Lattice Semiconductor Corporation (NASDAQ:LSCC) Q4 2022 Earnings Call Transcript

Lattice Semiconductor Corporation (NASDAQ:LSCC) Q4 2022 Earnings Call Transcript February 13, 2023

Operator: Greetings, welcome to Lattice Semiconductor Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host Rick Muscha, Lattice’s Director of Investor Relations. 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 will provide a financial and business review of the fourth quarter of 2022 and the business outlook for the first quarter of 2023. If you have not obtained a copy of our earnings press release that 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 first 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. 2022 was a remarkable year for Lattice as we significantly expanded our product portfolio and delivered record financial results. Annual revenue grew by 28% driven by growth in our core strategic markets of industrial and automotive and communications and computing. Full-year non-GAAP gross margin expanded by 590 basis points to a record 69.1% and we delivered annual non-GAAP net income growth of 64% year-over-year. We also continue to expand our product portfolio with multiple hardware and software product launches, including the successful launch of our new Lattice Avant mid-range FPGA platform, which doubles the addressable market of the company.

Let me now provide an overview of our business by end market. In the communications and computing market, full-year revenue increased 26%, which is the fourth consecutive year of double-digit growth for this market segment. We continue to have multiple long-term growth drivers in this segment, including content expansion and data center servers, new greenfield client computing design wins, 5G wireless infrastructure and data center networking. Turning now to the industrial and automotive market. Full-year revenue increased 41%, which is the third consecutive year of double-digit growth for this segment. We continue to see this market as a strong long-term growth opportunity for Lattice as our business continues to grow across multiple applications such as industrial, automation and robotics, as well as automotive ADAS and infotainment systems.

Turning now to consumer. Full-year revenue was down 3%, reflecting the macroeconomic softness in the consumer electronics end market. Consumer accounted for only 7% of our overall revenue in 2022. I’ll now provide some product roadmap highlights. Since the introduction of Lattice Nexus, we’ve launched five device families based on the platform. We have four device families in production and ramping with customers. The fifth device family, MachXO5-NX, which launched in the first half of 2022 remains on track to go into production in the first half of this year. We also expect to launch two additional Nexus device families this year. We continue to be pleased with the revenue ramp of our Nexus based products as each new device family adds a new layer of revenue.

We expect the overall Nexus portfolio revenue to continue to ramp over the next several years. In addition to the continued portfolio expansion of Nexus, we further expanded our product portfolio with the launch of our Lattice Avant platform. Avant doubles our addressable market and creates an additional greenfield revenue gross stream as Avant revenue ramps over the coming years. Our customers are excited about Avant, which offers up to 2.5 times lower power, 2 times faster performance and up to 6 times smaller physical device size than our competitor’s FPGA devices. Each of these competitive advantages provide significant differentiation and value for our customers applications and systems. Sonner than Nexus the Avant platform will consist of a series of device families that will be launched over time.

The first family Avant-E was launched in December and we expect to launch two additional device families later this year. As we’ve discussed over the past few years, software is a key element of our strategy. The investments we’ve been making in our software portfolio are making it easier for our customers to adopt Lattice products and get to market quickly. We’ve launched five software solution stacks to-date and have more on the roadmap. As we mentioned previously, over half of our new silicon design wins are now enabled by at least one of our five software solution stacks. This increases the value that we’re delivering to our customers on the long-term stickiness of our products. Avant also leverages the same software that our customers are already using today on our Nexus products, which enables easy customer adoption of Avant.

In summary, 2022 was another strong growth year for Lattice. We’re well positioned in long-term secular growth markets with a rapidly expanding product portfolio, accelerating customer momentum and consistent financial execution. I want to thank the Lattice team for all their hard work and dedication. As we began 2023, while we’re certainly not immune to any macroeconomic challenges impacting the industry, we’re well positioned to execute on our long-term strategy and continue to focus on unlocking the full potential of the company. I’ll now turn the call over to our CFO, Sherri Luther.

Sherri Luther: Thank you, Jim. We are very pleased with our full-year 2022 results. We drove strong double-digit revenue growth, significant gross margin expansion, and record profitability. We grew profit at more than 2 times the rate of our revenue growth in 2022. We generated a record level of cash from operations and increased the cash return to shareholders through share buybacks and debt paydowns. Let me now provide a summary of our results. Fourth quarter revenue was $176 million, up 2% sequentially from the third quarter and up 24% year-over-year. Q4 was the 11th consecutive quarter of sequential revenue growth. Full-year 2022 revenue was $660.4 million, up 28% from 2021. The strong revenue growth for the full-year 2022 was driven by double-digit revenue growth in our two strategic end markets of communications and computing, and industrial and automotive.

Our non-GAAP gross margin increased 50 basis points to a record 70% in Q4, compared to the prior quarter and was up 490 basis points, compared to the year ago quarter. Both the sequential and year-over-year increases in gross margin continue to be driven by our gross margin expansion strategy, which we started in 2019. Our non-GAAP gross margin for the full-year 2022 was 69.1%, up 590 basis points from 2021. Q4 non-GAAP operating expenses were $52.5 million, compared to $51.3 million in the prior quarter and $45.8 million in the year ago quarter. Non-GAAP operating expenses for the full-year 2022 increased to $201 million from $170 million, primarily driven by increased investment in our hardware and software portfolio. Our non-GAAP operating margin increased 50 basis points to a record 40.2% in Q4, compared to the prior quarter and was up 730 basis points, compared to the year ago quarter.

We continue to balance operating margin growth with investing in our long-term revenue growth and business expansion. Our non-GAAP operating margin for the full-year 2022 was 38.7%, up 850 basis points from 2021. Q4 non-GAAP earnings per diluted share was $0.49, compared to $0.32 in the year ago quarter, which represents 53% year-over-year growth. Non-GAAP diluted EPS for the full-year 2022 was $1.75, compared to $1.06 for the full-year 2021. This represents 65% year-over-year growth. Strong cash flow continues to be an area of focus for Lattice. For the full-year 2022, we generated a record $239 million in cash from operations, this represents an increase of 42%, compared to the cash generated from operations in 2021. In Q4, we repurchased approximately 290,000 shares or $20 million of stock, making Q4 our ninth consecutive quarter of getting share buybacks.

Over that period, we have repurchased approximately 3.6 million shares. Lastly, we paid down $20 million on our credit revolver, exiting the year with $146 million in cash. Let me now review our outlook for the first quarter. Revenue for the first quarter of 2023 is expected to be between $175 million and $185 million. Gross margin is expected to be 70% plus or minus 1% on a non-GAAP basis. Total operating expenses for the first quarter are expected to be between $53 million and $55 million on a non-GAAP basis. Stepping back, I’m very pleased with the tremendous financial progress we’ve made in 2022 across many key metrics, despite some level of turbulence in the broader macro economy. As we begin 2023, we remain vigilant about potential macroeconomic softness, but are laser focused on continuing to drive strong financial execution.

Operator, that concludes my formal comments. We can now open the call for questions.

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Q&A Session

Operator: Thank you. And at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Alessandra Vecchi with William Blair. Please proceed with your question.

Alessandra Vecchi: Thanks for taking my question and congratulations on the tremendous execution in this tough environment. On that topic, I think Lattice might be one of the only semi companies that hasn’t had to lower in this macro inventory correction, which again is tremendous, but has us fielding a few questions around whether you’ll just see it later in the cycle, kind of, the rolling recession, so to speak? Can you walk us through some of the puts and takes around what’s helped you buck the trend and whether you see any weakening, any trends as we move forward?

Jim Anderson: I Think, thanks, Alex, for the question. I think certainly in Lattice is not immune to any macroeconomic recessionary or inflationary pressures. But I do think there’s a lot of specific growth drivers that we’ve seen certainly over the last two to three years that have helped the company grow in a really consistent and sustainable way. First of all, we’re really pleased with the growth that we saw last year of 28% and that follows a strong year growth in 2021 of 26%. And as Sherri shared in her prepared remarks, actually Q4 was the 11th consecutive quarter of sequential growth and in particular, we’re very pleased to see growth in our two largest market segments, which are constant computing and industrial and auto.

Both of those segments have now grown double-digits for multiple years in a row and combined those segments represent about 90% of our revenue. And if you look within those market segments, just to highlight a few of the specific places where we’ve been growing in industrial and automotive, we just have a number of new design wins that are across many different industrial and automotive customers. Where we’ve either displaced competitors that are either FPGA competitors or for instance other microcontroller competitors. And those design wins are now in production and ramping, we also have places within the market where we’ve added additional content through our not just FPGAs, but our software that hasn’t existed in those systems before. And so that’s really helped us very solid growth in that industrial and automotive segment, which we grew 41% year-over-year last year.

And then in communications and computing, that segment has grown now double-digits for us four years consecutively in a row. We saw 26% growth there last year again, where we’re seeing growth is lot of specific content gains in, for instance, servers that go into data centers, so we continue to see our dollars of content per server expand. And as we look forward, we continue to see more opportunity to expand the amount of content that Lattice provides in servers that go into data centers. We’ve seen good growth in 5G wireless infrastructure, data center networking was another nice area for us last year. We see additional opportunity there over the coming years, so a number of different specific places that we’re driving growth within those markets.