The semiconductors industry has been hit badly by the Covid-19 lockdowns. The halt in manufacturing activity and the reduced demand at the consumer level have had significant effects on companies within this space.
The impact of these factors has started becoming visible on company financials too. For example, Lattice Semiconductor Corp (LSCC, Financial) recently released its results for the first quarter of 2020, and its numbers definitely took a hit, especially in the consumer segment in Asia.
However, due to highly diversified businesses including software offerings and large B2B offerings, the company’s stock has shown signs of recovery. In my opinion, this is a good stock to hold on to, despite the industry headwinds.
Company overview
Lattice Semiconductor Corp is an Oregon-based developer of semiconductor technology that is distributed through products, solutions and licenses. The company was founded in 1983 and employs close to 747 people today as a leading player in the semiconductors market.
Lattice's product lines include programmable logic devices, video connectivity application-specific standard products and wave devices. It provides both semiconductor devices and software through a Software-as-a-Service (SaaS) model.
The company's product offerings enable customers in the consumer market to build technology that utilizes more computing power, higher resolution video and reduced energy consumption. Lattice also offers field-programmable gate arrays (FPGAs) that consist of five product lines: ECP, MachXO, iCE40, CrossLink and power and thermal management products. These products have applications in electronics such as mobile devices, set-top-boxes, UHD TVs, home theater systems, PCs, projectors and monitors.
Key customers include original equipment manufacturers (OEMs) in the communications, computing, consumer, industrial and automotive end markets.
1st-quarter results
Lattice recently disclosed earnings results for the quarter ended March 31, in which it underperformed slightly on the revenue front but managed to deliver an earnings beat.
The company reported revenue of $97.32 million, which was below the analyst consensus estimate of $98.29 million and marked a rare quarter where the top-line dropped as compared to the corresponding quarter of the previous year. The drop in revenue was mainly in the Asia region, which was deeply impacted by the pandemic during the quarter and which represents the region in which the company has the highest sales concentration. Lattice's consumer segment was the worst affected, and management claimed that there was a 3% negative impact caused by the pandemic.
However, the company did manage to deliver a stronger bottom-line with earnings per share of 15 cents, which was above the analyst consensus estimate of 14 cents. Margin expansion, especially at the gross level, has been a key point that CEO Jim Anderson and the management highlighted in their earnings calls.
New products
Lattice Semiconductor went ahead with the launch of its new Nexus FPGA platform around December 2019 with a new line of FPGA chips. The platform has been created for power efficiency, which enables significant power reduction for Lattice’s customers across a broad range of applications. The management claims the product offers better performance compared to the competition in applications that require video connectivity, such as AI and embedded vision. I believe these FPGA chips are going to be a major catalyst for revenue growth in the future.
The company also has an impressive line of new software offerings such as its sensAI stack for AI inferencing at the network edge. At the Nexus event, the company announced the CrossLink-NX, a Nexus product that is optimized for embedded vision with potential applications such as biometrics, security and machine vision. The management is looking to launch two additional Nexus products in 2020.
Additional considerations
In the above chart, we see a large dip occurred in Lattice Semiconductor’s stock price when the pandemic crisis hit financial markets. However, prices have already climbed past the previous high for a 69% increase year to date.
Lattice Semiconductor is a fundamentally strong company. With an operating margin of 14.6% and a net margin of 10.8%, it easily has one of the best margin profiles in its industry. Its debt levels are also well within control with a cash-debt ratio of 0.81. The low gearing implies relatively low risk and is the reason why the company’s beta is almost 1.
Management has consistently been re-investing its profits back into the business for new innovations and growth, which is the reason why the company is not paying a dividend. However, with such strong fundamentals and such a remarkable recovery in a market that is generally not very positive for chipmakers, I think Lattice Semiconductor continues to be a solid growth play.
Disclosure: No positions.
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