Lattice Semiconductor (NASDAQ:LSCC) Beats Q2 Sales Targets, Inventory Levels Improve

Full Report / July 31, 2023

Semiconductor designer Lattice Semiconductor (NASDAQ:LSCC) beat analysts' expectations in Q2 FY2023, with revenue up 17.8% year on year to $190.1 million. The company also expects next quarter's revenue to be around $192 million, roughly in line with analysts' estimates. Lattice Semiconductor made a GAAP profit of $50.6 million, improving from its profit of $44.5 million in the same quarter last year.

Lattice Semiconductor (LSCC) Q2 FY2023 Highlights:

  • Revenue: $190.1 million vs analyst estimates of $187.3 million (1.47% beat)
  • EPS (non-GAAP): $0.52 vs analyst estimates of $0.51 (2.26% beat)
  • Revenue guidance for Q3 2023 is $192 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $67.1 million, up 84% from the previous quarter
  • Inventory Days Outstanding: 176, down from 191 in the previous quarter
  • Gross Margin (GAAP): 69.7%, up from 68.5% in the 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 strong, averaging 22% annually. As you can see below, this quarter was especially strong, with revenue growing from $161.4 million in the same quarter last year to $190.1 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

Lattice Semiconductor had a decent quarter as its revenue grew 17.8% year on year, topping analysts' estimates by 1.47%. However, this was its third consecutive quarter of decelerating growth, potentially indicating a coming cycle downturn.

Although Lattice Semiconductor's revenue growth has decelerated over the past three quarters, its management team thinks it will continue growing next quarter. The company is guiding to 11.3% year-on-year growth, which is relatively in line with Consensus estimates of 11.2% growth over the next 12 months.

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.

Lattice Semiconductor Inventory Days Outstanding

This quarter, Lattice Semiconductor's DIO came in at 176, which is 37 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what 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 Q2, up 1.3 percentage points year on year.

Lattice Semiconductor Gross Margin (GAAP)

Gross margins have been trending up over the last year, averaging 69.4%. These are some of the best margins in the semiconductor sector, driven by strong pricing power from its differentiated, value-add products.


Lattice Semiconductor reported an operating margin of 40% in Q2, up 1.8 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 Adjusted Operating Margin

Lattice Semiconductor's operating margins have been trending up over the last year, averaging 40.2%. On top of that, the company's margins are some of the highest in the semiconductor industry, driven by its highly efficient operating model and economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering Lattice Semiconductor expect earnings per share to grow 10.4% 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 $67.1 million in Q2, up 48.3% year on year.

Lattice Semiconductor Free Cash Flow

As you can see above, Lattice Semiconductor produced $235 million in free cash flow over the last 12 months, an eye-popping 32.6% 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.

Over the last five years Lattice Semiconductor has averaged a 25.2% return on invested capital (ROIC), implying that it has a defensible competitive position and has invested in profitable growth.

Key Takeaways from Lattice Semiconductor's Q2 Results

With a market capitalization of $12.5 billion, a $103.8 million cash balance, and positive free cash flow over the last 12 months, we're confident that Lattice Semiconductor has the resources needed to pursue a high-growth business strategy.

That revenue and earnings per share (EPS) both exceeded Wall Street's expectations was a positive. Additionally, we liked seeing Lattice Semiconductor's strong improvement in inventory levels. While next quarter's revenue guidance was roughly in line with Consensus expectations, gross margin and non-GAAP operating profit guidance were slightly ahead. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The market was likely expecting more, however, and the stock is down 1.16% after reporting, trading at $89.99 per share.

Is Now The Time?

When considering an investment in Lattice Semiconductor, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. There are numerous reasons why we think Lattice Semiconductor is one of the best semiconductor companies out there. While we'd expect growth rates to moderate from here, its revenue growth has been strong over the last three years. On top of that, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its impressive gross margins are indicative of robust pricing power.

Lattice Semiconductor's price to earnings ratio based on the next 12 months is 41.2x. 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 $98.6 per share right before these results, implying that they saw upside in buying Lattice Semiconductor even in the short term.

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