Lattice Semiconductor Corporation (NASDAQ:LSCC) Q1 2024 Earnings Call Transcript April 29, 2024

Lattice Semiconductor Corporation reports earnings inline with expectations. Reported EPS is $0.29 EPS, expectations were $0.29. Lattice Semiconductor Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Lattice Semiconductor First Quarter 2024 Earnings Call. [Operator Instructions] At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Muscha, Vice President of Investor Relations. Thank you. You may begin.

Rick Muscha: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice’s President and CEO; and Sherri Luther, Lattice’s CFO. We’ll provide a financial and business review of the first quarter of 2024 and the business outlook for the second quarter of 2024. If you have not obtained a copy of our earnings press release, it can be found at our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially.

We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company’s official guidance for the second quarter of 2024. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum, such as a press release or publicly announced conference call. We refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company’s performance and underlying trends.

For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at latticesemi.com. Let me now turn the call over to Jim Anderson, our CEO.

Jim Anderson: Thank you, Rick. And thank you everyone for joining us on our call today. Q1 ‘24 results were in line with expectations for revenue, margin, and profitability. The industrial and automotive segment was down 25% sequentially as demand softened and end customers reduced their inventory levels. The communications and computing segment were down 7% sequentially in Q1. Within that segment, computing was sequentially up on stronger demand for our products used in servers, which was offset by weaker demand in the communication segment. We expect Q2 revenue to be down sequentially from Q1, primarily driven by softer end customer demand and continued inventory normalization. In particular, we’re seeing incremental softness in the communication segment related to weaker telecommunications infrastructure deployments.

Looking forward to the second half of the year, based on our current view of anticipated near-term business conditions, we continue to expect revenue in the second half of 2024 to be higher than the first half. We believe the second half improvement will be driven by improving end market conditions as end customer inventory levels normalize, as well as a new Nexus and Avant product ramps. Turning now to our product portfolio. In our small FPGA portfolio, we now have seven Nexus device families launched and six in production and the seventh going into production in Q3. We recently shared with our customers the latest small FPGA product roadmap. This includes continued expansion of the number of Nexus device options coming to market over the coming quarters, which received a very positive reaction from our customers.

In our mid-range FPGA portfolio, we now have three Avante device families in the hands of our customers. The first device family, Avant-E, achieved initial revenue at the end of 2023, and we expect revenue to ramp through the course of this year and into the coming years. The second and third device families, Avante-G and X, are expected to achieve initial revenue toward the end of this year and to ramp over the following years. As a reminder, 90% of the target customers for Avant are already customers of Lattice today, and Avant leverages the same software that customers use today on Nexus. The strong competitive differentiation of Avant, which we demonstrated at a recent Developers Conference, combined with our software support, continues to produce a healthy, growing design opportunity pipeline.

As we discussed on our previous earnings call, Lattice hardware and software solutions are increasingly being used in a wide variety of AI-related applications. For example, an AI-optimized servers in the data center where the system is running generative AI workloads, Lattice devices are used in the control management and security of the AI computing system. Another example is in AI-enabled PCs, where Lattice hardware and software solutions are used to run the AI inference algorithm that provides features such as user presence and gaze detection. We recently shared that Lattice is designed into multiple new Dell Latitude systems, which we expect to benefit us in the second half of this year. In these types of AI applications, software is a key part of our strategy and how we enable customers in adopting our solutions.

In summary, we’re excited to be in the midst of the largest product portfolio expansion in our history, which is driving strong customer momentum. Despite year-term industry headwinds, the company is well positioned with a rapidly expanding product portfolio and we remain focused on long-term value creation. I’ll now turn the call over to our CFO, Sherri Luther.

Sherri Luther: Thank you, Jim. The first quarter turned out as expected with results in line with our prior outlook. We maintained strong profitability and cash generation and returned cash to shareholders through share buybacks. Let me now provide a summary of our results. First quarter revenue was $140.8 million, down 17.5% sequentially from the fourth quarter, and down 24% year-over-year, primarily reflecting end market demand softness and end customer inventory rebalancing. Our Q1 non-GAAP gross margin declined 140 basis points to 69% compared to the prior quarter and 130 basis points compared to the year ago quarter, due to mix in our end market segments. Q1 non-GAAP operating expenses were $54.9 million compared to $55.5 million in prior quarter and $54 million in the year over quarter.

We continue to be disciplined in the management of SG&A expenses while ensuring that we invest in our product portfolio. Our Q1 non-GAAP operating margin decreased 780 basis points to 30% compared to the prior quarter and was down 1,100 basis points compared to the year over quarter. Q1 non-GAAP earnings for diluted share was $0.29 compared to $0.51 in the year over quarter. In Q1, we repurchased approximately 265,000 shares or $20 million worth of stock, making Q1 our 14th consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 5 million shares, thereby reducing our dilution by 3.6%. Let me now review our outlook for the second quarter. Revenue for the second quarter of 2024 is expected to be between $120 million and $140 million.

Gross margin is expected to be 69% plus or minus 1% on a non-GAAP basis due to a less favorable mix from our end market. Total operating expenses for the second quarter are expected to be between $54 million and $56 million on a non-GAAP basis, which is in line with Q1 at the midpoint. Overall, we believe we are well positioned for long-term growth. As we navigate the near-term cyclic softness in our end market, we remain focused on supporting the expansion of our product portfolio and continued execution. Operator, that concludes my formal comment. We can now open the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Melissa Weathers with Deutsche Bank.

Melissa Weathers: Hi, guys. And thank you for letting me ask a question. I guess I have one bigger picture question and then a second one that’s more related to the near term cycle. On the bigger picture, you guys talked about some new Nexus product launches. I know you have seven in the market now with six coming and maybe one more. Can you just think about how is this newish product family going to start flowing into revenues and what kind of traction are you seeing with customers with those products?

Jim Anderson: Thanks, Melissa. Yes, we’re actually really excited about this, which is why I wanted to mention it in the prepared remarks. And actually, the customer feedback that we’ve gotten on this is very positive. What we did is we recently shared our latest small FPGA roadmap with all of our customers, and that includes some of the near term additions that we’re adding to the roadmap as well as our long term investment. In particular, we shared that we’re going to significantly expand the number of device options on Nexus and we added other new products to the long term. This was really positively received by our customers, first of all, just because to them it just indicates a sustained focus for Lattice on continuing to invest in innovation in this small FPGA portion of the market, which is really important to our customers.

So it’s sustained investment that they can count on, but then also they’ve been able to see that Nexus is incredibly differentiated, has great power efficiency benefits, features capabilities that I think demonstrate clear leadership in the industry. And so that combined just give them confidence to continue to shift more business over time to Lattice. We believe we’ve gained significant share in this part of the market over the past years. And I think this just positions us to continue to grow and expand our presence in this part of the market over the long term. And then that combined with in parallel, we continue to invest in Avant and the expansion of our Avant portfolio for mid-range devices. And when you take those two combined, our customers are just really excited about the continued expansion of our product portfolio and our investment in the long-term roadmap.

Melissa Weathers: Thank you for that clarification. I guess on the more cyclical side, a couple of your peers have talked about 2Q, hopefully marking the bottom for this FPGA cycle. And I think last quarter, you guys talked about channel inventory burn compare just inventory burn in general, completing in this quarter. Is that still your expectation? And how should we think about, in the near term, lattice resuming shipments to be closer to sell-through rates?

Jim Anderson: Yes, certainly our 2Q guidance factors that we know the first half of this year, what we saw in Q1, what we’re expecting in 2Q is across our customer base, our customers are reducing their semiconductor inventory overall. They’re drawing down those inventories that includes Lattice, the inventory that our end customers are holding in terms of Lattice inventory. And they view this as bringing inventory levels back to normalized levels. And so we believe that effect certainly continues through the current quarter 2Q. And then into the second half of the year, we believe that drawdown of inventory starts to dissipate through the second half of the year. So it gradually dissipates. It’s not that it turns off like a light switch, but that it dissipates over the second half of the year.

And that’s why in my prepared remarks, I mentioned that we believe the second half revenue be stronger than the first half for the reason, number one, that we believe that drawdown of inventory this effect dissipates in the second half of the year. But then the second reason is a Lattice-specific reason of we believe that the products, the Nexus and Avant products will continue to ramp over the course of this year. And then that’ll be additive to our revenue in the second half of the year as well. As I mentioned there’s a six Nexus device family just went into production so we’ll benefit from that in the second half of this year. The seventh we expect to go into production in Q3 and then the first device family of Avant is ramping this year.

We saw initial revenue from Avant at the very end of last year. We expect that to ramp through the course of this year and into next year with more benefit from that Avant-E series in the second half of this year and so for all those reasons we think the second half will be stronger than the first half.

Operator: Our next question comes from the line of Quinn Bolton with Needham and Company.

Quinn Bolton: Hi, guys, thanks for taking my question. I just wanted to start with your comments, Jim, on the communications side. I think it’s probably no surprise to many of us that the communications remain weak, but wondering if you had any signals that comms portion may be starting to reach a bottom or any further comments you might be able to give us on when you think the comms infrastructure markets may stabilize. And I’m not sure that you’ll give it, but I’ll ask, within comms and computing, can you give us a rough sense, is comms a bigger or smaller portion of that overall bucket just to help try to size the exposure?

Jim Anderson: Yes, thanks, Quinn. On the first part of your question, yes, we did see some incremental weakness in communication, specifically in telecom infrastructure, especially over the last one to two months, we saw some weaker demand there that’s towards the end of Q1, that’s rolling into Q2. And that telecom infrastructure spending related 5G infrastructure, that’s really ultimately at the end of the day tied to telecom CapEx by the big telecom carriers. And so I think once we start to see telecom CapEx tick back up and improve, that’s what will drive the telecom equipment spending, which will ripple back to us. And that’s when we’ll start to see improvement from the end market perspective of demand for telecom for our devices used in telecom infrastructure.

But it’s certainly, part of the sequential, a big part of the sequential decline that we’re seeing from Q1 to Q2 is that telecom weakness. And then on the second part of your question is just the relative sizing of comms and compute. Compute has been doing relatively well. We actually in Q1, we saw compute go up sequentially from Q4 to Q1. Remember that what’s in compute is a big driver of our compute is server. That’s both general purpose servers and AI-optimized servers. So we saw a good step up in demand from Q4 to Q1 in compute while communications declined in Q1. And moving into Q2, we’re expecting compute to be sequentially up in communications to decline again. And so at this point, compute is larger. It’s the majority of that part of our segment and because communications have been weaker as of late.

Quinn Bolton: Got it. Perfect. And then just on the industrial side of the market, I’m wondering if there are any specific trends to call out other than this idea that the inventory drawdown will dissipate in the second half of the year, which I imagine helps the industrial business get back to consumption levels, but are you seeing any specific trends in industrial segments that are worth calling out? Thank you.

Jim Anderson: Yes, I would say in that segment, it is a bit mixed. If you look at some of the subsegments, some of the subsegments are showing steady, stable demand or even growing demand. For instance, in medical equipment has been quite stable, aerospace and defense has been strong. So it is a bit of a mix depending on that segment. The automotive version, which is a smaller part of that segment for us, we have seen some sequential weakness there. The net-net is as we look towards the second half, we believe that inventory drawdown that is happening in the industrial and automotive segment, that negative effect on our demand, that effect starts to dissipate in the second half, just as customers reach their normal inventory levels.

Operator: Our next question comes from the line of Matt Ramsey with TD Cowen.

Matt Ramsey: Thank you very much. Good afternoon, everybody. Jim, I’m just going to bounce off of you a couple of questions that I’ve been getting from investors, and I think it would be helpful for you to maybe address or respond to them. I think the first one is not only yourselves, but you’re two much larger FPGA competitors have been going through this inventory digestion, and it’s very well documented. I wanted to sort of explore the talk, the relationship between that correction and what it’s done to the market versus the new design wins that you guys have with Avant. Do you feel like the timing of these new programs with Avant, because their new wins and new products ramping are relatively independent of the inventory situation in the industry, or do you think that the inventory situation and the drawdown may change some of the timing of the Avant ramp one way or the other? Thanks.

Jim Anderson: Yes, thanks Matt. I think on the Avant ramp, because we’re still early in the Avant ramp and maybe just a step back and just to summarize where we’re at in the Avant ramp. So today we’ve launched three Avant device families, the E, the G, and the X. The E, we began to generate revenue at the very end of last year, expect the E to ramp through the course of this year and into the following years in the contribution of, the revenue contribution of Avant-E will be more in the second half of this year since we’re going through the ramp. And then the G and X, which we launched at our Developers Conference in December of last year, we would expect to see a little bit of revenue from G and X before the end of this year.

That’s our kind of typical timeframe from launch to first revenue is usually about 12-18 months. But G and X would be more of a benefit in 2025. And because that ramp was shown relatively early and the inventory drawdowns that we’re going through are happening now, I don’t really see that affecting the Avant ramp in the short term. The Avant ramp here in the coming quarters is much more driven by actually the rate and pace of the customer’s own development program. So now that we’ve put the devices in the hands of customers, we’re supporting our customers, that the new design wins that will ramp much more driven by the customer’s own development cycles or qualification cycles, it’s less about the end market demand fluctuations. Now, I would say Nexus, that ramp can be affected by the end market demand fluctuations because Nexus is much, much further in its ramp.

We have six device families now that are in production. And so some of those early device families that we launched maybe a couple of years ago, those would be affected by end market demand fluctuations because they’re much further along. But Avant, I think really not affected by the end markets this year.

Matt Ramsey: Thank you for that color, Jim. I appreciate it. As my second question, I’ve been getting some questions from investors about, specifically about the server socket, the FPGA sockets that you have for basically all server vendors and maybe not that I mean we’re going we went through a correction in server now we’re seemingly coming back out of it and you guys have spoken to that but I think the questions are more about over the next several years how confident your team is that the share position that you’ve grown over the last several years you can continue to maintain and the visibility that you have into maybe in the next two or three server generations maybe you could talk about that a little bit and if there’s any different competitive dynamics for those sockets and there have been in the past. Thanks.

Jim Anderson: Yes, certainly servers if you look over the past years this has been a great growth area for us. We over the past years we’ve been able to grow both our attach rate as well as our ASPs. Our attach rates have grown as Lattice chips have been used in a higher percentage of servers, but also in some cases where there’s multiple lattice chips used in one server. And so our attach rates are now well over 1x. On average, a server uses more than one Lattice chip per server. And then at the same time, with each new generation, we’ve been trying to bring more capability, both from a hardware and a software standpoint to our customers to bring new features, new capabilities, which raises our ASP over time. In the current generation that’s ramping, that began ramping last year, but it’s ramping through the course of this year, that new server generation, we have significantly more dollars of content per server, a step up of about roughly 50% more dollars of content per server.

So as that generation of servers goes into full production, that’s a natural tailwind for us. And then as we look out over the next few generations, we feel good about our ability to continue to increase our dollars of content per server, just in terms of the new device functionality that we’re bringing, new capabilities over time. And as we get to those new server generations, we’ll certainly share more details about that. But we feel good about our ability to continue to drive innovation and additional content on those server generations over time.

Operator: Our next question comes from the line of David Williams with Benchmark Company.

David Williams: Hey, good afternoon, and thanks for taking my question. Jim, first, maybe if you could talk maybe a little bit about Avant design traction, and maybe where you’re seeing that, where you’re seeing the most traction maybe today, you mentioned some color around the number or size of those. And even if you can compare and contrast, maybe guess how Nexus performed during a similar stage over RAM.

Jim Anderson: Sure. Thanks, David. So, first of all, we’re really pleased by the Avant design win opportunity, just the growth in the overall design win opportunity pipeline. I think as I shared at the last earnings call, we had set last year a pretty aggressive goal for the team in terms of driving new Avant design wins, and they actually exceeded that goal. And so we’re really pleased with their performance on design wins last year. We’ve set another aggressive goal for this year, but we’re pleased with the momentum. We’re seeing adoption across all sorts of different applications. We believe Avant, over time, will be adopted across all of our end markets. We’re certainly seeing great opportunities in industrial applications like automation robotics, automotive applications, automotive ADAS systems, for instance, communications applications, data center as well over time.

An example in communications is one of the things that Avant opens up for us is, and specifically the Avant-X family, is Avant-X has higher connectivity speeds that allow us to address data plane applications. Up until this point with the Nexus, a small FPGA portfolio, we’ve really been addressing primarily control plane applications in communication systems, for instance, both data center communications and telecom. This now opens up; Avant now opens up data plane applications for us. So I think we’re pretty excited about the continued expansion of the design win pipeline. We’re now in the revenue ramping phase with Avant-E being the first, as I mentioned earlier, the first device family ramping into production, but we’re also really excited to get G and X into revenue as well.

We launched G and X, G is for general purpose, X is for additional connectivity speed, and we expect those to start to generate a little bit of revenue before the end of this year, but contribute to revenue next year. And then as you can imagine, we’ve got a lot more in the roadmap beyond that and we’ll share more about that. We’ll definitely share more about that at our Developers Conference in Q4. We’ll share more about the future Avant roadmap, as well as Nexus, but yes, the customer feedback and traction continues to be very positive on Avant.

David Williams: Thanks so much for that color, and maybe secondly, just anything from a geographic standpoint that stood out to you. Seems like Europe was down considerably sequentially in year-over-year, but is there anything in particular you’d point to, and then maybe just sort of what you’re seeing in Asia, that’s a better, worse, or anything that you’d point to as positive or negative?

Jim Anderson: Thank you. Yes, sure, thanks. Thanks, David. Yes, and the geographies, if you look at Q1, On the three geographies, Americas was pretty close to our overall company average in terms of what we saw, for instance, from a sequential revenue change from Q4 to Q1. North America kind of cracked our overall company average. Europe, as you mentioned, that was weaker than our overall company revenue. That’s specifically due to weakness in telecommunications. As you might expect, we have customers that provide telecommunications infrastructure systems, and we saw weakness with those customers. Then also specific industrial and automotive customers. Europe is of course, has some large industrial and automotive customers. We saw weakness there.

That’s what drove the weaker performance of Europe in Q1. Then on the flip side, we saw stronger performance than our overall company average in Asia. I would say the main factor there was server growth where a lot of our products that are used in server applications are shipped into Asia where the servers are assembled. And so we saw a good strength in Asia server demand in particular. And as I mentioned before, overall our computing portion of comms and compute was sequentially up from Q4 to Q1, primarily on server demand.

Operator: Our next question comes from the line of Christopher Rolland with Susquehanna.

Christopher Rolland: Hey guys, thanks for the question. I guess first of all, Jim, going back to a previous statement that you made, I think you said around $50 of FPGA Lattice content per server. I was wondering, what is that content number for next-gen? So Sierra Forest, Granite Rapids, Turin. And then it’s hard to do compares for AI servers, but I would love to know kind of, do you think about it on a GPU basis, dollar content per GPU? How do you look at that market, the metrics and your content there? Thank you.

Jim Anderson: Yes, thanks Chris. First part of the question on the server content growth in the current generation, just to correct you, I said 50%. And so we see a 50% increase from the prior generation to the generation that’s ramping now. The generation that now ramping now being in the case of Intel CPUs, the Sapphire Rapids CPU or a general CPU from AMD. And so we generally see on average when we look across all of our server customers, about a 50% increase in content. And then on the second part of your question, oh, just to finish the first part of your question, and then on the future generations, we’ll share more thoughts on the content increases that we expect on the future generations as we get a little closer to those server ramps.

But we do believe we continue to have the ability to drive higher levels of dollars of content per server on the future generations as well. Like I said, we’ll share more details as we get a little closer. And then on the second part of your question on AI servers, yes, in general, if you look at an AI server versus a general purpose server, we have either equal to or greater levels of content. AI servers, as you kind of mentioned, can come in a lot of different configurations, a more simple configuration that’s actually closer to what a general-purpose server would look like and then a very highly configured system with many, many GPU cards and simple configuration, we basically have about the same level of content as a general-purpose server in one of those and then on the other end of the spectrum and one of those highly configured systems, we have generally significantly more content on the highly configured systems, but overall we see the AI optimized server as a net positive for Lattice and we’ve certainly seen strong demand for our products that are used in AI optimized servers And that was one of the contributors, the growth that we saw in our computing segment from Q4 to Q1 and specifically within that server demand, one of the clear drivers was AI optimized server.

Christopher Rolland: Thanks, Jim. For my second one, it’s really about kind of some select opportunities that you have and competition in those opportunities. So it I think a previous question was around human I think of a server security and I think a speed is making some progress there, Google also has their own internal solution they announced. I don’t know if you had an opinion on that. But also human presence guys like Synaptics are saying they’re taking share in that market. And then if you had any new opportunities or new applications that have been popping up that are starting to become meaningful dollar drivers that you might want to put on our radar.

Jim Anderson: Yes, thanks, Chris, actually at that on the last part of your question around new opportunities. We did recently share and I mentioned this in the prepared remarks that Lattice hardware, software is now used on Dell Latitude laptops and we’re doing AI, basically AI algorithm is run on the Lattice chip using the video stream to detect or to detect things like human presence detection, gaze detection, et cetera. We’re really excited about that partnership with Dell and we expect to benefit in terms of revenue from that in the second half of this year. So that’s a relatively new announcement that we made and that’s around AI-PCs, and in the past, we’ve shared that we’ve had a partnership for a number of years with Lenovo, so you’d find Lattice chips and software used on Lenovo ThinkPad, for example.

So there’s a number of places that we’ve been able to establish proof points in terms of Lattice’s technology being able to be used for AI processing on the FPGA using our software. And this is primarily for inference processing. And as I said, to enable any new usage models, AI usage models related to presence detection or gaze detection. And then on the first part of your question, which I think goes back to security or servers, I think, there’s a number of different places that Lattice chips get used on a server that can get used for control management, security is another place. We feel, I’ll just reiterate what I said earlier, which is we feel very good about the ability to continue to expand our dollars of content over the coming generations.

Now, certainly, there is competition across all of our markets. We face competitors in all of our markets and across all of our products. But we feel, based on customer feedback, we’ve got very differentiated, unique solution, not just at the hardware level, but software as well. And we believe we’re well positioned to continue to expand our footprint and our revenue and servers as well over the coming generations.

Operator: Our next question comes from the line of Tristan Gerra with Baird.