Lattice's Investor Day Highlights The Separation From The Company's Past

May 24, 2019 9:59 AM ETLattice Semiconductor Corporation (LSCC)INTC, MCHP, AMD
Stephen Simpson profile picture
Stephen Simpson
18.07K Followers

Summary

  • Lattice management quantified the opportunities near at hand in its core low-power FPGA market.
  • Edge AI inferencing, 5G, and servers are the biggest near-term drivers, but auto and industrial are meaningful longer-term opportunities as well.
  • Lattice's growth and margin guidance was in line with my existing model and these shares are appealing today, but would be a clearer buy in the $10's.

To the extent that a bullish position on Lattice Semiconductor (NASDAQ:LSCC) is controversial, at least beyond valuation arguments, it is controversial primarily because Lattice used to be a poorly-run, scattered, low-value-add chipmaker. I’ve written multiple articles on how Lattice has changed (new management, new plan, new priorities, et al), but the company made its own case recently with an Analyst Day that highlighted what’s new and different about Lattice today.

For those who’ve been following the story closely over the last year or so, this Analyst Day was more evolutionary than revolutionary, but management nevertheless provided some interesting detail, particularly with respect to content opportunities, a new design philosophy, and the near-to-medium-term financial model. It wasn’t a home run presentation (there was some disappointment on the operating margin target), but it was a positive in my view and this is still a stock that interests me at the right price.

Refocused Around A Growing Opportunity With Relatively Little Competition

Lattice management once again emphasized that low-power FPGAs are its focus going forward, with the Silicon Image side of the business basically fading away, and that the company is going to walk away from lower-margin opportunities (particularly in consumer applications).

With Xilinx (XLNX) and Intel (INTC) focused on high-performance FPGAs, and Microchip’s (MCHP) Microsemi FPGA business more focused on mid-range applications emphasizing security and harsh environment performance (especially radiation), Lattice has a meaningful opportunity in the low-power market that management believes is worth about $1.6 billion today and could double to around $3 billion in 2022.

I do expect Microchip, which has some credible technology in low-power FPGAs, to offer competition in areas like AI inferencing in edge devices, but FPGA is not an easy market to get into, so I believe competition will be relatively limited. Likewise, while microcontrollers and other ASICs will always be competitive threats to varying degrees, Lattice is targeting markets with heterogenous needs and quick design cycles – factors which play well to FPGAs and poorly to MCUs.

Within that $3 billion of addressable market opportunity in 2022, about one-quarter will come from new applications like edge AI inferencing, embedded vision, and security, while the remainder will be in more traditional communications (5G), factory automation, server, auto, and consumer markets. For the next three to five years, edge AI inferencing, 5G, and servers are likely to be the biggest drivers.

Lattice is launching its second-gen SenseAI platform for the edge market, with a 10x performance improvement over the past generation, and is working on a new FD-SOI-based platform with Samsung that will have 50% better power performance. In 5G, Lattice is looking at roughly 30% greater content due to expanding beyond control functions into other control plane areas like bridging and power management for radio heads and baseband units. It’s also worth noting that not only has Lattice upped its content, but 5G is going to require more units in the field, so the overall opportunity is meaningfully larger than for 4G. On the server side, Lattice is seeing strong attach rates and much higher ASPs as the company’s chip address expanding functionality like security and systems status monitoring.

While AI, 5G, and servers will likely dominate the growth story over the next three to five years, that’s not all that Lattice has going for it. Industrial automation is still an important market, with Lattice going beyond traditional use cases like PLCs, sensor bridging, and motor control into areas like machine vision, load detection, and collision avoidance – all of which is increasingly important in robotics (for logistics and cobots).

Lattice also isn’t ignoring the auto opportunity, though it’s going to be less transformative than for many power and analog chip companies like Infineon (OTCQX:IFNNY), ON (ON), and STM (STM). Within autos, Lattice is looking to expand from audio/video bridging in infotainment and ADAS into motor control, IGBT protection, e-mirrors, and more advanced bridging for ADAS.

A New Model

With new people in virtually all of the major executive positions, it’s no great surprise that Lattice has changed its business plan and strategy. In addition to refocusing on growth opportunities where Lattice can establish a moat, and de-emphasizing markets like consumer, Lattice is changing its R&D approach. Management has shifted to more of a platform-based R&D and design strategy, one which should significantly improve R&D efficiency by maximizing design re-use and improving time-to-market.

As far as new products, the new SenseAI has been launched and a new security product (MachXO3D) is sampling now. A new product for video bridging (CrossLink Plus) should start sampling later this year, while the new FD-SOI FPGA platform will start sampling early next year.

Management guided to single-digit revenue growth in 2019 and 2020, with growth accelerating into the double-digits in 2021 and 2022, which was in line with both my own expectations and Street expectations. The long-term gross margin target of over 62% was a little higher than I expected, but not unduly ambitious. Where Lattice disappointed some analysts and investors was with operating margin guidance; hopes were for a 30% guide (30% non-GAAP OPM is a “sweet spot” for chip companies), but management instead guided for 25% to 30%.

I didn’t expect 30%, let alone 30%-plus OPM over the next five years, so I’m not too bothered by this. Moreover, I think spending around 20% of revenue on R&D is a good plan, given Lattice’s ambitions to build a leading franchise on the low-power side of the FPGA market. R&D spending is seemingly always a controversial topic with chip companies, but so long as Lattice management delivers the goods in terms of innovative product launches and revenue growth, I’m fine with it.

The Outlook

Very little changes in my model after this Analyst Day; I’ve trimmed back my expectations for the next couple of years only very slightly, and I’m tempted to bump up my expectations for 2021-2023 slightly, but I’m not going to do that now. If the opportunities in areas like AI inferencing, autos, and industry automation work out as I believe they can, there could certainly be some longer-term upside in margins and revenue.

The Bottom Line

I’d prefer to buy Lattice in the $10’s, but the long-term prospective returns from here are in the high single-digits and really not so bad. There are some higher-return opportunities out there, but many of them (like ams AG (OTCPK:AMSSY) ) have more execution and/or market risk than I currently see for Lattice. So, for now, Lattice remains in that grey zone for me where I like the company and the business plan, but I’m not so excited about valuation that I’d call it a must-buy.

This article was written by

Stephen Simpson profile picture
18.07K Followers
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.