Lattice Semiconductor Corporation (NASDAQ: LSCC) — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2023 (fiscal Q3 2023), not Q3 2022. Comparisons below are to the corresponding 2022 period unless noted. Financial statement amounts are in U.S. dollars; figures are unaudited.
Business context and reporting period
Lattice develops programmable logic semiconductor products, silicon-enabling products, system solutions, design services and technology licenses, serving communications and computing, industrial and automotive, and consumer markets. The filing describes its strategy as focused on low-power, small-size, easy-to-use programmable logic and investment in products for areas including edge AI, infrastructure, security and factory automation.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $192.2 million | $172.5 million | $566.6 million | $484.4 million |
| Gross margin | $134.6 million; 70.0% | $118.7 million; 68.8% | $395.7 million; 69.8% | $330.0 million; 68.1% |
| Operating income | $56.9 million | $48.8 million | $169.1 million | $133.4 million |
| Net income | $53.8 million | $46.4 million | $160.4 million | $127.0 million |
| Diluted earnings per share | $0.38 | $0.33 | $1.15 | $0.90 |
- Q3 revenue rose 11.4% year over year; nine-month revenue rose 17.0%. Q3 net income increased 16.0%; nine-month net income increased 26.3%.
- Operating cash flow for the first nine months was $197.6 million, versus $156.8 million. Investing activities used $25.3 million, including $16.4 million of capital expenditures and $8.9 million for software and IP licenses. Operating cash flow less capital expenditures was approximately $181.2 million.
- Cash and cash equivalents were $114.4 million at September 30, down from $145.7 million at December 31, 2022. Current assets were $360.7 million and current liabilities $100.7 million.
- Long-term debt was zero at September 30, compared with $128.8 million net carrying value at year-end 2022. The company had paid down $130 million of revolving borrowings and retained access to a $350 million secured revolving facility maturing September 2027.
- Inventory was $104.0 million, down from $110.4 million; days of inventory fell to 165 from 187 at year-end. Accounts receivable were $105.9 million, up from $94.0 million; days sales outstanding were 50 versus 49.
Material changes versus the prior comparable period
- Gross margin expanded by 1.2 percentage points in Q3 and 1.7 points for the first nine months. Management attributed the improvement to its gross-margin expansion strategy.
- Industrial and Automotive revenue grew 28% in Q3 and 45% year to date, led by broad industrial adoption, including automation and robotics, and automotive ADAS and infotainment designs. Communications and Computing revenue fell 6% in Q3 and 5% year to date, primarily on softer wireless and wireline infrastructure demand; datacenter demand partly offset weakness. Consumer revenue was nearly flat in Q3 but down 24% year to date.
- Nine-month revenue from Asia fell to $342.1 million from $350.3 million, while Americas revenue rose to $107.8 million from $67.0 million and Europe to $116.7 million from $67.1 million. China represented 31% of nine-month revenue, down from 48%.
- Research and development expense increased 20.8% in Q3 and 18.8% year to date, reflecting headcount-related costs, stock compensation and R&D equipment. Management said it expects to continue increasing R&D investment. Nine-month stock-based compensation was $52.4 million, versus $41.2 million.
- Income tax expense increased to $4.1 million in Q3 from $0.4 million and to $9.1 million year to date from $2.4 million, primarily due to higher worldwide income and U.S. tax on foreign operations.
Outlook, risks, contingencies and unusual items
- Management said cash, operating cash flow and credit facilities should be sufficient for liquidity and working-capital needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management cited macroeconomic and market uncertainty, including inflation, rising rates, recession concerns, financial-market volatility and geopolitical tensions, as possible sources of demand, labor-market and supply-chain disruption. It also identifies trade restrictions and tariffs, China-related conditions, conflicts and public-health events as risks.
- Distributor dependence is substantial: distributors generated 90% of Q3 revenue and 89% year to date. The two largest distributors represented 41% and 27% of net receivables at September 30, 2023.
- A newly approved Q3 2023 restructuring plan included a targeted workforce reduction; approximately $1.5 million of costs had been incurred by September 30. The plan is expected to be largely complete by the end of fiscal 2024.
- In a pending Oregon lawsuit relating to products sold around 2008, plaintiffs seek $180 million, punitive damages and other remedies. Lattice says it believes the claims are without merit and intends to defend them; it cannot estimate the likelihood or amount of potential exposure.
- The SEC approved a settlement of an administrative proceeding concerning late reporting and disclosure of certain officer and director transactions. Lattice agreed, without admitting or denying the allegations, to a $185,000 civil penalty and cease-and-desist relief; it reported remedial steps and said the transactions have been disclosed.
- The company repurchased $30.0 million of shares during the first nine months under a program authorized through December 2023, with $99.7 million remaining as of September 30. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting period: the supplied filing is Q3 2023, despite the request metadata indicating Q3 2022.
- Track whether softer communications demand and year-to-date consumer weakness continue, and whether industrial and automotive growth offsets them.
- Monitor distributor and receivables concentration, particularly the exposure to the two largest distributors and to China and broader Asia.
- Review the $180 million lawsuit’s developments and potential exposure; the filing provides no clear estimate of loss likelihood or amount.
- Check progress and costs of the workforce restructuring, continued R&D and stock-compensation growth, and the status of the expiring share-repurchase authorization.