Lattice Semiconductor Corporation (LSCC) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thank you all day 2 of TD Cowen TMT conference. Thank you all for attending. This is kind of semiconductor room. So a lot of familiar faces. My name is Matt Ramsay from the semiconductor research team and really, really excited to have Sherri and Esam from Lattice Semiconductor here to have a conversation about the company. It's been a remarkable journey since you guys took over the reins of the company, I remember trying to work like heck to get my initiation report out to make sure the stock didn't move from 6 to 8. So -- And well done to the whole team. But it's a really, really interesting time.

Esam, maybe you could give a little bit of an overview of where you guys are in the product transition from the market share that you have taken and continue to take in small FPGA. And the company is going through an exciting entry into sort of the mid-tier of the FPGA market with a couple of different customer sets, but a lot of the same customers, but much, much higher ASPs and a different type of application.

Yes. Thanks, Matt, for having us. So today, if you look at our product portfolio, it's the strongest product portfolio the company has had in its history. And the company is 41 years old as of last month, I think we hit 41. And we started this with our Nexus platform launch, which we did in December of 2019. And this, we introduced a new modernized small FPGA platform that was very differentiated from a power efficiency form factor, performance, reliability. And we launched that product in December of 2019. And since then, we've introduced 7 distinct device families based on that platform, of which 6 have reached initial production and the seventh one which we introduced last year will have the initial production in the second half of this year. And these are very differentiated products. And if you look at the company since then until now, I think we've demonstrated share gains and good growth based on our small FPGAs, which is basically Nexus platform, but also the pre-Nexus as well as have been growing. When we introduced that Nexus platform in '19 with its power efficiency, a lot of our customers came to us at that time. And so this is a really good power-efficient architecture. What do you have? And can you build something in mid-range? And what we decided to do at that time as we told our customers, we can go build a midrange FPGA. Nothing technically prevents us from doing that, but would you participate in that journey? And they said, yes. So we had about over 100-plus customers that help us define our Avant platform, which is our mid-range FPGA platform. And what was nice about this platform, not only is it very differentiated again from power efficiency, performance and form factor. But 90% of the targeted customers for mid-range FPGA applications are already existing customers of Lattice. They're familiar with our software tools. And we've built these software solution stacks, which we may talk about later, which help our customers get to market much faster, although software solution stacks were designed to support both our Nexus as well as our Avant platform. And we launched the first mid-range FPGA in December of 2022 with our Avant platform launch. And the first device was our Avant-E, which has edge optimized FPGA, which actually we achieved a really good milestone at the end of '23, which is initial production revenue from that Avant-E device, and we expect that to continue to wrap through '24 and continue to wrap even further in '25. And then last year, in December of '23, we announced 2 additional device families based on the Avant platform, our Avant-G and Avant-X device. G being our general purpose FPGA for midrange, X being our advanced connectivity FPGA, which opened up more applications for midrange for us. And those, we expect to hit a milestone of initial production ramp of revenue, although small at the end of this year, and that will continue to ramp over the next few years, very differentiated products. And so when I talk about earlier, our strongest product portfolio in our history, it's not just the silicon hardware, it's also on the software side. And what we've done over the past several years have introduced what we call software solution stacks. And we've had now 6 of these software solution stacks introduced into the market. And they focused on specific types of markets and applications. So we've got sense AI, which is really focused on artificial intelligence on our FPGAs. We've got security ones called [ Century ], et cetera. We've got envision all the way to our most recent announcement, which was Lattice drive focusing on applications in the automotive market.

I mean obviously, a lot going on there and some we'll get into more of the product stuff in a minute. But the elephant in the room, I guess, in the FPGA space is we've gone through a heck of an inventory correction, your competitors, yourselves. Sherri, maybe you could spend a little bit of time on from your vantage as CFO, where we are working our way through that because what I want to understand is how to get ourselves in the financial model to a level of stability to where we can now grow from right? And so we've had a big boom and then we've come down a bit on inventory correction. And I just from your perspective, where are we in that process? And like what are the KPIs that you're looking at to say, okay, now we're out at the back end of this and all the exciting stuff Esam is going to tell us about and make the P&L work.

Absolutely. So thanks, Matt. Thanks for having us as well. So we are in a cycle, a semiconductor cyclic correction, not just Lattice, but the semiconductor industry. There have been cycles before, and there will continue to be cycles. So this is just one of those cycles. And what we talked about in our last earnings call is that -- we expect the inventory digestion to continue into Q2 and that we expect that to dissipate into the second half of the year. And we said that we expect the second half to be higher than the first half in terms of revenue. Why do we think that? Well, number one is the inventory digestion and dissipation throughout the second half of the year that we expect to occur. But the bigger thing is really our Lattice specific growth drivers and that's really our products. Esam talked about those products, our Nexus product, 7 devices on our Nexus platform and our Avant platform, where we've launched our E, which we generated a small amount of revenue at the end of last year and then GNX expected at the end of this year. So at the end of this year, we'll contribute to that second half being higher and our Nexus devices. We have so many devices that we've launched on our Nexus platform. Each of those devices is additive to revenue in terms of adding to and contributing to that second half being higher than the first half. So that really gives us the conviction. It's the fact that even though we're in this cyclic downturn, we've continued to innovate and we will continue to innovate. When you look at our OpEx, for example, you'll see that from an R&D perspective, we've increased our R&D spend both sequentially and year-over-year. And why is that because we want to continue to make sure that we're investing for the long term of the company. And in the near term, while we're in this correction, we want to be disciplined about our OpEx in particular, on the SG&A front, but we also want to make sure that we are investing for the long term because that's the long-term growth of the company. And so that's very important to us. And certainly, on a quarterly basis, you might see fluctuations in OpEx, but we're certainly wanting to continue to invest in the long term of the business. The other thing I'll mention is just from an inventory digestion. We talk about correction and inventory digestion. So when we look at our distributor inventory that's in the channel because that's part of that digestion and we get that question as well. We really see that our inventory in the channel is at pre-pandemic levels. There might be some devices that are opine numbers that are slightly lower and some that are slightly higher. But overall, we would see that, say that our inventory in the channel is essentially what it was pre-COVID. But -- and we've got great visibility in terms of what our distributors have in terms of inventory in hand, they provide that visibility to us every week. But we have over 10,000 customers. And so it's really -- we don't have visibility to all 10,000 customers in terms of the inventory they have. But we do get inputs from them. We have very close relationships with our strategic customers. And so that gives us the visibility that we think the second half will also be higher than the first half.

Just a follow-up on that, Sherri, do you think we get to a point where you're shipping in line with sort of end sell-through at some point in the second half, maybe the third quarter? I'm just trying to figure out if you calibrated that a bit more. You've obviously over shipped for a little bit as the inventory built and then pretty significantly under shipped as we've been trying to flush some of the inventory through the system. But any sense as to when those lines sort of connect and more back on square footing?

Yes. Well, I mean, clearly, we're under shipping to consumption that we can see and that really goes back to the customers -- end customers consuming the inventory that they have on hand. And so we're under shipping to that demand. I would say, I would characterize just a little bit differently from what you had just said a second ago is I don't view that we overshipped into the channel or to our customers, certainly, other companies did. And I think that's pretty clear in terms of the verbiage that they provide in their earnings calls and you see that in their numbers. But we were very intentional that we did not want to do that. We wanted to make sure that we -- our strategic customers got the product that they needed, but we didn't see any benefit to either our customers or ourselves and over shipping anything. I think it's just really the visibility that our end customers have to their demand and then how quickly they can digest that. And so to your question, will we ship to consumption in the second half? We've not given that level of color. But certainly, over time, we would expect that to go up. And it goes back to those Lattice-specific growth drivers, our Lattice products. But again, second half, we do expect that to be higher than the first.

Got it. Makes sense. One of the -- just one last question on sort of setting the base for future growth. So I wanted to get your thoughts on -- a pretty good growth driver for the company over the last 3 or 4 years has been what the FPGA attach has been in the data center market for a couple of different applications. And you guys have now more than one device attached to basically ever serve with the chips by any OEM, including the hyperscale folks. There's been some conjecture by a couple of your competitors that they might want to take some of that share, let's say. So it'd be interesting if you could characterize the visibility that you have in the server space, what the functionality is that your products are delivering, what the visibility you have on multiple server generations, not just AMD, not just Intel, not just ARM-based but just what that profile looks like and particularly the visibility of holding serve in those markets as that industry grows.

Yes, I'd love to do that. So FPGAs, as you said, Matt, are being widely used in servers today. And in fact, if you go back in 2019 at our first Investor Day, we talked about our server opportunity and that we're investing in there. And we had an attach rate at that time. We talked about close to 25% that we expected to grow to close to 80%. Now if you fast forward today, our attach is well over 1%. So that means, as Matt said, if you open up a server out there, you're going to find, if not one, multiple Lattice devices within a server. And so what's driven that? What are we actually doing in the servers? Well, we do control management and security type functions within our servers. So if you think about a motherboard, you've got a lot of functionality in the motherboard. We manage all the power management, control management, board management as well as security type functions. And that's something that's becoming more prevalent across all servers that you require that. Servers are becoming more complex. You need that programmability. We're also CPU agnostic, which customers like. So it doesn't matter if you're using in AMD and Intel and ARm or some other CPU. What we do is agnostic to that. So as they have different bill of materials, they can use our FPGA, the programmability comes as a benefit for them. And now what we're seeing also, if you look at server architectures, it's becoming more modularized, meaning that it's no longer just a single motherboard, you have the motherboard that has the CPU on it or GPU or whatever that you want to put on there, but they're breaking that functionality into multiple boards versus a single board. And this is a trend that we're seeing in the industry around servers and they're modularizing it. The reason why they modularize it, it gives them more optionality to take something out and put something in and not have to redesign that entire motherboard like they used to in the past. So you see some of the control and security boards being separate now. And that way, they can remove a CPU, put another CPU and the control in securities maintains the same. You're seeing in configurations of server more NIC cards, network interface cards, you are seeing more storage cards. All of those modularization in the server is more opportunities for Lattice. Each one of those boards is another opportunity for Lattice. Hence, you see our attach rate going up generation after generation. In fact, if you go to our last Investor Day, we actually gave some color on what that means from a dollar perspective. And what we said is that if you look at the prior generation, which is now ramping down compared that to the generation of that ramping up, take Sapphire Rapids or Genoa, as an example, not only is the attach rate increasing, but also because of the complexity of these servers, the average ASP of the FPGAs are selecting is slightly going up as well. You combine both of those, you see about a 50% increase in dollar content from prior generation to the generation that's ramping up right now, which says that even if the number of servers in the market is flat, we still have the Lattice specific growth driver that drives growth within the server market. Now to our visibility, we work really close with multiple of our customers. They can be hyperscalers, OEMs or even some of the ODMs as well, and we're engaged in the next-generation servers that are being designed. In fact, we're also engaged in the generation after that as well. And we continue to drive higher attach rate and more complex FPGAs are being leveraged as well as drive a higher ASP. So we see that trend continuing, at least over the next 1 to 2 generations from what's being deployed today. For us, it's been a really good growth market. And you didn't ask the question about AI service, but I'm going to comment on that -- I was going to go -- so Matt's going to ask me, what about AI servers what's your attach rate there. If you look at general purpose servers compared to AI servers, the attach rate is about at a minimum the same as a general-purpose server, depending on the configuration of the AI server, it's actually much higher as well. So on average, if you look at our content of FPGAs and Lattice content and AI survey, it's higher than that of a general purpose. So think of the baseline being equal or greater as far as an attach rate on the AI servers.

Got it. Well done. Anyway, from the audience, this doesn't just need to be us talking. So if anybody has questions out in the audience, just I think there's a microphone coming somewhere. We're going to time in running across here with the microphone.

Over here. Second row.

I was just curious, just given the downturn that we're hopefully almost through, as you think about the uptake of Avant, anything to note and maybe looking back in history when you've launched products maybe during similar periods in the cycle. Is there any change in the way you think some of your customers are going to ramp maybe with a little bit more caution in terms of how much they buy or how much they ramp, given maybe some uncertainties in their end markets.