Release Date: July 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lattice Semiconductor Corp (LSCC, Financial) maintained a stable gross margin of 69% despite a challenging market environment.
- The company continues to see strong customer momentum with record design activity in the last two quarters.
- New product launches, such as the seventh Nexus device and Avant-E, are on track and expected to drive future revenue growth.
- LSCC has been successful in expanding its product portfolio, particularly in the small and midrange FPGA segments.
- The company is seeing positive signs of improvement in bookings and backlog, indicating potential recovery in the near term.
Negative Points
- Revenue declined 12% sequentially and 35% year over year due to inventory normalization and cyclic corrections.
- Demand remained soft across industrial and automotive markets, with revenue down 23% sequentially.
- The company continues to under-ship to end customer demand, which may impact short-term revenue.
- 5G wireless communication revenue was weak, contributing to flat sequential revenue in the communications and computing segment.
- Operating margin decreased to 25.4% from 30% in the prior quarter, reflecting the impact of lower revenue.
Q & A Highlights
Q: Can you talk about the design activity and how the ramps have been impacted by the down cycle?
A: With regards to design activity, we have the strongest product portfolio in the company's history. We recently expanded our Nexus platform and launched new devices. Despite the market downturn, we completed two consecutive quarters of record design activity. Our new product ramps, such as Nexus and Avant, have shown good progress, with revenue from these products in the first half of 2024 exceeding that of the first half of 2023. We expect additional new product ramps in the second half of 2024.
Q: The margin has been resilient despite the lack of leverage. Can you walk us through the incremental improvements you expect as sales return?
A: We are pleased with the 69% gross margin in Q2. Our gross margin expansion strategy has improved our gross margin by 1,200 basis points over six years. New products and software attach have been key drivers. We continue to focus on our long-term model of low 70s gross margin.
Q: Can you provide more detail on the inventory normalization and its impact on growth?
A: Inventory normalization varies by customer and product line. We expect this process to continue throughout 2024 but to a lesser extent in the second half. We are shipping under true demand to help with inventory digestion. We remain well-positioned for long-term growth with our strategic core markets and new product ramps.
Q: Can you update us on the pricing environment and its impact on gross margins?
A: Our pricing remains durable due to the differentiation our products provide. New products and trends towards higher capacity, greater capability products drive our pricing optimization strategy. Our software strategy also contributes to higher ASPs and margins.
Q: What signs of improvement are you seeing, and when do you expect to return to growth?
A: We see signs of improvement from customer interactions and operational indicators. Bookings increased in the second half of Q2, and we started Q3 with a higher backlog. New product ramps, such as the seventh Nexus device and Avant-E and X, are on track, which should drive new revenue streams and support a return to growth.
Q: How confident are you in maintaining your position in the server business, and are there opportunities to increase your attach rates?
A: We have demonstrated increasing attach rates and higher ASPs with each server generation. We have excellent visibility on the next generation of servers and expect our attach rate and ASPs to continue increasing. Our new MachXO5-D and Sentry Solution Stack are designed for next-generation PFR applications, further strengthening our position.
Q: Are there new emerging opportunities for Avant that you didn't foresee?
A: Avant opens up new market opportunities, including data networking and storage applications. We are also seeing opportunities in AI-related applications. Our team is working closely with customers to find new ways to leverage our FPGAs in various applications.
Q: What happened intra-quarter that led to the Q2 revenue miss, and how are pre-Nexus products performing?
A: The Q2 revenue miss was primarily driven by industrial and auto segments, where we continue to ship under true demand. Pre-Nexus products are down more, aligned with industry trends and our strategy to ship under true demand. Nexus products are ramping well, with strong demand and less normalization required.
Q: Can you provide more color on the improvement in backlog and bookings?
A: The improvement in backlog and bookings is driven by new product ramps, record design activity, and customer normalization. We saw an uptick in bookings in the second half of Q2, indicating positive momentum.
Q: How do you see the industrial and automotive segments performing in the future?
A: Industrial has been a strong segment for us, driven by our differentiated products. We expect to continue with double-digit growth in this segment. Our financial target remains 15% to 20% revenue growth over the next three to four years, supported by our strong product portfolio and new product introductions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
