Lattice Semiconductor Corporation (LSCC) Earnings Call Transcript
May 31, 2023
Earnings Call Speaker Segments
Good afternoon. Thank you all for coming. I'm Stacy Rasgon. I cover the U.S. semiconductor and semi-cap space here at Bernstein. And it is my honor to have our guest here today, Jim Anderson, the President and CEO; and Sherri Luther, the CFO of Lattice Semi. Before we start, I want to mention if you have questions on the back of your program, there's a QR code you can scan. It will take you to our Q&A portal. It's called Pigeonhole. You can submit those questions there. We'll have time for Q&A at the end. I don't cover Lattice. It does, however, come up pretty frequently in our conversations and actually more recently, investors ask how it fits into the broader FPGA space, especially since some of the larger competitors got acquired and how they differentiate those -- against those larger peers. They ask the new efforts to move up that FPGA stack into higher performance regimes. And they ask how much further the company can take things as they continue to extend their financial targets upwards as they did again recently, and we'll talk about that, I'm sure. So to answer those and many other questions, it gives me great pleasure to welcome Jim and Sherri. So thank you so much for joining us today.
Thank you, Stacy. Appreciate it. Yes, I appreciate that.
Thank you, Stacy.
Maybe just to touch on -- you guys did just have an Analyst Day, right? If you have to summarize it like 2 or 3 sentences, like what would you say?
I think I can do it in one sentence. Lattice is going through the biggest product portfolio expansion that we've ever done in the company's history, and we're 40 years old. So that's a pretty big deal, 40 years this year. And that's a really big deal for us, but it's an even bigger deal for our customers. Customers are really excited.
Got it. Maybe just as a high level, can you talk about that product portfolio in those announcing -- we'll go deeper certainly as we go. But just to the high level, like what's new?
Yes. So over those 40 years, where Lattice has historically innovated is in what we call the small FPGA part of the market. So think of these as very power efficient, very easy to use, small-sized FPGAs and going to just all sorts of different devices.
You wanted to talk about what an FPGA is, by the way, just given our...
Yes, I was assuming that was given. But -- so an FPGA is -- think about that as just a really flexible silicon device, where you can program your own personal algorithm, your own personal kind of innovation, you can program that right on to the chip itself. And this has been a technology programmable logic that's been around since the '80s. And it's super useful in many different applications because you may need a device that's really accustomed to your particular system. And you might want to be able to change and reprogram that device over time and an FPGA is a perfect fit.
Got it. And so you've been historically playing in the lower end part of the market?
No, not lower end, small FPGA.
Small FPGA, excuse me.
There's nothing low end about 70% gross margin. Well, we've been doing support [indiscernible].
[indiscernible].
It's mostly Sherri. She gets the credit. But if you look over to Lattice's history, it's really been the innovator in that small -- small form factor, power efficiency. And so we're definitely continuing to innovate there. In fact, we've really cranked up the rate and pace of new product introductions over the last few years basically tripled our rate of new product introduction. But then the newest news is in December of this past year, we introduced a new product line that's targeted at the midrange part of the market.
This is Avant.
This is Avant. Okay. So that Avant is the name of the platform. We introduced the first device family based on Avant and we'll bring out a series of device families basing on Avant. Avant doubles our addressable market and it basically allow...
[indiscernible] what is the...
In the most -- in our Investor Day, we estimated that the market size 5 years from now for us, our TAM is about $10 billion. Okay. And so Avant doubles that within that $10 billion. And the great thing is it's largely all the same customers. So if you look at the target customer list for Avant, 90% of those customers are already customers of Lattice today. They're already using the software that's used on the small FPGAs, they're already using that today from us. So it's easy to adopt.
So the software scales like directly across...
[indiscernible] the software so that our customers could leverage that onto Avant to try to make it really easy for them to adopt those new devices.
Got it. And the prior family, was it Nexus? Is that the small FPGA?
Yes. Nexus is the name of the platform of device families that we built based on that platform for the small FPGA segment. We introduced that in, I think, 2019. And so we've been introducing new device families based on that platform. We've got 5 now that are -- the fifth one went into production in this past quarter. All 5 of those device families are ramping. We just launched the sixth one, and we announced the seventh one will be out later this year. So we've got, again, a steady beat rate of new devices for the small FPGA segment. And then Avant is totally additive. It doesn't cannibalize small FPGA in any way, it's added.
Got it. What are your competitors -- so you have larger competitors that have mostly been acquired. You had [indiscernible], do they not play in these markets at all?
No, they do, but I think their strategy and focus is just different than ours, right? So as I said, we've typically focused our innovation around power efficiency, small size, ease of use, and if you look at midrange FPGAs, a lot of those same characteristics are really important to mid-range applications as well. In fact, most of our customers only use midrange and small FPGA. So like industrial and automotive customers, primarily just use mid and small, they really don't use the large FPGAs. But our competitors have generally been more focused on building very large FPGAs. That's a different architectural optimization point and so that we're just focused on a few different parts of the market.
So if you're moving into the midrange and that was, I guess, historically underserved, like what were those customers buying for those applications already today?
Yes, they would be buying Altera or Xilinx FPGAs. In fact, actually, it was the customers that told us to invest in Avant. So in 2019, we had just joined within the -- this was within the first year we were at the company. So we were showing them the new product road map for small FPGAs. So we're showing that to our customers, showing them all the Nexus devices that we're going to bring out and the competitiveness and the customers looked at that and said, hey, it looks like a great road map, but why are you guys just limiting yourself to small FPGAs. Why don't you just take that same power efficient architecture and build midrange FPGAs as well because again, we have thousands of customers. Most of our customers only use midrange and small FPGAs. So their point was by introducing a midrange product line, you could basically cover all of their needs. And so it was really customers that gave us the -- I wish I could take credit, but it was customers that gave us the idea to invest in Avant, and they're really pleased because we've launched it on time. We had promised Avant before the end of last year, and so now it's launched, and we're designing that in with our customers.
Got it. That's not being taken up like by microcontrollers or anything at this point or...
No, there's -- FPGAs have always been used in certain applications. again, because you can program the silicon itself and you can reprogram that over time. So there's just -- there's applications where an FPGA is just an inherently better fit. One of the places that we're seeing FPGAs grow in some of these Edge applications is when people are trying to add some level of artificial intelligence like inference at Edge...
We'll definitely talk about...
You're going to ask about that. Okay, yes.
What I would like to know was you mentioned you launched the first product based on the Avant platform. What was that product -- what application, what end market is it going into?
Yes. It's the first device family. It's called the Avant-E, E is for Edge, and so the product itself is more optimized for edge applications. So for Edge AI, which I guess we'll talk about talk about it -- but -- so one of the things that we see customers doing is -- and we've been talking about this for many years, so long before it became fashionable to talk about AI, right? But we've seen customers trying to add more intelligence, more decision-making capability to their Edge devices like industrial robots or automation equipment, where we've seen tremendous growth. And so in those applications, Lattice FPGAs are a really good fit because those algorithms are inherently parallel. They can inference algorithms or parallel. They can program our devices to be basically custom parallel processor specific for their algorithm. And they know those algorithms are going to change over time. And so the FPGA, they just reprogram and so we've seen good adoption of our small FPGAs in those applications. And so we did a version of Avant, our first version of Avant for those same type of applications.
It's interesting because you usually think about artificial intelligence as being like massively compute-intensive, and yet you're talking about small [indiscernible].
This is inference, right? There's training of the network, and then they're using the network to make decisions. So in Edge devices, what's usually the processing that's usually being done is inference processing. And so you want to be able to do inference processing with very low latency, very high power efficiency. And there are some tasks that fit very well into a small FPGA device from us that is incredibly low power and is a naturally good fit. And then that first Avant device that we're launching is targeted there.
Is this the Lattice AI play? Or is the AI play broader than that? Because I know you sell a lot of stuff like Intel servers and GPU servers and...
Yes, that's a good point. Okay. So one place that we're seeing adoption is in the Edge, but the other place is in the data set. So set aside the AI for a second, I'll come back to that. But in the data center, which is primarily servers in the data center. When we started, Lattice had a little bit of a toehold in the server segment, and we've grown that toehold significantly over the past 4 or 5 years. Now what we're doing in the data center on servers is different than what others are doing. What we're doing is control management and security of the platform. So we're not -- when I talk about FPGAs or Lattice chips getting used in the data center, it's not the compute but it's making sure that the system can be remotely managed, controlled and that it's secure. In fact, one of the first devices that boots up in a server is oftentimes a Lattice device. And so the Lattice FPGA will go out and make sure that, that system is secure, that it boots up in a secure way, that the firmware hasn't been corrupted and if the firmware has been corrupted it can repair that, et cetera. So those are the type of tasks that we're doing in servers. And we've seen that position within servers significantly increase over the past years. In fact, that's one of the main growth drivers of our comms and computing segment, which has grown double digits for 4 years in a row.
What's your attach in servers?
Yes. I was just going to mention, so that revenue growth that we've seen is a combination of both attach rate and ASPs. Our attach rate years ago, it would have been, say, 20%, it's now over 1x, which means almost every Lattice server ships with at least one...
Mostly more than one.
Yes, exactly. Almost every server ship with at least one Lattice chip and there's a lot of servers now that are shipping with multiple Lattice chips, right? Because they may have a chip. A Lattice chip on the motherboard and on the plug-in boards like the security plug-inboard, et cetera. So our attach rate has gone up significantly. And we brought out new capabilities, new functions that have increased our ASP over. And so what we measure is the dollars of content per server and we've seen that significantly go. And in the new -- and the new generation of servers, that's just starting to ramp in the second half of this year and into next year. There's, again, another big step up in our dollars of content. For sure, we estimate about 50% increase in dollars of content per server. And then you asked about -- we kind of go off on the spread on AI. So things like generative AI, large language model processing or just in general, machine learning that's certainly driving a tremendous amount of compute cycles into the data center that drives growth of just data center infrastructure in general, but growth of general purpose servers, but also servers -- you see more servers that are AI optimized, right, that have extra GPU content, et cetera. And so we're benefiting from the growth of AI as well. If you look at the...
Those are -- also your attach rates on those are also high?
Yes. So again, we look at dollars of content. But if we look at dollars of content, per more AI optimized server versus general-purpose server. It's either -- depending on the system configuration, it's either the same or [indiscernible] -- so yes, so we see benefit from the growth in that as well.
I want to ask a near-term because I'm not asking for any kind of guidance update or anything?
Okay, good because that would be [indiscernible].
What -- what are you seeing in data center right now? Because clearly, we're seeing a big surge in demand from these AI servers. At this point, it doesn't necessarily look like overall CapEx budgets are going up. So just what are you seeing in server and data center.
Yes. We certainly saw -- let me go a little bit back over the past quarters, we certainly saw a little bit of softness in the deployments of servers. We still grew year-over-year because of not the underlying units, but because we were growing dollars of content per server sell, for instance, in Q1, our comms and computing segment grew year-over-year, right? But yes, we certainly saw some of that softness. We've definitely seen a pickup in any server volume that's related to AI and that's not a surprise, right? So generative AI, et cetera. So we've...
[indiscernible] Last week, it's us. So maybe...
Well, we were seeing that even before, maybe not a surprise to us. But so we've definitely seen a pickup in that. But I think server demand in general will start to improve in the second half of the year.
New platforms.
Yes, new platforms, new platforms always drive some additional uptick in consumption.
Got it! Sherri, I wanted to ask you a few questions. So we talked a lot about the new platform introduction of new products. So clearly, it's improving the financial model. Can you maybe just give us a review of the changes to the model and maybe talk a little bit about some of these new product introductions that are actually influencing that?
Sure. So at our Investor Day actually on May 15, a couple of weeks back at NASDAQ, we laid out our new financial model, our long-term model where we raised our targets. We raised our target for revenue growth. Revenue previously was sort of in the low double-digit range with our prior target. We raised that to 15% to 20% revenue growth and again, this model is over a 3- to 4-year time frame. We raised our gross margin target to the low 70s.
Where are you running now? It's pretty close to that, right?
Yes. Last quarter was 70.3%. Yes. But low 70s. So we raised that target. Previously, it was 65%, our target. And we -- for OpEx, we put out a target of 30% for our OpEx spend, which incorporates you mentioned product -- new product development, expansion of that, and certainly, that incorporates it because believe investing in the long-term growth of our business is really important. So investing in our long-term product portfolio, investing in demand creation, customer support, all those areas we view as very important for the long-term growth of the business, and we want to continue to do that but do it in a disciplined way. And then we also raised our target for operating income. We raised that to the low 40s, and we put out a new target for free cash flow margin of greater than 30%.
So this is the first time you've had a free cash flow target.
Yes. The first time we put out a free cash flow margin target. This business generates a lot of cash. And so we've been focusing on cash for the past 5 years. I mean, it certainly was an area of focus for me when I joined the company definitely. And so in recognition of that, we want to continue to maintain that focus while investing in the business. But with record operating income that we've generated and that disciplined focus on investing, we're really happy with our free cash flow target, again, of greater than 30%.
And the growth target is -- what was the baseline for that? Was it last year? Or like what was...
You know that for the revenue growth you're referring to, I mean, it's based upon what we see out there for our products. We've got a lot of -- there's a lot of underlying secular growth drivers that we see for our business. We talked a lot about that at our Investor Day and Jim talked about that here within our strategic core market segments of comms & compute and industrial and automotive. But there are also Lattice-specific growth drivers. Our -- we also mentioned our seventh device will be announced later this year and for Nexus platform and on Avant. So -- we see a lot of underlying growth drivers there.
So the new product side.
So Nexus is not like a stale platform like...
No. Nexus -- we would expect Nexus to ramp for years.
So what is the typical life cycle of when you introduce the product. What is that [indiscernible].
[indiscernible] they last forever.
15, even 20 years, last for very long. That's why a pre-Nexus has been growing. It certainly has been a contributor. And we expect Nexus to also be a long-term contributor as well.
Yes. We'll get design wins on products that have been in production for 10 years or more. We'll get new design wins, so customers designing that into new applications. So FPGA is -- it's different than -- traditionally, you think of like memory or CPUs where the new version of memory or CPU comes out and the old one drops off and the new one picks up. FPGAs, even in older products last for a very long time. And it goes back to the nature of the chip itself being reprogrammable, very flexible. So even older products can continue to get designed into new applications -- so -- and we love -- well, Sherri loves to win pretty Nexus products and get designed in because the incremental investment is 0 or close to 0.
Have you guys ever given like a view of like how your revenue breaks out by age of the products. ADI used to give this great chart where they would show the revenue. And they'd always use this bar at the bottom and the products are like 30 years old, it's 10% of the revenue, whatever it is, still selling...
Well, actually, as you mentioned, ADI, I think our FPGA products in terms of their longevity are more similar to analog-type products than to processors or memory. But we've never broken that out, but we -- in the Investor Day, we did say that even our pre-Nexus products, we expect those to continue to grow over the coming years. Modest growth rates. That's not the fastest growth area, but we expect those to continue to grow. And actually, some of the new software packages that we've developed have helped us find new applications for those devices and kind of extended the longevity of those devices, which is a really good thing.
Let's talk about software -- actually it's a good segue because FPGAs historically have a reputation of being very problematic and difficult to program. Some people have pointed to that reason for why GPUs have like taken over in terms of [ accelerators ]. I know -- some of your larger peers were targeting those markets with like various degrees and mostly non-success. What are your thoughts on that? Are you doing things to make the programming environment easier and likely what is that -- what does that look like?
Yes. Short answer is absolutely. So when I joined the company, I'm not an FPGA guy.
You were an AMD but...
AMD, right. So I was doing computing and graphics at AMD and so when I joined Lattice, I didn't have a history in FPGAs. And I knew I had that same perception that, hey, these things are difficult to program, et cetera. And so one of the things that we really ramped up in that first year, and we've continued to ramp up the investment is really ramping up investment in software. And what we've specifically have been focused on and our strategy is to develop software that makes it just really easy for our customers to design our chips into their systems to either switch from a competitor's device to our device or if they've never used an FPGA before, to make it really easy to adapt. And so the specific strategy that we took is we've been developing application-specific solution stacks. So these are targeted at common applications that our customers would use the chip for and we basically give them a prebuilt set of libraries, tools, reference designs that make it much easier for them...
All different, though, based on the specific application...
Yes, exactly. I mean they may have some components that are similar across but they're specifically targeted at common usage models, so like the most recent one that we announced, which we'll launch this year is our automotive solution stack. So again, this is software that makes it easy to design our chips into automotive [ ethic ].
To do what? What kind of like...
Sensor aggregation in cars, video display, a number of other type of applications. The other one that we just introduced last year was around factory automation and robotics. We've got one -- I mentioned security before. Remember in the context of servers we introduced a software stack specifically for platform security. So we're seeing that now not just adopted in servers, but adopted in other types of equipment like data center networking, things like that. So we've got now 5 that are already launched and the sixth that we'll launch this year.
You haven't talked about what that sixth is.
No, no, that was the automotive. Yes, that's the automotive one. And so -- and we've said we're continuing to develop additional ones. And even those ones that we've already launched, we continue to refine and improve over time. And if -- the great thing is, we measure adoption rate and if you look at, well, the adoption, when I started was 0, but now our adoption rate is over 50%.
Of solutions.
Of solutions stacks, yes. This isn't the development environment, right? So solution stacks, meaning that when a customer chooses a piece of Lattice silicon, over half the time, they're now adopting one of those solution stacks. And the metric that Sherri likes, in particular, is we measure the ASP difference.
Well, that was my next question. How do you monetize it?
Exactly. That'd be -- good question. So how do we monetize it? We bake it into the cost of the chip and software together. We give it a single price and when we measure the ASP for the design wins that have software attached versus not, there's a higher ASP, and it's significantly higher. And that because that's software driven, the COGS is 0, so the gross margin is higher. And so as those design wins convert into revenue, they are naturally...
50% of your sales now are solution...
Design wins. Yes, [indiscernible] design wins of the last...
How much of the revenue is solutions?
That's still a smaller percentage, right? Because these are solution stacks that we brought out over the course of multiple years, right? But those will convert to revenue over the coming years, and it will be a [indiscernible]
Just interesting because it's higher gross margin presumably and higher ASP and your target is low 70s on gross margin and you're kind of there. And it sounds like a pretty small fraction of your revenue can currently...
Yes, that's true. So this would be a tailwind to the gross margin.
I can kind of see how it's -- where it's coming from.
Yes. But actually, the thing that we like the best about it is we've measured that this helps customers get to revenue quicker or get to production quicker, which drives our revenue faster. And then the other thing that we believe is that it creates much more long-term stickiness of our products because if customers integrate that software those solutions into their system level software that creates multigenerational stickiness. So there's a lot of positive effects of this. This is why -- if you look at our R&D spend, both spend on hardware versus software, actually, our spending on software has been growing faster..
That's interesting. So that's like where -- I was going to ask you, where are you -- how do you think about allocating that R&D? It sounds like that software is huge.
It's definitely. Yes. It's definitely the fastest-growing part of our R&D spend.
You have more software engineers than hardware engineers?
No. I think not yet.
Not yet.
But we're getting close. We actually -- in our last acquisition that we did was actually a software.
Who was that?
Yes, it was Mirametrix. So Mirametrix was a company that's artificial intelligence software in general but they were specifically developing computer vision software, and we were already partnering with them on applications that we're using their Computer Vision software with our chips. And so as we got to know them better, it became clear that eventually, we would want to be providing some of those software capabilities, so we brought them in and we acquired them in...
November of 2021.
Yes. So a little over 1.5 years ago.
Got it. Is it driving design wins? It sounds like you would have already partner with them anyways.
Yes, we were already working with them. But yes, we're seeing -- we believed Computer Vision technology would be adopted across multiple different market segments. We were already seeing that in our products and our software. And so yes, that's helped us drive additional incremental design wins.
Got it. Got it. And as I'm thinking about those longer-term growth targets? And are there any specific end markets that you're like more or less excited about? Like which ones are driving it? Where do you see the opportunities?
I think this is like asking you, who is your favorite child.
Of course. So it depends on the day...
Stacy knows who is [ his favorite ] so...
No. But I think -- I mean, the core strategic market segments that we have, comms and compute, industrial and automotive, I think if you think about where are the places where you would want to play the most, those are the market segments and those 2 market segments are 90% of our business or more.
Do you have consumer anymore?
Very, very small. It's very small.
Yes, when we started...
I haven't asked any questions about like what it was like when you got there, right?
It's a long time ago.
But it was very different to be clear.
Yes, it was different. But when -- I think when we started the year prior, about 30% of the revenue was consumer and so we've really repositioned the company into these 4 core markets, which all have long-term secular growth trends underneath it. But more importantly, are a naturally good match for our products. Consumer is not a great match for the type of products that we do.
Got it. So you mentioned in data setting [ plug-in ] security and everything around the compute and a bit of -- what about like networking? Do you have any plans like in the products of networking?
Yes, absolutely. So in communications, in general, for us is both telecom communications as well as data center networking. In both of those markets, one of the biggest growth areas for us is -- with Avant, we can now work in data plane applications. So with just small FPGA portfolio that we've had, we were doing well in terms of winning new sort of position in control applications. So you would see like pre-Nexus or Nexus devices used in control plane in both data center networking as well as telecommunications networking. But now with Avant, essentially kind of double our ability to address sockets by now being able to address some portion of data plane networking as well. So that's certainly good and then...
What's handling that now? That's not FPGAs...
It could be, in some cases, FPGAs, right? Some places in data plane, it's actually it's an advantage to use an FPGA because you want to be able to reprogram the FPGA. Let's say you have a different system configuration for kind of this market versus that market, you may use an FPGA because you can reprogram that data plane processor for the particular market that you're addressing. So sometimes an FPGA is just a better solution. But yes, with Avant we'll be able to address data plane as well, at least some portion of data plane. And then security, I think you were asking about security, yes that same security platform hardware security that we've been doing in servers, we're absolutely seeing the ability to take that into other markets like a piece of data center networking equipment, telecom, industrial systems. Even our industrial customers are worried about making sure that their hardware systems are secure. So bringing that same level of platform security in industrial is a good application.
Got it. Got it. You guys are fabless. What processes are you working right now? And I think you guys actually use FD-SOI wafers as well, correct?
Yes, that's right. So the Nexus product is the...
SOI is Silicon-on-Insulator by the way.
So the Nexus product is based on 28-nanometer FD-SOI. From Samsung. And FD-SOI, the simple way to think about that is it's a special flavor of 28-nanometer that's tuned for really good power efficiency. And so when we were developing the Nexus product line, the architecture of our device itself is power-efficient, but we also wanted to put that on a very power-efficient process. So the combination of the architectural power efficiency and the process technology make the Nexus devices just incredibly power-efficient. And especially in small FPGAs, that's really, really important, right? And that's why Nexus devices have just a tremendous power efficiency advantage over our competition like 2x to 3x better power efficiency. But that's what we use for Nexus. TSMC or we use 16 FinFET TSMC for the Avant devices? And then UMC for a number of our pre-Nexus devices. So we have a multi-foundry strategy right now of -- we used primarily UMC, Samsung and TSM...
Yes. Got it. Any thoughts on sort of like the general sort of diversification of supply that's going on right now with...
I think in the long term, especially for a fabless semiconductor company it's fantastic. Because if you fast-forward 5 to 10 years from now, there's going to be a lot more geographic optionality in terms of where we can design our products, right? So first of all, there's a lot more capacity being built out in general, but definitely more capacity being built in geographies that haven't had as much capacity whether it's Europe or the U.S. And it's not just foundries that have already been there in the past, but you even see TSMC and Samsung, building more capacity in the U.S., for example. So I think you look out 3, 5, 10-plus years, the -- if you're a fabless semiconductor company, you're going to have a lot more options in terms of geographically where you can produce your chips, but just also different foundry partners as well.
Yes. Would you guys be willing to pay more to get chips that are like sourced here in the U.S.? And would you [indiscernible] would your customers be willing to pay more...
Exactly. This is exactly what I was going to say. If my customer said that, hey, it is important for me to have that product done in the U.S., and I'm willing to pay for it, then yes, we would consider that. Yes. Absolutely.
Got it. So what comes -- I realize we're very early in the Avant cycle and you're just moving on just now into the midrange. And so I mean if we're sitting here 5 years from now, I can -- you started to convert a good amount of that [indiscernible] what comes after that? There are no designs to try to move up even higher?
Well, I mean, we're certainly working on -- there's a lot of products that are on our road map. On our 5- to 7-year long-term road map that haven't been announced that we're really excited about and our customers are excited about too. I was just -- spent all last week with our customers in Europe. I think when I joined the road map of the company was pretty short. And I think 1 of the things that we did early on is we mapped out 5- to 7-year road map that we've kept that fresh and new over the past 5 years.
Your customers must be a lot happier with that as they...
They're much happier about that. Yes, having us bring on new products is -- makes them happy. So I think when we have our strategic discussions with customers and we show them the long-term road map out 7-plus years, they're pretty excited about what they see on the road map, and we are too.
Yes. Got it. Got it. I guess, during your -- clearly, we're coming out the other side of the pandemic now and the initial was like ramp it with shortages. You guys weren't impacted. It seems like you guys handled -- maybe I'm just remembering though, it seems like you handled it better than others.
Yes. I think our customers would say, I think if you asked our big strategic customers, I think they generally say that Lattice did a better job than most companies who is supporting them through that cycle. There were some things that we had done strategically and tactically that just positioned us better to support our customers through those, that supply-constrained environment. And now, yes, I think it's largely behind us. I think this year, the supply -- may be just across the industry, there may be some point issues here or there, but it's largely behind us now. And certainly, I would expect it to be fully behind us by the second half.
Got it. Got it. And You mentioned buying like a little software company recently and -- is the portfolio or kind of right where it needs to be right now is or anything? I guess maybe more broadly, like M&A in general in the space has gotten tougher just from a regulatory standpoint, like any thoughts on...
The -- on the first part of your question, the way we would look at M&A, and we're always scanning the landscapes for any good opportunities in terms of acquisitions. But the mindset or the way that we think about it is we have very high conviction on our organic strategy. We feel very good about the strategic path that we're on. And so we look at anything inorganic as that would have to be additive to that organic strategy. It would have to help us accelerate the progress on that organic path. So it would be -- have to be highly complementary adjacent, it would have to click, naturally click in to that organic strategy. So that's a strategic lens that we look at it through. And obviously, there's a financial lens, too. But those could be -- those opportunities could be hardware or software, right? And they could be smaller or larger, right? But it would have to fit that strategic criteria. And yes. And actually, I think Mirametrix, that's actually a great example. That was the Computer Vision software was already sort of on our long-term road map of things we wanted to build out in terms of capabilities over the long term. And so it was a natural acceleration of our organic software strategy. So something along that lines either hardware or software would be interesting to us.
Got it. Got it. What does your China situation look like right now? I mean, clearly, there's been a lot of geopolitical issues and the demand situation is what it is. But like how much of your business is going into China? How much is getting consumed there? And I guess I'd love to just hear your broader thoughts on the general like geopolitical environment, the export controls and -- How was that influenced? You guys seem like not to have been impacted too much by -- or maybe even at all by some of that, but...
Yes. So I guess I would start by saying, we've certainly had -- Lattice has a long history in China. And actually, I think our first site was in early '90s -- and so we have a team in China that supports our China customers that's really good at supporting those local customers. And certainly, there's a strategy by the China government, have domestic competitors to have domestic...
Are there any domestic FPGA competitors?
Yes, yes, there's domestic FPGA companies. But I think when you think about what China is trying to do is make sure they have a domestic option for every different type of semiconductors. When you look across the different types of semiconductors, there are some that are easier, it's easier to create those [ connections ], and there are some that are harder. FPGA has definitely fall on the hard end of the spectrum, right? And this isn't Lattice-specific but just FPGA is -- it's a unique type of silicon. You have to design software that goes along with it. It's hard to replicate that. And so we're sort of on the harder end of the spectrum. In terms of them creating viable domestic competitors. But there's certainly domestic competitors there. We've -- I think our team in China has done an outstanding job of continuing to compete. We're bringing on a lot of new devices. I think they've done a really good job of competing in that market by developing actually applications and some software solutions that help customize for that market, for example. So We've, I think, done a pretty good job continuing to compete there, right? And we'll continue to vigorously compete in that market.
Yes. Got it. The export controls and things didn't really impact any of your...
Well, yes. I mean we certainly follow all the export controls and there were certainly particular companies that were added to the entity list that, of course, we had to abide by that, right, Huaweii being the obvious one. But the class of devices that we build haven't been the primary focus of some of the export controls, especially the ones more recently like last year, I mean those were focused on more high compute -- things that were going into supercomputer and stuff.
Yes, it was fairly surgical as much as it could...
so that latest round really didn't affect us.
Got it. Got it. We talked about [indiscernible] we haven't talked about. It's funny, like a year or 2 ago, it was 5G all the time, and...
Nobody asked about 5G anymore.
What does 5G mean for Lattice? Is there something left? Everybody thinks we're through the adoption.
No. We love 5G. It's just everybody is talking about AI, so nobody is...
Lat's talk about 5G. What is 5G mean for you?
And so first of all, when we look at 5G base stations, we have -- we're on the infrastructure side, not on the client side, right? So on the infrastructure side, we have 30% more content than a 5G base station compared to a 4G base station. So as 5G is built out, it's been a natural growth driver for us. In the last 3 years, I think it's grown every year. It's been a good contributor to our comms and computing growth that we've seen over the past years. And I still believe we're very early in the global full build-out of 5G. I mean there's even in the U.S., we need to build out more 5G. I mean it's pretty clear whenever I try to get 5G signal, there's more build-out that's needed, right? But then there's definitely -- Europe still needs to do a lot of build out, India, et cetera, right? So there's still a lot of 5G build out ahead of us. So we naturally benefit from that. And then whether it's 5G or next-generation 5G or 6G, with Avant, now we're able to -- with the same customers that were designed in the control plane applications in 5G, we're now able to go to them and say, Hey, now Avant, we can do some of the data plane as well, right? So it's a good opportunity for us.
Got it. I should have asked this question on AI. But I mean how much of your revenue, have you ever given a number?
No, it sounds like it's popular to do that.
Yes. It sure does [indiscernible]. Find it however you want apparently, but...
No, we haven't broken that out. Maybe that's something if it's important to investors to break it out. We wouldn't want to do that for any tactical reason, right? But if we believe to that, that was something that was important to customers, we would -- or to investors, we would do that. But -- the main areas of exposure, the 2 that we talked about, data center and AI and then that sort of inference at the edge of the network.
But. Sherri a question for you. So we were talking about free cash flow targets, you guys are generating cash. What do you do with the cash?
Well. We invested in the business.
But, no, this is on top of that -- this is post R&D so it's.
So from a -- maybe I'll ask the question from a capital allocation perspective. So again -- but I meant that I sounded like I was joking, but I'm serious in terms of investing in the organic part of the business. That is our top priority. Investing in our long-term product road map and demand creation, customer support infact is the...
That was on it was 30% of revenue on OpEx, right?
On OpEx, yes, absolutely. Absolutely. So that's #1 priority. The other things we've been doing from a capital allocation perspective is we've had 10 consecutive quarters of share repurchases as a return of capital to our shareholders. And so we've repurchased about 3.7 million of shares, and that's reduced our dilution by a little over 2.5%. That's something that we continue to look at on a quarterly basis. And so we're really pleased with the results there. We've significantly paid down our debt. Last year, we actually amended our credit agreement to turn it into more -- even more favorable terms increase our access to...
Before the rates started to go up or...
Yes, we had great [indiscernible] Yes, good timing. We had great rates. And so we have access to a $350 million revolver. So but...
You guys aren't levered though...
No. Like -- It's below. Like negligible, it's below 1. 0.4.
Different than when you joined. You joined when we were levered.
Very different Yes, it was like 3x or...
I wanted to avoid this, but I guess -- just talk a little bit, what was it like when you got here? I know it's in the past, it's been round about 5 years...
Well, I'll hit my 5-year anniversary in September, you'll hit it?
In January. Yeah.
It's kind of a little bit of a crazy story.
Well, I think -- maybe I'll say it in a positive which is why did I -- why did I join Lattice, right? Because I was really happy at AMD, right? We were doing good things at AMD but what I saw in Lattice was it was a company that had -- was positioned in a really good part of the semiconductor industry. Even though I hadn't worked in FPGAs I'd worked close enough to them to know that, that's a really good part of the industry, high barriers to entry, limited number of companies that actually can do FPGAs for general purpose design. So naturally a good part of the industry to be in. And then within that part of the industry, Lattice had kind of a unique position, right? It was focused on this sort of power efficient. And I thought that the company, if it had the right strategy focused in the right markets, really got the -- get the engine, the product engine working again, that there was a lot of upside to the company. And then also I would say just if you set all that product and market stuff aside and you just look at the financials of the company, you could look at that and say, Wow, this company is really underperforming relative to comparables, right? Like if you just put at that time, Lattice and Xilinx next to each other and you just look at it and say, what's going on, right? And there's no reason -- there's no inherent structural reason why Lattice shouldn't be able to be at a similar business model. And so there was a lot of opportunity to go get Lattice to the point that it should be, right? And we're certainly we're pleased with the results that we've driven over the past few years. But obviously would say we're much more excited about where we are from here with the company, right? Much more excited about the next 5 years and before...
The story is not over here.
No, for sure.
I guess as customers are trying to evaluate you've got tons of new products that are coming in and they're going to -- like if they're not using your products like what is their next choice? Like do they have to go to Xilinx? Or do they go to a Microchip or like what's -- or are you creating new opportunities and I mean I found out that the best companies out there, well they're actually out there creating their markets, right?
That's a really good point. What we're seeing is when we look at our revenue growth over the last few years or the revenue growth over the next 3 to 5 years, it really comes from 3 sources. Number one is good old-fashioned [ share conversion ], which is just we're replacing Altera, Xilinx devices because our products are better because our customers are more strategically aligned to us, right? That's certainly a contributor. The -- we're also seeing TAM conversion where -- there's places where maybe historically, a customer has used a microcontroller, where actually an FPGA is a much better fit. And especially as they're adopting AI algorithms that are parallel that don't run well on a microcontroller we're seeing customers switch over to our devices, as they're a better bet. And then the third was the one you're mentioning, which is TAM expansion. And a lot of the growth that we've seen in the server segment started out as share conversion, but over the last couple of years and what's driving it moving forward is really TAM expansion. Where we're bringing new capabilities like that security capability that just didn't exist before and there's other markets as well that we can point to or other applications where, yes, we're just bringing a new solution or a new capability that just was never in that market before, and that's purely TAM expansion.
Got it. And I guess as the data center architecture like transitions, I know you talked about your content in the GPU server is kind of the same as -- are we going to be buying fewer GPU servers, though? I mean, just because it's -- if it's 30x the performance or whatever, like, is that a negative or?
I don't believe that, that's a net negative. If you just look at total spend going into data centers, I believe that's a secular growth for the industry. This is not a Lattice comment just for the industry for at least the next decade. I think the amount of compute that traditional workloads as well as the AI workloads drive is so monstrous that's just going to drive steady growth in infrastructure spend and data center. Now within that envelope of spend, you'll see where -- if you go back 5 or 10 years, servers were kind of all the same, right? It was a server based on an Intel processor. There was really no AMD share. There was -- now you see...
Do you care, by the way, Intel versus AMD?
We don't care at all. So we are -- and in fact, that's a value that we bring to our customers. We are totally agnostic in architecture. So when we develop our solutions, we develop them to work with Intel processors, AMD processors, ARM-based processors, GPUs from anybody, other FPGAs. We -- one of our sort of key design goals is to make sure that we're totally agnostic. And that's actually really important to especially our hyperscale customers because our hyperscale customers whereas years ago, they were -- they just had an Intel server. Now they've got Intel, AMD, ARM servers, they got GPUs plug in. They've got FPGA accelerator card. So we've got this tremendous kind of explosion in complexity and flexibility. And so when we're able to bring them a single security and management solution that they can leverage across all their platforms. That helps them reduce complexity. And so that's a big value to them.
Yes. Does the flexibility of the FPGA in that kind of dynamic environment...
Definitely helps. Yes. Because one of the things that they do is, they use the flexibility to put some of their own specific algorithms into that FPGA and they know they're going to want to change that and read that. And so the fact that they can just reprogram that FPGA, it just makes it a naturally good solution.
That makes sense. So we're about a 1-minute warning. So I will give you your soapbox. We've got a room full of investors here. Why should investors buy your stock today?
Well, look, I would say, number one, and this is one of the things that attracted me to Lattice is FPGAs are a good part of the semiconductor market, hands down. For 40 years. So it's been a good place to be. So we're in a good neighborhood. Number two, we're definitely in the right markets. Sherri mentioned this. we're focused on 4 core markets that have long-term secular growth trends and are a naturally good fit for our technology. But the thing we're most excited about is the companies in the biggest product portfolio expansion that it's ever done in its 40-year history, we were doubling the size of our portfolio, doubling our addressable market. That's what we're excited about, that's what our customers are excited about.
Got it. I think that's a fantastic list to leave it. Thank you so much. Really appreciate it.
Thanks.
Thank you, Stacy.
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