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Last week, I penned an article whereby I shared some insights into the explanations behind the large pullback by Lattice Semiconductor (NASDAQ:LSCC) shares. In the article, I surmised that the most important purpose for the selloff was normal malaise, together with weakening revenues, by the worldwide semiconductor business as per the Semiconductor Industry Association’s newest report. In this air of uncertainty, LSCC was punished greater than most as a result of its stratospheric valuation. I urged buyers trying to construct long-term positions in LSCC to attend for the corporate’s quarterly report and, if optimistic, use the pullback to drag the set off.
Well, Lattice Semiconductor launched its earnings report on May 1, and handed the check in flying colours. The firm reported income of $184.31M (+22.4% Y/Y), $6M higher than the Wall Street consensus whereas non-GAAP EPS of $0.51 beat by $0.01. Q1 marked the twelfth consecutive quarter of sequential income progress for the corporate. Meanwhile, web revenue per diluted share clocked in at $0.40 on a GAAP foundation, good for 53.9% Y/Y progress, and $0.37 per share on a Non-GAAP foundation, representing 37.8% Y/Y progress.
And, now the metric that has currently been attracting quite a lot of scrutiny: Profit Margins. Lattice Semiconductor’s Q1 2023 gross margin on a GAAP foundation got here in at 69.8%, good for a 290-basis level enchancment whereas revenue margin on a Non-GAAP foundation improved 260 foundation factors to 70.3%. Non-GAAP working revenue margin clocked in at 41%, a rise of 470 foundation factors year-over-year. The firm is now in its fifth 12 months of its gross margin growth technique, the place it’s been capable of drive an enormous 1,360 foundation factors enchancment because it began this system in 2019.
I discover LSSC’s appreciable margin growth at this level of the semi cycle is solely outstanding contemplating what the remainder of the semiconductor business has been going by means of. Many corporations within the business are at present going by means of a severe stock correction cycle that has not solely taken a giant hit on revenues however has additionally triggered huge margins contractions. Companies within the house are struggling to dump extra inventories, aka channel destocking, forcing them to chop product costs closely as I defined right here for Himax Technologies (HIMX), and right here for Qorvo Inc. (QRVO).
Over-capacities and lessening demand are proving to be difficult to the semiconductor business this 12 months. High inflation has negatively affected shopper electronics pricing whereas demand has begun to return to regular ranges after the peak of the Covid-19 pandemic, resulting in extra inventories. Indeed, inventories of shopper chips are at their highest level in additional than a decade. Historically, over-capacities tend to take more than a year to correct. Unfortunately, specialists are saying the present one would possibly really take longer. Meanwhile, the automotive business is experiencing the other downside, with provide nonetheless lagging behind, demand and shortages prone to proceed by means of 2024.
Largest product portfolio growth
Thankfully, Lattice Semiconductor doesn’t look like negatively impacted by these business traits. Regarding the thorny situation of stock ranges, LSCC doesn’t reveal precise stock knowledge, however has supplied helpful commentary:
When I have a look at our distribution channel stock on the finish of Q1 comparatively — it was comparatively unchanged from the top of final 12 months, This autumn. And our disti and channel stock continues to be low relative to what we’d think about regular ranges of inventory. So while you have a look at the channel stock and say, properly, that is what’s fairly wholesome and over time, we’ll must replenish {that a} bit and so we really feel properly positioned for long-term progress for the corporate. We’re actually not proof against any of the macroeconomic challenges or any demand fluctuations in our finish markets, however we really feel very well positioned over the long run.’’
Regarding revenue margins, firm CFO Sherri Luther says that Lattice Semiconductor has been capable of not solely preserve but in addition broaden its margins through the downcycle by means of the addition of a slew of recent merchandise, pricing optimization, higher product combine and product price efficiencies.
…And additionally, what I might add is we have added an amazing quantity of software program content material to our software program portfolio. And we see rising adoption from our clients of our higher-level software program, our software answer stack, the adoption price or connect price is now over 50%,’’ CEO Jim Anderson elaborated.
According to Anderson, the addition of those software program options to its merchandise has been serving to the corporate safe larger ASPs. He has revealed that the connect price of LSCC’s software program options at present exceeds 50%. Better nonetheless, the corporate believes its present pricing is sturdy over the long-term. Anderson says that one of many biggest attributes about FPGAs is their excessive fungibility. Due to their programmability, the identical product usually will get adopted throughout a number of markets that the corporate serves.
But as I identified in previous articles, the most important purpose why LSCC has been outperforming is the corporate’s accelerated price of innovation. According to the CEO, Lattice Semiconductor goes by means of the part of its largest product portfolio growth within the firm’s historical past. Last quarter, the corporate started cargo of the MachXO5-NX FPGAs, the corporate’s fifth technology Nexus system. The firm additionally launched MachXO5T-NX, the sixth household constructed on the Lattice and Nexus platform. These units can be utilized in a number of purposes, together with knowledge middle networking, machine imaginative and prescient, and industrial IoT.
The Nexus platform stays the corporate’s key progress driver, with Anderson claiming it’s ‘‘…extremely competitive versus other FPGAs that are out there. Nexus delivers power efficiency that’s two to three times better than our competition, incredible physical size advantages where our devices are much, much smaller.’’
But it’s in all probability not going to be lengthy earlier than the corporate’s new platform, Lattice Avant, takes over as the important thing income driver. Launched in December, Avant is focused at mid-range FPGA purposes and doubles the corporate’s addressable market as I defined right here. The firm has already launched its first Avant-based system and plans to launch two extra system households within the present 12 months.
Takeaway
I turned bullish on Lattice Semiconductor practically three years in the past because of the demonstrable success of its enterprise mannequin transition and the corporate’s mission to change into the “low power programmable leader.” So far, the corporate has exceeded expectations and is now trying to goal the mid-range FPGA phase with Avant, which can significantly improve its greenfield alternatives. The newest quarterly consequence has buttressed my bullish thesis.
LSCC shares stay costly, one thing that may make them fairly unstable and weak to giant pullbacks each time the business goes by means of a weak part. Nevertheless, I consider this firm gives an incredible funding alternative for long-term shareholders with funding timelines of 5+ years.