The Six Five – On The Road: Lattice Analyst & Investor Day
On this episode of The Six Five – On The Road host Daniel Newman is at Lattice Analyst & Investor Day in New York City. He sits down with Lattice Semiconductor’s President and CEO, Jim Anderson, along with Esam Elashmawi, Chief Strategy and Marketing Officer, and Sherri Luther, Chief Financial Officer for a conversation on the announcements that were made during the day.
Their discussion covers:
- How Lattice Semiconductor has achieved multiyear growth success to in terms of product and business strategy
- The current trend lines driving growth, particularly with AI and EdgeAI
- Long-term growth for the company, with a look into the expanding product portfolio Lattice has planned for the future
- Some key insights into Lattice’s capital allocation strategy and how their buyback program has performed for its shareholders
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Daniel Newman: Hi, everyone. Welcome to another Six Five podcast, On the Road here at the Lattice Semiconductor Analyst and Investor Day 2023 here in New York City. I’m Daniel Newman, host today. I’m joined here today by Esam, Sherri, and Jim. Hey, welcome to the show. It’s great to see you all.
Jim Anderson: Thanks. It’s great to be here, Daniel.
Sherri Luther: Thank you.
Daniel Newman: I feel like I’ve had a few of you on the show before.
Jim Anderson: I think you might have. Yeah.
Daniel Newman: Last year at the computer museum, a couple of you.
Jim Anderson: Yeah.
Esam Elashmawi: Yeah, that’s right.
Daniel Newman: Sherri, I think it’s the first time.
Sherri Luther: I think it’s the first time, yeah.
Daniel Newman: Thanks. You had a really good day today here at the Analyst Investor Day, by the way. One of the best presentations I’ve seen for the CFO.
Jim Anderson: She did well.
Sherri Luther: Thank you. Thank you.
Daniel Newman: We’ll talk more about that here. I want to talk to all of you, and I’m glad to have you here with me because each of you came on stage today and talked… God, there had to be about 100 equities analysts here in the room.
Jim Anderson: Here in the room. Yep.
Daniel Newman: Not to mention a remote group, and there were great questions coming in, which is always indicative. And my Twitter stream, which is always pretty indicative of how I feel, was pretty warm. And I’ll be candid, I don’t give out free positivity. But when you get on stage, and you talk about expanding revenue you get on stage, you talk about lowering OpEx, which during this time of austerity, I’ll call it in the market, is always very strong.
And then increasing Op Inc, generating more cash. Sorry, not stealing your thunder. I’m going to give you a chance to talk about that. When you talk about all that, you make it very easy to feel positive.
Jim, over the last several years since you’ve started, you’ve seen the company double in size. Revenue, very impressive. And of course, you’ve seen the share price grow exponentially. A lot of very positive things for the company. I guess start out, just talk a little bit about the day today. Talk a little bit about what you were focused on here at the Analyst and Investor Day.
Jim Anderson: Yeah, I think first of all, we’re really happy to be back here. The last time we did an investor event in person was four years ago, so we’re happy to be back in person at Nasdaq. But our message was, number one, that when we look at the company, we are absolutely positioned in the right end markets. The markets that we have now over 90% of our revenue in, are the right end markets for Lattice to be in.
And that’s industrial, automation and robotics, automotive electronics, communications and computing. We’ve completely repositioned the company in the right markets. And then what we’re really excited about is we’re in the middle of the biggest product portfolio expansion in history. And so that’s driving some really great financial results. If you look at just over the last, say two years, top line revenue is accelerated. We grew revenue by, what was it? 26%…
Sherri Luther: Yep, 26%.
Jim Anderson: In 2021. 28% last year. We’ve grown gross margin to now about 70%. Operating income approaching 40%. A lot of really good financial progress. And I think that demonstrates us being in the right markets, and bringing great products to our customers.
Daniel Newman: You make a great point, Jim. I’ve said publicly a number of times that your diversification, and the fact that your exposure to consumers has been somewhat limited, has really been a tailwind for you to have such strong results over the past few quarters.
I mean, the semiconductor industry at large has not had a great 2023 or even back half of 2022. But each quarter I get the call and say, “Hey, we’re going to talk about the numbers.” It’s like record revenue, profit. And it’s almost like, “Okay, too good to be true. What am I missing?” I think that was some of the sentiment here.
A lot of the questions that came in were like, “All right, this is really good. Talk a little bit more about how you’re going to do it.” And Sherri said that it brings me over to you is, you heard him say, I think you’ve put a target number up near 70%.
Sherri Luther: Gross margin?
Daniel Newman: And going over for 70. Yeah, for gross margin. That’s quite a feat. Expanding in a time, like I said, a challenging market. Of course, you guys are uniquely positioned. You’re in those end markets that have been a little bit more resilient, I would say, than some of the consumer parts. But all that success, what do you attribute that to? How do you keep that going into that range of getting over 70 and then above? Because everyone’s going to want you to keep going. There’s no end to that.
Sherri Luther: Yes, and we always are trying to beat our targets as well, no doubt. But the gross margin target that we put out is the low 70s. And back in 2019 when we developed our gross margin expansion strategy and laid the foundation there, we had three key areas of pricing optimization, product cost or product mix rather, and product cost reductions. And so, we’ve been executing on that strategy now for going into its fifth year.
And so, we have improved our gross margin by 1,360 basis points in that period of time. This whole methodology and the strategy that we’ve put in place is part of our DNA. It’s the way that we run our business. And it’s really focused on, in particular the pricing optimization aspect is focused on making sure that we get the value for our products.
Our products with our leadership product portfolio, our software attach, and the functionality that our products provide make it a lot easier to sell our products to customers because they want that functionality. It’s tremendously helpful in differentiating their applications as well.
We’re going to continue to execute on that gross margin expansion strategy. And you know what? We’ve got multiple levers there and are really pleased with the progress over the past four years.
Daniel Newman: Yeah. You definitely mentioned all the levers that you have and all those end markets. When you showed, I think, Simon, was it in your part of the presentation? You showed the content opportunity inside of the automobiles, you showed the data center opportunity. The 5G.
I mean, think about all the trend lines and, of course, you had this backdrop of AI. Yeah, I mean we can’t… I imagine you’re going to have to speak to that at some point. I’ve never seen a trend come on in such short order.
Again, if you’ve been in the industry a while, we’ve all been thinking about AI. I mean, I remember you showing me a vision training back at the Avant launch. You were showing me some of the vision. And I’m saying how faster, lower power, what you’re accomplishing there.
But this generative AI thing has brought a whole new level. And that, of course, is going to mean more compute, more FPGAs, more and more. And so, you’ve seen your… Esam, I remember when I think we first started working in being briefed by Lattice, you were around three billion. Was that what you were showing?
Esam Elashmawi: Yeah. That’s right.
Daniel Newman: 2006.
Sherri Luther: That’s right.
Daniel Newman: And it was, I think you pushed a six with the initial…
Esam Elashmawi: That’s right.
Daniel Newman: Advent of the Avant line. And then at this event you show you flashed ten.
Esam Elashmawi: That’s right.
Daniel Newman: Which is pretty significant. What do you attribute, what are the trend lines, Esam, that are driving this growth in Sem?
Esam Elashmawi: Yeah, I mean, $10 billion, we’ve got lots of headroom to continue to grow with our products, both small and mid-range FPGAs. There’s a lot of things happening in the industry that we’re taking advantage of with our customers trying to innovate more. Artificial intelligence is one of them. You spoke about that.
We just see our customers, whether it be in an industrial market, adding more intelligence to the robots that are being deployed. We see that in the automotive market with ADAS type applications, in cabin monitoring that can leverage artificial intelligence as well. And there’s just a lot of edge applications.
You know we’re in client devices. You and I had chatted about that before. Their client devices are being deployed today that are leveraging very small power efficient Lattice FPGAs and software to run these artificial intelligence for user applications like presence detection, shoulder surfing. We see just a growing application around Edge AI, which really is exciting for us.
Daniel Newman: By the way, you flashed a data point, I think something about maybe getting an hour or more or something like that.
Esam Elashmawi: That’s absolutely right.
Daniel Newman: But when you think about the world and all that’s going on with climate, net zero, companies. You have 1,000 employees, 10,000 employees, every time they plug in one more charge, that one more hour is the difference from that person running through one more cycle, one more charge. I mean, that’s pretty big. And that’s something in AI, that’s something in FPGA. That’s something, people don’t talk about that, but what a really great application at the edge.
Esam Elashmawi: It is. I mean, we’ve always built a DNA in the company and our mission is to be the low power programmable leader. And it’s not just that our FPGAs are low power. We’re actually bringing in capabilities for our customers to even drive their systems at a low power. And that’s a really good example of how we do that in the client device as well.
Daniel Newman: Yeah. And I like that you mentioned that on the screens and displays in cars, enabling every car might have a somewhat different setup and display, but they could use programmable to be able to use the same device.
Esam Elashmawi: The same device
Daniel Newman: To be able to address different configurations. Cars, because they’re still, they’re going to need variety. Even though I know we’re standardizing, and I know with Tesla every car… But a lot of people want that variety. They still liked it. I know you and I have had car conversations.
Esam Elashmawi: Yes, we have. Many.
Daniel Newman: It’s our cockpit. It’s the car. That’s the thing.
Esam Elashmawi: That’s where we sit. We grew up on cars. You and I had that conversation.
Daniel Newman: We did. We did. And I liked some of the personality you’re able to bring out by being selective. And that flexibility in the programmable gives you the opportunity to have differentiation while still being flexible and design low power, scalable in your build.
Jim, you talked about the roadmap a little bit, actually, you and Esam both did. You launched some product. You talked about future product, here. Talk a little bit about that product roadmap and how you’re going to continue to roll out products so quickly. Because that’s going to be part of what’s going to make this 10 billion Sem possible. And obviously it’s going to be part of what’s going to continue to make Lattice Semi very compelling to this analyst and investor community.
Jim Anderson: Yeah, that’s a great question. And we are always happy to talk product. We love the product. I mean, I’m a product guy. And most importantly, Lattice is a product company. I mean, we’re only as good as our products. But I think the thing that we’re really excited about right now, as our entire company is excited about, is that Lattice is going through the biggest product portfolio expansion it’s ever done in its entire history. And the company’s 40 years old. And so, over that 40 year history, this is the biggest expansion we’ve ever done. I mean, yeah, we announced just today four new products that we’re going to bring out this year. We’re building out the Lattice portfolio at a really rapid rate. And if you ask our customers, hey, what are they excited about? It’s the same thing. Lattice is bringing out a tremendous number of new products.
But we’re not just bringing out a lot of new products. We’re bringing out market-leading products, products that are two and a half times better power efficiency than our competition. That’s a big deal to our customers. I mean if you look at our customer systems, usually the primary design constraint is around power, the total system power budget.
If we’re able to go to our customer with a solution that’s two and a half times better power efficiency, that’s a big win for our customers. And we’re doing that with higher performance. And then the physical device size, a lot of times our devices are six times smaller than our competition. It’s just an incredible amount of differentiation that we’re bringing in.
I think if you ask people in the company, “what are we excited about?”, it’s definitely the product portfolio, the strength of the product portfolio, the fast rate that we’re building that out. And I think our customers would say the same thing. They’re equally excited about that.
Daniel Newman: And the power challenge is always palpable.
Jim Anderson: Oh, yeah.
Daniel Newman: It’s a big challenge. And it’s not just for the sake of lower power anymore. Like I said earlier, there’s a pretty big mandate on every device.
Jim Anderson: Yeah, certainly.
Daniel Newman: Every company needs to use less power. And so, helping to solve for that is meaningful and people should care about that. And so, one of the things that you talked about, I believe, Esam, it was you and it all blurs together, it was you guys went quick. But you talked about how your new products are connecting and attaching very well with your existing customer base.
Esam Elashmawi: Yes.
Daniel Newman: And this is something that’s a little different for you, was that historically you sort of had a smaller portfolio, smaller subset of products, you landed Avant very quickly. With this product roadmap, I’m curious, in customer engagements, how are they evolving? How are you able to show that net revenue expansion and attach? Has that landing been easy or what are you seeing there?
Esam Elashmawi: Yeah, the customer intimacy and working relationship has changed dramatically since we started back in 2019. And it goes back to what Jim talked about, which is our product portfolio expansion. When our customers see us investing in products that satisfy their needs, align with their roadmap, the customer intimacy just gets stronger. And when it gets stronger, they’re actually participating in that definition itself.
I mean, you and I talked about this and we talked about this at our Avant launch. We had over 100 plus customers that we engaged with that defined Avant that we launched in December of 2022. The customer engagement is much stronger than it was before. And with that customer engagement, not only are they helping us define the right products they need, but they’re also working with us really closely.
And we’re identifying new ways to leverage our flexible, power efficient FPJ architecture. And that’s good for the industry, it’s good for the customer, it’s good for us, and it’s good for the industry as well because they take advantage of the FPJ, it’s flexibility and low power.
The engagements have gotten better at every level. It’s better at the engineering level, at the system architect level. Even with some of our customers right now, we’re engaging with their marketing teams. I mean, we’re talking with their marketing teams and what’s your challenge? Where do you want to go with these products? It’s very different than it was before.
Daniel Newman: You flashed a large swath of logos, which was very impressive, all the partners. I also say your software, if I may suggest, has been very sticky. Everybody’s trying to figure out how to develop on silicon, how to develop for the programmable environment. And that’s been something I know over the last three or four years as I’ve been following Lattice Semiconductor more closely has been the speed of development in software, which is enabling companies to get onto platform. But not only that, but once they’re invested, stay on the platform. And I think stickiness, especially when you don’t have traditional ARR, is really important to that investor community. Helps you push that margin, helps you keep those customers, and makes your revenue more predictable. Everybody loves that. Everybody wants that.
Sherri, a more pragmatic capital allocation question. I think in 2022, you guys announced a fairly robust buyback program, something like 150 million. Talk a little bit about the capital allocation strategy and how the buyback program, how you’re utilizing it and what your plans are there, et cetera.
Sherri Luther: Sure, absolutely. Frankly, with our strong cash generation and strong balance sheet, we’ve been able to execute in all aspects of our capital allocation strategy. First and foremost is investing in the organic business. And so, the investments that we’ve made in our product portfolio, as Jim mentioned, represent the rapid expansion in the company’s history.
And so, we’ll continue to make investments in that area. Certainly investments in demand creation, customer support, all of that for the long term growth of our company. In November of 2021, we acquired Mirametrix as part of our software solution strategy. And so, that’s been going very well.
And then, I talked in our presentation earlier today about the significant pay downs that we’ve done on our debt and reduced the leverage to four years ago was about 3X, very high. And so, today it’s well below one. We’ve made significant progress there on our balance sheet.
And then from a return of capital to shareholders, our share repurchase program that you mentioned, the 150 million authorization since the end of 2020 when we started that program, we’ve repurchased 3.6 million shares. And so, that’s reduced our dilution by two and half percent. Very significant.
And so, when you look at our capital allocation strategy, something that we evaluate and execute on every quarter, evaluating the best use of our cash, but we certainly prioritize long-term growth and long-term shareholder value as part of that.
Daniel Newman: Yeah, I noticed a lot of very positive feedback from the investors in the room related to the capital allocation and related to the cash flow and the way you communicate the company’s strategy. I think right now, I keep calling it a period of austerity.
I know there’s mixed messages coming from the market, but with the higher interest rates, lowering debt is very important with a lot of what I would call uncertainty. We hear a lot, especially from peers in the semiconductor space, “Oh, we expect the back half to be better. We expect, expect, expect.”
I think the thing is you’re saying, “No, we’re going to do it right now.” These market conditions are rife for growth. And I think that you’ve been on top of it. Now, the great news is you’ve been doing it through this period of time that has been… And I track all the semi companies, this has not been an opportune time for growth. It hasn’t been a great time to try to remove debt because cash flow and cash has been king. The fact that you’re able to do and mix your strategy and stay really forward-thinking with it, Sherri, is really good. Jim, I’d like to wrap it up.
Jim Anderson: We’re lucky to have Sherri.
Daniel Newman: Well. Behind…
Jim Anderson: I think that was your point, Daniel, right? We agree.
Daniel Newman: If I’d have only said that, it would’ve been a short show, but it seems based on the reaction today, yes, you sure are, Jim.
Jim Anderson: Thank you.
Daniel Newman: Let’s wrap up with just some thoughts on what you really want the audience today to walk away with. What are some of the key messages, maybe the top one or two things, Jim, that you really hope that the investors and the analysts in the room walked away thinking?
Jim Anderson: Yeah, that’s a good question. I’m coming up on my five-year anniversary at Lattice. I can’t believe it’s already been five years.
Sherri Luther: I know. I know.
Jim Anderson: In fact, you guys will be five years too, soon. And when I reflect over the last five years, I feel really good about the progress we’ve made with the company over the last five years, whether that’s revenue growth or product line expansion, profitability expansion, et cetera.
I’m certainly speaking for myself, but I think I can speak for you guys too and saying we look forward. We’re definitely much more excited about where we’re headed from here than in the past five years. We think we’re just scratching the surface. We’re just getting started with the company.
If you look at, first of all, the great end markets that we’re positioned in, we’re positioned in exactly the right markets. They have long-term secular growth trends. We’re in the right markets, but more importantly, we’re in the biggest product line expansion we’ve ever done in the company’s history. That’s a big deal to us, and that’s definitely important to our customers.
We’re really excited about that and we’re really excited about what that means in terms of the company’s financials moving forward. I mean, Sherri, you raised our revenue target today. We raised our gross margin target. We raised our operating income target.
Sherri Luther: Operating income target.
Jim Anderson: We raised almost every financial target of ours today. And that’s because of the strength of the product portfolio build out, the markets that we’re in. We feel great about the future of the company and the ability to continue to just generate outstanding shareholder value for our investors.
Daniel Newman: Jim, Sherri, Esam, thank you so much for joining me here on this Six Five On The Road in New York City at Lattice Semiconductors Analyst and Investor Day. Really appreciate you being with me.
Jim Anderson: Thank you.
Daniel Newman: Thank you. I appreciate it.
Sherri Luther: Thanks so much.
Jim Anderson: Thank you.
Daniel Newman: All right, everybody, you had it here. Thanks for joining the Six Five On The Road. We are here in New York City for now, but I got to go. Hit that subscribe button and join us for all of our shows. We really appreciate you tuning in. We’ll see you later.
Daniel Newman is the Chief Analyst of Futurum Research and the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio