Lattice Semiconductor Corporation (LSCC) Earnings Call Transcript & Summary

Good morning, everybody. This is -- this room, I guess, is Semiconductor Central. I don't know if -- that I'm going to leave this room for the next 2 days, but we'll see how that goes. Anyway, my name is Matt Ramsay, the semis analyst at Cowen. And thank you all for coming to the Cowen TMT Conference. I guess this is the second session of the day, and we're all in person and no virtual meetings, which is awesome.

That's a nice change.

Yes. I'm really, really excited to be joined by Jim Anderson, the CEO of Lattice. Jim and I have known each other a long time since -- and have been working together and seen the company since you took over. How long has it been?

I'm in my fourth year now, although it seems like more than that.

It did.

That 4 years went by fast, but it seems really long at the same time. So...

I remember, actually, I was on the -- on my second day of vacation when you left AMD to join Lattice, and so you ruined the week of my vacations.

Oh, yes. Sorry about that, Matt.

So I'll make sure I hold that against you.

It's all about you, Matt.

And of course, -- but it's been -- anyway, thank you, Jim, for making the time to -- and for Sherri and Rick and the team as well to be with us, a really close partnership with my research team and with Lattice. And it's been remarkable to see what you guys have done with the company over the last 3, 3.5 years. So congratulations on that. You wanted to open and give us -- if you have any opening comments or you wanted to sort of talk about the state of affairs. I know there's a lot of half -- it seemed like I had 3 or 4 years in my life as a semiconductor analyst, was talking about where we were in the cycle. And then it felt like we got away from that for 3 or 4 years. It was secular growth. It was all the exciting things that are going on. And then zoop, we've been right back to where are we in the cycle. So if you could spend a few minutes just talking about how things are going on the day to day. I know that's top of investors' minds.

Yes. No problem. Maybe I'll start by just kind of telling you since you were asking what year I'm in, the fourth year, Sherri as well. Maybe talk about kind of where is the company at, right, and then I'll come back to that question. But I think of the company as kind of going through different phases since we started about 4 years ago. And this is the way I talk about it internally with the team as well. I think Phase 1 for the company was the first couple of years where we were rebuilding kind of the foundation of the company. So rebuilding the product portfolio, the product road map, customer support, infrastructure, sales team, et cetera. So really rebuilding a lot of the fundamental parts of the company. And that was the first couple of years. And then the last couple of years have been what we call the accelerated growth phase, where a lot of those improvements that we put in place in the first 2 years started to bear fruit, right? So a lot of those new products started to come out. So those new products are ramping, creating new revenue streams, a lot of new design wins with customers. That was kind of the second phase. And what we're really excited about is the third phase starts in the second half of this year when we launched Avant platform. That's what we call the expansion. And that's where we're going to double our addressable market, bring an entirely new product generation to the market that our customers asked us to develop. And so we're pretty excited about moving from this kind of second phase into the third phase -- or at the second half of this year. So we're still -- and as you can imagine, we've got some additional phases beyond that, right? So we still feel -- although it's 4 years, we still feel like we're still early in the journey for the company of unlocking the full value of the company. But in terms of your question a little bit more near term, what have we seen? So first of all, seeing really good strong growth. In our most recent quarter, we grew 30% year-over-year, and that was off a strong year last year, 26% growth last year and growth in 2020 as well in a tough environment. So we've seen really good, strong double-digit growth and -- and if you look at -- first of all, what markets we're positioned in. If I had to pick 4 markets to have the company positioned in just magically, I would pick the 4 that we're in today, 4 really great markets, all with secular growth, long-term secular growth trends [indiscernible]. And these 4 markets account for almost 90% of our revenue today, which wasn't the case when I joined 4 years ago. So we've changed the mix of the company. Those 4 markets are industrial automation and robotics, which continues to grow; automotive electronics, which obviously has secular growth trends; computing, for instance, servers that go into data center, we've been continuing to build our position in servers; and then the fourth one, communications in general, 5G wireless infrastructure, in particular. So we're positioned in great end markets. And then from a product perspective, we're going through new product cycles. Our latest product generation Nexus is still early in its ramp. We're only in the second year of a multiyear ramp of that product line. And then our next new big generation of products that will double our addressable market, Avant, we'll launch that in the second half of the year. So we feel pretty good about where we're headed. Certainly over the [Audio Gap]

Got it. No, that makes sense. I do want to come back to -- I think you guys have invested in some inventory maybe earlier on. You're on certain process nodes that might not be as mainstream and maybe insulate you a little bit more. If you could talk about the supply situation in the near term for your company and how it might support growth in maybe the shorter term, and we can get the short-term conversation out of the way, but it is top of mind for everyone right now. So just what are you seeing short term? I mean there's -- every day we hear different things of what are going on in China with lockdowns and Port of Shanghai and all these things. So just kind of level set us on maybe the near term and where the company is?

Yes. From an industry perspective, obviously, semiconductor industry, the supply chain is tight, right? I think from an industry perspective, I think we can definitely assume that, that continues through the end of this year probably well into next year. Some people even believe it may extend into 2024, right? So the supply chain will continue to [Audio Gap] Tight. In terms of Lattice, there's a couple of things that we've done that helped us navigate that tightness challenge the last year or 2. First of all, back in beginning of 2019, we put in place a new supply chain strategy. So we rebuilt our supply chain, kind of completely rearchitected it, consolidated some suppliers, et cetera. And I think that new supply chain strategy really helped us navigate '21 -- or 2020 and '21, right, last couple of years and helping us this year as well. And that's kind of strategically what we did. But tactically, I think, a good move, and Sherri, our CFO, is in the front row, and she was very supportive of this, was at the beginning of the pandemic, we started investing in inventory. We started building our inventory. So when many others were canceling orders and reducing their demand, we decided to build inventory. And the reason we did that is because we had new product ramps coming. We had new design wins that we're going to ramp with our customers, and we want to make sure we have the supply to support that. So throughout 2020, we built inventory every quarter, and we actually entered '21 with a good level of inventory, the highest level of inventory we had, had in quite a while, and we've been able to maintain that into this year. And so that's helped us really navigate the last year and into. [Audio Gap] We feel like we're -- we're certainly not immune to the supply chain constraints, but we feel like we're doing a pretty good job.

Great. You mentioned in the beginning of the conversation, that moving from -- into Phase 2 of the growth of the company now and then into Phase 3 as we see what's coming with Avant later this year and that starts to contribute to revenue next year. But I wanted to -- where are we in the Nexus ramp? I hate to use the baseball analogy and try to figure out what inning we're in.

I think which inning.

Yes, yes. We always do that. But -- like you guys have a number of different vertical market specific products and application-specific products that are derivatives of the Nexus line that you've been launching over the last couple of years. Like can you just kind of walk us through where we are? And these are long-lived product cycles, right? And so that's -- hence the question. The focus will shift to Avant, but the Nexus platform is, I would think, still in the early stages of ramping.

Yes, absolutely. We're still very much in the early stages. Baseball inning maybe #2 or 3 or inning 2 or 3. So we're -- this year is only our second full year of the ramp of Nexus. Last year was our first year, and that's a multiyear ramp. So that will continue to grow and ramp over multiple years to come. And first, what is Nexus, right? So Nexus is our latest FPGA platform that we launched at the end of 2019. If you ask our competitor -- or our customers, hey, how do the Nexus products compare to our competitor's products? They'll tell you that they're measuring up to 4x better power efficiency of our products, so higher performance, better reliability and up to 4x better power [ efficiency ]. So not like 10% or 20% power efficiency, 4x better, which is a big deal to our customers because usually, our performance and power -- system-level power constraints are their primary design criteria. So super-competitive products. I think the strongest product portfolio that the company has had in its almost 40-year history. I think a lot of the long-term Lattice employees would tell you this. So very, very strong product portfolio that we've launched or we've got now 4 device families based on Nexus in production. We actually just yesterday announced our fifth device family, and you should expect more device families to come. We've got a good strong Nexus road map of devices to come over the coming quarters. So we'll continue to build on that next portfolio. But yes, we're still early in the ramp of that. It's just the second year. So with the new devices coming into production that are still yet on the road map, we expect that Nexus product line to ramp for multiple [Audio Gap]

Got it. There are a couple of specific markets I wanted to dig into a little bit. One is in the compute space. So you guys have a really broad server coverage now. And no secret that both Intel and AMD are launching brand-new server sockets and brand-new platforms later this year at some point. And so I just wanted to understand a bit about the -- how big of a driver that can be for your company? Is it more FPGAs per server? Is it a higher ASP because of new functionality? What kind of driver can those launches be?

It's actually both of those things that you mentioned. So first of all, we're -- the solutions we provide are CPU agnostic. So if you look at today, we ship in Intel platforms, AMD platforms and ARM. There's ARM server platforms that we ship in as well. And if I go back to when I first started at Lattice, we had a toehold in the [ server ] market. Our chips are used for control management and security of server platforms, both in cloud data centers as well as traditional enterprise. And so we built that kind of toehold position in servers to now today, our attach rate is over 1. It means on average, there's more than one Lattice chip that ships per global server shipments in the world. And that's because there are some servers now that don't just have one Lattice chip, but they've got 2 Lattice chips. So we see with some of the new server architecture, some of the new server platforms, we see additional opportunity to continue to drive our attach rate higher, well above 1x. And then we've also seen steady ASP increase. With each new server generation, the amount of functionality and capability that we're bringing to the server platform increases and with that brings a higher ASP. So the combination of higher attach rates and higher ASPs, it has made that a really good growth area for us, and we expect. [Audio Gap]

That makes sense. And then the company has recently moved into the PC market as well, which is exciting. I mean, PCs -- the market is going through a little bit of turmoil right now after a couple of years of growth with COVID and work from home and the like. But you mentioned over 1x attach in the server market. And now you've kind of got that to use the same analogy, toehold in the PC space with Lenovo. And I just wonder if you could talk through a little bit about the next 2, 3, 4 years in the PC market. There's opportunity sort of behind the camera in a notebook for lots of applications. There's potentially under the keyboard for other applications on the security side and whatnot. But what kind of -- what's the ambition? And is it the similar attach rate in certain segments of the PC market that you have in servers, like what's the ambition over time?

Yes. We certainly just see the PC space as just a huge system [indiscernible] for us, right? So -- and by the way, I know these market server and PC very well because of my history in the industry, et cetera. So I spent a lot of time in these markets. And kind of -- if you take the server -- since we were just talking about server, if you take that for reference and you look at number of server units that ship globally compared to number of PC units that ship globally, I mean there's over 300 million units a year of PCs that's shipped. That's 20 to 30x the size of the server market. So we've been able to build a really good position in server, and we're just at the beginning of building and growing in the [Audio Gap] So we see it as a big potential growth system TAM unit growth. We started -- revenue started flowing from the segment back in 2020. We grew it in '21. We expect it to grow in '22 and years to come. So what we're -- the kind of functionality that we're bringing to the devices is basically functionality that hasn't existed. [Audio Gap] for us. We're bringing new user experiences. The latest system that we announced was the Lenovo ThinkPad Carbon X1, which is their -- one of their very premium enterprise product lines, and so they use the Lattice chip to do artificial intelligence processing, to detect if you're sitting in front of your laptop, like many people are today, and if you look away from your laptop, it can detect that you're not paying attention to your laptop and tell the system to turn off the screen. And that can save hours of battery life. If you're in meetings and you're not always looking at your screen and the system can turn off that screen and save the battery life, that's a big deal. It can also detect if somebody sneaks up behind you and is trying to look over your shoulder, it can tell you that somebody is looking over your shoulder, you might want to be careful, you might want to lock your screen, et cetera. And it can do a number of other things as well. So yes, we see that as a great potential growth area. We're still very early in penetration.

And I mean the unit numbers are hugely different. Would the ASPs be hugely different as well in the other direction for you guys? I'm just trying to gauge the size of the TAM.

Yes, good question. ASPs in the PC would be lower than in server because the servers are usually using larger capacity prices. So it's a lower ASP, but with 20 to 30x the number of units still a tremendous dollar [Audio Gap]

No, that makes sense. I wanted to shift gears just a little bit, and folks from the audience, please feel free to interrupt and interject if you'd like to get a certain topic addressed by Jim. But I wanted to shift gears because you mentioned Avant kind of sort of launch later this year and revenue next year. You guys have hugely differentiated yourself with Nexus in the low-power FPGA market. And my own observation is someone who, in my industry career, made the mistake of trying a program in FPGA, was that -- the guys that are in the competition, right, Altera inside of Intel, Xilinx now inside of AMD, a lot of focus on their software has been on programmability. And what you do in programmability is you add a whole bunch of fluff in software to make it easier to interact with the outside world, which is, to my first order, exactly the opposite of what you would want to do to run low power. And so your software strategy has been very, very different at Lattice. And so my question is, as you get pulled into the mid-tier of the market, does that differentiation change? Does it hold? Are the software strategies different? That's what I really like to understand.

Yes, it holds. And maybe I'll start with just explaining what our [ software ] strategy is. And -- so -- and what's kind of unique or different about it is. And this began in 2019, we really started to ramp up investment in software, what we call application-specific software solution [indiscernible]. We wanted a really long [Audio Gap] but you can think about it as prebuilt software tools and libraries that are prebuilt for specific usage models that basically give the customer like an off-the-shelf starting point [ software ]. So in some sense, we've done a bunch of work for them to abstract out the complexity of the FPGA and make it much easier to program. They can program, in some cases, in C, very high-level language, right. So they -- we built out a portfolio of these software stacks. We brought now 5 -- actually, we just launched our fifth one yesterday. And what they do is they make it really easy for customers to adopt our Lattice devices and get to market quickly. And they also make it really easy to switch from a competitor's device to our device, and whether that's in competitive FPGA or a microcontroller. So it really reduces the switching cost to our devices and it creates a lot of stickiness with our customers. So we've launched now 5 to date, 1 on artificial intelligence inference processing at the edge of the network, a computer vision software stack, a security platform, hardware security software stack and industrial automation and robotics. And then yesterday, we launched our 5G ORAN software stack. So this is a big part of making it really easy to use Lattice. And then you mentioned Avant at the beginning of your question. That's our new platform addressing mid-range part of the market. We've designed the software so that -- all that same software that our customers have adopted on our Nexus devices or even pre-Nexus devices is transferable and leverageable new -- to the new product platform of Avant. So we've given customers an easy migration path to the product.

Got it. No, that makes sense. And one of the things that was interesting, too, in some conversations that yourself and Esam and I have had over the last, I don't know, 6 months or so, I was surprised to hear a couple of things. Initially, I was really surprised to hear at the ASPs you were talking about Avant. Maybe you can walk us through that and some of the interesting numbers there. And then the other thing that I was encouraged to hear is that it's not like with Avant you're ramping up a whole new biz dev sales team and going out customer hunting. This is -- I forget the stat that maybe 80% of the customer...

No, 90%...

90% of the customers are the same that you already have for Nexus that are actually pulling you into that market. So if you could talk a little bit about those 2 areas, ASPs and the customer overlap, I think that would be interesting.

Yes. That's actually one of my favorite stats is if you look at the target customers for Avant, 90% of the target customers are already customers of Lattice. Lattice is, by the way, the highest volume FPGA maker in the world. And so we have a very wide customer base. And if we look at target customers for Avant, they're basically the customers we have today. So what we're doing is just selling another product line to customers that know us and trust us that we've done a pretty good job supporting them on supply, et cetera. And so we're just bringing them a new product line. And by the way, it's a product line they've asked for. Back in 2019 when we were introducing Nexus to our customers, we've got really good feedback on the Nexus product line, but the customers also said, hey, could you bring out higher capacity devices in midrange part of the market based on your same power-efficient architecture for Nexus. And we had enough strategic customers ask us that question, that we took a look at it and decided, yes, we should really build out the product portfolio. So Avant is a new FPGA architecture. It increases the capacity of our devices by about 5x. It will double our addressable market, almost all the same customers we have today. The software is leverageable from the devices that we have today onto the new Avant platform. ASPs versus what we have today are about 10 to 20x for Avant devices. And what I love is it creates a completely new revenue stream for Lattice because this is a part of the market that we don't serve today. So we'll continue to grow in the small FPGA market that we've always historically been for 40 years. We'll continue to grow revenue there with Nexus and follow-on device. But what we'll do now is, we'll layer on top of that the Avant product line, which will create new revenues that accelerates our. [Audio Gap]

That -- I mean and the 20x ASP number. I remember I contacted one -- done our own conversation with one of your customers, and they told me 8x was what they were thinking about. And then I remember bouncing out. I was expecting you guys to push back a ton on that. I mean like don't get carried away and then no. So the 8 to 10 -- 10x to 20x is a remarkable number. The immediate question that follows though is for Xilinx and Altera, you're poking the bear a bit, I would say, is the analogy I've used. So do you expect a different competitive response? Are you going into parts of the market that will really like, I guess I poked the bear and elicit some response? Or are you expecting because of the customers and who they are in the history with Lattice that, that transition to Avant will be relatively smooth.

Well, yes, again, remember, it's the customers that asked us to build this product line because from their vantage point, they were seeing us innovate in the small FPGAs. And they were kind of starved for innovation in mid-range, so they asked us to step up and bring new products to the range. I think with our competitors, our competitors just over the last few years, certainly have been just very focused on making very large FPGAs, very complicated for more specific applications like machine learning in the data center, some specific communications applications. So they've been very focused there. And we're just innovating at the other end of the spectrum. So we're innovating in small FPGAs soon to become mid-range FPGA. So the type of FPGAs that a huge part of the industry needs. And so I just see it as our competitors are innovating in a different part of the market. But our customers need innovation in certainly in the parts of the market.

One question I get sometimes is it seems like in the semiconductor market, all through the supply chain for every public company in the West, there's 4 or 5 start-ups in China. But FPGAs are a bit different. The barrier to entry in software is just massive. So any concerns about new upstart -- you guys are sort of chasing the market upstream. Anybody coming behind to really worry about?

Well, we're always -- look, we always take competition very seriously, whether that's our traditional competitors or any sort of new and evolving competitor regardless of whatever geography come from. So we're always trying to remain paranoid about the competition. And I think the best way to be competitive is just drive the road map and it asked us what we're doing for innovating and expanding the product portfolio. But to kind of the first part of your question, but if you look at the FPGA industry, it does have, I think, uniquely high barriers. The chips themselves are complicated and unique and the software above them is complicated. And that interaction of software and hardware together it creates a significant barrier to entry. The same -- if you look at it, the same 3 companies that founded the FPGA space, which was Lattice, Xilinx and Altera back in the early '80s are basically the same companies that are here 40 years. Obviously, Altera and Xilinx absorbed by other companies, but the same 3 companies are still around. And that gives you a sense of the barriers [ to entry ]. So we always have to remain paranoid about competition. But we feel really good about our product road map. We feel great about the design win pipeline, the customer engagement. So I feel good about the. [Audio Gap]

Really quickly, I think we only have a couple of minutes left. There are so many -- it's rare that I have these conversations where there's so much product stuff to talk about that we don't get to anything else. But...

I'm happy to talk about products. No problem.

I did want to touch on some financial stuff a bit. And the questions I get, the remarkable change in the gross and the operating margin of the business since your management team took over. I get questions about the path to 70% gross margin. Is that a realistic path? Sherri doesn't have a microphone, so you can feel free to opine on that without...

Sherri's sending me hand signal right now from the front row. Well, here's what I would say is back in -- to step you back in time a little bit. So back in 2019, at the beginning of 2019, we put in place for the company a gross margin expansion. And that was focused on a number of things: pricing optimization, better product costs, better mix of the company in terms of the mix of markets. And we've been driving that. Well, we're now in our fourth year of driving that gross margin expansion strategy, and we continue to focus on gross margin expansion going forward as well. It's something that we believe is just a continuous area for us to focus. And if you look over -- since when we started to now, we've expanded gross margins by about 1,000 basis [ points ] and across '19, '20 and '21, we grew gross margin pretty consistently at about 300 basis points of expansion per year, right? And so we made good progress to date. We don't think we're done yet. We're continuing to focus on margin expansion moving forward. One of the things that does help is that we have new product cycles that will help give a tailwind to gross margin. So both Nexus and Avant, those products have been designed to be accretive to the company's margin. And so we believe that will continue to put some wind in the sales. So it's something that we can remain focused on.

Sherri's nodding. We're both safe. The -- we didn't cover any new ground there. I guess it's pretty consistent. Anyway, congratulations on all that. One of the just -- the one thing I wanted to end with is just on going back to Avant quickly because it's a question that I get is just you guys are going to have an event, I think, later this year to launch the product officially. Just want to understand a little bit the time to revenue and when the revenue becomes actually material to the P&L.

Yes, that's the question most people in this room care about, right? It's just more about when does it hit the revenue. So what we are modeling for Avant is for revenue to start about 12 to 18 months after the launch of product. And that's -- and the reason we're modeling that is because that's what we saw in [ Nexus ]. We launched Nexus. And to us, launch means not just having a public event, but we're putting samples in the hand. It usually takes customers about 12 to 18 months, some of those first adopter customers from when they get the samples to start to ramp. And so that's what we saw with Nexus is from launch to first revenue in that 12 to 18 months. That's what we're modeling for Avant. So what you sort of translate that to Avant you'd say, okay, if we launch the product in the second half of this year, we would expect to see some, maybe some small amount of revenue towards the end of next year '23, but a more material contribution [indiscernible] '24 and then obviously, continuing to ramp beyond, in the years beyond. So that's what we're modeling.

Yes. Well, unfortunately, I think we've bumped up on time. But thank you so much, Jim, for the great conversation, and thanks, everybody, for joining. And have a good rest of the day. Thank you.

Thanks, man. Appreciate it. Thank you.