Conference in December.

Operator: Our next question comes from the line of Tristan Gerra with Baird.

Tristan Gerra: So it sounds like the revenue shortfall relative to expectations for Q4 is all industrial and automotive related. So assuming that gives us about $95 million in Q4 for that segment, that’s still above the run rate of ’22. So the question, and I know you’ve mentioned weakness in China, how much further downside could there be in that segment that’s been growing very meaningfully over the past 2 years? Where do you think your true demand quality revenue run rate baseline is in that market? And what was the significant growth in the past few quarters, was it driven by inventory sales versus content gains? So just trying to see where we could land from a stable run rate, quarterly run rate in future quarters in that segment.