Lattice Semiconductor Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Lattice Semiconductor Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Musher, Senior Director of Investor Relations.

Operator

Thank you, Rick. You may begin.

Speaker 1

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 The Q3 of 2023 and the business outlook for the Q4 of 2023. If you have not obtained a copy of our earnings press release, It can be found at our company website in the Investor Relations section at laticemi.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.

Speaker 1

We wish to caution 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 This call includes and constitutes the company's official guidance for the Q4 of 2023. If at any time after this call, we We will refer primarily to non GAAP financial measures during this call. By disclosing certain non GAAP information, intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends.

Speaker 1

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 atlatticemi.com. Let me now turn the call over to Jim Anderson, our CEO.

Speaker 2

Thank you, Rick, and thank you everyone for joining us on our call today. We delivered solid results in Q3 with quarterly revenue growth of 11% year over While maintaining healthy gross margins and operating margins. Today, Lattice has the strongest product portfolio in our history in terms of both hardware and software solutions, we continue to expand our product portfolio at a rapid rate. We're looking forward to the expected launch of 2 newest members of our Avant Mid Range FPGA family at the Lattice Developers Conference in December. Let me touch on a few Q3 highlights.

Speaker 2

In addition to the Q3 revenue growth, we achieved a record non GAAP gross margin of 70.6%, which was an increase of 110 basis points year over year. We expanded non GAAP operating margin by 60 basis points year over year 40.3 percent and we generated 40% free cash flow margin. Let me now provide an overview of our business by end market. In the communications and computing market, revenue was up 6% sequentially and down 6% on a year over year basis. We're pleased to see the sequential uptick in this segment given some of the macroeconomic challenges this end market has experienced over the past quarters.

Speaker 2

The sequential growth was driven in part by growth in data center servers for both general purpose and AI optimized applications, And we expect growth in servers to continue into the current quarter, offset by softer demand in 5 gs Telecom Infrastructure. Over the long term, we continue to believe we are well positioned for growth in this segment, given our growing content per share Both general purpose and AI optimized data center servers as well as long term growth opportunities in data center networking and telecom infrastructure. Turning now to the industrial and automotive market, revenue declined 5% sequentially and was up 28% year over year. While we're very pleased with the year over year growth, we did experience sequential softness in this market consistent with broader industry trends, We expect this market softness to continue into the current quarter. However, we continue to expect this market to be a strong long term growth opportunity for Lattice As we address growing applications in industrial automation and robotics as well as automotive ADAS and infotainment systems.

Speaker 2

I'll now provide some product roadmap highlights. We're driving the largest product portfolio expansion in the company's history, which we believe continues to create new future revenue We recently introduced CrossLink UNX, the 7th device family built on the LatticeNexus platform. This newest device family is the industry's 1st FPGA in its class with integrated USB functionality, which is applicable to many diverse use cases. We also continue to be pleased with the progress on our new Lattice bond platform, which creates new greenfield revenue opportunities for Lattice. We look forward to further expanding the platform with the expected launch of 2 new Avant device families at our Linus Developers Conference in early December.

Speaker 2

Software is a key component of our strategy as our software accelerates customer adoption and enables faster time to market for our customers, while driving long term multi generational stickiness for our solutions. Avon to also leverage the same software that our customers are already using today Our current NexSys products, which enables faster customer adoption on our new Yvonne platform. We look forward to sharing new details of We're not immune to macroeconomic headwinds in our end markets. We're excited about the continued rapid expansion of our product portfolio, And we believe that we continue to be well positioned for long term growth across our core markets. I'll now turn the call over to our CFO, Sherry Luther.

Speaker 3

Thank you, Jim. We are pleased with our solid Q3 financial results. On a year over year basis, We drove double digit revenue growth, continued gross margin expansion and strong profitability. We generated a record level of cash from operations, continued to invest in our leadership product portfolio and returned capital to shareholders through our 12th consecutive quarter of share buybacks. Let me now provide a summary of our results.

Speaker 3

3rd quarter revenue was a record $192,200,000 up 1% sequentially and up 11% year over year. Sequential growth in the quarter was driven by Communications and Computing. Year over year revenue growth was driven by Industrial and Automotive. Our non GAAP gross margin increased 10 basis points in Q3 compared to the prior quarter to a record 70.6% and was up 110 basis points on a year over year basis. Both the sequential and year over year increases in gross margin expenses were $58,200,000 compared to $58,000,000 in the prior quarter $51,300,000 in the year ago quarter.

Speaker 3

R and D expenses increased both sequentially and on a year over year basis as we continue to make investments in our product roadmap. Our non GAAP operating margin was 40.3% in Q3 and was up 60 basis points compared to the year ago quarter. Q3 earnings per diluted share was $0.53 compared to $0.48 in the year ago quarter, which represents 10% year over year growth. Driving strong cash flow generation continues to be a key focus area for the company. In Q3, we generated a free cash flow margin 40% and returned capital to our shareholders by repurchasing $10,000,000 in stock or approximately 110,000 shares In the 12th consecutive quarter of our share repurchase program, we ended the quarter with $114,000,000 in cash.

Speaker 3

Let me now review our outlook for the Q4. Revenue for the Q4 of 2023 is expected to be between $166,000,000 $186,000,000 Gross margin is expected to be 70.5 percent plus or minus 1% on a non GAAP basis. Total operating expenses for the Q4 are expected to be between $57,000,000 $59,000,000 on a non GAAP basis. In closing, I am pleased with our financial results and continued execution. While we are experiencing softness in some of our end markets, we remain focused on driving profitable long term growth.

Speaker 3

Operator, we can now open the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. Thank you. Our first line question comes from the line of Mark Lipacis with Jefferies.

Operator

Please proceed with your question.

Speaker 4

Hi, thanks for taking my question. I had a question on Geographic trends, can you talk about what you saw in the quarter geographically and how things are playing out so

Speaker 2

Yes. Thanks, Mark. And I'll also talk about it in the context of the end markets as well. So first of all, for Q3, First of all, we're pleased with the revenue results in Q3, the sequential growth and the year over year 11% growth. In the Comms and Computing segment, if we look at Q3, we did see sequential uptick in revenue, we are pleased with that.

Speaker 2

That was one of the main drivers of that sequential growth from Q2 to Q3 As data center servers, both general purpose servers as well as AI optimized servers, from a geo perspective, it would be very much the Just as a reminder on that new generation of servers that's starting to ramp here in the second half of the year and into next year, we do have Significantly higher level of content in that new generation of servers. So that's a tailwind that we saw from Q2 to Q3. We expect that to continue Into Q4, now we are seeing in Q4, although we see servers being sequentially Within the Communications and Computing segment, we do see some headwinds in software demand in communications, specifically in 5 gs Telecom infrastructure and that's both wireless and wireline infrastructure. We're seeing Lower demand, we view that as really from lower CapEx spending driven by lower CapEx spending from telecom And that would be the geography that would be more from the European geography, some Asia as well That's softness around telecom infrastructure. And then net net for that comms and computing segment, We expect as we go into Q4 from a sequential basis, we would expect that segment to be flat to sequentially down with as I said, with kind of server And being up and 5 gs Telecom Infrastructure being down sequentially.

Speaker 2

And then if I move over to the Industrial Auto segment, our other big segment. In Q3, first of all, quite pleased with the year over year growth that we saw in Q3, 28% year over year. But towards The end of Q3 really in the last kind of 4 to 6 weeks of Q3, we started to see demand Often from our industrial and automotive customers, I would say that was really localized to the Asia geography And we expect that softness that we started to see at the end of Q3 extend into the current quarter Q4 And that's both a comment relative to the Asia geography as well as in Q4, the current quarter, We're starting to see demand softness in the Europe geography as well. And so we think that in a softening Demand that we saw towards the end of Q3 extends into Q4 and the net then is our industrial and auto segment, we're expecting that to be sequentially Down from Q3 to Q4. So hopefully that gives you some color both by segment, but also to your question by geography as well.

Speaker 4

That's very helpful. Thank you. And if I may, on the follow-up, can you talk about AVANT? It sounds like you're queuing up 2 more Products in that family to launch, how should we think about AVANT relative to Nexus, and what do you think you really hit your stride on Avant in terms of revenues?

Speaker 2

Yes, great. Thanks, Mark. Happy to talk about Avant. We're always excited about Avant. So First of all, just in general, we're really pleased with the continued progress on Avant overall.

Speaker 2

We launched that platform towards the end of Last year and just as a reminder, Sovant is our new mid range FPGA platform. It doubles our addressable market and what we're really excited Basically creates an entirely new greenfield revenue growth stream for the company. We feel really good about just the continued And execution on Avant. You asked relative to Nexus, when we look at the design win pipeline for Avant, it's very Pipeline is significantly larger, which we view as really positive. In terms of revenue, we continue to expect Small amount of initial revenue from Avant this quarter in Q4, as we've talked about in the past, it'd be a small 25 and beyond.

Speaker 2

We're also really excited about launching the next two device families In the Avant lineup, that's the Avant G and X. We're expecting to launch that at the developers conference, Lattice conference will now have with the addition of GNX, we'll have 3 device families 3 different Avant And a lot of diverse applications across our customer base. And so really excited about that and Excited to now once we put all the samples in the hands of customers to really focus on driving Revenue ramp as we move forward. And one other, I guess note as a reminder on Avant is, it does leverage The same software as Nexus. So we leverage the same software investments that we've been making on the Nexus platform.

Speaker 2

Avant So anyway, happy to certainly share more about Avant, the new versions GNX at the developers conference in December.

Speaker 4

Very helpful. Thank you.

Operator

Thank you.

Speaker 5

Hi, good afternoon. So it sounds like the revenue shortfall relative to expectation for Q4 is all industrial So assuming that gives us about €95,000,000 in Q4 for that segment, That's still above the run rate of 22. So the question and I know you've mentioned weakness in China. How much further downside could there be in that segment that's been growing very meaningfully over the past 2 years? Where do you think your true demand quality revenue run rate baseline is in that market?

Speaker 5

And what drove the significant growth in the past few Was it driven by inventory build versus content gains? So just trying to see where we could land from A stable run rate, quarterly run rate in future quarters in that segment.

Speaker 2

So on the kind of back half of your question, we really see the growth that we Drove through the 1st three quarters of this year, and remember that follows multiple years of double digit growth, really as Content gains, we've had significant design win growth over the past really 3 to 4 years and that's led to multiple years of We would expect industrial and automotive to have again significant growth for the full year for 2023. And so as we said, we really view that as driven by content gains. Those content gains we believe are multi year revenue streams, right? A lot of those design wins that we win are Which begun production, those stay in production for in the industrial and automotive segment for sometimes 3, 5, 7 years or longer. So those Really long lifetime revenue streams.

Speaker 2

And so when we talk to our customers about the kind of near term headwinds, What our customers are saying is that is near term demand softening based on their customers. So their customers placing Lower number of orders on them. And that what they've shared with us is they believe that that's really driven by lower CapEx Expending by their customers due to higher interest rates, higher cost of capital, etcetera. So but if we Back, really quite pleased with the growth that we've driven in this segment over the past year, certainly this year as well. And we continue to see industrial and automotive as a long term growth opportunity for the company.

Speaker 2

We believe that Industrial Automation and Robotics, Automotive Electronics that these applications are in multi year secular growth Trends that will last for many years over the long term in that Lattice and Lattice devices are really well Positioned to take advantage of those secular growth trends and well positioned to gain more content with our customers, Especially with not just the continued expansion of our Nexus product line, but the beginning ramp of our Vond product line and the build out of our Vond product line as well.

Speaker 5

Thank you. That's very useful. And then for my follow-up, You've mentioned in the past that you have very little in terms of LTSA. So what's your expectation for pricing next I know you're not providing a guidance, but given the weakness, do you think that we get back to maybe a Low single digit decline in pricing, that's what a couple of analog companies have reported so far, discerning season. And where are your lead times currently relative to a quarter ago?

Speaker 2

Yes. Thanks, Tristan. On pricing, we see our pricing as generally stable and durable. We're in our as Sherry Said in our prepared remarks, we're in now our 5th year of our gross margin improvement strategy, which Included better pricing optimization. And I would say over those 5 years, which there have been many different sort of market conditions over those 5 years, Over those 5 years, we found that our pricing was very durable, very stable.

Speaker 2

And We don't have any reason to think that that would change, right. So we believe that our pricing will remain durable. On lead times, the second part of your I would say that lead times are for us are really back to normal, which normal we would say is kind of pre COVID time. There can always be a particular silicon package combination that might be in tight supply. But overall, I would say our lead times are Back to normal.

Speaker 2

And then just more broadly, I would say, just we view the semiconductor supply chain overall It's really kind of back to normal in terms of supply availability.

Speaker 5

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Blake Friedman with Bank of America Securities.

Speaker 6

Hi, thanks for taking my question. Just wanted to go back to Avant and just relative to 90 days ago, Have there been any changes related to your thoughts on how Avan is expected to ramp next year? And have any of the recent macro developments impacted the timing of any customer ramps?

Speaker 2

Thanks, Blake. I would say no. In terms of changes on Avant, The only changes we've seen over the last 90 days would be continued growth in the design win pipeline, Which we would have expected, right, as we continue to engage with customers as new device, Avant devices The changes are just our continued execution and progress on getting Avon G and X ready for launch at the developers Conference. So and then the second part of your question, doesn't no changes relative to Thinking on how Avant would ramp next year over the following years. That's really driven Less by any macro changes, more by just the level of customer engagement and design win progress and then the natural Timing of our customers on when they selected a device to just their natural timeline to when they would enter production with those devices.

Speaker 6

Got it. It's helpful. And then just as a quick follow-up on OpEx. If I look over the past few years, OpEx has kind of grown This mid teen range on an annual basis, just kind of given the potential macro weakness over the next few quarters, just curious how we should think about

Speaker 3

I mean, while there can be fluctuations from quarter to quarter based on the timing of programs and things like that. But you certainly have seen that over the several years that we've been investing quite a bit in our long term product portfolio and demand creation. So that's been going on now For several years. And even in the current quarter, the sequential or in the Q3 quarter sequentially as well as year over year, you've seen that we've Increased our R and D spend and the investments that we're making. So investing in our product portfolio for the long term growth of the company, that continues to be an area of focus for the company.

Speaker 3

We've talked about the fact that we're in the most rapid expansion of our product portfolio in the company's history. And Making sure that we make the right investments are very important there. And so that's definitely important to us. We want to make sure that we do it in a disciplined way, of course, but We're really pleased with the product launches, the customer momentum. And as we look ahead, you can expect to continue to see us I want to make sure that we are investing the right amount in our product portfolio.

Speaker 3

The other just reminder that I'll provide is from our Investor Day earlier this year, we So, that long term investment is continues to be an area of focus for us.

Speaker 6

Great. Thank you.

Speaker 7

So there have been a number of companies that have Reset revenue guidance recently and it's kind of spurred a reevaluation customer inventory and channel inventory out there. Have you guys begun this process? Are You really comfortable with understanding the level of inventory out there, particularly after This downtick in demand, at least evident for Q4. And are there any Patterns, geographically or end markets, or actually by disti themselves that you've noticed.

Speaker 2

Yes. Thanks, Chris. In terms of inventory, let me start with distribution or channel inventory. Most of our revenue flows through vast majority of our distribution, so that's certainly really important to us. We have very good visibility on distributor inventory.

Speaker 2

When we look Distributor inventory where it ended in Q3, I would say very much within the normal historical range for us In terms of levels of disti inventory, so we see that as healthy. There are 1 or 2 Distributors that I would say are still on the relatively lean side in terms of inventory, so they're a bit lean. But overall in aggregate, Our inventory level in the channel, I would view as healthy and within normal range. And then if we move to So we have thousands of end customers, so we don't have perfect visibility of end customer inventory. There are some of our large strategic customers that give us visibility into their levels of inventory.

Speaker 2

With those large strategic customers, We don't see any obvious signs of excess inventory or pockets of inventory with those large strategic customers. But again, we don't have perfect

Speaker 7

And perhaps another one for you. So Alterra came out, they had some kind of an interesting update on a Kind of pre IPO track. I guess, first of all, they talked about a decline in revenue. It looks like maybe a third of their revenue, Peak to trough is there expectation for a decline. I was wondering how you guys in terms of An overall decline in revenue, how you might see that.

Speaker 7

But also, I just wanted your kind of Take on refocusing on the low end with new products they have coming in the Q1 of next year And also refocusing on the channel and industrial and auto, I believe an area where you've taken some considerable share Over the past few years. Thanks.

Speaker 2

Yes. So in the first part of your question, I can only speak to our business and what we see largely covered I think in one of the earlier questions, which is Overall for the full year, we're looking forward to another strong year for the full year in terms of overall Kind of despite the sequential guide down for Q4, if you look at where we're tracking for full year, we're pleased with The overall track that we're on, especially given some of the macroeconomic conditions that we're seeing in some of the end markets. So we're pleased with our progress This year and this year to date. Now on the second part of your question, what I would say is on competition is I would say the I would start by saying the same thing that I said over 5 years ago when I joined the company and probably the Lattice employees are tired of hearing me That's what I continue to repeat it, which is we will always assume there is robust competition in every market that we serve and every That we serve and every product that we build, right? That's our philosophy.

Speaker 2

And so beginning in 2018, when I joined the company, we assumed There would be robust competition. We plan our products accordingly. And we feel really good about the competitive positioning of Platform 5 are in production and ramping number 6 and number 7 will go we expect to go into production next year in the 1st and second half of next year respectively. And then Avant, again, we feel really good about the competitive position of Avant As we shared at the launch, last year, the power efficiency of Avant, the feature set, The size efficiency are great. So we feel really good about that competitive positioning and clearly we'll share more about that at the Developers Conference that we have in December when we launch Avant GNX.

Speaker 2

But yes, I would say that We'll always assume that there's robust competition and so, and we'll our goal is to always make sure our products are absolute leadership It's in segments that they're targeting.

Speaker 7

Great. Thanks so much, Jim.

Operator

Thank you. Our next question comes from the line of Srini Pajjuri with Raymond James. Please proceed with your question.

Speaker 8

Thank you. Jim, given the macro weakness, are you seeing any change in your customers, I guess, adoption of some of the I understand you have a lot of them coming up and a lot of design activity out there. But given the macro, do you see any impact at all to

Speaker 2

All of our products and I can come back and touch on Avan specifically. But across all of our products, which would include Avanpa and not just But also Nexus and even pre Nexus products, if I look at the design wins and the design win pipeline Through the 1st 3 quarters of this year, we're seeing another very, very healthy year of growth in our design wins This year and that follows multiple years of significant growth. And so we're quite pleased with the continued expansion of the pipeline and of course that pipeline converts to revenue over the coming quarters. So we're pleased with that. And we're actually pleased with that across An important part of that Design win growth is our software strategy.

Speaker 2

I mentioned this in the prepared remarks. But for over 5 years now, we've been investing in our software portfolio. We've been In our software portfolio, we've been building out a portfolio of application specific solutions to act that are targeted for End use cases and applications that make it much very easy for customers to adopt our products and get to Quickly, they help our customers either switch from a competitor's device to our device Our customers that have maybe never used a Lattice device before or using a Lattice device in a new application, they help speed up that Process and so software which has been one of the places that we've invested significantly over the past years that certainly had impact on the rate and pace of our design wins and that benefits the NexSys products, the pre NexSys products and because Avonk leverages that same One of the original parts of your question, we're pleased with the rate and pace of Avant design win growth And we're looking forward to the revenue ramp, starting as we expect at the very end of this year, but benefiting us in 2425 beyond.

Speaker 8

Got it. Thank you. And as a follow-up, Jim, you talked about auto and industrial kind of weakening In Asia and maybe spreading beyond Asia into Europe as well, I guess nobody has perfect visibility, but to the extent you can share with us What your customers are saying about how long these macro headwinds are going to continue and when some of this Demand and I guess crosscurrents will kind of bottom out. Any thoughts and any color on that would be really helpful. Thank you.

Speaker 2

Yes. Thanks, Srini. Yes, I think our customers are struggling a little bit with how long that will be. I think their is a bit cloudy right now. When we Talk with our customers, they're seeing that demand softness as they're really attributing that to again to a pullback in CapEx related to those higher interest rates, higher cost of capital.

Speaker 2

And as I shared earlier, we certainly saw that initially in the Asia geography towards the end of Q3 expecting that to continue into Q4. And then we expect to see that softening extend into Europe as well. And we'll give at our next earnings call, we'll give more thoughts on what we're seeing in Q1 and next year at our next earnings call.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Ramsay with TD Cowen, please proceed with your question.

Speaker 9

Yes. Thank you very much. Good afternoon, guys. Jim, I wanted to dig into the trends in industrial and auto in that segment. So a few questions there.

Speaker 9

So apologies for the multipart thing. But could you help us a little bit, first of all, to break down that segment between the industrial and auto business, just roughly Percentages, second part, are you seeing any drastic differences in lead time trends The industrial business and the auto business like which one is holding up better, which one worse? And then lastly, if you could give us some visibility into Specific customer or specific applications where you're seeing this weakness. I mean, the call so far has talked about things very generally, and I wanted to get a bit more If you could, as to where you're seeing things that are holding up and where you're seeing things that have really weakened from an end application standpoint? Thanks.

Speaker 2

Yes, thanks, Matt. I think there was 3 parts. I'll do my best to hit each one of those. On the breakdown of industrial and auto, Just as a reminder for Lattice, if you look at that segment, we are definitely more heavily weighted towards industrial than Automotive is a relatively small percentage. We don't break out into sub segments, The majority of our revenue is industrial.

Speaker 2

Auto is a smaller part of that segment, It has been over the past quarters the faster growing part of the segment. Industrial, I think we talked about a number of times, so I won't Kind of repeat the comments on industrial. Automotive more specifically, we do anticipate Automotive the automotive market overall to start to soften in for instance this quarter, Just the belief is that higher interest rates, the fact that There's been the restocking of car lots is largely behind us, start to affect the end market demand in terms of new automotive And so we're assuming that that market begins to soften this quarter. On the second part of your question, on the lead time differences between the Between the 2, I don't think we see any significant lead time differences between the 2. But again, that segment for us is much more heavily weighted towards industrial.

Speaker 2

And so we tend to be a little bit more focused on the industrial impact because of its heavier weighting. Which I think was around specific customers and applications. What I would say is that the demand softness that we've seen is really broad Based, it's we kind of talked about by geography, but within those geographies, broad based across many customers, Many different applications. So we're certainly seeing that across things like industrial automation applications, robotics Applications. Yes, I would really and we anticipate automotive electronics.

Speaker 2

I would really categorize it as a pretty broad

Speaker 9

My second question really quick for Sherry. You and I talked a lot about the performance of the company on a free cash flow margin basis. And I think you got a question earlier about OpEx. But when you think about sort of floors and margins on an operating The SORAFOR and free cash flow margin, is there a certain trend that you would see in the end markets that would make you dial back spending? Or is this An environment where you have all these new products with Avant that are about to launch and you guys are going to sort of spend through the cyclicality And see where we end up on the other side because of the confidence in the products.

Speaker 9

Thanks.

Speaker 3

Yes, Matt. So I would say that on the OpEx front, Investing for the long term growth of the company is definitely something we've been focused on focusing on. We've been doing that quite a bit with all of the new products that we've launched. But that is continues to be important. And the target that we put out at our Investor Day for R and D spend in particular is 18% to 20%.

Speaker 3

So as a long term model, that model remains intact. I think though what I would say is that the way we've been investing has Always been in what we consider to be a disciplined way. And so we'll continue looking at the way that we're making those investments in a very disciplined way. And You can see the guide for Q4 in terms of what that's looking like. The company has very strong free cash flow, strong cash generation, free cash flow, we're really pleased with that.

Speaker 3

We are thrilled that we 40% free cash flow margin for the quarter was really good And we'll continue to focus on that. We'll continue to focus on making sure that we're investing in the right things. Gross margin, we believe our gross margin is durable And we'll continue to execute on our gross margin expansion strategy and focus on that area. So we just really view that we'll continue to

Operator

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

Speaker 10

Hey, good afternoon. Thanks for taking my question. So I guess, Jim, first, just kind of understanding how small the auto is relative to the Industrial segment. It is a greenfield opportunity for you. And just wondering if you could maybe talk about where you see the growth opportunities there and what do you think the mix optimization would If you think about those 2, would it be a fifty-fifty or is there maybe a less of a mix that'd be more optimal for the business?

Speaker 2

Yes. Thanks, David. So definitely, the auto within industrial and auto, auto is a smaller Component, but it has been a faster growing area for us over the past quarters. The applications that we would address Would be ADAS and Infotainment Systems. Actually, one of the recent wins that we announced with customer was in Mazda, new Mazda models of cars were used in their ADAS system.

Speaker 2

The Lattice device gets used between the camera that's at the front or the rear of the vehicle. It That Mazda application very typical application that we get used in automotive applications, but there's many other examples as well. So we do see automotive electronics over the long term as first of all kind of an obvious secular growth area And that's why we continue to see automotive electronics as just a really strong growth area for the company over the long term.

Speaker 6

Thanks for the color there.

Speaker 10

And then secondly, just Sherry, we've talked about the gross margin and it's been surprisingly robust And you pointed to that resiliency in the past, but I think this is the first time that we're seeing it really maintained on the softer outlook. And I guess, does Does that

Speaker 8

give you

Speaker 10

greater confidence just in that trajectory and the sustainability of it? And then does this maybe signal there could be more upside opportunity incrementally on the rebound? Thank you.

Speaker 3

Yes. Thanks, David. So gross margin, 70.6 A record, so we're really thrilled with that and a sequential improvement as well of 110 basis points or year over year rather improvement. But gross margin is something an area that we continue to focus on. I mean, we're in our 5th year now, as I mentioned in my prepared remarks.

Speaker 3

And the Factors that we've been executing on there, we continue to focus on. You can see fluctuations in gross margin from 1 quarter to the next quarter. But at the midpoint of our guide, it is a range, right, 70.5% plus or minus 1%. It is a We will continue to focus on gross margin and we believe our gross margin is durable. And when you At our Investor Day earlier this year where we increased our gross margin target to the low 70s, that's our long term target model and we'll continue to drive toward that.

Speaker 2

And maybe I'll just add, one of the benefits we've seen on gross margin is Software attach rate. As Sherry mentioned, gross margin can fluctuate quarter to quarter based on things like just mix of product. But one of the longer term trends That we think benefits our gross margin is software attach. As we've seen a higher percentage, actually now over half of all Lattice silicon design wins have what we call a software attach, which means they're using 1 of the 6 software solution stacks that We've launched into the market and when customers adopt that solution stack that combination of silicon and software generally Has a higher ASP and that higher ASP design win usually has a higher gross margin associated So I think that's one of the tailwinds over time at higher software adoption and the benefit that we see over time.

Operator

Thank you. Our next question comes from the line of Reuben Roy with Stifel. Please proceed with your question.

Speaker 11

Thank you. Jim, you said you like to talk about Avant. So I was going to ask another question on Avant and specifically around the pipeline and your comment on The pipeline at this point being significantly larger than kind of the same timeline for Nexus. And the question is, I think if I remember correctly, The initial Avant SKU was had a feature set, I guess, that was targeted towards edge processing and Potentially Edge AI, is that sort of the area where you're seeing most of the design activity or at this point has that broadened

Speaker 2

So no problem with asking another question on Bond. Yes, so as I said, we are seeing Really good growth of the pipeline. And actually Edge AI applications are some of the initial And that's actually has more to do with the sequence of the products coming out. When we launched the Avan The Avanti was actually optimized more around edge applications, things like doing artificial intelligence or inference processing at the edge in lots of different applications, industrial Seeing at the edge in lots of different applications, industrial applications, automotive applications, other applications as well. And so revenue and so that's where and because that product is more optimized around edge applications, edge AI in General, that's where the kind of initial design win pipeline started to build and that's where the first revenue streams will we expect to start to generate.

Speaker 2

Now the follow on device families of AVANT G and X, we're very excited about those products as well. And as I shared earlier, We'll launch those at the developers conference in December. Now those will address a range of other applications that we're excited And we'll certainly talk more about that at the developers conference in December. And so stay tuned, we'll hear more about that in December.

Speaker 11

Got it. Great. Okay. So if I could ask a quick follow-up. I don't think you've talked about client side PCs.

Speaker 11

I don't think you mentioned it this quarter, maybe not last. Maybe you can give us an update, especially with some new Processor SKUs coming out and some excitement around potentially AI centric notebook computers being done. Is there an opportunity for you folks with either content gains or are you seeing any design activity around that front at this point or is it too early?

Speaker 2

Yes. In fact, thank you for asking that. Happy to touch on that. Yes, so in Client, we continue to view Client as A large, a very large system TAM opportunity for us and we've announced A number of customers that we're already engaged with in the past, we had announced that Lattice devices and software are Used on Lenovo ThinkPad devices, LG Gram Series, Asus, but there are other Client OEMs that we're working with as well, it's a little too early to talk about those publicly, But we're really excited about those engagements and we'll definitely share more about that as those get launched and enter production. But yes, Lattice Devices are great solution for doing edge AI applications in client devices, in particular, we can help drive Battery savings, we can help improve security of the system, a number of different applications that we were getting designed into.

Speaker 2

And yes, we continue to see this as a good growth area for the company and we'll share additional OEM engagements and design wins as those come closer to production.

Speaker 11

Great. Thank you, Jim.

Speaker 2

Thanks.

Operator

Thank you. Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

Speaker 12

Thanks for taking my questions. First Sherry, and then an event question for Jim. Sherry, on the gross margin as revenue pulls back, is there any sort of significant Under absorption or operations costs that could start to be a factor for gross margin? And then second, looks like at the Analyst Day or sorry, Investor Day, you set a target for OpEx to be 30% of sales. At the midpoint of guidance in December, it looks like OpEx is going to be about 30 3% of sales.

Speaker 12

Is there an upper threshold where you would start to cut absolute OpEx? Or Could you see OpEx moving into the mid-30s for a period of time as you invest in the long term business?

Speaker 3

Yes. Thanks, Quinn. So from a gross margin perspective, the way I would look at it is, we've contemplated all Strategy that we've been executing on now for 5 years or in its 5th year. There are multiple factors there that we've talked about in the That have enabled us to really get value for our products and some of those do include product cost efficiencies. Jim talked about the software attach, new products, Mick, there are so many various factors that are built into our gross margin expansion strategy that Those are all fully contemplated as part of the guide that we provided for Q4.

Speaker 3

And again, we believe our gross margin is durable and we'll continue to drive toward The long term target model that we put out at our Investor Day earlier this year. From an OpEx perspective, the 30% is a long term model, That's our target. And within that, we talked about the R and D at 18% to 20% and SG and A 10% to 12%. So in terms of an upper limit on our OpEx, the way that I would answer that is that, we continue to focus on making sure that we're making the right investments For the company, for the long term growth of the company, we want to do it in a disciplined way and we'll continue To manage the business in that way, we've made a ton of progress in terms of all the investments we've made with the products that we've launched to date. And we want to Continue that focus because that's the long term growth of the company.

Speaker 3

And so you can see fluctuations on a quarterly basis, as I mentioned before, from an OpEx perspective, but we'll still drive toward our target model that we put out at our Investor Day.

Speaker 12

Great. And then for Jim, I know you've said multiple times the Pipeline is bigger than the Nexus pipeline at the given point in time. But I guess I'm wondering and I hope this Does it come across as a very simple question, but does that translate into a faster revenue ramp for Avant? Or Is it just that the TAM is much bigger for Avant? It's 10x higher ASPs.

Speaker 12

And so the pipeline is bigger, but it doesn't People shouldn't necessarily read into a faster event revenue ramp than Nexus. And I guess where I'm getting this is, Getting lots of questions from investors after the close, kind of, hey, can Avant ramp help offset some of this macro weakness that you're seeing And still allow you to sort of grow in 2024? Thank you.

Speaker 2

Yes, I think that what I would say is That Avant, design win pipeline being larger than Nexus is obviously positive. We certainly expected that, but it's still it's good to see that. The pipeline The whole idea of the pipeline is that it converts to revenue over time. I think the major If you look at the major limiter or governor over the revenue ramp over time, once we The samples in the hands of customers, it's actually more the customers rate and pace of being able to bring that product To market, they're on their own natural beat rate and natural platform refreshes. And so they'll as we win designs, they'll Sign Avant in at the next platform refresh rate.

Speaker 2

And so that's more of the rate or the governor of That growth rate over time of Avant, once we put the samples in customers' hands. And then what I would say is I would refer you back to The Investor Day that we did earlier this year, where we tried to characterize or give a sense of How to think about both the continued ramp of our small FPGA products, we expect those to continue to grow over the long term, but then how to about how Avant layers on top of that over a multiyear period.

Speaker 12

Got it. Thank you, Jim. Thanks.

Operator

Thank you. Ladies and gentlemen, that was our final question. I would now like to turn the floor back over to Lattice's President and CEO, Jim Anderson, for closing comments.

Speaker 2

Thank you, operator, and thanks again everybody for joining us on the call today. We're pleased with the solid results in Q3 and We're really excited to continue to execute on what we see as the biggest product portfolio expansion in the company's history and excited to share more about that at

Operator

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • In Q3 the company delivered $192.2 million in revenue (up 1% sequentially and 11% year-over-year), achieved a record non-GAAP gross margin of 70.6% and non-GAAP operating margin of 40.3%, generated 40% free cash flow margin and repurchased $10 million of stock.
  • Communications & computing revenue rose 6% sequentially on strength in general-purpose and AI-optimized data center servers, while telecom infrastructure remained weak; industrial & automotive declined 5% sequentially but grew 28% year-over-year on robust design-win momentum in automation, robotics and ADAS.
  • The company is executing its largest product portfolio expansion ever, having launched the CrossLink UNX FPGA with integrated USB and planning December introductions of two new Avant mid-range FPGA families (G and X) that leverage the existing Nexus software ecosystem.
  • For Q4 2023 management expects revenue of $166 million to $186 million, non-GAAP gross margin of 70.5% ± 1% and non-GAAP operating expenses of $57 million to $59 million, reflecting anticipated macro softness in industrial and auto markets.
  • Despite near-term headwinds, the company reports normalized supply chains, stable pricing and strong cash generation, affirming its positioning for profitable long-term growth across core markets.
A.I. generated. May contain errors.
Earnings Conference Call
Lattice Semiconductor Q3 2023
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