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Key Takeaways for Lattice Investors
Lattice Investor Day 2023
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I knew it would happen at some point, but I was finally invited to one of the big important financial stock exchanges. This year, Lattice Semiconductor invited me to Nasdaq Marketplace to attend their Analyst and Investor Day. Since then, Lattice has published their 23Q2 earnings report, to an impressive set of numbers. The headline is that the company is showing a consistent quarter-to-quarter rise in revenue that has amazingly continued for twelve straight quarters, doubling total revenue in that time. Lattice has also seen gross margins go above 70%, and deliver a strong EPS, again over successive quarters and years. This is all despite the industry going through the boom and bust in the macroeconomic climate these past couple of years - Lattice's core businesses lends themselves very well to weathering that storm and coming out of it with both continued revenue growth, but also next generation TAM growth going after new and expanding markets.
At the Analyst and Investor Day, three of the key players from Lattice took to the stage: CEO Jim Anderson, CFO Sherri Luther, and CSMO Esam Elashmawi. Here's a brief overview of their current performance and some insights gleamed from the event.
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Lattice 23Q2 Results Overview
As stated previously, Lattice's Q2 was a strong growth quarter for the company, compounding many quarters of strong growth. Year on year revenue grew 18%, from $161.4 million to $190.1 million, a new company record. The growth over the last 10 quarters equates to a 25.8% CAGR, outstripping most of the semiconductor market.
Plotting over time, we can see this growth from $97m revenue in Q1 2020 to $190m in Q2 2023. A slow yet consistent growth quarter over quarter, which also has come with a 1000+bp growth in gross margins over that time, from 60% to 70%. Some of this is accelerated over the pandemic, stretching from 62% in Q2 2021 to 68% in Q1 2022, but also indicative of some of the model changes happening at the fundamental core of Lattice.
Part of this is a pivot in Lattice's target market segments. Lattice had, for the longest time, a strong 'Consumer' portion of its revenue stream - even in 2019, this business unit had 19-20% of the full revenue. This positioned its portfolio towards consumer use-cases and end-points. However now the company is almost entirely comprised of two long running business units: industrial/automotive, and communications/computing. Where the consumer group is now 5% of business, low enough that Lattice doesn't need to mention the YoY changes compared to the others, and we're seeing a trend in customer base towards the others, particularly automotive and industrial. It's easy to see why, given the continued high-demand of automotive and industrial silicon, particularly items like FPGAs, which provide flexibility and control over a long lifetime product set to exist for 10-20 years that needs meaningful updates.
Plotting that trajectory over time, we see 2018 has an even split of Consumer, Comms, and Industrial. While Comms (and Computing) has stayed semi-consistent since, bouncing between 28% and 43% and coming back down in recent quarters, the Industrial (and Automotive) has stayed at around 40% until the last three quarters, reaching a peak in Q2 2023 of 61%. This showcases a +55% YoY growth in revenue (GAAP) of Industrial and Automotive.
Lattice's current Nexus and other products in its portfolio are finding use cases in industrial and automotive growing substantially. The validation ramp of those markets is often slow, and any growth is likely to be extended over time as these products are supported over decades.
The revenue % growth over time is also mirrored in the operating profit, growing from 22.7% in Q1 2020 to 41.0% in Q1 2023 - again showcasing 12 quarters of growth in every quarter, and still 40.0% in Q2. EPS has followed similarly from $0.15 per share in Q1 2022 to $0.51 per share in Q1 2023, or a +37% YoY from Q1 2022.
One point not explicitly stated in the financials, but going through the data, is the trend of the geographic sources of Lattice's revenue. Historically, Lattice has a strong presence in Asia.
Since 2018, revenue percentage by geographic location has been 70% or higher until Q3 2022, and it is now trending downwards, being 57% only six months later. Those percentage points are being split between America and EMEA, both of which posting historic revenue highs for Lattice. When asked, CEO Jim Anderson stated that this is partly because of where chips are sold - these are sell-in numbers, so the chips may end up in systems sold in Asia still, but also in 2019 the company rebuilt its sales force in Americas and EMEA, focusing on clients in those regions. The fruits of these changes are starting to come through, again indicating the delay often associated with focused product or new product development in Lattice's markets.
For the outlook, Lattice is advising growth again in Q2 2023, despite the traditional 'weakness' we've been seeing from other fabless semiconductors over the last few quarters. The midpoint of the outlook is $188m for the quarter, with a 70% gross margin.
Commentary from Lattice Investor Day
One of the biggest changes in recent quarters for Lattice has been a pivot in its portfolio design methodology. I've covered this in a video on my channel TechTechPotato before, but since the advent of CEO Jim Anderson taking over in September 2018, the company has pivoted to a more agile strategy. Previous Lattice product design was very linear, with a new product family often being a separate team to the one before it, with no cross talk between groups to form sets of standards. The new way of doing things at Lattice is to introduce the concept of an overriding FPGA platform of products, from which optimized FPGA models are derived under a set of design principles. These optimizations might be for performance, features, security, power, die size, or market focused, such as automotive or industrial. The first platform under this design approach is Lattice Nexus, from which it has introduced six FPGA product groups tailored to different application needs, such as control, security, embedded vision, and others.
Alongside hardware is software - with Lattice taking a solution-based approach given customer feedback. Lattice has created software toolkits, enabling hardware, software, IP, reference designs, and demos, into an application focused ‘solution stack’. The stack is meant to provide all the necessary ingredients for customers to get a head start on development by bringing everything under a single banner. Alongside Edge AI, embedded vision and security, Lattice highlighted its automation and ORAN solutions.
Lattice stated that the software value add to the Nexus line is substantial - currently 50% of its design wins use Lattice software and platforms directly, allowing customers to get to a production release 3-6 months quicker (than when using just the hardware alone). For the bottom line numbers, design wins with software attach results in higher average selling prices of the FPGAs for Lattice - most likely as the software allows customers to explore the utility of higher/better SKUs in the stack before deciding on a particular model.
Building on the six parts in the Nexus line, Lattice is still adding to this family, with MachXO5T-NX for advanced system control having launched in April 2023, and CrossLinkU-NX for embedded vision is coming later this year.
In December 2022, Lattice announced its second FPGA platform, this time targeting the underserved mid-range FPGA market. Lattice Avant will be a big expansion opportunity for Lattice given that the traditional players in the mid-range FPGA market, Xilinx and Altera, are currently focusing on integrating with their ‘new’ owners, AMD and Intel, respectively.
Built on this common Avant platform, Avant-E was the first product launched. Avant-E targets low-powered edge applications, and at the Investor Day the company previewed Avant-G and Avant-X, for general purpose FPGA and advanced connectivity FPGA markets respectively. Avant-G and Avant-X are set to launch later this year.
The important thing here is to showcase what Lattice means by 'small' FPGA and 'mid-range' FPGA.
Lattice's business today is majority in the Small FPGA focus. With Avant, the company moves into the mid-range, addressing larger silicon requirements with more features. This plays well into the growing markets of industrial and automotive, as well as communications and computing. Lattice has stated in the past that its attach rate in servers globally, for example, is going beyond one FPGA per server. Demand for FPGA silicon with reconfigurability but also updated tools to enhance security, control, and connectivity is growing. That also applies to industrial automation, telecommunications, and automotive applications as well. The net result is Lattice increasing its market addressability. In the past, Lattice has said that this will grow from $3B today to $6B.
Lattice at its 2023 investor day added in metrics showcasing that it expects the addressable market to grow to $10B by 2028.
The growth of AI and new datacenter applications adds another 25% to the traditional FPGA market that Lattice addresses between Avant, Nexus, and its other legacy portfolio. What I think is important here is that pie chart in the bottom right - Lattice sees its SAM breakdown between small FPGA and mid-range FPGA as 45-to-55. Currently that sits at 100-to-0, and perhaps 95-to-5 by the end of 2023. That's a big swing, partly due to how the markets are shifting, but also the higher ASP model combining with moderate volume.
Jim highlighted that the Avant revenue is set to start at the end of 2023, starting small. However, the ASPs for Avant are 10-20x higher than that of Nexus, and many customers are going to be using both.
Lattice spoke extensively about its segment opportunities, and how the portfolio is increasing Lattice's reach into segments for which Lattice already delivers to customers extensively. The communication about this is essentially that Lattice is addressing current customer needs and building with customers who already have a strong base with Lattice design. Of course, new customers are always welcome, but Lattice extensively works with thousands of customers in multiple markets.
For its datacenter computing offering, Lattice focused a lot on capability, cost, and the demand for a unified architecture. CSMO Esam Elashmawi stated that customers building large 3000W servers for AI are looking to save costs and save power, even saving milliwatts matters, and having a unified platform and choosing the right device matters for Lattice customers. On top of that, Esam pointed out that even a small attach rate to the 300m unit/year client business is significant baseline revenue for a company like Lattice - they are already making inroads into client computing products today through partnerships with Lenovo, ASUS, and LG, all using Lattice technology.
One of the issues here is the rapid growth and changing ecosystem of the uses and requirements of these markets. If a new feature or new compute paradigm is needed tomorrow, a product with a lifecycle of 15-20 years needs the capability to make those adjustments - perhaps not those adjustments on the fly, but as the industrial equipment providers who update models every couple of years but keep the same underlying platforms with new FPGA firmware or bitstreams.
This also applies to one of the growing areas for Lattice customers, machine learning/artificial intelligence, and the ability to have a reconfigurable solution that optimizes for power as models evolve becomes a key consideration with platform integration.
With industrial and automotive clients, while power consumption is important, the capabilities of the chips matter most.
On the financial side, CFO Sherri Luther highlighted a lot of what I stated at the top of this piece - Lattice has had substantial success over the last three years with almost every metric trending in a positive direction for the company. As a company that goes after long product life-cycle revenue streams, revenue stays steady and over time, margins will increase. This includes pricing optimization, having the right mix of products, and maximising the value of long standing industry partnerships.
On top of this, Lattice is building for long term growth. This means bringing down operating expenses as a percentage of revenue. From 35.8% in 2020, this currently sits around 30% and trending lower. The actual dollar amounts are increasing as Lattice's revenue is increasing, but as a fraction it is decreasing.
In terms of liquidity, Lattice is growing free cash flow as a percentage of revenue, hitting nearly 33% in 2022, and increasing its free cash flow per share. With debt paydown (and the debt rating improving 3x in 3 years), Lattice ended up net cash positive at the end of 2022, and as of its investor day event hadaccess to a $350m 'revolver', for any immediate need. The company has also approved $130m of share repurchase through to the end of this year, on top of the 3.6 million shares repurchased in the last three years.
Lattice has in the past given multi-year models, and it took time to go through the following slide updating the old model it gave in 2021. In short, everything looks a lot better, and continues to build on a strong momentum, focusing on the long term growth of the company.
I mean, it's difficult not to present this is a great light. I'm pretty sure most fabless semi companies in the space would love to have an outlook like this. For those of you listening to this, the slide showcases a model of low double-digit year-on-year growth in revenue for the next three to four years, with gross margin in the low 70s, OpEx of around 30%, and operating income in the low 40s. The company also added a free cash flow target to the model, targeting a free cash flow margin of over 30%, with significant cash generation.
One thing not focused on this event was the inventory levels. I went back through Lattice's disclosures, and plotted days of inventory vs days of revenue outstanding.
Lattice has historically kept around 120-140 days of inventory on hand. This is important to manage, especially with how long order-to-production cycles can take. But also it helps absorb a peak in an increase in demand, if a customer wants to increase its orders. However storing inventory can be expensive, and thus a careful balance - there's no benefit to keeping a year's worth of hardware you're not selling. The ratio of inventory days to days revenue outstanding is a bit of an odd metric, especially as a company could fulfil a large order and end up with fewer days revenue on the books. But it's important to note this ratio is near an all time high for Lattice, and the inventory days are also at a high, but have at least come down in the latest quarter. It wasn't addressed at the investor day, but I think keeping track of this data for the next couple of quarters is going to be important.
So this was technically my first in-person investor day, and it was a very good wrap of the company's latest financial performance, as well as longer term insights. The audience in the room are obviously keeping close track of those numbers, what it means for any future prospective investment. Lattice did a good job outlining where their portfolio is going, what customers are demanding, and how Lattice is addressing a new market with a unique opportunity, while its main competitors aren't paying attention.
As part of the investor day, there was a series of open questions from the room to the executives. Here's my attempt at a transcript, cleaned for clarity.
Q: What's the key highlight to walk away with? You're now guiding for 15-20% growth, above the low double digit predictions from 2 years ago.
JA: Our product portfolio expansion. The company has never expanded this big, this fast, at the demand of customers. I love products, we're only as good as our products. We're now having discussions with big customers that didn't happen 5 years ago - multi-generational discussions about multi-generational products, showcasing multi-generational trust in Lattice. We're working with customers, meeting their need, in both hardware and software.
Also, we outperformed our low double-digit CAGR from 2021. The end-market was stronger than what we thought. Semis as a whole is part of it that, but part of it is Lattice specific too. The rate at which customers have switched to us - it's been a faster conversion from competitors than anticipated, in industrial and automotive especially. The software solution drives a lot of that, makes it easier for customers to switch from customers, or designed us into apps we haven't been used in before.
Q: Timing with Avant, with revenue in Q4 this year. Can you talk more about the initial revenue markets? Are these new platforms, or existing legacy platforms?
A: We have been engaged with over 100+ customers on the Avant platform definition. Our first product is Avant-E for edge, so the initial revenue is really on Avant-E. But we spoke about Avant-G and Avant-X today are also coming. The first adoption will be on the Edge though, for industrial and some other segments.
Q: Free cash flow - what is driving that confidence to support long-term FCF. What are the drivers?
A: The best way to drive FCF is our operating income. We have discipline in our investment strategy - we have focused on cash, working metrics, and aim to drive accountability and results. As we look ahead, our higher revenue targets and operating income targets are going to drive that. We'll drive progress.
Q: What's driving the higher ASPs (average selling price) in automotive compared to other segments? Are they simply higher prices, or is it the software attach - or are they buying higher SKUs due to the software?
A: It's not just automotive. When we measure software attach ASPs, they are significantly higher than non-software attach sales. It's mostly because of the software attach, when we measure like-for-like. We're trying to isolate the purely software benefit.
Q: For the early update for Avant - you said 90% of people that are already building on Nexus or are using software are also using Avant. Is that on track? In long term revenue guidance, what % is Avant?
A: We've been engaging with customers for a while. We look at revenue based on extensive forecasts with customers. We're doing really well with Avant compared to Nexus ramp. If we compare like-for-like, Avant is exceeding Nexus metrics at same point. Our target is 15-20% revenue growth year-over-year for 3-4 years. At the end of that, we expect Avant to be 15-20% of the company total revenue.
Q: Looking at the competition - there are still really only four FPGA companies in the market. As you move into mid-tier, can you give a summary of competitive landscape? Are competitors reacting?
A: On the competition, from day 1 when we joined the company (Jim and Esam), our approach has been to assume a robust competitor in every segment. We build roadmap based on that. If it occurs, we're ready - if not, upside! We have also put in sales strategies, marketing strategies, on top of our product differentiation - we make sure that they're differentiated regardless of the competition. But also if we consider our software tools, that's a competitive advantage for us. Also, we have customer intimacy and their roadmaps are now aligned with us.
Q: The other three FPGA companies are talking about soft markets in 2H. What are your insights?
A: So while we don't have specific annual guidance through to end of the year, we have guided up QoQ. Over the multi-Q period, as we talked today, we feel good about long-term growth. In channel, one of the things we did well over the last 12-24 months is that we made sure our channel and distributors didn't get overloaded.
Q: I've been going back through the data, and noticed that the geographic sources of revenue are trending away from Asia. What used to be 72-75% is now less than 60%, happened mostly in the last two quarters. Is there a reason for that?
A: We have had strength in our growth in US and EMEA - but also those numbers are ship-in, so chips shipped there, but products sold elsewhere, e.g servers. One key aspect is that we rebuilt our salesforce in 2019 for USA and EMEA, with a focus on direct sales.
Q: Software attach rates - you stated that Lattice design wins have 50% attach rate for software. Where are you on revenue for hardware-only vs software-attach design wins?
A: We've had design wins over the last 18 months for which we'll see the revenue gain in 12-24 months. We don't have metrics on the revenue of software attach - it's not 50% today, but it's a long-term goal and we'll cover those metrics as they convert.
Q: The margins of software attach - is it a good tailwind? What's the offset on GM given you're already above 70% and trending to the low 70s.
A: Software attach is definitely beneficial to margins. The cogs of the software are effectively zero, so additional ASP with software is pure margin.
Q: You stated a 50% server attach rate. ASPs vs units, are these tied to new servers or prior?
A: New chips are enabling new modularity, and it gives us opportunities. The systems are becoming more complex, so driving increased functionality is improving our offering. It is enabling a higher $/server over time.
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