Hello, welcome to the Lattice Semiconductor First Quarter 2023 Earnings Call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Rick Muscha, Senior Director of Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice's President and CEO, and Sherri Luther, Lattice's CFO. We'll provide a financial and business review of the first quarter of 2023 and the business outlook for the second quarter of 2023. If you have not obtained a copy of our earnings press release, it can be found at our company website in the investor relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available, but that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks.
These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the second quarter of 2023. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum, such as a press release or publicly announced conference call. We will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the investor relations section of our website at latticesemi.com.
Let me now turn the call over to Jim Anderson, our CEO.
Thank you, Rick, and thank you everyone for joining us on our call today. We delivered strong results in Q1 with record quarterly revenue, which grew 22% year-over-year, and non-GAAP net income growth of 36% year-over-year. While we're certainly not immune to any macroeconomic challenges impacting the industry, growth in our core strategic markets is driven by growing demand for our leadership product portfolio, strong customer momentum, and solid execution. Let me touch on a few Q1 highlights. In addition to the strong revenue growth, we expanded non-GAAP gross margin by 260 basis points year-over-year to a record 70.3%. We achieved record non-GAAP operating profit of 41%, which was an increase of 470 basis points year-over-year.
We further expanded our product portfolio with the recent launch of the sixth device family based on our Nexus platform, where we launched enhanced versions of multiple software solution stacks as we continued to expand our software portfolio. Let me now provide an overview of our business by end market. In the communications and computing market, revenue was down 9% sequentially and up 4% on a year-over-year basis. As we expected, the sequential decline in revenue in this segment was primarily due to softer industry-wide server and market demand. However, we continue to see this segment as a long-term growth driver for the company, as it includes multiple growth factors such as content expansion and data center servers, new greenfield client computing designs, and growth in wireless infrastructure and data center networking.
Turning now to the Industrial and Automotive market, revenue increased 21% sequentially and was up 55% on a year-over-year basis. Q1 growth reflects strong customer adoption of Lattice solutions in new design wins across a broad range of applications, including industrial automation and robotics, as well as automotive ADAS and infotainment systems. I'll now provide some product roadmap highlights. We're pleased to announce that MachXO5-NX began production shipments in Q1, which is our fifth Nexus device family to enter production. We also recently introduced MachXO5T-NX, the sixth family built on the Lattice Nexus platform. This device family provides advanced system control in multiple applications, including data center networking, machine vision, and industrial IoT.
Overall, we continue to be pleased with the broad adoption of our Nexus-based products, and our commitment to continued investment and expansion of our Nexus platform has further strengthened our leadership position in the small FPGA segment. We also continue to be pleased with progress on our new Lattice Avant platform, which launched in early December. Avant has targeted at mid-range FPGA applications and doubles our addressable market and creates new greenfield revenue opportunities for Lattice as it ramps over the coming years. Customer engagement and momentum continues to grow, and we look forward to launching two new Avant device families later this year. Turning now to our software strategy. As we've discussed over the past few years, software is a key component of our strategy, and we've been increasing investment in our software portfolio. These investments are driving faster customer adoption of Lattice products.
Over half of our new silicon design wins are now enabled by at least one of our software solution stacks, which increases the value that we're delivering to our customers and the long-term stickiness of our products. In Q1, we expanded the capabilities of three of our solution stacks, and we expect our expanding software portfolio to remain a key driver of customer enablement and momentum. In summary, while we're certainly not immune to any macroeconomic challenges impacting the industry, Lattice continues to be well positioned in long-term secular growth markets with an expanding product portfolio, accelerating customer momentum, and strong financial execution. We look forward to sharing more about our future plans at our Investor Day on May 15th. I'll now turn the call over to our CFO, Sherri Luther.
Thank you, Jim. We are pleased with our strong financial results in Q1, with record profitability driven by double-digit revenue growth and continued growth margin expansion. We continue to focus on cash generation while investing in our long-term product roadmap. We also returned capital to our shareholders through our 10th consecutive quarter of share buybacks. Let me now provide a summary of our results. First quarter revenue was a record $184.3 million, up 5% sequentially from the fourth quarter and up 22% year-over-year. Q1 was the 12th consecutive quarter of sequential revenue growth. Revenue continued to grow year-over-year in our two strategic market segments of industrial and automotive and communications and computing.
Our non-GAAP gross margin increased 30 basis points to a record 70.3% in Q1 compared to the prior quarter, and was up 260 basis points compared to the year-ago quarter. Both the sequential and year-over-year increases in gross margin continue to be driven by strong execution on our growth margin expansion strategy, which is now in its fifth year. Non-GAAP operating expenses were $54 million compared to $52.5 million in the prior quarter and $47.2 million in the year-ago quarter. Both R&D and SG&A expenses increased sequentially as we continue to make investments in our product portfolio, customer support and demand creation. Our non-GAAP operating margin increased 80 basis points to a record 41% in Q1 compared to the prior quarter and was up 470 basis points compared to the year-ago quarter.
We continue to balance operating margin expansion with investments that will drive Lattice's long-term revenue growth. Q1 non-GAAP tax expense increased to $3.2 million, primarily due to tax reform changes related to the capitalization of R&D costs. Q1 earnings per diluted share was $0.51 compared to $0.37 in the year-ago quarter, which represents 37% year-over-year growth, which is faster than the rate of revenue growth. Cash generation continues to be a priority. We ended the quarter with $112 million in cash after repurchasing 119,000 shares or $10 million in stock. We also paid down $25 million on our credit revolver. Subsequent to the end of the quarter, we paid down an additional $60 million on our credit revolver. Let me now review our outlook for the second quarter.
Revenue for the second quarter of 2023 is expected to be between $183 million and $193 million. Gross margin is expected to be 70% ±1% on a non-GAAP basis. Total operating expenses for the second quarter are expected to be between $56 million and $58 million on a non-GAAP basis. In closing, I'm very pleased with our strong financial results and continued execution despite the macroeconomic challenges impacting the industry. We are looking forward to our Investor Day on May 15th, when we will share our plans of how we continue to build long-term shareholder value. Operator, we can now open the call for questions.
Thank you. We'll now begin with your question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Matt Ramsay from TD Cowen. Your line is now live.
Yes, thank you very much. Good afternoon, everybody. Jim, I wanted to start my first question. I think in Sherri's script, she mentioned 12 consecutive quarters of sequential revenue growth, which is remarkable. When you guys just put up 22% growth in Q1, which is a lot better than the industry's doing, let's say. If you could talk to us a little bit about the drivers of the growth now, as you continue to consolidate share in the low tier FPGA market.
In particular, One of the questions I get as you've gone put up this much growth is, do you feel comfortable with where distributor and channel inventory is, and the inventory levels, so we can still see further growth going forward at maybe a similar pace? Thanks.
Yeah, thanks for the question, Matt. Yes, we're quite pleased with the results that we saw in Q1, in particular, the year-over-year growth of 22%. We feel like we're off to kind of a good start for the year, especially considering, you know, over the last two years, we've grown at over 20% per year, and like you said, 12 consecutive quarters of growth. We feel good about that. You know, I attribute it to really 2 things. Number one, from a market perspective, you know, we position the company in, I think, the right long-term secular growth markets, and we have really strong Lattice specific growth drivers within that, those markets. Number two is product portfolio expansion.
You know, right now we're in the midst of, I would say, the largest product portfolio expansion the company's ever done in its history. I think both of those have just positioned us really good for growth. On the first one, just a little bit more color on from a market perspective, we're certainly pleased with our continued progress in the industrial and automotive segment. You know, industrial robotics, industrial automation, automotive electronics like ADAS and infotainment systems, all of those applications are really good applications for Lattice devices. The power efficiency that we bring, the flexibility, the increasing software content that we're delivering to our customers, all of those help us bring, you know, really unique and I think compelling solutions to our customers.
That growth that we're seeing in those segments really driven by design wins that we've, you know, accumulated and driven over the last one, two, three, four years, and those design wins entering production. We're quite pleased with the growth that we see in that segment. Even, you know, comms and computing, even though we saw some sequential decline in that segment, we again, chalked up growth on a year-over-year perspective from that from that segment. I think that, you know, stands out relative to the industry. There again, we see, you know, growth in content expansion and servers, you know, good growth in data center networking, wireless infrastructure. A number of specific growth vectors there.
Like I said, on number two, on the product expansion, you know, we continue to expand out our small FPGA platform of Nexus. Just got our fifth device family into production. six, we just launched. Avant is still ahead of us in terms of revenue ramp. We're just getting started with Avant this year. We're pretty excited about the continued product expansion. I think the last part of your question was around disti and channel inventory. When I look at our distribution channel inventory at the end of Q1, it was relatively unchanged from the end of last year, Q4. Our disti and channel inventory is still low relative to what we would consider normal levels of inventory.
We look at the channel inventory and say, "Well, that's, you know, looks pretty healthy, and over time, we'll need to replenish that a bit." We feel well-positioned for long-term growth for the company. We're certainly not immune to any of the macroeconomic challenges or any, you know, demand fluctuations in our end markets, but we feel really well-positioned over the long term.
Thanks so much for that, Jim, and all the detail there. As my follow-up, you mentioned in some of your commentary as to Sherri Luther, the growth in the auto and industrial segment being really strong. Comms and computing, it's no secret that there's been some temporary server build softness and also some softness in the PC market that seems to be bottoming and maybe starting to turn. If you could maybe talk us through the next couple of quarters in that particular segment, maybe lead times for your devices relative to when servers ship or when PC builds start to turn around. If you could just kind of walk us through how should we think about the sort of re-acceleration of that segment if those end markets do turn? Thanks.
Yeah. Thanks, Matt. Yeah, we've certainly seen just, along with everybody else in the industry, we've certainly seen some end market unit softness in both servers and PCs. For us, servers is a bigger factor. Our position or revenue in servers is much larger than what we have in PCs at this point. We see PCs as a continued long-term, large TAM opportunity for the company. In the servers space, both, you know, hyperscale and enterprise servers, that's been a great growth area for us for at least the last three to four years. Actually, comms and compute has grown double digits for us now for, as of the end of last year, four years in a row, servers being one of the main drivers of that.
For us, most of that revenue growth in servers has actually been driven by content expansion. That's either higher attach rates, higher ASPs. That's been a much bigger factor for us than the underlying server unit growth in terms of the server TAM. We expect that to continue to be the bigger driver for us over the long term, the continued expansion of dollars in content for Lattice. We continue to see great areas of opportunity to grow that, and we expect that to be the bigger factor in our continued growth. You know, that said, to the extent that there starts to be a pickup in end market server demand, we would expect to benefit from that.
Generally, we would benefit from that maybe, you know, a quarter or so ahead of when the actual servers start to ship, just given, you know, the systems getting built and our system or our chips getting ordered ahead of time. We would expect to see a pickup about a quarter ahead of when the end server deployments hit. Again, I'd stress that, the majority of our growth in that segment is really more driven around, again, that dollars of content per server.
All right. Thank you very much. Congrats again. I'll jump back in the queue.
Thanks, Matt.
Thank you. Next question is coming from Tristan Gerra from Baird. Your line is now live.
Hi, good afternoon. Great gross margin showing in terms of result and guidance. Could you talk about the driver, and also how sustainable that is? You know, if you could talk about the key drivers and, you know, your expectation for pricing for the rest of the year.
Yeah. Thank you, Tristan, for the question. We're really very pleased with our, another record quarter gross margin for us, 70.3%, 260 basis points improvement year-over-year.
As I mentioned in my prepared remarks, we're now in our 5th year of our gross margin expansion strategy, where we've driven a 1,360 basis points improvement since we started this program in 2019. Really the drivers are multiple factors. New products have added value to our gross margin, pricing optimization, mix, product cost efficiencies, all of those items have been factors that have contributed to us expanding our gross margin. We'll continue to focus on gross margin, and we'll look forward to our Investor Day on May the 15th, where we'll give you an updated financial model at that time.
Yeah. Maybe I'll jump in. I think Tristan also asked about pricing at the very end of end of the question, Tristan. Just to address the pricing perspective. I think you're asking kinda go forward pricing. We believe our pricing is durable. You know, as Sherri mentioned, part of that gross margin improvement initiative that we've been working on over the past now our fifth years, that included pricing optimization and just frankly better pricing discipline within the company. So we feel like we've built some strong muscles around pricing, and we feel like our pricing's durable. Also what I would add is we've added a tremendous amount of software content to our software portfolio, and we see increasing adoption from our customers of our higher-level software, our application solution stacks.
The adoption rate or attach rate's now over 50%. Software, when it's adopted by our customers, that also helps us secure higher ASPs and helps drive, you know, generally higher, better solutions to our customer and better ASPs for us over the long term. That's a net tailwind to our ASPs over time as well.
Great. For my follow-up, you've mentioned the attach rate above 1 in data center. You mentioned just on this Q&A that you expect the attach rate will continue to increase. If you could talk about the drivers, you know, obviously, as you expect to continue to outpace data center units, what are going to be the driver for attach rate to go even beyond where they are today and/or the ASPs to go further? Is that going to be reliant on new products, or do you feel that there is more functionality that you can address or that your existing products already addressing in data center? Any color on that path for, you know, continued expansion in data center?
Yeah. It's a great question, Tristan. Let me talk about both parts, the attach rate and the ASP expansion, which combine to drive dollars of content per server. On attach rates, which are now, I would say well above 1x, we continue to see more opportunities for across the server infrastructure for more Lattice chips to be used within the server, whether it's on the motherboard itself or the cards that are attached into the motherboard, or, you know, just sort of multiple different places where we can see additional Lattice chips being adopted. We continue to see more opportunity there, number one.
and you kind of alluded to this, is as we bring more functionality, more capability through our new products, new devices, through the new software that we're developing, and even with Avant coming out as well, we see opportunities to just bring additional content and capability to servers just like we've been doing over the past four to five years. When you combine that opportunity to continue to bring more content, which brings higher ASPs with continued growth and attach rates, we continue to see this as a really good growth area for the company. You should expect us to talk in a little bit more detail about this at our upcoming Investor Day.
We'll give some more kinda specific examples of where we see continued opportunity in the, in the server and data center infrastructure segment.
Great. Thank you very much.
Thank you. Next question is coming from Christopher Rolland from Susquehanna. Your line is now live.
Hey, guys. Thanks for the question. I was wondering, I don't think you guys have given this before, but I have a feeling it's growing a little bit more. I was wondering about auto as a percentage of total in INA now. You mentioned ADAS, but would love to know, you know, what's driving that, or is it really just purely industrial automation? Also sometimes you guys kind of force rank the segments. I'd love a little bit of color there too.
Thanks, Chris. On automotive, we're very pleased with the continued progress on automotive electronics, and it is a, it's a combination of ADAS and infotainment applications, just in many different places where a power-efficient, flexible, adaptable chip like we provide can be used in automotive electronics applications, both for EV applications, but also for the increasing electronic content that's growing even within gas-powered cars, right? We're pleased with the growth that we've seen in the, you know, the most recent full year, automotive and industrial overall grew very strong. I think it was about 41% year-over-year, but our automotive business actually grew well above that. In the most recent quarter, Q1, we again saw very strong growth in automotive.
We see this as a really good growth area for the company. Very, kinda compelling and exciting design win pipeline that we have ahead of us. We feel good about that growth. Now that said, it is still the smaller portion of that segment, but we're pleased with the growth of it. We are seeing strong growth in, you know, industrial automation robotics applications as well. You know, over the past quarters, automotive has been growing a bit faster, we're still quite pleased with the growth we're seeing throughout the industrial segment in many different applications, especially when it relates to automation and robotics.
Great. Yeah. If you could, if you can kind of force rank the segments and give us an idea of where you think we may have more or less strength into next quarter.
In terms of next quarter, if you look at Q2, I would expect on a sequential basis. You know, we certainly, if you take the midpoint of our guide for Q2, we've guided up sequentially. I would expect the sequential growth in Industrial and Automotive. I would expect Comms and Computing to be sequentially flat. Overall, for the revenue to be sequentially up based on the midpoint.
Very helpful. Just lastly, comms, wireless, and wireline, kinda what's going on there? Are there any, you know, highly significant drivers, coming up here in your opinion?
In Q1, we did see a bit of sequential weakness in wireless infrastructure, which I think is, you know, pretty consistent with what the industry has seen. Part of that sequential drop that we saw in comms and compute, primarily server, but a little bit of it being wireless infrastructure as well. Moving forward, you know, we still see wireless infrastructure as a great long-term growth area for the company, especially given the greater amount of content that we have in 5G base stations and other equipment related to telecom infrastructure. The other area of growth that we've talked about more recently that we're excited about is data center networking. We continue to see good growth there and a very healthy design win pipeline there as well.
Again, you know, all of this we'll touch on in more detail at our Investor Day in a couple weeks from now.
Thanks so much. Really appreciate it, Jim.
Thanks, Chris.
Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Hans Mosesmann from Rosenblatt Securities. Your line is now live.
Thanks. Hey, guys. Congratulations. Good results in a tough market. Most of my questions have been answered. I am curious, Jim, in the new design engagements where, you know, software is a big component of that, you know, up till the design win, what is the competitive dynamic for those specific new sockets that you're winning?
I think that in general, you know, we feel like we've got really good competitive position in general. I'll come back to the software part of your comment, but I wanna start with just, you know, the devices themselves. If you look at Nexus, extremely competitive, you know, versus other FPGAs that are out there. We're able to deliver power efficiency that's two to three times better than our competition, you know, incredible physical size advantages where our devices are much, much smaller. I think even at just the device level, we feel really well positioned competitively. Similar for Avant, as we're, you know, we've launched the first device family based on Avant. We have two more device families we're planning to launch this year and more to come in the future.
We also feel really well positioned competitively there. The devices themselves are competitive. I think when we add to that the software capabilities and portfolio that we've built out over the past 4-5 years, I think that makes a really compelling combination for our customers. You know, our software solution portfolio is now, you know, five different application-specific software solution stacks for common customer applications. We're seeing great adoption of those software solutions. As I mentioned, the attach rate of our software solutions is now over 50%. What that software does is number one, that helps our customers design our products in very quickly. Either helps them switch from a competitor's device to our device quickly, but more importantly, helps them get to market easily and quickly.
That helps drive their time to market, but also helps improve our time to revenue. We also believe it creates much more long-term stickiness for our solutions. That software, once it's kinda integrated into their system-level software, that creates multi-generational stickiness for our entire solution, including the silicon. We feel very good about the software and the level of competitiveness and stickiness that it creates. You know, it's certainly a big investment area for the company. We've been growing investment there. We're now in our fifth year of increased investment there, and we continue to be excited about the potential moving forward.
That's great, Jim. What I wanna get to is how does your competition compete against that specifically? What are they doing to compete against you, recently? Is there any competition down there in the small FPGA? That's what I'm looking for. Their behavior or your customer behavior is like, "Hey, I gotta use you. You're the only guy that can really address this." That's what I'm trying to get to.
Well, I think that what we're doing in the marketplace is, we believe it's, it's unique or specific to Lattice. I think that combination of silicon tightly coupled with the specific application solution stacks, we believe that that's a really competitive and compelling offering in marketplace. That's something that's really differentiated versus our competition, and I think we believe our customers recognize that and definitely appreciate that. We think that's borne out by the adoption rates that we're seeing for our software.
Great. Thank you very much.
Thanks, Hans.
Thank you. Next question is coming from David Williams from Benchmark Company. Your line is now live.
Hey, good afternoon. Thanks for taking the question. Congrats on the execution. Just quickly, Jim, maybe anything from a geographic mix perspective that surprised you during the quarter? Asia was down again quite a bit this quarter. Just wondering if you're seeing anything in terms of a potential rebound there, and then maybe what drove the Americas and Europe improvement?
Yeah. Thanks, David. Just as a reminder, the revenue breakdown by geography, that's shipped to revenue. That's where Lattice products are shipped. It doesn't necessarily reflect where the end product is actually consumed. I just wanna say that from the outset. You gotta keep that in mind. A lot of times, where the Lattice product is shipped, the system will be assembled there and shipped to a different geography. That said, yeah, we're pleased to see continued growth in North America and Europe. We've, you know, we've certainly seen strong growth with those customers over a number of quarters. We have seen some softness in the Asia geography. You know, we attribute that to some of the softness that we talked about earlier in terms of server demand.
Many servers are assembled in Asia, for instance. When we look longer term, we see, you know, good growth expectations across our geographies over the long term.
Great. Then maybe just from a fungibility standpoint of the products and customers, can you talk maybe about that fungibility, obviously maybe not between specifics with the software stack, but just kind of thinking about the inventory levels, and those are fairly flat, just modestly, but is there much fungibility that you have between those different products and customers?
Yeah, there's very high fungibility. One of the great things about FPGAs, one of the things I certainly like about FPGA products is because they're programmable, the same product can get adopted across almost every market that we serve. We often see, especially our popular products, we often see those being used across every single market that we serve. There's great fungibility across our markets, and I think that's a real strength to the business.
Thanks so much.
Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Ruben Roy from Stifel. Your line is now live.
Thank you. Hi, Jim, I guess most of my questions have been answered, but I did have a question on software. You started to talk a little bit about this, and I guess, you know, when you think about software attach rates and a little over the half the design wins, having some sort of, you know, these soft IP cores involved, is there an upper limit for software attach rate, i.e., you know, are there some end markets or applications where we just wouldn't see software, that kinda limits growth? Is it, you know, if you build the stacks, you know, your customers will come and use software and eventually, you know, maybe not 100%, but does that number keep going up?
Yeah. Thanks, Ruben. I think there is an upper limit. There will always be a certain portion of customers that wanna do a lot of the work themselves and won't adopt the software stack. We don't know exactly what that is. We don't believe we've hit that yet. But, yeah, I would assume that some portion of our customers would not adopt and just use their own software or own specific programming modules. Yeah, I can't say that we know what that limit is. We don't believe we've hit it yet.
Great. The follow-up to that is, you know, a lot of us investors focus on new products, Nexus and of course Avant coming up. In terms of software and, you know, sort of the way, you're looking at markets and addressing customers, Are the software stacks sort of pulling through interest and adoption of pre-Nexus products, would you say?
Yeah, that's a great question, Ruben. That's absolutely correct. We've seen, in a lot of cases, software kinda rejuvenate products, older products that have been around for quite a while. Yeah, one of the other benefits that we've seen to the software portfolio is not just helping enabling and driving the new products but actually rejuvenating and lengthening the lifetime of the existing products. We're quite pleased with that because the amount of incremental investment to activate that on older products is very, very low. It's a really good ROI for us. We have seen our pre-Nexus products continue to grow in a very healthy way as well.
You know, if we look at last year's growth or the most recent Q1 growth, pre-Nexus products continued to be a big, you know, a big growth driver for us as well. At least part of that is certainly due to software enablement.
Excellent. Thanks for that detail, Jim.
Thanks, Ruben.
Thank you. That does conclude our question and answer session. I'd like to turn the floor back over to the CEO. Mr. Anderson, please go ahead, sir.
Yeah. Thank you, operator. Thanks again everyone for being on the call today. We're certainly pleased with our continued execution and strong results in Q1. Of course, we look forward to sharing more details about all of our future plans at our Investor Day on May 15th. Operator, that concludes today's call.
Thank you. You may now disconnect your lines and have a wonderful day. We thank you for your participation today.