Lattice Semiconductor Corp Q1 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Lattice Semiconductor Corporation’s First Quarter of 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Now, it is my pleasure to hand the conference over to your first speaker today, Rick Muscha, Senior Director of Investor Relations. Thank you. Please go ahead.

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 first quarter of 2022 and the business outlook for the second quarter of 2022. 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 actual results may differ materially. We refer you to 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 second quarter of 2022. If at any time after this call, we communicate any material changes, we intend that such updates will be done using a public forum such as press releases or publicly announced conference calls. We’ll 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 our CEO, Jim Anderson.

Thank you, Rick. And thank you everyone for joining us on our call today. We had a strong start to the year with our Q1 revenue growing by 30% year-over-year and our Q1 non-GAAP net income growing at 72% year-over-year. Our strong revenue profit growth is driven by our strategic focus and expansion in secular growth markets, our rapidly expanding product portfolio, and our relentless focus on execution. We see growing momentum across our customer base, where we’re increasing our share of wallet with our strategic customers and experiencing an acceleration of customer conversions to Lattice products. Let me now touch on a few highlights from Q1 of 2022. Coming off a strong Q4, we grew revenue by 6% sequentially in Q1, but with double-digit year-over-year growth in each of our three market segments. We expanded our non-GAAP gross margin by 600 basis points year-over-year to a record 67.7% in Q1, which marked the beginning of our fourth year of executing on the gross margin expansion strategy that we established at the beginning of 2019. We achieved a record non-GAAP operating profit of 36.3%, an increase of 830 basis points year-over-year. I’m pleased to announce that CertusPro-NX began production shipments in Q1, which is our fourth Nexus device family to enter production. Let me now provide an overview of our business by end market. In the Communications and Computing market, revenue increased 4% sequentially and 27% on a year-over-year basis. As we’ve highlighted previously, our key growth drivers include Data Center Servers, Client Computing and 5G Infrastructure. In Servers, our attach rate has grown to over 1x, and we expect this growth trend to continue as new server architectures provide Lattice with more opportunities to increase content. In Client Computing, the Lenovo ThinkPad design that we announced at CES is now in production, and we expect additional customer platforms to begin ramping in the coming quarters. In 5G Infrastructure, we continue to benefit from this long-term opportunity given our higher content in 5G versus 4G systems and the continued worldwide build-out of 5G Infrastructure. Turning now to the Industrial and Automotive market, revenue increased 16% sequentially and was up 40% on a year-over-year basis. Q1 growth in the Industrial segment reflects strong customer adoption in a broad range of applications, including industrial automation and robotics. As we’ve discussed in prior calls, we are seeing an accelerated pace of our customers converting designs from a competitor’s FPGA or microcontroller to a Lattice FPGA. Customers are conveying their designs to Lattice to take advantage of our market-leading power efficiency, flexibility, and software content that we provide. The accelerated pace of design conversions contributed to the strong revenue growth we achieved in Q1. We’re also pleased with our strong growth in automotive applications. Our growth in automotive is driven by the ramp of new designs in ADAS and infotainment applications. Turning now to Consumer, revenue increased 15% sequentially and 19% year-over-year. Revenue growth is primarily driven by new applications such as smart home and prosumer that leverage our differentiated FPGA portfolio. I’ll now provide some product roadmap highlights. Since the introduction of Lattice Nexus, we’ve launched four device families based on the platform, CertusPro-NX into production in Q1, and that provides better power efficiency, best-in-class system bandwidth, and a much smaller footprint than competitive devices. We now have four Nexus device families in production and ramping with customers, and we have additional Nexus devices planned for launch in the coming quarters. We continue to be pleased with the broad adoption of our Nexus platform across all our market segments. We’re also excited about our upcoming Lattice Avant platform. Avant will double our addressable market, it has five times the capacity of our Nexus platform, and it will allow us to address mid-range FPGA applications. Customer engagement and momentum continue to grow, and Avant will create an additional new revenue stream for Lattice with ASPs that are 10 to 20 times higher than our current ASPs when it begins ramping into production. Execution remains on track for launch in the second half of this year, and we expect to hold a public event for our Avant customers and partners in Q4 of this year. Turning now to our software strategy. As we’ve discussed previously, we’ve been increasing investment in our software portfolio. Our fifth solution stack will be focused on 5G O-RAN applications and is expected to launch in Q2. Beyond the continued expansion of our software solution stacks, we are pleased with the integration of the Mirametrix acquisition that we completed in Q4 2021, which has already started to open new customer end market opportunities for Lattice. In summary, we’re very pleased with our outstanding results in Q1. These results are directly attributed to our focus on the right growth markets, our rapidly expanding product portfolio, and the consistent execution of our strategy. We’re off to a strong start in Q1, and we continue to expect 2022 to be another robust year of growth for Lattice. I’ll now turn the call over to our CFO, Sherri Luther.

Thank you, Jim. We are pleased with our strong Q1 financial results. We drove strong double-digit year-over-year revenue growth, significantly expanded gross margin, and delivered record profitability. We generated strong free cash flow while continuing to invest in our long-term product roadmap. We also returned cash to our shareholders through share buybacks. Let me now provide a summary of our results. First quarter revenue was $150.5 million, up 6% sequentially from the fourth quarter and up 30% year-over-year. Revenue grew double-digits year-over-year in all three of our end markets with sequential growth as well. IP was down sequentially. Our non-GAAP gross margin increased 260 basis points to a record 67.7% in Q1 compared to the prior quarter, and was up 600 basis points compared to the year-ago quarter. Both sequential and year-over-year increases in gross margin continued to be driven by strong execution of our gross margin expansion strategy, which we started in early 2019. Non-GAAP operating expenses were $47.2 million compared to $45.8 million in the prior quarter and $38.9 million in the year-ago quarter, as we continue to invest in our hardware and software portfolio. Our non-GAAP operating margin increased 340 basis points to a record 36.3% in Q1 compared to the prior quarter and was up 830 basis points compared to the year-ago quarter. We continue to balance operating margin expansion with investments that will drive Lattice’s long-term revenue growth. Q1 non-GAAP earnings per diluted share was $0.37 compared to $0.22 in the year-ago quarter, which represents 72% year-over-year growth. We continue to focus on strong cash generation, and in Q1, we drove a 47% year-over-year increase in operating cash flow. We ended the quarter with $123 million in cash after repurchasing approximately 245,000 shares, or $15 million in stock under our existing buyback program. This was our sixth consecutive quarter of executing share buybacks. Let me now review our outlook for the second quarter. Revenue for the second quarter of 2022 is expected to be between $153 million and $163 million. Gross margin is expected to be 68% plus or minus 1% on a non-GAAP basis. Total operating expenses for the second quarter are expected to be between $48 million and $50 million on a non-GAAP basis. In closing, we are pleased with our strong financial results and continued execution to our financial model. We remain focused on driving sustained revenue growth and profit expansion led by our strong position in growing end markets, and our expanding leadership product portfolio.

Thank you, ma’am. We will now begin the question-and-answer session. Your first question is from the line of Alessandra Vecchi with William Blair. Please go ahead.

Hey, everyone, first off, congratulations on super strong execution in a tough environment. With that, you guys are clearly seeing strong growth entering the year. Can you give us a little more color on what’s driving that growth, as if it sounds very share gain oriented? And then, additionally, now with four Nexus device product families in production, can you give us any insight into what percentage of total revenue Nexus now is? And how much of the growth has been from core versus Nexus?

Yeah, thanks for the question, Ales. Appreciate it. Yeah, we were very pleased with the growth that we saw in Q1, a 30% year-over-year growth. That was actually after a pretty strong year last year. Last year, I think our revenue grew by 26%. So we clearly are entering the year with very strong revenue growth in Q1. Maybe I’ll touch on a couple of different factors, maybe first from a market perspective, and then maybe from a product perspective kind of what’s driving that growth underneath. So, first of all, from a market perspective, again, we continue to see very strong growth in comms and computing. In fact, the last three years in a row, that segment has grown double-digits in each one of the last three years. And again, in Q1, we saw a 27% year-over-year growth in that segment. We’re seeing growth from 5G wireless infrastructure, servers, where our dollars of content per server continues to expand, and also growth in client computing as well. And then also very pleased with our other big strategic segment, which is Industrial and Automotive, and the performance in that segment; we saw 40% year-over-year growth in Q1. Again, after a very strong year last year, in fact, that segment grew 34% last year, so again, really strong performance entering the year. In Industrial and Automotive, we continue to see growth in applications like industrial automation, robotics, and automotive electronics. As I mentioned in the prepared remarks, one of the things we’re really pleased to see in that segment is a faster conversion that our customers are driving away from competitive devices towards Lattice FPGA. We see an accelerated conversion there in that segment, and that certainly helped drive our performance in Q1. We’re really pleased with the performance in that segment as well. And then from a product perspective, if we look at it on the other dimension of product, clearly, we have new product cycles that are helping drive growth. Nexus, now we’ve entered, we’ve put in place our fourth product that’s now in production based on the Nexus platform, the most recent one entering production in Q1. That product platform continues to ramp with our customers. In fact, last year was just the first year, the first full year of revenue from Nexus; we expect Nexus to grow again this year. We really see that as a multiyear growth ramp. So new product cycles with Nexus, and you can expect new additional Nexus devices to be coming in the coming future quarters. And then, of course, moving out in time, we’ve got Avant ahead of us as well. We are on track to launch Avant in the second half of this year, and that’ll add a new revenue stream in the future, so multiple new product cycles. And then our pre-Nexus products continue to grow very well as well. We’ve seen very strong growth from pre-Nexus. So multiple growth drivers, both from a product perspective and from a market perspective as we enter 2022.

That was really helpful. Thank you. And then maybe just a follow-up for Sherri, in a similar vein is on the gross margin front. If I backed out the volatility and licensing and services, I show a very strong product gross margin for Q1, roughly, I think up 100 basis points sequentially. And the implication is up another 200 basis points in Q2. Can you give us any more color into sort of the underlying drivers of that whether it’s mix-Nexus, some of the strategic changes you guys have made internally over the last year plus? And where we should, is this a new sort of baseline gross margin going forward?

Yeah. Thank you, Ales, for the question. So we’re really pleased with the results of our gross margin expansion. You talked about the product gross margin; you’re right, it was up 400 basis points sequentially and 660 basis points year-over-year. Our total gross margin all-in showed an improvement of 260 basis points sequentially and 600 basis points year-over-year. So we’re really pleased with that progress. Just as a reminder that back in 2019, we laid out our gross margin expansion strategy that we’ve been executing on, as Jim mentioned in his opening comments, we’re entering our fourth year now. When you look at that improvement in gross margin, it’s been increasing by an order of magnitude of 300 basis points each year, so it’s been a total improvement of over 1,000 basis points since 2018, so we’re really pleased with that. It’s coming from manufacturers; really driving that pricing optimization is really the main factor right now. We’re also having the same contributions from mix, as well as higher margins on our newer products, so all of those factors are really coming into play. When you look at the midpoint of our guide, you’ll see that we’re continuing to execute on gross margin expansion into our Q2 quarter as well.

Operator, did you have the next question?

Okay. Thank you. Hey, congrats on the progress and the execution here; it’s been nice to see the cadence and the consistency. Just want to see maybe if you could talk more about the durability of the demand that you’re seeing or the growth maybe within the industrial and the automotive. It sounds like your customers are converting more quickly. Is there maybe any color around that conversion cycle? Or maybe what’s driving that we might find helpful?

Yeah. Thanks, David. Again, we’re just really pleased with the progress in that segment, the strong growth that we saw last year and into Q1 of this year. What we’re seeing is customers in the Industrial and Automotive segment—and again, in industrial applications like industrial automation, robotics, automotive electronics—are seeing the portfolio that we have today and the roadmap moving forward, and they’re just seeing that as an incredibly competitive, strong product offering that we have today in a very strong product roadmap moving forward. We’re continuing to expand our product offering right now with Nexus in the future with Avant. Our customers are seeing that and are really excited about driving a strategic multi-generational transition to Lattice over time. If you look at some of the competitive stats for products like Nexus, they can achieve up to four times the power efficiency, offer far better reliability, and bring a tremendous amount of software content. So that really helps the customers in terms of switching to our devices, allowing them to get up and running quickly and get to market quickly. That software also helps the device be sticky over time. We’re seeing customers really motivated to switch primarily for the technical or product benefits. More recently, we’ve also seen that these same customers have really appreciated how we’ve supported them through this supply-constrained environment. They’ve seen us do a good job of supporting their supply needs, which has catalyzed them to drive that transition faster than what they might have originally planned. I was actually in Europe just a couple of weeks ago, spending a lot of time with our European Industrial and Automotive customers. We’re seeing fantastic momentum with those big customers, particularly regarding strategic multi-generational transitions to Lattice devices. We see this as a very durable shift of share and revenue towards Lattice over time.

Perfect. And then maybe from a supply chain standpoint, anything there that you’re seeing either improve or deteriorate, just kind of given what’s going on in the world today and the issues in China and, of course, in Russia? Can you talk maybe to your supply chain challenges or improvement or maybe deterioration you’re seeing?

Yeah. Certainly at an industry level, the semiconductor supply chain remains tight. At an industry level, the expectation is that it will remain tight through the end of this year and well into next year. Now, Lattice specifically, I think we’ve done a really good job navigating those supply chain constraints for our customers. I want to take the opportunity to thank our supply chain operations team; they’ve done a great job supporting our customers over the last two years. If you asked our customers, I think they’d say we’ve done quite a good job of supporting them. Our intention is to continue that; we’re certainly not immune to supply chain tightness, and there can be tightness on particular semiconductor or package combinations. But overall, I think we’re doing a good job of supporting them. Some of the more recent potential supply chain disruptions that you mentioned, like the Russia-Ukraine conflict, we haven’t seen any disruptions in our supply chain due to that. We’re working carefully with our suppliers to understand any potential disruptions. But we haven’t seen any material supply disruptions due to that conflict; we're monitoring it moving forward. Regarding your mention of China and some of the COVID-related lockdowns, again, we haven’t seen any significant disruption. Our primary supply chain is outside of China, so it is not located there. There might be secondary effects if we have suppliers to our suppliers that have part of their supply chain in China. But in terms of our primary supply chain, we haven’t seen an impact; it’s something we are monitoring carefully, working with our suppliers, but no significant disruption to date.

Your next question is from Lucas Cohen with Rosenblatt Securities. Please go ahead.

Hi, everyone. Thanks. This is Lucas Cohen calling in for Hans. Thanks for letting me ask a question here, and congratulations on the great results. Hans wanted to know what the mid-range FPGA parts look like in terms of a ramp for the second half of the year. I know you touched upon it a little bit, but I wanted to get some more insight there?

Yeah. No problem, Lucas. Thanks for the question. So Avant is the name of the platform for our mid-range FPGA offering. As I mentioned in the prepared remarks, Avant is on track to launch in the second half of this year. What Avant brings to the market is, if you compare it to the Nexus devices we have in production today, Avant capacity or capability is about five times the capability of Nexus, and it will allow us to address applications in the mid-range portion of the FPGA market, roughly doubling our addressable market. As those products begin to ramp into production, they will create an entirely additive new revenue stream for Lattice, because that’s a market we don’t serve today. In terms of timing for that ramp, we’d launch in the second half of this year, and generally, we would expect to start seeing revenue 12 to 18 months after the initial launch. That would put some revenue towards the end of 2023, but it would have a more material impact in 2024. That’s based on our experience with our Nexus devices, which followed similar ramp timing post-launch. But Avant is definitely something we’re very excited about. I can tell you the sales team is extremely excited because they’re working with our customers on the Avant design wins and design ends. The engineering team is also very excited, but yeah, we’re looking forward to the second half of this year.

Thank you. And maybe as an unrelated follow-up question, Hans is curious about the front-end availability and back-end at Samsung?

Yeah. So it’s our Nexus products that are based on the Samsung foundry. We do have multiple foundries that we utilize: TSMC, UMC, and Samsung. Nexus products are based on the Samsung foundry at 28 nanometers. We’ve been able to support our customers very well. Nexus contributed to the growth that we saw last year and Nexus contributed again to the growth that we saw in Q1. I think we’ve done a good job of supporting our customers, and we certainly expect that to continue.

Your next question is from Christopher Rolland with Susquehanna. Please go ahead.

Hi, this is an unidentified analyst on behalf of Chris. I know you guys talked about supplies earlier, but I want to ask about demand specifically. Last year, you shipped about one-third of your revenue to a distributor in Taiwan. So I’m curious if you’re seeing any changes in the demand patterns in Asia, specifically in the Greater China region. Thank you.

Yeah. Thank you. So we haven’t seen any significant shifts in demand. We saw good growth across all regions. Last year, we’re expecting all of our major geographical regions to grow again this year, and we’re not seeing any significant demand shifts from a year-over-year perspective when we look towards the demand or the backlog that we have for 2022. There can be some fluctuations from quarter to quarter in terms of which products shipped to which distributor. But at a macro geo level, we haven’t seen any significant shifts.

Thank you. And as a follow-up, I also wanted to ask about OpEx. I think you guys guided 35% as the long-term guide. But you’ve been underspending in the recent quarters at around low-30s. That’s been a positive to the bottom line. But would you say this is the new normal, or should we expect some sort of a step-up at some point in the future? Thank you.

Yeah. Sure. Thank you for the question. So OpEx target, as you indicated, was 35%, which we rolled out last year. When you look at our OpEx, particularly our R&D spend, we’ve discussed for quite some time that we have a bias to investing in our long-term product portfolio. When you look at our R&D spend, it has increased 30% year-over-year, which attests to the new product launches we’ve announced and our platforms we’re excited about—like our Avant launch in the second half of this year. We will continue to invest in demand creation, as that is very important for us to support the future growth of the company, and so year-over-year, Lattice also increased 12%. While we’re below our target, we feel like we are investing the right amount in the business, and we’ll continue to do that to drive the long-term growth of the company.

And your final question is from Matt Ramsay with Cowen. Please go ahead.

Thank you very much. Congratulations on the results. Good afternoon. Apologize, guys; these have maybe been asked. There’s a bunch of companies reporting at the same time here tonight. So bear with us. Jim, I wanted to ask about the progress and the contribution of your business selling into notebooks. I know there was a deal that you guys had announced publicly with Lenovo, and you were pursuing other opportunities there. If you could give us any color on sort of the magnitude of the contribution of those new wins and any description on the pipeline of engagements you have there would be helpful. Thank you.

Yeah. Thanks, Matt. So first of all, when we look at last year, as a basis, we saw Comms and Computing grow by about 25%, and certainly the Client Computing segment was a good contributor to that. We had a number of platforms ramping into production. More recently, at CES, we announced a partnership with Lenovo and their ThinkPad platform, which we’re really pleased with; that platform has now entered production and is ramping. That’s a platform where we’re delivering artificial intelligence processing capability with our FPGA and software. That AI capability is used to provide a range of really interesting user experiences, like detecting if you walk away from your laptop, allowing our chip to dim the screen to save power or battery life, improving security by detecting shoulder surfing, and providing various other capabilities. We’re excited about the Lenovo ThinkPad partnership, and we expect that to ramp throughout this year. There are additional other customer OEM platforms in the pipeline we’re working on, and you can expect to hear more about that in the coming quarters as those reach production. We see this as a significant long-term growth opportunity for the company, as this is truly Greenfield growth in a huge market. The PC market has a system TAM of over 300 million units a year, so that presents a large potential TAM for us. We’re at the early stages of penetrating this market, and we see it as a significant growth opportunity that’s bringing unique capabilities that we think will standardize across PC platforms in the coming years.

No. Thank you for that, Jim. As my follow-up question, I wanted to ask about the data center and the server business. There are obviously reiterations of pretty positive CapEx numbers from a lot of hyperscale folks through this earnings cycle. There are new server launches coming with brand-new sockets and platforms from both Intel and AMD as we move through the year. I know the penetration level in terms of unit attach is pretty high in your business right now, but I think there are some content expansion opportunities there. Can you kind of characterize how you’re thinking about that business contributing to growth, Jim? That would be really helpful. Thank you very much.

Yeah, thanks, Matt. We definitely see Comms and Computing, which includes servers as one of our key growth areas. If you look at the last three years, that segment has seen double-digit growth each of those last three years, and much of that growth has been driven by our continued expansion in the server segment. We’re expanding our average dollars of content per system and we see that continuing to grow. Both attach rates and ASP growth moving forward are expected. With new server architectures coming, we see opportunities for expanded Lattice silicon and more Lattice sockets. Our attach rate is already above 1x, and we expect it to continue to rise. ASPs should also grow as we introduce more capability and content with each new server generation. As I’ve mentioned before, our products are CPU-agnostic, so whether it’s an Intel processor, an AMD processor, or an ARM processor, the capabilities and functions we bring work equally well across those architectures. Most of our customers engage with us regardless of the processor type they’re using, applying the same Lattice solution for control, management, and security across different server systems. We feel very positive about the continued expansion in that segment, which has been a key growth area for us over the last few years; however, we see plenty of room for further growth moving forward.

And that completes the question-and-answer session. I will now turn the call back to Lattice’s CEO, Jim Anderson for summary or final comments.

Thank you, operator, and thanks, everybody, for being on the call with us today. I'm happy to have kicked off the year with really strong results of 30% year-over-year growth following what was a very strong year last year. Again, we continue to see strong growth from our two big strategic segments, Communications and Computing, and Industrial and Automotive, as we discussed several of those growth factors today, along with key product cycles that are helping drive growth. Our pre-Nexus products are growing. Our Nexus products are still in the early ramp stage, and we expect those to ramp in the coming years. The Avant product ramp is also ahead of us. We’re really excited about the future growth of the company, and I look forward to providing more updates at our next earnings call. Operator, that concludes today’s call.

Thank you, sir. To all participants, thank you for joining. This concludes today’s conference call. You may now disconnect. Stay safe and well. Have a good day.