Lattice Semiconductor Corp (LSCC) Q4 2022 Earnings Call Transcript

Greetings, welcome to Lattice Semiconductor Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host Rick Muscha, Lattice’s Director of Investor Relations. You may begin.

Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice's President and CEO; and Sherri Luther, Lattice's CFO. We will provide a financial and business review of the fourth quarter of 2022 and the business outlook for the first quarter of 2023. If you have not obtained a copy of our earnings press release that can be found at our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are predictions based on information that is currently available and 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 2023. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. We will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the Company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at latticesemi.com. Let me now turn the call over to Jim Anderson, our CEO.

Thank you, Rick, and thank you everyone for joining us on our call today. 2022 was a remarkable year for Lattice as we significantly expanded our product portfolio and delivered record financial results. Annual revenue grew by 28% driven by growth in our core strategic markets of industrial and automotive and communications and computing. Full-year non-GAAP gross margin expanded by 590 basis points to a record 69.1%, and we delivered annual non-GAAP net income growth of 64% year-over-year. We also continue to expand our product portfolio with multiple hardware and software product launches, including the successful launch of our new Lattice Avant mid-range FPGA platform which doubles the addressable market of the company. Let me now provide an overview of our business by end market. In the communications and computing market, full-year revenue increased 26%, which is the fourth consecutive year of double-digit growth for this market segment. We continue to have multiple long-term growth drivers in this segment, including content expansion and data center servers, new greenfield client computing design wins, 5G wireless infrastructure, and data center networking. Turning now to the industrial and automotive market. Full-year revenue increased 41%, which is the third consecutive year of double-digit growth for this segment. We continue to see this market as a strong long-term growth opportunity for Lattice as our business continues to grow across multiple applications such as industrial automation and robotics, as well as automotive ADAS and infotainment systems. Turning now to consumer. Full-year revenue was down 3%, reflecting the macroeconomic softness in the consumer electronics end market. Consumer accounted for only 7% of our overall revenue in 2022. I'll now provide some product roadmap highlights. Since the introduction of Lattice Nexus, we've launched five device families based on the platform. We have four device families in production and ramping with customers. The fifth device family, MachXO5-NX, which launched in the first half of 2022 remains on track to go into production in the first half of this year. We also expect to launch two additional Nexus device families this year. We continue to be pleased with the revenue ramp of our Nexus based products as each new device family adds a new layer of revenue. We expect the overall Nexus portfolio revenue to continue to ramp over the next several years. In addition to the continued portfolio expansion of Nexus, we further expanded our product portfolio with the launch of our Lattice Avant platform. Avant doubles our addressable market and creates an additional greenfield revenue growth stream as Avant revenue ramps over the coming years. Our customers are excited about Avant, which offers up to 2.5 times lower power, 2 times faster performance, and up to 6 times smaller physical device size than our competitor's FPGA devices. Each of these competitive advantages provides significant differentiation and value for our customer's applications and systems. Similar to Nexus, the Avant platform will consist of a series of device families that will be launched over time. The first family, Avant-E, was launched in December and we expect to launch two additional device families later this year. As we've discussed over the past few years, software is a key element of our strategy. The investments we've been making in our software portfolio are making it easier for our customers to adopt Lattice products and get to market quickly. We've launched five software solution stacks to-date and have more on the roadmap. As we mentioned previously, over half of our new silicon design wins are now enabled by at least one of our five software solution stacks. This increases the value that we're delivering to our customers and the long-term stickiness of our products. Avant also leverages the same software that our customers are already using today on our Nexus products, which enables easy customer adoption of Avant. In summary, 2022 was another strong growth year for Lattice. We're well positioned in long-term secular growth markets with a rapidly expanding product portfolio, accelerating customer momentum, and consistent financial execution. I want to thank the Lattice team for all their hard work and dedication. As we began 2023, while we're certainly not immune to any macroeconomic challenges impacting the industry, we're well positioned to execute on our long-term strategy and continue to focus on unlocking the full potential of the company. I'll now turn the call over to our CFO, Sherri Luther.

Thank you, Jim. We are very pleased with our full-year 2022 results. We drove strong double-digit revenue growth, significant gross margin expansion, and record profitability. We grew profit at more than 2 times the rate of our revenue growth in 2022. We generated a record level of cash from operations and increased the cash return to shareholders through share buybacks and debt paydowns. Let me now provide a summary of our results. Fourth quarter revenue was $176 million, up 2% sequentially from the third quarter and up 24% year-over-year. Q4 was the 11th consecutive quarter of sequential revenue growth. Full-year 2022 revenue was $660.4 million, up 28% from 2021. The strong revenue growth for the full-year 2022 was driven by double-digit revenue growth in our two strategic end markets of communications and computing, and industrial and automotive. Our non-GAAP gross margin increased 50 basis points to a record 70% in Q4, compared to the prior quarter and was up 490 basis points, compared to the year ago quarter. Both the sequential and year-over-year increases in gross margin continue to be driven by our gross margin expansion strategy, which we started in 2019. Our non-GAAP gross margin for the full-year 2022 was 69.1%, up 590 basis points from 2021. Q4 non-GAAP operating expenses were $52.5 million, compared to $51.3 million in the prior quarter and $45.8 million in the year ago quarter. Non-GAAP operating expenses for the full-year 2022 increased to $201 million from $170 million, primarily driven by increased investment in our hardware and software portfolio. Our non-GAAP operating margin increased 50 basis points to a record 40.2% in Q4, compared to the prior quarter and was up 730 basis points, compared to the year ago quarter. We continue to balance operating margin growth with investing in our long-term revenue growth and business expansion. Our non-GAAP operating margin for the full-year 2022 was 38.7%, up 850 basis points from 2021. Q4 non-GAAP earnings per diluted share were $0.49, compared to $0.32 in the year ago quarter, which represents 53% year-over-year growth. Non-GAAP diluted EPS for the full-year 2022 was $1.75, compared to $1.06 for the full-year 2021. This represents 65% year-over-year growth. Strong cash flow continues to be an area of focus for Lattice. For the full-year 2022, we generated a record $239 million in cash from operations, representing an increase of 42% compared to the cash generated from operations in 2021. In Q4, we repurchased approximately 290,000 shares, or $20 million of stock, making Q4 our ninth consecutive quarter of executing share buybacks. Over that period, we repurchased approximately 3.6 million shares. Lastly, we paid down $20 million on our credit revolver, exiting the year with $146 million in cash. Let me now review our outlook for the first quarter. Revenue for the first quarter of 2023 is expected to be between $175 million and $185 million. Gross margin is expected to be 70% plus or minus 1% on a non-GAAP basis. Total operating expenses for the first quarter are expected to be between $53 million and $55 million on a non-GAAP basis. Stepping back, I'm very pleased with the tremendous financial progress we've made in 2022 across many key metrics, despite some level of turbulence in the broader macro economy. As we begin 2023, we remain vigilant about potential macroeconomic softness but are laser-focused on continuing to drive strong financial execution. Operator, that concludes my formal comments. We can now open the call for questions.

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

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

Thanks, Alex, for the question. I think certainly Lattice is not immune to any macroeconomic recessionary or inflationary pressures. But I do think there's a lot of specific growth drivers that we've seen certainly over the last two to three years that have helped the company grow in a really consistent and sustainable way. First of all, we're really pleased with the growth that we saw last year of 28%, and that follows a strong growth year in 2021 of 26%. And as Sherri shared in her prepared remarks, actually Q4 was the 11th consecutive quarter of sequential growth and in particular, we're very pleased to see growth in our two largest market segments which are constant computing and industrial and automotive. Both of those segments have now grown double-digits for multiple years in a row and combined those segments represent about 90% of our revenue. If you look within those market segments, just to highlight a few of the specific places where we've been growing in industrial and automotive, we have a number of new design wins that are across many different industrial and automotive customers. Where we've either displaced competitors that are either FPGA competitors or for instance other microcontroller competitors. Those design wins are now in production and ramping. We also have places within the market where we've added additional content through our not just FPGAs but our software that hasn't existed in those systems before. That's really helped us achieve very solid growth in that industrial and automotive segment, which we grew 41% year-over-year last year. In communications and computing, that segment has now grown double-digits for us four years consecutively. We saw 26% growth there last year. Again, we’re seeing growth from a lot of specific content gains in, for instance, servers that go into data centers, so we continue to see our content dollars per server expand. We see opportunity to expand the content Lattice provides in servers that go into data centers. We've seen good growth in 5G wireless infrastructure; data center networking was another nice area for us last year, and we see additional opportunity there over the coming years. There are a number of different specific places that we're driving growth within those markets. Lastly, I'd highlight that from a product perspective, we have multiple new product cycles that we're going through. If you look at the Nexus platform, our most recent platform in production, we have launched five device families, four device families are in production and the fifth one goes into production in the first half of this year. We have two more that we're going to launch this year. And then, of course, Avant is still ahead of us. We're really excited about the customer momentum around Avant. So again, we're certainly not immune to the macroeconomic pressures across the industry, but definitely there are some Lattice-specific growth vectors that we're quite excited about.

Great. And then just as one follow-up. It seems like EMEA as a geography has really outpaced year-over-year growth. Is that a function in a period where obviously, the continent has some things going on? Is that really a function of content gains and share gain within industrial? Does it spread beyond industrial? Can you help us think about the traction you're getting in Europe specifically?

Yes, definitely. In Europe, the market is more weighted towards industrial and automotive. As we've seen our industrial and automotive revenue grow globally, we've certainly seen strong growth in Europe. Because Europe is kind of over weighted towards industrial auto, that's why we've seen particularly strong growth in that geography.

With that, I'll go back into queue. Thank you.

Thanks, Alex.

Our next question comes from the line of David Williams with Benchmark Company. Please proceed with your question.

Hey, thanks and appreciate the time to ask question. Let me also add my congratulations on this very solid quarter and execution here. I guess really my first question for you, Sherri, is just on the gross margin and I know we've talked about this in the past, but just kind of wondering if you can tell us about how durable you think the gross margins will be around this level? I know we've had discussions, but it seems like there's a lot of tailwinds at the company level, but maybe some headwinds developing from a market perspective, just kind of given the macro. Can you help us maybe understand the durability there?

Yes. Thanks, David, and thanks for the question. So, we're really pleased with our record gross margin in Q4 of 70%, a 50 basis points improvement sequentially and 490 basis points year-over-year. As a reminder, we've been executing on our gross margin expansion strategy now since 2019. This would actually be our fourth complete year of executing that strategy and the results that we've been able to drive with that strategy have been 1,330 basis points since the end of 2018. The elements of that strategy have multiple factors that have been driving it, including pricing optimization. We've been executing on this for four full years now, so that's been a key part of our strategy to really get the value for our products. New products like Nexus, for example, have been designed to be gross margin accretive. So they've added value to our gross margin along with mix and product cost efficiencies. With so many of those factors driving our gross margin, we feel that our ARM gross margin is durable. We're really pleased with the progress that we've been able to make here and it's really part of our DNA, the way that we manage our business and work to capture value for our products. So gross margin continues to be a focus area for us.

Okay. Thanks so much for the color, very helpful. And then maybe Jim one for you, just kind of thinking about your customers from the Avant platform, the interest that you're seeing. Are you getting the sense that customers are looking maybe to improve their existing product lines? Or is this an area that you can gain additional sockets? And then also, are you seeing new customers coming to you that you didn't previously service or couldn't service with the Nexus line that maybe you can with Avant? Maybe pull in some Nexus revenue there as well. Just kind of curious about that customer base you're seeing for Avant?

Yes. Thanks, David. We're really excited about Avant and we were so happy to launch that in December. If you were at the Avant launch event, you actually saw a lot of customer participation in that event, with many different customer testimonials and comments. You can clearly see that there's strong excitement in our customer base around that. A lot of that excitement is due to the level of differentiation that the platform offers, including 2.5 times better power efficiency and up to 6 times better physical device size. These are meaningful benefits for our customers and help them design much more efficient systems. When we look at the target customer base for Avant, there's a 90% overlap between the target customers for Avant versus existing Lattice customers. That means that 90% of that target customer base is already a customer of Lattice today. That also means that they're using Lattice software, so all of that software content developed for Nexus and pre-Nexus devices is also usable for Avant. Customer momentum and engagement are very strong. If you compare Avant's customer design win progress or design win funnel versus Nexus, Avant is far exceeding what Nexus achieved at the same point in time. We're really excited about it, and our sales team is very enthusiastic about the growth opportunities with Avant ahead.

And our next question comes from the line of Matt Ramsay with Cowen. Please proceed with your question.

Thank you very much. Good afternoon. And I mean 70% gross margin, Sherri, that's really, really impressive, so congrats to the whole team. I guess my first question, Jim, is related to the guidance to guide, I think well ahead of consensus for the March quarter definitely sticks out among the semiconductor market right now? In particular, I guess no secret that the notebook market in the very short-term, the server market in terms of units are feeling a bit of correction and we've also seen some weakness from the wireless infrastructure space as well as in some of the box makers and in CapEx from some of the carrier folks. So I just wondered if you could walk through some of those end market trends and maybe juxtapose that against the guidance. I assume most of it's driven by industrial and automotive on the upside and maybe comps and computing a little bit weaker. If you could clarify that, that'd be great. Thank you.

Thanks, Matt, for the question. Yes, if you take midpoint of our guidance for Q1, clearly, at a total company level, we've guided up sequentially. If you look underneath the covers at the different segments, yes, we expect industrial and automotive to be up sequentially from Q4 to Q1, continuing to see design wins ramp within that market segment. We do expect communications and computing to be down sequentially from Q4 to Q1, primarily driven by the softness that the industry has seen in overall server consumption and deployment. So we do expect that segment to be sequentially down. Additionally, we expect consumer to also be down sequentially from Q4 to Q1, tracking normal seasonality within consumer. That's a little color on the overall end markets.

Thank you, Jim. I appreciate it. Sherri, as a follow-up, I've been looking at the balance sheet and noticed that days of inventory have increased significantly over the past few quarters. Could you explain what this means from a sell-in perspective? Are there items that haven't sold as well as expected, or is this an indication of anticipated future sales as you're increasing inventory in preparation for growth? I would find it helpful to understand the factors influencing the inventory situation. Thank you.

Sure. Thanks, Matt. So if you recall, we've actually been pretty consistent over the past two years or so, saying that we may choose to increase inventory to support the growth of our business. That's exactly what we did. We increased inventory to support growth in terms of the design wins with customers and new product ramps. Jim mentioned in his prepared remarks that we have four Nexus devices that are in production and ramping, and we have one that is going to be in production in the first half of this year. New products are certainly driving growth and demand for inventory. We may continue to increase inventory going forward, anything we do to support the business and future growth. The other point is if you look at our cash from operations, our cash from operations was a record for Q4 and for 2022 it was also a record in cash from operations, and our free cash flow at 41%. We're really pleased with not only the revenue growth and profitability but also our cash generated from operations. Our products have very long lifecycles, and our risk of obsolescence is very low as a result of that. We feel very comfortable with the level of inventory that we have, ensuring that we've got the right amount of inventory to support our customers in that future growth.

Thanks, Sherri. Appreciate it.

Our next question comes from the line of Christopher Rolland with SIG. Please proceed with your question.

Can you give us an idea now of the size of automotive as part of that multi-group there? And then talk about like in your presentation, for example, it just looks like you guys have tons of applications that FPGAs can address. Can you talk about maybe the ones that are getting the kind of the most design wins, the most traction, the most uptake? That'd be great. Thank you.

Yes. Thanks, Chris. We don't break out automotive separately within that segment. I can give you a little bit more color on what we saw last year. Overall, industrial and automotive last year grew 41%. Within that, automotive grew significantly faster than that. Automotive is still the smaller portion of that segment, but it's definitely the faster growing portion. We're getting designed into various applications, particularly across ADAS and infotainment applications. Infotainment seems to be the area where we're getting designed into the most often. There's a strength in many different applications. For instance, sensor aggregation is necessary in automobiles. Numerous sensors across the automobile need to be aggregated and preprocessed before being sent back to the main processor where you would find Lattice devices performing that function. You'll also find Lattice devices handling some of the video functions in electronic mirrors like rearview mirrors and side mirrors. Numerous different areas, but overall, we're quite pleased with the revenue growth that we saw in automotive, and the design win funnel looks quite strong, and we're excited about Avant, our newest product line's applicability to automotive as well.

That's a great segue, Jim, for my second question around Avant, but also around the low-end lineup as well, Nexus in particular. I was wondering if you can talk about the competitive environment both in terms of share, but also pricing from competitors as well. Can you describe what you're seeing at the low-end of the market overall and how things might have changed through this cycle to the current period where we are now? And then what we should expect for Avant in the mid-range market for you guys as well?

Yes. Thanks, Chris. Just to correct your terminology, we call it small FPGA, not low-end. Nothing low-end about 70% gross margin. In small FPGAs, we're quite pleased with the progress we're making there. When you look at our product portfolio in small FPGAs, not just Nexus but also the pre-Nexus devices, combined with the significant software portfolio we've built out over the last four years, we feel very confident in our competitive strength. I think it’s the strongest product portfolio that the company's ever had in its history in the small FPGA market. We feel really good about the momentum we built and the growth we're driving in that segment, which includes Nexus, our newest product line, but also even the pre-Nexus devices. The software we've added has helped breathe new life into many pre-Nexus devices by enabling new applications for those products. Regarding pricing, I would characterize our pricing as durable. Over the past four years of executing our pricing optimization strategy, we've seen strong pricing durability. We’re always vigilant regarding competition, but we feel good about our product line's competitive strength and pricing durability. For Avant, we assume there will be robust competition in mid-range FPGAs, and we built our roadmap with that in mind. The combination of Avant's competitiveness, the software leveraged from Nexus to Avant, and the fact that the target customers of Avant are 90% already customers of Lattice today, positions us well for growth in the Avant product line over the coming years.

Thank you, Jim. Thanks, team.

Our next question comes from Hans Mosesmann with Rosenblatt Securities. Please go ahead with your question.

Thanks. Congratulations, everyone. Most of my questions have been addressed, but I might have overlooked this. Can you provide an update on channel inventories and your lead times? Also, have there been any supply-related issues that emerged in the last quarter that weren't present previously?

Yes. Thanks, Hans. I'm glad you asked about that. Regarding Lattice-owned inventory, when Sherri was talking earlier, she was talking about that. The channel inventory, which is inventory sitting at our distributors, represents most of our revenue flow through distribution. The channel inventory remains quite lean. In fact, from Q3 to Q4, we saw our channel inventory roughly flat, slightly down sequentially. Compared with historical norms, the inventory in the channel remains lean. At some point over the coming quarters, we do need to replenish that inventory to return to what we and our distributors would consider normal levels. In terms of lead times, our lead times have come down and continue to improve, along with the overall semiconductor supply chain over the last 12 months regarding capacity at wafers as well as assembly and test houses improving. We're seeing lead times decrease and expect them to continue to improve. Regarding any supply chain disruptions, there’s nothing of note to report in terms of any supplier disruptions over the past quarter. Our supply chain is running well, and we've been able to build inventory, as Sherri mentioned regarding Lattice inventory, which we view as a positive to support growth.

Great. Thank you. Congrats again.

Thanks, Hans.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Lattice’s CEO, Jim Anderson, for closing remarks.

Thank you, operator, and thanks everyone for joining us on today's call. So when we look back at 2022, it really was another great year for Lattice. I want to once again, thank the Lattice team as well as our partners and customers for their dedication and support not just in 2022, but over the past years. As we kick off 2023, we're certainly looking forward to another strong year for Lattice as we continue to rapidly expand our product lines and drive new levels of innovation for our customers. Operator, that concludes today's call.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.