Q1 2023 Lattice Semiconductor Corporation Earnings Call
Hello, and welcome to the lattice semiconductor first quarter 2023 earnings call. If anyone should require operator assistance. Please press star zero on your telephone keypad.
A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded its now my pleasure to turn the call over to Rick Mcvey Senior director of Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone with me today are Jim Anderson, <unk>, President and CEO and Sherri Luther <unk> CFO Wil.
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.
Semi dot 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.
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 eight Ks.
These documents contain and identify important risk factors.
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.
Clothing, certain non-GAAP information management and tests 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 Atlanta.
Semi dot com.
Now I'll turn the call over to Jim Anderson, our CEO .
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 of 36% year over year.
While we're certainly not immune to any macroeconomic.
Amit 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 73%.
We achieved record non-GAAP operating profit of 41%, which was an increase of 470 basis points year over year.
Further expanded our product portfolio with the recent launch of the six device family based on our Nexus platform. We launched enhanced versions of multiple software solution 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 a sequential decline in revenue in this segment was primarily due to softer industry wide server end market demand.
We continue to see this segment as a long term growth driver for the company as it includes multiple growth factors such as contract expansion in 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 wireless solutions and new design wins across the broad range of applications, including industrial automation or robotics as well as automotive Adas.
And infotainment systems.
I'll now provide some product roadmap highlights.
We're pleased to announce that Mark <unk> Nx began production shipments in Q1, which is our fifth Nexus device family to enter production.
We also recently introduced Mark X O five T annex the fixed family built on the latest 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 <unk> 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 of bond platform, which launched in early December .
Vantage targeted a midrange at P. G ads locations and doubles, our addressable market and creates new Greenfield revenue opportunities for lattice is it ranch over the coming years.
Definitely there was maintained momentum continues to grow and we look forward to launching two new about device families. Later this year.
Turning now to our software strategy as we've discussed over the past few years shoppers a key component of our strategy that we've been increasing investments in our software portfolio. These investments are driving faster customer adoption of wireless 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 solutions and we expect our expanding chocolate portfolio to remain a key driver of customer enable.
And and momentum.
In summary, while we're certainly not immune to any macroeconomic challenges impacting the industry wireless continues to be well positioned long term secular growth markets with an expanding product portfolio accelerating customer momentum and strong financial execution.
I wanted to sharing more about our future plans at our Investor day on May 13th.
I'll now turn the call over to our CFO Sherri Luther.
Thank you Jim.
We're pleased with our strong financial results in Q1 with record profitability.
By double digit revenue growth and continued gross 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.
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, and our two strategic market segments of industrial and automotive and communications and computing.
Our non-GAAP gross margin increased 30 basis points to a record 73% in Q1 compared to the prior quarter and was up 260 basis points compared to the year ago quarter.
The sequential and year over year increases in gross margin continued 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 balanced operating margin expansion with investments that will drive lattices 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 51 cents compared to 37 cents 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 119000 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.
Thank you and I'll be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment maybe necessary.
To pick up your handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Matt Ramsay from TD Cowen. Your line is now live.
Oh, yes. Thank you very much good afternoon everybody.
Jim I wanted to start my first question I think in and Cherry 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 is doing let's say.
Maybe you could talk to us a little bit about the drivers of the growth now as you continue to consolidate share in in the low tier FPGA market and then.
In particular do you feel comfortable at one of the questions I get as you've gone to put up this much growth as you feel comfortable with where distributor and channel inventory is and inventory levels. So we can still see further growth going forward and maybe a similar pace. Thanks.
No. Thanks for the question, Matt Yeah. So we're quite pleased with.
Results that we saw in Q1 in particular the year over year growth of 22%, we feel like we're off to a kind of a good start for the year, especially considering you know 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 position the company and I think the right long term secular growth markets.
And we have really strong lattice specific growth drivers within that those markets and then number two is product portfolio expansion. We're 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.
It's really good for growth say on the first one just a little bit more color on from a market perspective, we were 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 power efficiency that we bring the flexibility the increasing software content that we're delivering to our customers all of those help us.
You know 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.
<unk> and driven over the last 1234 years.
Zane when entering productions were quite pleased with the growth that we see in that segment and even comms and computing, even though we saw some sequential.
A decline in that segment, we are again chalked up growth on a year over year perspective from that.
From that segment and I think that you know stands out relative to the industry and there again, we see growth in content expansion and servers.
Good growth in data center networking and wireless infrastructure. So a number of specific growth factors there and.
And then like I said on number two on the product expansion.
We continue to expand out our small FPGA platform of Nexis, 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 a bond.
This year and so we're pretty excited about the continued product expansion and I think the last part of your question was around <unk> and channel inventory when I look at our.
Distribution channel inventory at the end of Q1 relatively it was relatively unchanged from the end of last year Q4, and our Disney and channel inventory is still low relative to what we would consider normal levels of inventory shall.
So when you look at the channel inventory and say well, that's you know looks pretty healthy and over time, we'll need to replenish that a bit and so we feel well positioned for long term growth for the company, we're certainly not immune to any of the macroeconomic challenges or any.
Demand fluctuations in our end markets, but we feel really well positioned over the long term.
Thanks, so much for that Jim and all the detail there.
My follow up you mentioned and some of your commentary as to Cherry.
The growth in the auto and industrial segment, being really really strong, but comms and computing, it's no secret that there's been some <unk>.
Every server build softness and also some softness in the PC market that seems to be bottoming and maybe starting to turn so you could maybe talk us through the next couple of quarters in that particular segment.
Maybe lead times for your devices relative to win server ship or when PC builds start to turn around if you could just kind of walk us through how should we think about the sort of reacceleration of that segment. If those end markets do turn.
Yeah. Thanks, Matt Yeah, we've certainly seen just along with everybody else in the industry. We've certainly seen some end market unit softness symbol servers and Pcs.
For us servers is a bigger factor our position or revenue on servers.
Is a much larger than what we have in Pcs at this point, although we see Pcs as a continued long term large tam opportunity for the company, but in the servers.
Space both.
Hyperscale and enterprise servers, and that's been a great growth area for us for at least the last three to four years actually comms <unk> compute has grown double digits for us now for as of the end of last year or four years in a row servers being one of the main drivers of that but for US most of that revenue growth in servers has actually been driven by content text.
<unk>, that's either higher attach rates higher asp's.
That's been a much bigger factor for us than the underlying server unit growth in terms of the server Tam and we expect that to continue to be the bigger driver for us over the long term. The continued expansion of dollars in content for lattice, we continue to see great areas of opportunity to grow that.
And we expect that to be the bigger.
The bigger factor in our continued growth.
That said to the extent that there starts to be a pickup in end market server demand, we would expect to benefit from that will generally we would benefit from that maybe you know a quarter or so ahead of when the actual servers start to ship just given.
The system is getting built in our system or our chips getting ordered ahead of time.
So we would expect to see a pick up about a quarter ahead of when and server deployments.
Yeah, but but again I would stress that the majority of our growth in that segment is really more driven around again that dollars of content per server.
Alright, Thank you very much congrats again I'll jump back in the queue.
Thanks Pam.
Thank you next question is coming from Tristan <unk> from Baird Goodbye, and there's not a lot.
Hi, good afternoon.
Right.
Margin showing in terms of our result and guidance could you talk about the driver.
And also how sustainable that is you know if you could talk about that.
Key drivers and your expectation for pricing for the rest of the year.
Yeah. Thank you Justin for the question. So we're really very pleased with our another record quarter, if its margin for 73% 260 basis points improvement year over year.
As I mentioned in my prepared remarks anywhere now in our fifth year of our gross margin expansion strategy.
Where we've driven 39 or 60 basis points improvement since we started this program in 2019.
So and really the drivers there are multiple factors of new products have added value to our gross margin pricing optimization mix product cost efficiencies all of those items have been factors that have contributed to expanding our gross margin and so we'll continue to focus on gross margin and then we look forward.
To our Investor day on May the 15th I will give you an updated financial model at that time.
Yeah, maybe I'll jump in I think Christian I also asked about pricing at the very end of <unk>.
And to the question Tristan just to address the pricing perspective.
I think you're asking kind of go forward pricing, we believe our pricing is durable.
You know as Sherry mentioned part of that gross margin.
Improvement initiative that we've been working on over the past now our fifth years that included pricing optimization, and just frankly better pricing discipline within the company and so we feel like we've built.
Built some strong muscles around pricing and we feel like our pricing is gerbo and also what I would add is we've added a tremendous amount of software content to our software portfolio and we see increasing adoption from our customers of our higher level software our application solution stacks the adoption rate or attach.
Rates now.
Over 50% and software when it's adopted by our customers that also helps us secure higher asps and helps drive.
Generally higher better better solutions to our customer and better asps for us over the long term and so that's a net tailwind to our asps over time as well.
Great and then for my follow up you've mentioned.
Do you attach rates above one <unk> data center you mentioned just on this Q&A that you expect the attach rates will continue to increase.
So if you could talk about the drivers you see as you would expect to continue to outpace our data center units.
What are they going to be the driver for attach rate to go even beyond where they are today and all the Isps to go further or is that going to be reliant on on your products or do you feel that there is more.
Functionality that you can address so that your existing products already addressing in data center any any color on that path.
<unk> expansion data center.
Yes, it's a great great question Tristan and.
Let me talk about both parts the attach rate and the ASP expansion, which combined to drive dollars of content per server on attach rates, which are now I.
I would say well above onex, we continue to see more opportunities for us.
Across the server infrastructure for more lattice chips to be used.
Within the server, whether it's on the motherboard itself or the cards that are attached into the motherboard.
Or.
Just sort of multiple different places, where we can see additional lattice chips being adopted and so we continue to see more opportunity. There number one and then number two and you kind of alluded to this is as we bring.
More functionality more capability through our new products new devices through the new software that we're developing and even with the bond coming out as well, we see opportunities to just bring additional content and capability to servers, just like we've been doing over the past four to five years and so when you combine that.
Opportunity to continue to bring more content, which brings higher asps.
With continued growth in attach rates.
Continue to see this as a really good growth area for the company and you should expect us to talk.
All in a little bit more detail about this at our upcoming Investor Day, we'll give some more specific examples of where we see continued opportunity in the in the server and data center infrastructure segment.
Great. Thank you very much.
Thank you next question is coming from Christopher Rolland from Susquehanna. Your line is now live.
Hey, guys. Thanks for the question.
I was wondering I don't think you guys have given this before but I have a feeling it's growing a little bit.
More I was wondering about auto as a percentage of total and ion a now you mentioned a das but would love to know you know.
What's driving that or is it really just purely industrial automation and then.
Hum also sometimes you guys kind of force rank the segments.
I'd Love I'd, I'd love, a little bit of color there too.
Yeah, Thanks, Chris Sean automotive, yes.
We're very pleased with the continued progress on automotive electronics and it is a it's a combination of Adas and infotainment applications.
It just didn't many different places where our power efficient flexible adaptable chip like we provide can be used in automotive electronics applications. Both for EV applications, but also for the increasing electronic content, that's growing even within gas powered cars range. So.
We're pleased with the growth that we've seen in the.
The most recent full year automotive and industrial overall grew very strong I think it was about 41% year over year, but our automotive business actually grew well above that and in the most recent quarter Q1, we again saw very strong growth in automotive and so we see this as a really good growth area for.
The company very.
Very kind.
And a compelling and exciting design win pipeline that we have ahead of us and so we feel good about that growth and now that said it is still a smaller portion of that segment.
But we're pleased with the growth of it and but we are seeing.
Strong growth in industrial.
All automation robotics applications as well.
Although over the past quarters automotive has been growing a bit faster, we're still quite pleased with the growth we're seeing throughout the industrial segment in many different applications, especially when it relates to automation.
And robotics.
Great Yeah, and Ah if if you could if you can kind of force rank ranked segments and give it give us an idea of where you think we may have more or less strength in the next quarter.
Oh in terms of next quarter. If you look at Q2 I would expect on.
Our sequential basis, we certainly if you take the midpoint of our guide for Q2, we guided up sequentially I would expect the sequential growth in industrial and automotive I would expect comms and computing to be sequentially flat.
And but overall the revenue to be sequentially up based on the midpoint.
Very helpful. And then just lastly, a comms wireless and wireline.
Kind of what's going on there are there any you know highly significant drivers are coming up here in your opinion.
In Q1, we didn't see.
Bit of a sequential weakness in wireless infrastructure, which I think is.
Pretty consistent with what the industry has seen so part of that sequential drop that we saw in comms <unk> compute primarily server, but a little bit of it being wireless infrastructure as well.
Moving forward, we still see wireless infrastructure as a great long term growth area for the company, especially given the greater amount of content that we have in <unk> base stations and and other equipment related to telecom infrastructure or the other.
Area of growth that we've talked about more recently that we're excited about is data center networking, we continue to see good growth there and a very healthy design win pipeline, there as well and again.
You know all of this will will touch on in more detail at our Investor day in a couple of weeks from now.
Thanks, So much really appreciate Jim.
Thanks, Chris.
As a reminder, that star one to be placed in the question queue. Our next question is coming from hogs. Most of the men from Rosenblatt Securities. Your line is now live.
Thanks Heiko.
Congratulations good get good results in a tough market.
Some of my questions have been answered, but I am curious Jim.
The new design engagements, where software is a big component of that.
So the design win what is the competitive dynamic for those specific new sockets that you're winning.
Yeah, I think that.
So in general.
We feel like we've got really good competitive position in general.
I'll come back to the software part of your comment, but I want to start with just the devices themselves. If you look at next us.
Extremely competitive versus other.
<unk> that are out there, we're able to deliver power efficiency, that's two to three times better than our competition.
Incredible physical size advantages, where our devices are much much smaller so I think even at just the device level, we feel really well positioned competitively and then similar.
For Avant is we're we've launched the first device family based on a bond we have two more device families. We're planning to launch.
This year and more to come in the future. We also feel really well positioned competitively there and so the devices themselves are competitive, but I think when when we add to that the software capabilities and portfolio that we've built out over the past four to five years I think that makes it a really compelling.
Combination for our customers.
Our <unk> solution portfolio.
Now five different application specific software solution stacks for common customer applications, we're seeing great adoption of those software solutions as I mentioned the attach rate of our software solutions is now over 50%.
And what that software does is that number one that helps our customers design our products in very quickly either helps some switch from our competitors device to our device.
Quickly, but more importantly helps them get to market.
Easily and quickly and that helps drive.
Their time to market, but also helps improve our time to revenue. We also believe that creates much more long term stickiness for our solutions software once it's integrated into their system level software that that creates multi generational stickiness for for our entire solution, including.
The silicon so we feel very good about the software and a level of competitiveness and stickiness that it creates.
It's certainly a big investment area for the company, we had been growing investment there for we're now in our fifth year of increased investment there and we continue to be excited about the potential moving forward.
That's great Jim, but what I want to get to is how does your competition compete against that specifically what are they doing to compete against U K recently.
Or is there any competition down there and the small FPGA, that's what I'm looking for their behavior of your customer behavior is like Hey, I got to use you youre. The only guy that can really address this that's what I'm trying to get.
Well I think that what we're doing in the marketplace is we believe it's it's.
It's unique or specific to lattice and so I think that combination of silicon tightly coupled with the specific application solution stacks. We believe that that's a really competitive and compelling offering and marketplace. That's something that's really differentiated versus our competition and I think our we believe our customers.
And I use that and definitely appreciate that and we think that's borne out by the adoption rates that we're seeing for our software.
Great. Thank you very much.
Thanks Hans.
Thank you next question is coming from David Williams from Benchmark Company. Your line is now live.
Hey, good afternoon, thanks for taking the question and congrats on the execution.
Just a quick could you maybe anything from a geographic mix perspective that surprised you during the quarter Asia was down.
Again quite a bit this quarter, but just wondering if youre seeing anything in terms of a potential rebound there and then maybe what drove the Americas and Europe improvement.
Yeah. Thanks, David So just as a reminder, the revenue breakdown by geography that ship to revenue. So that's where our latest products are shipped.
And and it doesn't necessarily reflect where the end product is actually consumed. So I just wanted to say that from the outset. So.
So you got to keep that in mind, a lot of times, where the latest product is shipped the system will be assembled there and shipped to a different geography now that said, yes. We were pleased to see continued growth in North America and Europe . We've.
Certainly seeing strong growth with those customers over a number of quarters, we have seen some softness in the Asia geography.
We attribute that to some of the softness that we talked about earlier in terms of server demand. Many servers are assembled in Asia for instance, but.
But we when we look longer term, we see good growth expectations across our geographies over the long term.
Great.
Then maybe just from a fungibility standpoint of the products and customers.
Can you talk maybe about the Fungibility, obviously, maybe not between specifics, but the software stack, but the.
Just kind of think about the inventory levels.
And those are fairly flat up just modestly but is there is there much sounds ability that you have between those different products and customers.
Yeah, there is very high fungibility.
One of the great things about <unk>.
PGA is one of the things I certainly like about FPGA products is because they are programmable the same product can get adopted across almost every market that we serve so we often see.
Especially our popular products, we often see those being used across every single market that we serve and so theres great Fungibility.
Across our markets and I think that's a real strength a strength to the business.
Thanks, so much.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Ruben Roy from Stifel. Your line is now live.
Thank you Hi, Jim.
I guess most of my questions have been answered, but I did have a question on software you started to talk a little bit about this and I guess.
When you think about software attach rates and a little over they have to design wins.
I'm, having some sort of the soft IP cores involved is there an upper limit.
For software attach rate I E. You know are there some end markets or applications, where we just wouldn't see software.
That kind of limits growth or or is it you know if you build the stocks you customers will come and use software and eventually.
You know, maybe not 100%, but does that that number keeps going up.
Yeah. Thanks, Ruben I think there is an upper limit there will always be.
Certain portion of customers that want to do a lot of the work themselves and wont adopt the software stack. We don't know exactly what that is we don't believe we've hit that yet.
But yeah I would assume that some portion of our customers would would not adopt and just use their own software or one specific programming a module.
Modules so.
But yes, I can't say that we know what that limit is we don't believe we've hit it yet.
Great.
The follow up to that is you know.
A lot of us investors focus on new products next to us and of course of aren't coming up but in terms of software and sort of the way you're looking at at markets and addressing customers is it software or software or the software stacks sort of pulling through interest and adoption of <unk> products.
Would you say.
Yeah, that's a great question Ruben and that's absolutely correct. We've seen in a lot of cases software kind of rejuvenated.
<unk> shoulder products that have been around for quite a while and so one of the other one.
Are the other benefits that we've seen to the software portfolio is not just helping enabling and driving the new products, but actually rejuvenating and lengthening the lifetime of the existing products and we're quite pleased with that because the amount of incremental investment to activate that on an older products as <unk>.
Very low and so it's a really good ROI for us and and so we have seen our <unk> products continued to grow in a very healthy way as well.
If we look at last year's growth or the most recent Q1 growth pre nexus products continued to be a big big.
A big growth driver for us as well and in at least part of that is certainly due to the software enablement.
Excellent thanks for that detail Jim.
Thanks Reuben.
Yeah.
Thank you that does conclude our question and answer session I like to turn the floor back over to CEO . Mr. Anderson. Please go ahead Sir.
Yes, Thank you operator, and thanks again, everyone for being on the call. Today, We're certainly pleased with our continued execution and strong results in Q1 and of course, we look forward to sharing more details about all of our future plans at our Investor day on May 15th operator that concludes today's call.
Yes.
Thank you you may now disconnect your lines and have a wonderful day, we thank you for your participation today.