Lattice Semiconductor (LSCC)

Semiconductor designer Lattice Semiconductor (NASDAQ:LSCC) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 14.7% year on year to $120.2 million. The company expects next quarter’s revenue to be around $123.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.22 per share was in line with analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Lattice Semiconductor’s 3.9% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the semiconductor sector and is a tough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Lattice Semiconductor’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 16.1% annually.

This quarter, Lattice Semiconductor reported a rather uninspiring 14.7% year-on-year revenue decline to $120.2 million of revenue, in line with Wall Street’s estimates. Despite meeting estimates, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for flat sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 12.6% over the next 12 months, an improvement versus the last two years. This projection is healthy and implies its newer products and services will spur better top-line performance.

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 225, which is 60 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Lattice Semiconductor’s gross margin is one of the best in the semiconductor sector, and its strong pricing power is a direct result of its differentiated products and technological expertise. As you can see below, it averaged an elite 68.4% gross margin over the last two years. Said differently, roughly $68.35 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Lattice Semiconductor produced a 68% gross profit margin in Q1, in line with the same quarter last year. Zooming out, Lattice Semiconductor’s full-year margin has been trending down over the past 12 months, decreasing by 2.8 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Lattice Semiconductor has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 16.5%, higher than the broader semiconductor sector.

Analyzing the trend in its profitability, Lattice Semiconductor’s operating margin decreased by 9.7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Lattice Semiconductor generated an operating profit margin of 5.8%, down 6 percentage points year on year. Since Lattice Semiconductor’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Lattice Semiconductor’s EPS grew at an unimpressive 5.6% compounded annual growth rate over the last five years. This performance was better than its flat revenue, but we take it with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q1, Lattice Semiconductor reported EPS at $0.22, down from $0.29 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Lattice Semiconductor’s full-year EPS of $0.83 to grow 42.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Lattice Semiconductor has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging an eye-popping 30.1% over the last two years.

Taking a step back, we can see that Lattice Semiconductor’s margin expanded by 2.8 percentage points over the last five years. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Lattice Semiconductor’s free cash flow clocked in at $23.28 million in Q1, equivalent to a 19.4% margin. This cash profitability was in line with the comparable period last year but below its two-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Lattice Semiconductor hasn’t been the highest-quality company lately because of its poor top-line performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 23%, impressive for a semiconductor business.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Lattice Semiconductor is a profitable, well-capitalized company with $127.6 million of cash and $16.23 million of debt on its balance sheet. This $111.3 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

This was a quarter without many surprises. Revenue and adjusted EPS in the quarter roughly met Wall Street's expectations, as did Q2 guidance for those same two metrics. One negative was that Lattice's inventory levels increased. Management stated that the company is "monitoring the market environment, along with the broader industry, as it could have an impact on our outlook", likely referring to tariffs and overall global GDP and industrial production. Overall, this was an unexciting quarter. The stock traded down 3.3% to $51.30 immediately after reporting.

Updated: June 14, 2025 at 10:20 PM EDT

Are you wondering whether to buy Lattice Semiconductor or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Lattice Semiconductor isn’t a terrible business, but it doesn’t pass our bar. For starters, its revenue growth was uninspiring over the last five years. And while its admirable gross margins indicate robust pricing power, the downside is its declining operating margin shows the business has become less efficient. On top of that, its unimpressive EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders.

Lattice Semiconductor’s P/E ratio based on the next 12 months is 40.6x. This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there.

Wall Street analysts have a consensus one-year price target of $62.78 on the company (compared to the current share price of $47).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.