No Surprises In Lattice Semiconductor's (NASDAQ:LSCC) Q4 Sales Numbers, Next Quarter Sales Guidance Is Optimistic

Full Report / February 13, 2023
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Semiconductor designer Lattice Semiconductor (NASDAQ:LSCC) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 24.1% year on year to $176 million. Guidance for next quarter's revenue was $180 million at the midpoint, which is 3.03% above the analyst consensus. Lattice Semiconductor made a GAAP profit of $51.9 million, improving on its profit of $28.5 million, in the same quarter last year.

Lattice Semiconductor (LSCC) Q4 FY2022 Highlights:

  • Revenue: $176 million vs analyst estimates of $174.7 million (small beat)
  • EPS (non-GAAP): $0.49 vs analyst estimates of $0.48 (2.08% beat)
  • Revenue guidance for Q1 2023 is $180 million at the midpoint, above analyst estimates of $174.7 million
  • Free cash flow of $71.7 million, up 20.1% from previous quarter
  • Inventory Days Outstanding: 186, up from 159 previous quarter
  • Gross Margin (GAAP): 69.4%, up from 64.2% same quarter last year

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 solid, averaging 18.5% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $141.8 million to $176 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 Total Revenue

This was a decent quarter for Lattice Semiconductor as revenues grew 24.1%, topping analyst estimates by 0.71%. This marks 9 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, Lattice Semiconductor believes the growth is set to continue, and is guiding for revenue to grow 19.6% YoY next quarter, and Wall St analysts are estimating growth 11.5% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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.

Lattice Semiconductor Inventory Days Outstanding

This quarter, Lattice Semiconductor’s inventory days came in at 186, 51 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Pricing Power

Lattice Semiconductor's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 69.4% in Q4, up 5.1 percentage points year on year.

Lattice Semiconductor Gross Margin (GAAP)

Gross margins have been trending up over the last year, averaging 68.4%. Lattice Semiconductor's gross margins remain one of the highest in the semiconductor sector, driven strong pricing power from its differentiated chips.


Lattice Semiconductor reported an operating margin of 40.2% in Q4, up 7.3 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Lattice Semiconductor Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 38.6%. Lattice Semiconductor's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 15.4% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Lattice Semiconductor's free cash flow came in at $71.7 million in Q4, up 46.5% year on year.

Lattice Semiconductor Free Cash Flow

Lattice Semiconductor has generated $215.5 million in free cash flow over the last twelve months, translating to 32.6% of revenues. This is a great result; Lattice Semiconductor's free cash flow conversion was very high compared to most semiconductor companies, in the last year. This high cash conversion, if maintained, puts it in a great position to invest in new products, while also remaining resilient during industry down cycles.

Lattice Semiconductor’s average return on invested capital (ROIC) over the last 5 years of 20.9% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Lattice Semiconductor's Q4 Results

Sporting a market capitalization of $11.1 billion, more than $145.7 million in cash and with positive free cash flow over the last twelve months, we're confident that Lattice Semiconductor has the resources it needs to pursue a high growth business strategy.

We were very impressed by the strong improvements in Lattice Semiconductor’s operating margin this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was less good to see the inventory levels increase. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 2.16% on the results and currently trades at $84.5 per share.

Is Now The Time?

When considering Lattice Semiconductor, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Lattice Semiconductor is a great business. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from here. But on a positive note, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its impressive operating margins are indicative of an highly efficient business model.

There's no doubt that the market is optimistic about Lattice Semiconductor's growth prospects, as its price to earnings ratio based on the next twelve months of 41.0x would suggest. But looking at the semiconductors landscape today, Lattice Semiconductor's qualities stand out and we still like it at this price.

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