Q2 2023 Lattice Semiconductor Corp Earnings Call
Speaker 1: Greetings. Welcome to the last SESSCS Semiconductor 2nd Quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. A question-and-answer session will follow the formal presentation.
Speaker 1: If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Rick Muscha, Senior Director of Emergency Relations. May be good.
Speaker 2: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice's president and CEO , and Sherry Luther, Lattice's CFO . We'll provide a financial and business review of the second quarter of 2023 and the business outlook for the third quarter of 2023. If you have not obtained a copy of our earnings press release, it can be found at our company website.
Speaker 2: in the investor relations section at lattice semi.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.
Speaker 2: We refer you to the documents of the company files with the FCC, including our 10Ks, 10Qs, and 8Ks. 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.
Speaker 2: This call includes and constitutes the company's official guidance for the third 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.
Speaker 2: 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.
Speaker 2: For historical periods, we provide reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the investor relations section of our website at latticemi.com.
Speaker 2: Let me now turn the call over to Jim Anderson, our CEO .
Speaker 3: Thank you, Rick, and thank you everyone for joining us on our call today.
Speaker 3: We've delivered strong results in the first half of 2023, the first half revenue growing 20% year over year and non-GAAP net income increasing 29% over the same period.
Speaker 3: We're pleased with our first half results, but we're even more excited about the path moving forward as we continue to drive the largest product portfolio expansion in the company's history.
Speaker 3: Let me touch on a few Q2 highlights.
Speaker 3: We achieved record revenue growth in Q2 with growth of 18% year over year. Q2 was also our 13th consecutive quarter of sequential growth. We expanded non-GAAP gross margin by 140 basis points year over year to a record 70.5%.
Speaker 3: and non-GAAP net income increased 23% year over year. Let me now provide an overview of our business by end market.
Speaker 3: In the communications and computing market, revenue was down 3% sequentially and down 11% on a year-over-year basis. The sequential decline was primarily due to softer end-market demand in communications infrastructure applications, which was partially offset by sequential growth in computing and Trademark author Mart.. Yup.
Speaker 3: where we saw a strong demand in data center applications, such as servers used for artificial intelligence. Turning now to the industrial and automotive market, revenue increased 7% sequentially and was up 55% year over year.
Speaker 3: Our strong growth was across multiple applications such as industrial automation and robotics, as well as automotive ADES and infotainment systems. We continue to deliver robust growth in this segment, and we believe our product portfolio is well positioned to drive sustained long-term growth.
Speaker 3: I'll now provide some product roadmap highlights. At our Analyst and Investor Day in Maine, we detailed the broad and rapid expansion of our product portfolio. We're driving the largest product portfolio expansion in the company's history, which continues to create new revenue streams for ladders.
Speaker 3: We've launched six device families to date based on our Nexus platform, with five of those device families in production and ramping with customers.
Speaker 3: On our new lattice Avant mid-range FPGA platform, we launched the first device family at the end of last year and continue to expect to generate revenue from this family before the end of this year.
Speaker 3: with the revenue ramp continuing into next year and the following years.
Speaker 3: In addition, we remain on track to further expand the Avant platform offerings with the planned launch of two new Avant device families at our Lattice Developers Conference in Q4.
Speaker 3: Turning now to our software portfolio, software is a key component of our strategy and it's an important part of how we enable our customers. We built a portfolio of application specific software solution stacks which accelerates customer adoption and enables faster time to market for our customers.
Speaker 3: We recently launched Lattice Drive, which is our sixth software solution stack, and is targeted at a variety of automotive electronics applications.
Speaker 3: We believe customer adoption of our software drives long-term multi-generational stickiness for our solutions.
Speaker 3: Overall, we continue to be pleased with our execution of our portfolio expansion and the customer momentum that it's generating.
Speaker 3: While we're certainly not immune to any macroeconomic challenges impacting the industry.
Speaker 3: We believe lattice continues to be well positioned for long-term growth and expansion.
Speaker 3: I'll now turn the call over to our CFO , Sherry Luther.
Speaker 4: Thank you, Jim. We are pleased with our financial results in Q2 as we continue to deliver double-digit revenue growth.
Speaker 4: record gross margin, and strong profitability.
Speaker 4: We generated strong free cash flow, returned capital to shareholders through our 11th consecutive quarter of share buybacks, and subsequent to Q2 have fully paid off our debt.
Speaker 4: Let me now provide a summary of our results.
Speaker 4: Second quarter revenue was a record $190.1 million, up 3% sequentially from the first quarter and up 18% year-over-year.
Speaker 4: Q2 was the 13th consecutive quarter of sequential revenue growth.
Speaker 4: Both sequential and year-over-year revenue growth in industrial and automotive offset the revenue decline in communications and computing.
Speaker 4: Our non-GAP gross margin increased 20 basis points in Q2 compared to the prior quarter to a record 70.5% and was up 140 basis points on a year-over-year basis.
Speaker 4: Both the sequential and year-over-year increases in gross margin continue to be driven by consistent execution on our gross margin expansion strategy.
Speaker 4: non-GAAP operating expenses were $58 million compared to $54 million in the prior quarter and $49.9 million in the year-ago quarter.
Speaker 4: Both R&D and SG&A expenses increase sequentially as we continue to make investments in our product roadmap as well as in-demand creation.
Speaker 4: Our non-GAAP operating margin was 40% in Q2 and was up 190 basis points compared to the year ago quarter.
Speaker 4: We continue to balance operating margin with investments that will drive Lattice's long-term revenue growth.
Speaker 4: Q2 earnings per diluted share was 52 cents compared to 42 cents in the year ago quarter.
Speaker 4: This represents 24% year-over-year growth and is faster than our revenue growth.
Speaker 4: Driving strong cash flow generation continues to be a key focus area for the company.
Speaker 4: In Q2, we generated a free cash flow margin of 35% and returned capital to our shareholders by repurchasing $10 million in stock or 122,000 shares in the 11th consecutive quarter of our share repurchase program.
Speaker 4: During Q2, we also paid down $60 million in debt.
Speaker 4: Subsequent to Q2, we paid off the remaining $45 million of outstanding debt and the company is now debt-free.
Speaker 4: We ended the quarter with $104 million in cash.
Speaker 4: Let me now review our outlook for the third quarter.
Speaker 4: Revenue for the third quarter of 2023 is expected to be between 187 million and 197 million.
Speaker 4: Gross margin is expected to be 70.5% plus or minus 1% on a non-GAAP basis.
Speaker 4: Total operating expenses for the third quarter are expected to be between $58 million and $60 million on a non-GAAP basis.
Speaker 4: In closing, I am pleased with our financial results and continued execution.
Speaker 4: despite the continuing macroeconomic challenges impacting the industry.
Speaker 4: We remain focused on driving further revenue growth and profit expansion.
Speaker 4: Operator, we can now open the call for questions.
Speaker 1: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker 1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Sreeni Prashuri with Raymond James. Please proceed with your questions. Thank you. Thanks for taking my question.
Speaker 5: for double-digit growth again next quarter on an ear on your basis. Some of your peers have talked about potential slowdown in the second half. I'm just curious as we look through the next few quarters, can you talk about where you're seeing continued strength and where you might be seeing somewhat of a macro slowdown in terms of your end markets?
Speaker 3: Yeah, thanks for the question, Sreeni. First of all, really pleased with the results in the first half of this year. If we look at first half, 20% year-over-year growth. Pleased with that relative to the fact that we've had a couple years now of really strong growth plus relative to the overall broader semiconductor industry.
Speaker 3: performance. So pleased with the first half and you know if you look at the midpoint of our guidance, we guided up sequentially for Q3. I think first if you look at it from a customer or market perspective, if I look at you know where is what's the source of that growth in the first half.
Speaker 3: The vast majority of that growth is coming from new design wins, new revenue streams that have really just begun production and initiated within the last, say, 12 to 24 months. So we look at that to be really positive in that those revenue streams are fresh revenue streams that are kind of early in their life cycle and ramping.
Speaker 3: And they're underpinned by multiple different growth vectors, growth in industrial automation robotics, the industrial segment has been a really good performer for us, growth in automotive electronics, continued content expansion and things like data center servers.
networking equipment and so those are just a few examples. So we feel well positioned in terms of the freshness of the revenue and kind of the growth factors that we're positioned in. But then I'll see you can look at it from a product perspective and we're frankly we're just going through so many new product cycles and product drivers.
customers would say the same. And then we're in the middle of the biggest product portfolio expansion in our history, too. So also from a product perspective, we've got multiple new products cycle drivers. Nexus is an example. Nexus are newest platform for small FPGA. We're...
You know, now have five different device families based on Nexus that are in production and ramping with the six that we've launched that's That'll go into production next year more to come on the road map Nexus will will continue ramp We believe for multiple years to come and then a violent our new mid-range FPGA platform That's all that revenue and that revenue ramp is still ahead of us. So
We feel good from both a market and a product position in terms of our ability to continue to grow over the long term. Certainly not immune to any end market fluctuations. We would feel that just like everybody else, but we feel well positioned for growth over the long term given the latest specific growth drivers.
Great, thank you for that answer. And then, I guess as you look at your new products, in particular the event mid-range products, Jim, you talked about some of the new products ramping, which were launched in the last 12 to 18 months. Just curious how in a Nexus design cycles compared with Avant, are the Avant cycles little longer, somewhat similar.
And also if you can talk about where you're seeing the most traction in terms of the Alonth product, you know, the designs, you know, that, you know, I think you talked about potentially generating some revenue this year. So if you can talk about which end markets, you expect the revenue from.
Yeah, thanks, Shreeni. First of all, on the design cycles, in terms of the timing of the design, from when, say, a design is one to when it reaches production, the event design cycles are very similar to Nexus in that standpoint, right? So we look at the timing of the revenue.
to be very similar. Now the ASPs of a bond are different. ASPs of a bond are significantly higher than Nexus. And about 10 to 20 times higher than if you look at the company's average ASP today. So significantly better ASPs, but similar cycle times in terms of...
We're really pleased with the continued growth of the Avant design when pipeline, when we launched Avant in the platform at the end of last year, we also launched the first device family in that based on that platform Avant E.
We continue to expect the first revenue for Avanti to begin before the end of this year. It'll be a small amount of revenue this year, but it's an important milestone for us to generate first revenue before the end of this year and then it would continue to ramp into next year and beyond. And then also remember at our Analyst and Investor Day, we also announced that we would launch two additional device families.
with a bond and certainly stay tuned. We'll share more about our next product launches month, G and X, as we get closer to those that launch date. Thank you for.
Thank you, that's all I have.
Our next question comes from the line of David Williams, who Ben Smart Company. Please proceed with your question.
Good afternoon. Thanks for taking my questions and congrats on the execution of stability here.
I guess my first question, Sherry, just kind of thinking about the debt payoff and congratulations on being debt free. But I'm curious if this changes your approach to the capital structure going forward and maybe how we should think about your appetite for leverage down the road.
subsequent to the end of Q2, we did pay off the remaining debt that we had on the balance sheet. And it's really, really due to the strength of our free cash flow for the quarter, we had 35% free cash flow. Really pleased with the strength there that we were able to pay off our debt balance.
From a capital allocation perspective, number one priority for us is investing in our long-term product roadmap, as well as demand creation. And so that continues to be a priority for us. You can see that with the rapid expansion of our product portfolio and the investments that we've been making in those areas. You can see that in our P&L.
The other areas that we focus on from a capital allocation perspective is really returning capital to our shareholders. And you see that in Q2, we executed on our 11th consecutive quarter of share buybacks where we repurchased $10 million in stock. And so we're really pleased with that. We do have another 110 million still outstanding on the board authorization and that expires at the end of the year.
the best use for cash on a quarterly basis.
Great, thanks for the color of the series. Maybe, Jim, just then, and you talked a little bit about the automotive industrial in the last question, but just kind of curious, if you could give maybe a little more color around the industrial segment specifically, maybe what you're seeing there, it seems like there's some undercurrents here where some more our industrial automation is slower.
see good strength in the industrial and I'll include in their automotive as well both industrial and automotive. Again, in industrial it's primarily around industrial automation, robotics, automotive, electronics that's really around 8-as in infotainment systems.
Yeah, we continue to see good, healthy demand there. Again, I'll emphasize what I said earlier, which is a lot of those revenue streams that are driving growth for us. The vast majority are fresh revenue streams. And if you think about the lifetime of those revenue streams, we're still early in the lifetime of those new design lens, new revenue streams that we've seen ramping. So we feel good about time.
areas over the long term as we highlighted in the Investoring Analyst Day back in May.
Thank you very much, good afternoon guys. Jim, I wanted to ask a little bit about, and obviously the industrial and comms businesses, super strong over the last two quarters.
We've been hearing a little bit about lead times, potentially coming in. So if you could maybe level set us on particularly your industrial business, the comms as well, just how you're seeing sort of in customer demand, the channel, and lead times in that business.
how you're thinking about trends over the next couple of quarters in that segment given the massive results you've seen in the last couple of quarters. Thanks.
Yeah, thanks Matt. In terms of lead times in general, I think you're asking about lattice lead times, just to clarify. And so if we talk about lattice lead times, we're certainly seeing our lead times return to what we would view as normal, closer to normal lead times, sort of lead times more consistent with pre.
pre-pandemic supply chain, ahead before that supply chain crunch that we saw. So we just continue to see lead times normalized, which we view as very positive. That's positive for our customers or distributors as well. And so yeah, I think about lead times continuing to normalize.
In the industrial segment, as I just mentioned, we continue to see good demand. If I look at our Q3 guidance, if you look at the midpoint of Q3 guidance, we guided up sequentially, and we would expect the industrial and automotive segment to be...
up sequentially or flat to sequential growth from Q2 to Q3 consistent with our overall guide. And then I think you mentioned comms as well, communications. Now in Q2 we did see some softness in communications infrastructure, specifically in wireline and wireless. We saw some end-market softness.
related to i think you know slower capital spending around five you build out et cetera so we saw a little bit of sequential revenue decline from q1 to q2 uh... in that uh... in that uh... communications and computing segment but that was partially offset by we saw pickup and demand for servers
our chips going into servers that go into data centers. So those are kind of some of the puts and takes that we saw in the Q2 timeframe. So hopefully that's a little bit of additional color and just kind of what we're seeing by end of our kit. Yeah, thanks Jim, I appreciate it.
As my follow-up, I wanted to ask about we're getting really, really close to when Avant starts to contribute to revenue a bit. You guys were kind enough to give us a little bit of insight into what's going on in the
software attach rates for Nexus and what that might mean for ASPs at your investor meeting. And as you get towards rolling out of its revenue and you look over the pipeline over the next 18-24 months.
What are you seeing for a Vaunt software attach rates at this point relative to what you might expect? What you might have expected when you launched the product almost a year ago, and just how is that software attached trending in the pipeline? Any info you have there would be really helpful.
over 50% of the time, when a customer selects a piece of silicon, they're using one of our software solution stacks on top or in conjunction with that silicon. And now with the new lattice drive solution stack that we just launched, we now have six different solution stacks offered customers. And those solution stacks just as a reminder are around making it really easy for customers to adopt to lattice silicon and solutions, get to market quickly, speeds up our time to revenue, and then also creates multi-generational stickiness. And we've also tried to make sure that customers that adopt that software, those software solutions or software.
Thanks for the question, Chris. So yeah, as I mentioned in the prepared remarks, if we look at sequentially from Q1 to Q2, we definitely did see softness in the communications part of our communications and computing segment. For us, communications is both wireline and wireless. We did see softness in both 5G wireless infrastructure as well as related wireline infrastructure. I think that definitely related to end-market softness that other companies are seeing in terms of...
you know, teleco capital spending into infrastructure build out. In terms of, you know, second party your question, what percentage of comms in compute does that account for? We don't break out comms into a separate sub-sagment, but comms is the smaller portion of that segment computing.
I see. Okay. So I guess that means consumer would probably be down for next quarter as well. But I actually have a bigger question around AI. So in your presentation, you mentioned the GPU card. Looks like you do have some content there. You mentioned power control reporting and throttling.
I would love to know a little bit more about this also if you see some additional applications you could be addressing. But really, what is the content here? What is the attach rate? Like in server, it's more than one. What do you think the attach rate here is?
And do you think this is going to be a meaningful, needle-moving opportunity potentially going forward? Yeah, thanks Chris. We do believe AI is a net benefit driver for us in the server data center space over time.
As I mentioned earlier, when we look at general purpose servers and then I'll call it servers that are more optimized for artificial intelligence workloads, we usually see about the same level of content or sometimes higher levels of content in the AI optimized server. Now there's a lot of different configurations, both general purpose and
additional opportunity in those AI optimized servers in terms of increasing our attach rate, but also increasing the capabilities functionality that we're bringing to those servers and the ability to continue to grow our dollars of content per server. And I think that actually applies to
sort of the lead time backdrop and maybe backlog out there in distribution. Can you talk about pricing environment for Nexus and pre-Nexus products as you see it maybe this quarter and going forward through the end of the year?
Yeah, certainly. I would call the pricing environment for us very stable. We believe our pricing is very durable. We have been doing pricing optimization for, we're now in our, I guess our fifth year of doing that as part of our gross margin expansion strategy.
At the beginning of 2009, we kicked off that strategy. Part of that was pricing optimization. And so over the last four or five years, we've built really good internal processes and muscle around pricing our products correctly in the market, making sure that we're pricing for the value that we deliver to the market.
portfolio as we add newer devices that are higher capability, higher capacity. Certainly those new products with higher capability, higher capacity, those come with higher ASPs. And so we've seen our ASPs increase steadily over time. And we believe that'll continue as we continue to bring higher capacity, higher capability.
All right, thank you operator and thanks everybody for being on the call with us today Certainly pleased with continued execution and strong results in the first half while we continue to execute on Certainly our biggest product portfolio expansion in the company's history and we're excited about the opportunities ahead for lattice Operator that concludes today's call And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation
Goodbye.