Lattice Semiconductor Corporation (NASDAQ:LSCC) Q4 2023 Earnings Call Transcript

Lattice Semiconductor Corporation (NASDAQ:LSCC) Q4 2023 Earnings Call Transcript February 12, 2024

Lattice Semiconductor Corporation reports earnings inline with expectations. Reported EPS is $0.45 EPS, expectations were $0.45. LSCC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Lattice Semiconductor Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Muscha, Vice President of Investor Relations. Thank you. 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 fourth quarter of 2023 and the business outlook for the first quarter of 2024. 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 first quarter of 2024. 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. 2023 was another strong year for Lattice as we expanded our product portfolio and delivered record financial results. Annual revenue grew by 12%, marking the third consecutive year of double digit growth. Full year non-GAAP gross margin increased 130 basis to a record 70.4% and we delivered 15% year-over-year growth in non-GAAP EPS. We also continued our rapid product portfolio expansion with the launch of multiple new hardware and software solutions, including two new device families based on our new Avant mid-range FPGA platform. While I’m pleased with the full year revenue growth for 2023, our progress in Q4 of 2023 was impacted by the cyclic correction affecting the broader semiconductor industry.

In the industrial and automotive market, although revenue grew 11% year-over-year in Q4, revenue declined 9% sequentially as demand softened across this end market as customers reduced their inventory levels. In the communications and computing market, revenue declined by 14% sequentially in Q4 as growth in data center computing was offset by weaker in wired and wireless telecommunications, driven by lower wireless infrastructure deployments. Looking forward, we expect Q1 ’24 revenue to be sequentially down from Q4 ’23, driven by softer end customer demand across our end markets as end customers rebound to their inventory levels. At this point, we expect revenue in the second half of 2024 to be higher than the first half of ’24, driven by improving end market conditions as end customer inventory levels normalize as well as new Lattice Nexus and Avant product ramps.

Turning now to our product portfolio. In our small FPGA portfolio, we now have seven Nexus device families launched with five in production and ramping with customers and two families entering production later this year. We are very pleased with the strong revenue growth of Nexus in 2023 as it was a major contributor to the overall company growth. We also achieved a record level of design wins with Nexus in 2023 and our Nexus pipeline of opportunities continues to grow. Nexus revenue and design win growth in ’23 was primarily due to a combination of displacing competitor devices as well as the adoption of Nexus in new greenfield applications. Turning to our mid-range FPGA portfolio. At the Lattice Developers Conference in December, we launched two new device families based on our new Avant platform.

We now have three Avant device families in the hands of our customers with the first device family, the Avant-E, generating initial revenue at the end of 2023 as planned. Avant’s initial revenue was driven by numerous applications such as communication gateways, industrial engine controls, LiDAR applications and more. We expect the Avant-E series to ramp throughout the course of this year with a more significant contribution in the second half of this year and continued growth in the following years. We expect initial revenue from the newly launched Avant-G and X Series before the end of this year. Our three Avant device families provide a market-leading lineup of solutions for customers in the mid-range FPGA market. As a reminder, 90% of the target customers for Avant are already customers of Lattice today and Avant leverages the same software that customers use today on Nexus.

Given the competitive differentiation and use of adoption of Avant, the overall pipeline of Avant design opportunities continues to grow and significantly exceeds the pipeline of access at the same relative point of time. We also refreshed four of our key software solution stacks. We continue to see strong software adoption at an attach rate of over 50%. We continue to expand the capabilities and performance of our software portfolio to enhance the customer design experience and to make it easy for them to adopt Lattice products and get to market quickly. Our most widely adopted solution stack to date has been our SensAI stack, which supports a variety of AI applications. One of the frequent questions we’ve gotten from investors over the past months has been around overall Lattice AI related opportunity.

So I’d like to provide some additional color on that topic. Lattice hardware and software solutions can be used in a wide variety of AI-related applications. For example, in AI optimized servers in the data center where the system is running generative AI workloads, for example, Lattice devices are used in the control, management and security of the AI computing system. Another example is in AI-enabled PCs, where Lattice solutions are used to run the AI inference algorithm that provides features such as user presence and gaze detection in PC systems like the Lenovo ThinkPad. A third example is AI-enabled automotive ADAS systems, where Lattice solutions are used to aggregate and pre-process essential data that is used for AI processing. We recently announced that Lattice solutions are being used in the ADAS systems of monster crossover SUVs. There are many other examples as well.

When we look across all the AI applications across our end markets, we estimate that wireless revenue in 2023 included about $100 million of AI-related revenue. We expect our AI-related revenue to more than double over the next few years based on the growing pipeline of AI-related design wins. In summary, I’m pleased with the strong progress in 2023 as we achieved record revenue and gross margin and continue to execute on the biggest product expansion in our company’s history. While the industry moves through a temporary correction cycle and we experience some short-term cyclic headwinds in our end markets, we continue to be well positioned for growth over the mid and long-term. We have the strongest product portfolio in our history and we continue to rapidly expand our product lines and accelerate our customer momentum.

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

Sherri Luther: Thank you, Jim. We are pleased with our full-year 2023 results. We drove double-digit revenue growth for the third consecutive year, continued gross margin expansion, and strong profitability. We generated a record level of cash from operations, expanded free cash flow margin, increased the cash return to shareholders through share buybacks and completely paid down our outstanding debt balance. Let me now provide a summary of our results. Fourth quarter revenue was $170.6 million, down 11% sequentially from the third quarter and down 3% year-over-year as end market demand softened and end customers reduced their inventory. Full-year 2023 revenue was $737.2 million, up 12% from 2022. Revenue growth for the full-year 2023 was driven by double-digit revenue growth in our industrial and automotive end market, representing the fourth consecutive year of double-digit growth in this end market.

Our Q4 non-GAAP gross margin declined 20 basis points to 70.4% compared to the prior quarter due to mix and was up 40 basis points compared to the year ago quarter. Our non-GAAP gross margin for the full-year 2023 was 70.4%, up 130 basis points from 2022. Q4 non-GAAP operating expenses were $55.5 million compared to $58.2 million in the prior quarter and $52.5 million in the year ago quarter. The sequential decline in operating expenses was driven by the timing of certain R&D programs as well as the prudent and disciplined management of our SG&A expenses. Non-GAAP operating expenses for the full-year 2023 increased to $225.7 million from $201 million, primarily driven by increased investment in our long-term product roadmap as well as in customer support.

Our Q4 non-GAAP operating margin decreased 240 basis points to 37.8% compared to the prior quarter and was down 230 basis points compared to the year ago quarter. Our non-GAAP operating margin for the full-year 2023 with a record 39.8%, up 120 basis points from 2022. We continue to balance operating margin growth with a disciplined approach to investing in the long-term growth of the company. Q4 non-GAAP earnings per diluted share was $0.45 compared to $0.49 in the year ago quarter. Non-GAAP diluted earnings per share for the full-year 2023 was $2.01 compared to $1.75 for the full-year 2022. This represents 15% year-over-year growth. I would now like to provide an update related to our taxes. In Q4 due to our consistent and continued profitability, we released our valuation allowance totaling $57 million, which had a GAAP EPS impact of $0.41.

This is reflected as a tax benefit in our GAAP income statement. As a result of the release of the valuation allowance, we are expecting our 2024 effective tax rate to be in the range of the mid- to high-single-digits. Demonstrating our continued focus on cash flow, we generated a record $270 million in cash from operations in 2023. This represents an increase of 13% compared to the cash generated from operations in 2022. Free cash flow margin increased to a record 34% in 2023. In Q4, we repurchased approximately 900,000 shares or $50 million of stock, making Q4 our thirteenth consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 4.8 million shares, thereby reducing dilution by 3.4%. Our Board recently approved a $250 million share authorization.

We will prioritize investing in the organic growth of our business, but intend to continue returning capital to our shareholders through share repurchases. Let me now review our outlook for the first quarter. Due to the cyclic correction and demand headwinds that we are seeing across all of our end markets, revenue for the first quarter of 2024 is expected to sequentially decline to between $130 million and $150 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis due to lower absorption as well as a less favorable mix from our end markets. Total operating expenses for the first quarter are expected to be between $54 million and $56 million on a non-GAAP basis, which is roughly in line with Q4 ’23 at the midpoint.

We are taking a cautious and prudent approach to near-term OpEx, while still enabling the long-term growth and expansion of our product portfolio. Overall, I’m very pleased with the continued financial progress we made in 2023 across many key metrics. As we enter 2024, we are experiencing near-term cyclic softness in our end markets, including customers rebalancing of their inventory levels. However, we continue to believe we are well-positioned for long-term growth. Operator, that concludes my formal comments. 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 Quinn Bolton with Needham.

Quinn Bolton : I guess, Jim, as you look out at 2024, I’m sure visibility is pretty low. But two questions. You’ve guided to 140th midpoint for the March quarter. Do you have any sense based on backlog, current order patterns, whether you would expect June to be sort of flattish, up or down? And then you expressed confidence that the revenue in the second half of the year would be better than the first half. What’s that based on? Is that just your best guess as to when inventory is digested? Is it based on design win traction, the ramp of Avant? What gives you confidence in that second half being better than the first half?

James Anderson: Yes. Thanks, Quinn. So first of all, on — I think your first question was around Q2. At this point, relative to Q1, we would expect Q2 to be roughly in line with Q1. Now historically, we’ve seen Q2 be stronger than Q1. So there is some potential that Q2 would come in a little higher than Q1. But at this point, we see Q2 roughly in line with Q1. Some of the headwinds that we’re seeing in Q1, we expect to continue into the second quarter as well. On the second half of the year, yes, at this point, we do expect the second half to be stronger than the first half. That’s really based on two things. The first one would be the inventory digestion and rebalancing that we’re seeing by our end customers in — kind of the first quarter of this year, which we expect to continue into the second quarter of this year.

We expect that to dissipate — that effect to kind of dissipate through the rest of the year and to be less of a factor in the second half of the year. So that’s part of the second half being stronger. The other is, as you mentioned, it’s essentially new product ramps. We’ve got a number of new products ramping throughout this year and they contribute more to the second half than they do to the first half. A couple of examples of that is on Nexus, we’ve launched seven device families based on Nexus. Five of those device families are already in production. But there’s two more that go into production this year. One of those goes into production in Q2 and the other goes into production in Q3. And so we expect those to benefit us in terms of revenue in the second half.

And then also, Avant, we achieved first revenue from the Avant platform at the end of this past year. We expect Avant to ramp throughout this year and into next year. And the contribution from Avant is more significant in the second half than the first half. So yes, it’s a combination of that, the dissipation of the inventory effects at our end customer with — combined with new product ramps from Lattice.

Quinn Bolton : And then just a follow-up question. You guys have kept the disti inventory levels pretty tight. So I imagine most of this inventory digestion you’re seeing is coming from the end customers. But how — where are you with disti channel? Is that still pretty lean? And do you see an opportunity potentially to restock the distis in the second half? Or are you going to keep that disti inventory pretty tight given the uncertain environment?

James Anderson: Thanks, Quinn. Yes, the inventory digestion I was referring to is end customer inventory digestion and rebalancing. And so yes, if we look at the disti — the amount of inventory held in the disti channel. If we kind of look at where it ended in 2023, I would characterize it as very much back to pre-pandemic levels, kind of back to normal pre-pandemic levels. And our goal would be to keep it at those normal pre-pandemic levels.

Operator: Our next question comes from the line of Hans Mosesmann with Rosenblatt Securities.

Hans Mosesmann: Jim, thanks for the color on the AI part of the business. I get that question asked a lot. Can you give us some puts and takes on how to look at this opportunity going forward? I suspect that the $100 million last year was driven by the accelerated server type products maybe ADAS. But what about the industrial markets and as things go to more inference-related workloads there and so on?

James Anderson: Thanks, Hans. And actually, maybe before I talk about the go-forward, maybe I’ll just give a little bit more context and color around a little bit of the history of this as well. So Hans, you’ll remember that back in our 2019 Investor Day, that was the first Investor Day that we did as a new management team. Actually, AI workloads and the ability of Lattice to help with AI was one of the things we flagged back in 2019 as a potential growth area. And so even back then about five years ago, we were making organic investments to enable customers to use Lattice devices and AI applications. In fact, one of the first solution fax we developed was SensAI, which was around inference at the edge of the network, AI inferencing and then we introduced another solution, chopper solution stack called mVision, which was around computer vision processing.

And all that was to help enable customers to design Lattice products into AI applications. We also made organic — inorganic investments in this area as well. A little over two years ago, we acquired a small software company called Mirametrix, which was focused on computer vision, basically AI processing at the edge for computer vision technology. And they came with an existing revenue stream and we’ve certainly been focused since we acquired them on growing the revenue synergy between the software that they brought as well as the Lattice devices. And so there’s been a number of investments we’ve been making over the past years. And so yes, when we look forward, we see a number of different applications where Lattice can continue to grow and participate.