Semiconductor designer Lattice Semiconductor (NASDAQ:LSCC) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 23.6% year on year to $140.8 million. On the other hand, next quarter's revenue guidance of $130 million was less impressive, coming in 7.5% below analysts' estimates. It made a non-GAAP profit of $0.29 per share, down from its profit of $0.51 per share in the same quarter last year.
Lattice Semiconductor (LSCC) Q1 CY2024 Highlights:
- Revenue: $140.8 million vs analyst estimates of $140.2 million (small beat)
- EPS (non-GAAP): $0.29 vs analyst estimates of $0.28 (1.8% beat)
- Revenue Guidance for Q2 CY2024 is $130 million at the midpoint, below analyst estimates of $140.5 million (implied operating income given gross margin and operating expense guide was below expectations)
- Gross Margin (GAAP): 68.3%, down from 69.8% in the same quarter last year
- Inventory Days Outstanding: 195, up from 174 in the previous quarter
- Free Cash Flow of $26.09 million, down 61.8% from the previous quarter
- Market Capitalization: $10.16 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 solid, averaging 18.6% annually. But as you can see below, its revenue declined from $184.3 million in the same quarter last year to $140.8 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).
This was a slow quarter for the company as its revenue dropped 23.6% year on year, in line with analysts' estimates. This could mean that the current downcycle is deepening.
Lattice Semiconductor's revenue growth has decelerated over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 31.6% year-on-year revenue decline while analysts are expecting a 6.5% drop 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.
This quarter, Lattice Semiconductor's DIO came in at 195, which is 50 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 68.3% in Q1, down 1.5 percentage points year on year.
Gross margins have been relatively stable over the last year, averaging 69.5%. Lattice Semiconductor's gross margins are some of the best in the semiconductor peer group, driven by strong pricing power from its differentiated, value-add products.
Profitability
Lattice Semiconductor reported an operating margin of 30% in Q1, down 11 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 down over the last year, averaging 37.5%. However, the company's profitability remains one of the strongest in the industry, driven by its solid gross margins and economies of scale generated from its highly efficient operating model.
Earnings, Cash & Competitive Moat
Wall Street expects earnings per share to decline 13% 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 $26.09 million in Q1, down 28.4% year on year.
As you can see above, Lattice Semiconductor produced $239.1 million in free cash flow over the last 12 months, an eye-popping 34.5% 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.
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 27.6%, 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 few years, Lattice Semiconductor's ROIC has significantly increased. 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.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.
Lattice Semiconductor is a well-capitalized company with $107.5 million of cash and $12.8 million of debt, meaning it could pay back all its debt tomorrow and still have $94.67 million of cash on its balance sheet. This net cash position gives Lattice Semiconductor the freedom to raise more debt, return capital to shareholders, or invest in growth initiatives.
Key Takeaways from Lattice Semiconductor's Q1 Results
It was good to see Lattice Semiconductor beat analysts' EPS expectations this quarter. On the other hand, its revenue and implied operating profit guidance for next quarter missed analysts' expectations and its operating margin shrunk. Overall, this was a mixed quarter for Lattice Semiconductor. The company is down 2.6% on the results and currently trades at $74.9 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.
We think Lattice Semiconductor is a good business. Its revenue growth has been solid over the last three years, and growth is expected to increase in the short term. 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 indicate robust pricing power.
Lattice Semiconductor's price-to-earnings ratio based on the next 12 months of 53.6x indicates that the market is certainly optimistic about its growth prospects. There are definitely things to like about Lattice Semiconductor and there's no doubt it's a bit of a market darling, at least for some. But when considering the company against the backdrop of the semiconductor landscape, it seems there's a lot of optimism already priced in. We wonder whether there might be better opportunities elsewhere right now.
Wall Street analysts covering the company had a one-year price target of $75.67 per share right before these results (compared to the current share price of $74.90).
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