Lattice Semiconductor Corporation (NASDAQ:LSCC) Q4 2023 Earnings Call Transcript
Lattice Semiconductor Corporation (NASDAQ:LSCC) Q4 2023 Earnings Call Transcript February 12, 2024
Lattice Semiconductor Corporation reports earnings inline with expectations. Reported EPS is $0.45 EPS, expectations were $0.45. LSCC 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 Fourth 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. [Operator Instructions]. 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 fourth quarter of 2023 and the business outlook for the first 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 first 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.
James Anderson: Thank you, Rick, and thank you, everyone, for joining us on our call today. 2023 was another strong year for Lattice as we expanded our product portfolio and delivered record financial results. Annual revenue grew by 12%, marking the third consecutive year of double digit growth. Full year non-GAAP gross margin increased 130 basis to a record 70.4% and we delivered 15% year-over-year growth in non-GAAP EPS. We also continued our rapid product portfolio expansion with the launch of multiple new hardware and software solutions, including two new device families based on our new Avant mid-range FPGA platform. While I'm pleased with the full year revenue growth for 2023, our progress in Q4 of 2023 was impacted by the cyclic correction affecting the broader semiconductor industry.
In the industrial and automotive market, although revenue grew 11% year-over-year in Q4, revenue declined 9% sequentially as demand softened across this end market as customers reduced their inventory levels. In the communications and computing market, revenue declined by 14% sequentially in Q4 as growth in data center computing was offset by weaker in wired and wireless telecommunications, driven by lower wireless infrastructure deployments. Looking forward, we expect Q1 '24 revenue to be sequentially down from Q4 '23, driven by softer end customer demand across our end markets as end customers rebound to their inventory levels. At this point, we expect revenue in the second half of 2024 to be higher than the first half of '24, driven by improving end market conditions as end customer inventory levels normalize as well as new Lattice Nexus and Avant product ramps.
Turning now to our product portfolio. In our small FPGA portfolio, we now have seven Nexus device families launched with five in production and ramping with customers and two families entering production later this year. We are very pleased with the strong revenue growth of Nexus in 2023 as it was a major contributor to the overall company growth. We also achieved a record level of design wins with Nexus in 2023 and our Nexus pipeline of opportunities continues to grow. Nexus revenue and design win growth in '23 was primarily due to a combination of displacing competitor devices as well as the adoption of Nexus in new greenfield applications. Turning to our mid-range FPGA portfolio. At the Lattice Developers Conference in December, we launched two new device families based on our new Avant platform.
We now have three Avant device families in the hands of our customers with the first device family, the Avant-E, generating initial revenue at the end of 2023 as planned. Avant's initial revenue was driven by numerous applications such as communication gateways, industrial engine controls, LiDAR applications and more. We expect the Avant-E series to ramp throughout the course of this year with a more significant contribution in the second half of this year and continued growth in the following years. We expect initial revenue from the newly launched Avant-G and X Series before the end of this year. Our three Avant device families provide a market-leading lineup of solutions for customers in the mid-range FPGA market. 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.
Given the competitive differentiation and use of adoption of Avant, the overall pipeline of Avant design opportunities continues to grow and significantly exceeds the pipeline of access at the same relative point of time. We also refreshed four of our key software solution stacks. We continue to see strong software adoption at an attach rate of over 50%. We continue to expand the capabilities and performance of our software portfolio to enhance the customer design experience and to make it easy for them to adopt Lattice products and get to market quickly. Our most widely adopted solution stack to date has been our SensAI stack, which supports a variety of AI applications. One of the frequent questions we've gotten from investors over the past months has been around overall Lattice AI related opportunity.
So I'd like to provide some additional color on that topic. Lattice hardware and software solutions can be used in a wide variety of AI-related applications. For example, in AI optimized servers in the data center where the system is running generative AI workloads, for example, Lattice devices are used in the control, management and security of the AI computing system. Another example is in AI-enabled PCs, where Lattice solutions are used to run the AI inference algorithm that provides features such as user presence and gaze detection in PC systems like the Lenovo ThinkPad. A third example is AI-enabled automotive ADAS systems, where Lattice solutions are used to aggregate and pre-process essential data that is used for AI processing. We recently announced that Lattice solutions are being used in the ADAS systems of monster crossover SUVs. There are many other examples as well.
When we look across all the AI applications across our end markets, we estimate that wireless revenue in 2023 included about $100 million of AI-related revenue. We expect our AI-related revenue to more than double over the next few years based on the growing pipeline of AI-related design wins. In summary, I'm pleased with the strong progress in 2023 as we achieved record revenue and gross margin and continue to execute on the biggest product expansion in our company's history. While the industry moves through a temporary correction cycle and we experience some short-term cyclic headwinds in our end markets, we continue to be well positioned for growth over the mid and long-term. We have the strongest product portfolio in our history and we continue to rapidly expand our product lines and accelerate our customer momentum.
I'll now turn the call over to our CFO, Sherri Luther.
Sherri Luther: Thank you, Jim. We are pleased with our full-year 2023 results. We drove double-digit revenue growth for the third consecutive year, continued gross margin expansion, and strong profitability. We generated a record level of cash from operations, expanded free cash flow margin, increased the cash return to shareholders through share buybacks and completely paid down our outstanding debt balance. Let me now provide a summary of our results. Fourth quarter revenue was $170.6 million, down 11% sequentially from the third quarter and down 3% year-over-year as end market demand softened and end customers reduced their inventory. Full-year 2023 revenue was $737.2 million, up 12% from 2022. Revenue growth for the full-year 2023 was driven by double-digit revenue growth in our industrial and automotive end market, representing the fourth consecutive year of double-digit growth in this end market.
Our Q4 non-GAAP gross margin declined 20 basis points to 70.4% compared to the prior quarter due to mix and was up 40 basis points compared to the year ago quarter. Our non-GAAP gross margin for the full-year 2023 was 70.4%, up 130 basis points from 2022. Q4 non-GAAP operating expenses were $55.5 million compared to $58.2 million in the prior quarter and $52.5 million in the year ago quarter. The sequential decline in operating expenses was driven by the timing of certain R&D programs as well as the prudent and disciplined management of our SG&A expenses. Non-GAAP operating expenses for the full-year 2023 increased to $225.7 million from $201 million, primarily driven by increased investment in our long-term product roadmap as well as in customer support.
Our Q4 non-GAAP operating margin decreased 240 basis points to 37.8% compared to the prior quarter and was down 230 basis points compared to the year ago quarter. Our non-GAAP operating margin for the full-year 2023 with a record 39.8%, up 120 basis points from 2022. We continue to balance operating margin growth with a disciplined approach to investing in the long-term growth of the company. Q4 non-GAAP earnings per diluted share was $0.45 compared to $0.49 in the year ago quarter. Non-GAAP diluted earnings per share for the full-year 2023 was $2.01 compared to $1.75 for the full-year 2022. This represents 15% year-over-year growth. I would now like to provide an update related to our taxes. In Q4 due to our consistent and continued profitability, we released our valuation allowance totaling $57 million, which had a GAAP EPS impact of $0.41.
This is reflected as a tax benefit in our GAAP income statement. As a result of the release of the valuation allowance, we are expecting our 2024 effective tax rate to be in the range of the mid- to high-single-digits. Demonstrating our continued focus on cash flow, we generated a record $270 million in cash from operations in 2023. This represents an increase of 13% compared to the cash generated from operations in 2022. Free cash flow margin increased to a record 34% in 2023. In Q4, we repurchased approximately 900,000 shares or $50 million of stock, making Q4 our thirteenth consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 4.8 million shares, thereby reducing dilution by 3.4%. Our Board recently approved a $250 million share authorization.
We will prioritize investing in the organic growth of our business, but intend to continue returning capital to our shareholders through share repurchases. Let me now review our outlook for the first quarter. Due to the cyclic correction and demand headwinds that we are seeing across all of our end markets, revenue for the first quarter of 2024 is expected to sequentially decline to between $130 million and $150 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis due to lower absorption as well as a less favorable mix from our end markets. Total operating expenses for the first quarter are expected to be between $54 million and $56 million on a non-GAAP basis, which is roughly in line with Q4 '23 at the midpoint.
We are taking a cautious and prudent approach to near-term OpEx, while still enabling the long-term growth and expansion of our product portfolio. Overall, I'm very pleased with the continued financial progress we made in 2023 across many key metrics. As we enter 2024, we are experiencing near-term cyclic softness in our end markets, including customers rebalancing of their inventory levels. However, we continue to believe we are well-positioned for long-term growth. Operator, that concludes my formal comments. We can now open the call for questions.
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