Semiconductor designer Lattice Semiconductor (NASDAQ:LSCC) fell short of analysts' expectations in Q4 FY2023, with revenue down 3% year on year to $170.6 million. Next quarter's revenue guidance of $140 million also underwhelmed, coming in 19.7% below analysts' estimates. It made a non-GAAP profit of $0.45 per share, down from its profit of $0.49 per share in the same quarter last year.
Lattice Semiconductor (LSCC) Q4 FY2023 Highlights:
- Revenue: $170.6 million vs analyst estimates of $176.5 million (3.3% miss)
- EPS (non-GAAP): $0.45 vs analyst estimates of $0.45 (small beat)
- Revenue Guidance for Q1 2024 is $140 million at the midpoint, below analyst estimates of $174.4 million (gross margin and implied operating profit guidance also below)
- Free Cash Flow of $68.24 million, down 12.2% from the previous quarter
- Inventory Days Outstanding: 174, up from 164 in the previous quarter
- Gross Margin (GAAP): 69.7%, in line with the same quarter last year
- Market Capitalization: $9.63 billion
A global leader in its category, Lattice Semiconductor (NASDAQ:LSCC) is a semiconductor designer specializing in customer-programmable chips that enhance CPU performance for intensive tasks such as machine learning.
Lattice Semiconductor was founded in 1983 by Rahul Sud and Ray Capece. After initial struggles led to a 1987 bankruptcy, Lattice promptly emerged from Chapter 11 and went public in 1989.
Traditionally, field-programmable gate arrays (FPGAs) have been reserved for specific use-cases where the volume of production is small. For these low-volume applications, the premium that companies pay in hardware cost per unit for a chip they can program themselves is more affordable than the development resources spent on creating an application-specific integrated circuit (ASIC).
New cost and performance dynamics have recently broadened the range of viable applications and FPGAs are now used for cases such as accelerating artificial neural networks for machine learning, video processing or 3D MRI imaging. Lattice makes general-purpose FPGAs but also dedicated chips optimized for security and video connectivity applications.
Competitors in the field-programmable gate array (FPGA) market include longtime leaders Xilinx which was acquired by AMD (NASDAQ:AMD) in early 2022, and Altera that was acquired by Intel (NASDAQ:INTC) in 2015. Samsung and QuickLogic (NASDAQ:QUIK) are other competitors.Sales Growth
Lattice Semiconductor's revenue growth over the last three years has been strong, averaging 22.2% annually. But as you can see below, its revenue declined from $176 million in the same quarter last year to $170.6 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Lattice Semiconductor had a difficult quarter as revenue dropped 3% year on year, missing analysts' estimates by 3.3%.
Lattice Semiconductor's revenue inverted from positive to negative growth this quarter, which was unfortunate to see. Looking ahead to the next quarter, the company's management team forecasts a 24% year-on-year revenue decline. On the other hand, analysts expect revenue to turn positive over the next 12 months, with average estimates of 1.1% growth.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Lattice Semiconductor's DIO came in at 174, which is 31 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Lattice Semiconductor's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 69.7% in Q4, up 0.4 percentage points year on year.
Gross margins have been trending up over the last year, averaging 69.8%. These are some of the best margins in the semiconductor sector, driven by strong pricing power from its differentiated, value-add products.
Profitability
Lattice Semiconductor reported an operating margin of 37.8% in Q4, down 2.3 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Lattice Semiconductor's operating margins have been trending up over the last year, averaging 39.8%. On top of that, the company's margins remain towards the high end of semiconductor companies, driven by its efficient operating model and economies of scale.
Earnings, Cash & Competitive Moat
Analysts covering Lattice Semiconductor expect earnings per share to be relatively flat over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Lattice Semiconductor's free cash flow came in at $68.24 million in Q4, roughly the same as last year.
As you can see above, Lattice Semiconductor produced $249.5 million in free cash flow over the last 12 months, an eye-popping 33.9% of revenue. This is a great result; Lattice Semiconductor's free cash flow conversion places it among the best semiconductor companies and, if sustainable, puts the company in an advantageous position to invest in new products while remaining resilient during industry downturns.
Key Takeaways from Lattice Semiconductor's Q3 Results
With a market capitalization of $9.67 billion, Lattice Semiconductor is among smaller companies, but its $114.4 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were glad Lattice Semiconductor's revenue and EPS outperformed Wall Street's estimates, even if the beats weren't too big. It was also good to see an improvement in Lattice Semiconductor's inventory levels. On the other hand, its revenue guidance for next quarter underwhelmed, and this is where the market is focused and why the stock is weak. The industry has seen some choppy results, starting with bellwether Texas Instruments and continuing with ON Semiconductor. Overall, the results could have been better. The company is down 12.3% on the results and currently trades at $59 per share.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Lattice Semiconductor's five-year average ROIC was 29.4%, beating other semiconductor companies by a wide margin. Just as you’d like your investment dollars to generate returns, Lattice Semiconductor's invested capital has produced robust profits.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Lattice Semiconductor's ROIC averaged a 32.3 percentage point increase each year. The company has historically shown the ability to generate good returns, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.
Key Takeaways from Lattice Semiconductor's Q4 Results
Revenue missed, leading to an operating income miss, although EPS was in line. Looking forward, the company's outlook was below expectations and a further reason for the stock's weakness. Specifically, revenue, gross margin, and implied operating profit guidance for next quarter missed analysts' expectations. Overall, this was a mediocre quarter for Lattice Semiconductor. The company is down 7% on the results and currently trades at $66 per share.
Is Now The Time?
Lattice Semiconductor may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
There are several reasons why we think Lattice Semiconductor is a great business. While we'd expect growth rates to moderate from here, its revenue growth has been strong over the last three years. Additionally, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its impressive gross margins indicate robust pricing power.
Lattice Semiconductor's price-to-earnings ratio based on the next 12 months is 36.4x. Looking at the semiconductors landscape today, Lattice Semiconductor's qualities really stand out, and we really like it at this price.
Wall Street analysts covering the company had a one-year price target of $76.19 per share right before these results (compared to the current share price of $66.00), implying they saw upside in buying Lattice Semiconductor in the short term.
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