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Edited Transcript of LSCC earnings conference call or presentation 11-Feb-20 10:00pm GMT

Q4 2019 Lattice Semiconductor Corp Earnings Call

HILLSBORO Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Lattice Semiconductor Corp earnings conference call or presentation Tuesday, February 11, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Robert Anderson

Lattice Semiconductor Corporation - President, CEO & Director

* Rick Muscha

Lattice Semiconductor Corporation - Senior Director of IR

* Sherri R. Luther

Lattice Semiconductor Corporation - CFO & Corporate VP

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Conference Call Participants

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* Alessandra Maria Elena Vecchi

William Blair & Company L.L.C., Research Division - Research Analyst

* Charles Lowell Anderson

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

* Christopher Adam Jackson Rolland

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Hans Carl Mosesmann

Rosenblatt Securities Inc., Research Division - Senior Research Analyst

* Joshua Louis Buchalter

Cowen and Company, LLC, Research Division - VP & Research Associate

* Mark John Lipacis

Jefferies LLC, Research Division - MD & Senior Equity Research Analyst

* Richard Cutts Shannon

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Tristan Gerra

Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. (Operator Instructions) I would like to welcome everyone to the Lattice Semiconductor Fourth Quarter Fiscal Year 2019 Earnings Release Conference Call. Later, we'll conduct a question-and-answer session. (Operator Instructions) A replay will be available approximately 2 hours after the call today. The replay dial-in number is (404) 537-3406. The conference ID number is 8176926. The replay will be also accessible on Lattice website at latticesemi.com.

I would now like to turn the call over to Rick Muscha. Please go ahead.

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Rick Muscha, Lattice Semiconductor Corporation - Senior Director of IR [2]

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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 will provide a financial and business review of the fourth quarter of 2019 and the business outlook for the first quarter of 2020. If you have not obtained a copy of our earnings press release, it can be found in 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 and that actual results may differ materially. We refer you to documents 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 first quarter of 2020. 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.

Some financial information presented by us during the call will be provided on both a GAAP and a non-GAAP basis. 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. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. 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 President and CEO.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [3]

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Thank you, Rick, and thank you, everyone, for joining us on our call today. As I reflect back on 2019, my first full year with Lattice, I want to thank all of our customers, our partners and investors for supporting us as we began transforming Lattice and putting the company on a much stronger trajectory. I'd also like to especially thank my Lattice team. I deeply appreciate all of your hard work and dedication. While we made good progress to date, I'm even more excited about where we're headed.

Highlights from our full year of 2019 included significant improvements across our key financial metrics. For example, non-GAAP gross margin expansion of 210 basis points year-over-year as we began execution of our product cost reduction strategy and our pricing optimization strategy. Non-GAAP net income increased 88% year-over-year as we optimized our spending and refinanced our debt to reduce our interest expenses. And we delivered much stronger cash generation in 2019 as we more than doubled our cash flow from operations on a year-over-year basis.

In addition to the improvements in our financials, over the past year, we've established and executed on a much stronger product road map. We've begun delivering products on a faster, more predictable cadence with a great example of this being the launch of our Nexus platform this past December, ahead of schedule. Over the past 12 months, we've also dramatically increased the depth of our engagement across our key strategic customers. We're encouraged with our progress in 2019, but we have much more work to do as we realize the full potential of Lattice.

Let me now provide an overview of our business by end market in 2019. In the communications and computing market, revenue increased 27% year-over-year as we experienced strong growth in this segment throughout the year. In computing, we continue to benefit from customer adoption of our products that are used in both server and client computing platforms. For example, in servers, we're benefiting from increased attach rates and higher ASPs versus the prior server generation. And we're working closely with our key server customers to add more value to their future platforms by providing increased hardware security functionality.

In the communications market, we're benefiting from 5G infrastructure deployments. We saw a healthy growth in 5G revenue in 2019, and we expect revenue to continue to grow as the 5G wireless infrastructure build-out progresses over the coming years.

Turning now to the industrial and automotive market. Revenue declined only 4% in 2019, despite the challenging macroeconomic climate and trade tensions that impacted this segment. We continue to believe this segment will remain a long-term growth vector for us, given the breadth of applications that we serve, including robotics, factory automation, embedded vision and the increasing level of electronic content in autos.

Turning now to the consumer market. Revenue declined 25% in 2019 as a result of both demand softness related to macroeconomic conditions and a continued shift in our revenue mix towards our other market segments. Within consumer, our focus is on applications with multiyear revenue streams and higher profitability, where our solutions add value by enabling customers to differentiate their products.

I'll now shift to some highlights of our recent product road map execution. In late 2018, shortly after I joined Lattice, we went through an extensive R&D portfolio optimization process, where we eliminated low-return programs and concentrated our R&D investment on the most strategic and highest-return programs. In the second half of 2019, we started to see the benefit of this optimized product strategy. And we expect to further benefit from this over the coming years. For example, our CrossLinkPlus product, which was launched ahead of schedule in Q3 of 2019, quickly entered production and generated meaningful revenue for us in Q4. We continue to be pleased with the customer adoption and expect this product to continue to ramp.

Another example of our accelerated road map cadence is the launch of our Nexus platform ahead of schedule this past December. The Nexus platform has been architected for power efficiency, which enables a significant power reduction for our customers across a broad range of applications. In addition to up to 75% better power efficiency compared to our competitors, we also demonstrated significantly better performance in applications such as AI and embedded vision. We're very pleased with the broad customer attraction on our Nexus platform.

I'm also pleased to announce that as part of our strategy to increase our investments in application-specific software solutions, we'll be launching the first version of our embedded vision stack in late February. This is another proof point of the comprehensive build-out of our software solutions portfolio. Also, we remain on track for the launch of our security solutions stack targeted for the second half of 2020.

In summary, 2019 was an important year for us, and I'm very pleased with the progress we made. We've strengthened our product road map, accelerated the cadence of new products and deepened our relationships with key customers in all verticals, while driving major improvements in the company's financial results. As we begin 2020, our team is energized and focused on executing our strategy for sustained long-term growth and profitability.

I'll now turn the call over to our CFO, Sherri Luther.

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Sherri R. Luther, Lattice Semiconductor Corporation - CFO & Corporate VP [4]

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Thank you, Jim. In 2019, we are pleased that we delivered significant profit expansion, record cash generation and a further delevering of our balance sheet. We continue to make substantial progress towards the long-term financial model we communicated at our Investor Day.

Let me now provide a summary of our results. We achieved fourth quarter revenue of $100.2 million, down 3.1% sequentially but up 4.4% year-over-year. Revenue growth in industrial and automotive was offset by sequential declines in communications and compute as well as consumer. Gross margin on a GAAP basis was 59.2% compared to 59.4% in the third quarter and up from 56.6% in the year ago fourth quarter. Our non-GAAP gross margin was 59.6% compared to 59.8% in the prior quarter and up from 56.7% in the year ago fourth quarter.

In Q4, our product margin increased, offsetting some of the reduction in gross margin from lower IP revenue compared to Q3. For the full year 2019, gross margin on a GAAP basis expanded to 59%, up 400 basis points from 2018. Our non-GAAP gross margin for the full year 2019 was 59.3%, up 210 basis points from 2018. The gross margin improvement in the year demonstrates meaningful progress as we continue to execute on our product cost reduction and pricing optimization strategies.

Q4 GAAP operating expenses were $43.8 million compared to $44.8 million in the third quarter. On a non-GAAP basis, operating expenses were $35.3 million compared to $35.9 million in the third quarter. As a percentage of revenue, operating expenses were approximately 35% in Q4, which is consistent with our target model. In Q4, R&D increased to 18% of revenue, while SG&A was approximately 17% of revenue. For the full year 2019, GAAP operating expenses declined 19.4% from $222.6 million in 2018 to $179.4 million in 2019. On a non-GAAP basis, operating expenses for the full year 2019 declined approximately 10.5% to $144.7 million. We continue to focus on driving SG&A efficiencies to achieve our target model, while prioritizing investments in support of our product pipeline and growth opportunities.

EPS was flat sequentially in Q4 with Q3 2019. For the full year 2019, GAAP EPS improved to $0.32 per share from a loss of $0.21 per share in 2018. EPS on a non-GAAP basis increased to $0.59 per share from $0.33 per share.

Driving cash flow generation continues to be a key area of focus for the company. For the full year 2019, we generated a record $124 million in cash from operations, more than doubling the cash generation in 2018. We ended the year with a cash balance of approximately $118 million. At our Investor Day, we detailed our plan to actively delever the balance sheet. In 2019, we made $117 million in total debt payments. As a result, our non-GAAP debt leverage ratio, as defined in the credit agreement, is now 1.3 as compared to a leverage ratio of 3 at the end of 2018.

Let me now review our outlook for the first quarter. Revenue for the first quarter of 2020 is expected to be between $96 million and $104 million. Gross margin is expected to be 59.5% plus or minus 1% on a non-GAAP basis. Total operating expenses for the first quarter are expected to be between $36 million and $37 million on a non-GAAP basis.

As we begin 2020, we are excited about the opportunities in front of us. We remain committed to expanding our profitability and increasing our cash flow generation to build additional value for Lattice and our shareholders.

Operator, we can now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Charlie Anderson from Dougherty & Company.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [2]

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Congrats on a really solid year. I wanted to start with the guidance. It's a little bit of a wider range than last quarter. So I wonder maybe if you could kind of speak to what went into that. And I'm assuming this was maybe part of it, just the coronavirus impacts that you're assuming you're going to be dealing with here in Q1, whether it be on demand side or disruption side, what have you? And I've got a follow-up.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [3]

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Yes. Thanks, Charlie. Yes, that's exactly right. So we did widen the range for the revenue guidance slightly. On the gross margin and OpEx ranges, we left those similar to prior quarters. But on revenue range, we widened it slightly. And you're right, it's related to potential uncertainty around the coronavirus. And we just thought it would be prudent to widen the range just a little bit. And then you had a follow-up, Charlie?

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [4]

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Yes. Nexus came out towards the beginning of December. I know it's only been a couple of months here now, but I wonder, maybe, Jim, if you could kind of speak to the initial traction that you're seeing? I know you'd hope to potentially get some revenue by the end of the year but maybe more so next year. Just kind of update us on how that's going so far.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [5]

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Yes. Great. Yes, as you know, we launched our new Nexus platform in December of last year. Actually, it was originally scheduled to be launched the first half of this year, but our engineers were able to execute ahead of schedule, and we were able to launch in December, which I'm very happy about. And I want to thank, again, the Lattice engineers for all their hard work on that. As we talked about in December, initial customer traction has been very strong. We have over 65 customers that are engaged with the Nexus platform. We've got over 35 or so customers that were part of our early access program. And so we've had quite strong engagement. I think that really speaks to the competitiveness of the platform. Nexus is a full grounds-up rebuild of our FPGA platform both from a hardware and a software perspective. We launched the very first device in the family in December. When we look at that versus competitor devices, what we're measuring is up to 75% better power efficiency. And for our customers, that's a big deal. That's a meaningful difference and a big competitive advantage. And so yes, we're quite pleased with the customer traction. We've -- as we also shared in December, we plan to introduce a couple of additional Nexus devices throughout this year 2020, targeting a new device launch in the first half of this year and another one in the second half of this year. So yes, customer traction, we're quite pleased with.

And then you mentioned revenue expectations. Yes, I would still say for this year, we may see a little bit of revenue from the Nexus products towards the end of this year but would expect the ramp to be more material in 2021 next year.

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Operator [6]

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Our next question comes from the line of Mark Lipacis from Jefferies.

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Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [7]

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I had 2. On -- the first, on the comms, compute, it looks like -- was it down sequentially? I guess, if I looked at Intel and AMD, it seemed like they had pretty solid sequential growth in the fourth quarter. So I was just trying to reconcile the difference between the 2. That's the first question. And then I had a follow-up.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [8]

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Sure. Thanks, Mark. Yes, there was a decline in comms & compute sequentially from Q3 to Q4. I will point out that on a year-over-year basis in Q4, if you go Q4 to Q4, I think the growth was about 18% year-over-year. And then that segment grew, I think, 27% year-over-year for full year. But we did see a sequential decline. If you look within that segment, actually the computing portion of that segment was relatively flat Q3 to Q4, and the decline was primarily driven by communications. We saw a drop-off in demand across a number of communications customers.

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Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [9]

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Okay. That's really helpful. And then on the Nexus platform, what kinds of customers or applications are you seeing the most interest? Where do you think you'll see the most success in that as you start to ramp?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [10]

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Yes. Thanks. Great question. We're seeing customer adoption and traction across all markets. We're seeing some nice early access, customer activity around industrial, things like industrial automation, robotics, automotive electronics, comms, compute, consumer. Basically, all of our segments, we have customers -- customer traction that's active. The competitive differentiation or the value that Nexus brings, especially around power efficiencies, so I mentioned earlier, up to 75% better power efficiency relative to our competitors, that's really compelling to customers across multiple markets, especially when you're talking about edge computing applications, IoT, industrial IoT or inference at the edge of the network. And so yes, we're pleased with the customer traction, and it's pretty broad spread across multiple different markets.

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Operator [11]

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Next question comes from the line of Tristan Gerra from Baird.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [12]

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As your gross margin outlook is now fairly close to 60%, what are the gross margin levers for this year and before the ramp of Nexus? And then also, if you could talk about to the other operating margin levers for this year.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [13]

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Yes. Thanks, Tristan. So first of all, on gross margin, I'll take you back to our Investor Day in May of last year. And just as a reminder, that our long-term business model is to be at gross margin levels that are above 62%. We're very focused on that goal and have plans in place to drive towards that goal over the coming years. I would say that the gross margin improvement that we're driving comes across 3 categories. First category is pricing optimization. This was a strategy that we built out actually at the end of 2018, and we've started implementing in -- at the beginning of 2019. And that's about really pricing our products, I would say, really optimally in the market, really getting the fair value for our products -- product pricing in the market.

And then we had a second strategy, your second category of product cost reductions. Again, we have built out a pretty comprehensive strategy end of 2018, started executing that in early 2019. That yielded benefit for us in 2019. We're expecting that to continue moving forward. And that's about driving just a constant treadmill of reductions in our product costs.

And then the third category is, as we shared at the Investor Day, was over the coming years, we're expecting growth to primarily come from our industrial and auto segment, our comms & computing segments. Those -- as the growth comes from those segments and our mix shifts towards those segments, that naturally provides some gross margin uplift in terms of mix shift. So those are really the 3 categories that we're driving over time to achieve that over 62% gross margin target.

And then in terms of some of the other operational things that we're focused on, we continue to focus on OpEx, for instance. Now we are at -- approximately at our target model. So for total OpEx, our target model is 35% of sales. We're at about that in total. But if you look within that, at R&D and SG&A, we're a little bit underneath our target of running R&D at about 20%, and we're a little over our target of running SG&A at 15%. So on SG&A, we have some work we still need to do. That will come from direct dollar cost reductions as well as better scale as the revenue grows. And on R&D, we can expect over the coming quarters for R&D to increase in a gradual, careful way as we continue to invest in our product line. So that would be kind of what to expect on OpEx. And then Sherri, maybe you want to add a -- or assuming that this year, some improvements in terms of interest expense, maybe you want to comment on that?

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Sherri R. Luther, Lattice Semiconductor Corporation - CFO & Corporate VP [14]

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Yes. Before that, I'll just add that in terms of SG&A, that in 2019, we ended the year with SG&A at 17.7% of revenue, which is down quite significantly from 2018, which is 21%. So lots of progress made, but as Jim mentioned, we've got more work to do to get down to our target level for SG&A.

Operationally, you'll also notice in Q4, we had some favorability in interest expense. And that's because in Q3, we really locked into the lowest interest rate tier for our debt. And so in Q4, you saw a full quarter's benefit of that. So you'll continue to see that benefit into 2020 from the lower interest rate. So that's pretty exciting.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [15]

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Thanks, Sherri.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [16]

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And then any color on the end market trends quarter-over-quarter embedded in your Q1 guidance?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [17]

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Yes. A little bit of color on Q1 guidance. If you take the midpoint of our Q1 guidance, it's roughly flat Q4 to Q1. But within that, we would probably expect consumer to be down a bit. Typically, consumer is a bit seasonally down from Q4 to Q1. And we would expect that to be offset by the industrial, automotive, comms & compute segments.

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Operator [18]

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Next question comes from the line of Alessandra Vecchi from William Blair.

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Alessandra Maria Elena Vecchi, William Blair & Company L.L.C., Research Division - Research Analyst [19]

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Congratulations on a wonderful quarter. I just want to touch base on the CrossLink platform or I should specify CrossLinkPlus. I think in the past, you had said you expected initial revenue in Q4. I was just wondering how that was trending, how adoption was looking. And really, how we should think about the contribution there as we move out into 2020 and beyond?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [20]

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Yes. Thanks, Alex. So CrossLinkPlus product, if you recall, we launched that in Q3 of last year. In fact, that was another product that we actually launched a bit ahead of schedule. The engineering team did a great job executing on that and was able to launch in Q3. And then we started to ramp that product actually very quickly. We ramped it -- started ramping in Q4 and did generate a meaningful amount of revenue in Q4, which I'm quite pleased by. Our product engineering team did a great job getting that into the market, and there were some really strong initial customer demand for that. We expect that product to continue to ramp this year and into the following years. So it's really a nice, unique product with some unique capabilities, and we've seen a strong customer adoption and traction for that.

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Alessandra Maria Elena Vecchi, William Blair & Company L.L.C., Research Division - Research Analyst [21]

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Super. And then similar, in the same vein, just on the MachXO3D, I think you guys initially have been targeting server customers and were sampling at quite a few there. Any sort of early traction or feedback or samplings or on the client side?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [22]

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Yes. So we've seen the initial traction and focus is primarily on the server side, as you mentioned, and we're quite pleased with that progress. We launched that product last year. We expect that product to enter meaningful production this year and to start to ramp into production in server platform. So we're excited about that. And yes, you're right, that product, what that does is provide hardware-level security or platform root-of-trust. That is applicable beyond the server platform. That could be used in client devices. That could also be used, for instance, in networking platforms, anywhere where you want to provide very basic hardware-level root-of-trust security in a platform. And so we're pursuing those applications as well. Probably a little bit early for me to comment more specifically on that, but we're certainly engaged in those opportunities also.

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Alessandra Maria Elena Vecchi, William Blair & Company L.L.C., Research Division - Research Analyst [23]

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Perfect. Just lastly, more out of a curiosity since you guys have been delivering ahead of schedule on products. Was the embedded vision stack -- I know you had talked about on the December event, 2 new software stacks coming this year. Was the embedded vision went a little bit earlier than expected? Or was this sort of in line with your thoughts?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [24]

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Yes. It was about -- it was a month or 2 ahead of schedule. We really pushed the team. Yes, we were really pushing the team to be ready for Embedded World, and Embedded World happens at the end of February. And so yes, we wanted them -- we wanted to basically roll out that software stack at Embedded World. And that's the schedule that we're currently on. So yes, it was a bit ahead of schedule, which we appreciate from the engineering team.

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Operator [25]

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Next question comes from the line of Matt Ramsay from Cowen.

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Joshua Louis Buchalter, Cowen and Company, LLC, Research Division - VP & Research Associate [26]

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This is Josh Buchalter on behalf of Matt. Congrats on the results. It was nice to see the return to year-over-year growth the last couple of quarters. As we start thinking about moving towards that double-digit target over the next few years, how much would you say is dependent on new product traction from Nexus portfolio build-out versus mix away from legacy consumer or any type of end demand recovery that's embedded in those expectations?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [27]

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Thanks, Josh. Yes, I would remind you that it's not just Nexus that we launched last year. But we actually launched a couple of important products ahead of that, which we've already mentioned a little bit on this call, which is MachXO3D, remember, we launched that in the first half of 2019. And that's the product that's providing platform root-of-trust security in applications like servers and then CrossLinkPlus, which we talked about. We expect those products to help drive revenue in 2020 and beyond. And then Nexus would come along a little later in time. But yes, we remain focused on our long-term business model goal, which is to get to that low double digit, consistent, sustainable revenue growth. And certainly, with the new products that we're launching like the CrossLinkPlus, MachXO3D, the Nexus, the different Nexus products that'll come out this year as well as the software stacks that we're rolling out this year will help contribute and solidify that growth in the future.

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Joshua Louis Buchalter, Cowen and Company, LLC, Research Division - VP & Research Associate [28]

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That's helpful. And then you guys put up a pretty decent number in the industrial and automotive year-over-year growth. We heard from some of your peers that there was -- they're seeing signs of end market stabilization, some said recovery. I guess, how would you characterize it as you're seeing it? Is it more of a macro trend or new product traction that you would say is driving the year-over-year growth?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [29]

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Yes. Thanks, Josh. I would say that if you look at our results in industrial, auto in 2019, certainly, we were impacted by the same macroeconomic slowdown or softness that was pretty broad-based across that sector that other companies were affected by as well. But we do have some Lattice unique growth drivers within that segment that helped us, I think, perform a bit better than the rest of the industry. Just some examples of that would be industrial automation, industrial robotics, industrial safety applications as well as just a number of different automotive electronics applications. So there's some nice design wins and customer engagements that we have in there that are helping us perform, I think, a bit better than the general market. And as we mentioned at our Investor Day back in May of last year, we do believe this is a long-term growth market for us over the coming years. It's really this market, industrial, auto as well as comms & compute that are primary growth factors over the coming years.

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Operator [30]

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(Operator Instructions) Next question comes from the line of Christopher Rolland from Susquehanna.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [31]

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The long-term model is shooting for double digits here. 2019 was obviously pretty challenging for everybody. But do you think you can hit that double-digit outlook for 2020? And perhaps talk about kind of the products that build to help you get there.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [32]

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Thanks, Chris. Yes, we remain committed to our financial model that we put out at that May investor meeting. And not just the revenue growth, but as I mentioned a little earlier in the call, we also put out goals around gross margin expansion and expansion of operating income as well. And so we remain committed and focused on all of those goals. On the revenue growth, in particular, yes, the model that we put out was to achieve low double-digit revenue growth in the outer years. There's a number of different contributors to that both from a market perspective and from a product perspective. From a market perspective, it's really comms & compute, industrial, auto. Within comms & compute, it's server and client computing platforms helping drive that growth as well as 5G wireless infrastructure build-out. We're still in the very early stages of 5G infrastructure build-out. We have a good position across multiple OEMs in that application. As -- and as 5G wireless infrastructure is built out over the coming years, we expect that to be a growth area for us.

And then in industrial and automotive, it's some of the things that I mentioned earlier, industrial automation, automotive electronics. And really, the products that will help drive that are some of those products that we launched just this past year. MachXO3D, for instance, is used in servers and will help drive our growth in the computing space. The CrossLinkPlus product, it's actually used across a wide variety of different applications, end markets. And then Nexus as well, our brand-new FPGA platform, for which we'll be rolling out new family members over the -- this year as well, that will help drive growth across those segments as well. And so there's really quite a number of different growth vectors across those markets.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [33]

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And then one clarification and a question as well. The clarification is around compute. Intel had pretty strong guidance here and AMD as well. Just wondering why compute was flat.

And then for kind of a follow-up question. Sherri, you're pretty close to getting to net cash at some point here. And so in terms of the balance sheet, how do we think about what you're going to do with some of that cash? Or are you guys -- have you thought about a dividend? Is that too early in your kind of growth process here? Or is it more about acquisitions? Are you looking for tuck-ins in the FPGA space or other areas of adjacency? Just any color there would be great.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [34]

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Yes, Chris, on your first question around compute in Q4 and sequentially from Q3 to Q4, I will take the opportunity to point out that on a year-over-year basis, the comms & compute segment did grow 18% year-over-year, which is not shabby growth, right? But from a Q3 to Q4 sequentially, yes, it was roughly flat. From quarter-to-quarter, demand can fluctuate. But I think we're seeing very good positive growth in that segment on a year-over-year basis. And Sherri, why don't you go ahead with the cash question?

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Sherri R. Luther, Lattice Semiconductor Corporation - CFO & Corporate VP [35]

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Sure, yes. Thanks, Chris, for the question. So yes, for Q4, we were at a net cash of about $29 million for the quarter, so pretty excited about that. But in terms of -- and of course, obviously, having paid down the debt quite substantially with a leverage ratio of 1.3, clearly paying down the debt was a key focus on top of making investments in the business and the R&D investments that we talked about as well. As we look forward, we'll continue to evaluate the best use of our cash. I mentioned in Q3 that we locked into the lowest interest rate tier. So we're already at that lowest interest rate and won't go any lower than where it is right now in our debt. But we'll continue to evaluate the best use of our cash, looking at all options, continuing to invest in R&D, evaluating whether we continue to pay down debt and other alternative uses of our cash. So all will be evaluated as we move forward.

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Operator [36]

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Next question comes from the line of Richard Shannon from Craig-Hallum.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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Maybe I'll ask a question on the comms space. You talked about computing within your bucket being kind of flat sequentially and comms down. Wondering if you can help delve into the relative trends between wired and wireless there. Was there a pause in 5G in any way? I know it's very early, but maybe you can comment quickly on how that was going in the fourth quarter.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [38]

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Yes, sure. Thanks, Richard. Yes, we did see, as I mentioned earlier, sequential decline in comms from Q3 to Q4. It was across a number of different customers, and it was across both wireline and wireless. And I do think there is a little bit of a pause or slowdown in 5G-related build-outs. We're still early in 5G wireless infrastructure builds. And so it can be lumpy from quarter-to-quarter in terms of the demand. That said, if we look at full year 2019, we were actually quite pleased with our 5G wireless infrastructure revenue, and that certainly was a contributor to the 27% year-over-year growth that we saw in communications and computing. And we remain convinced that over the long term, 5G wireless infrastructure is both a growth driver for the industry as well as Lattice, as we have good position in control plane applications in 5G wireless infrastructure across a number of different customers. So we do think that is a multiyear growth opportunity for us.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [39]

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Okay. And just a follow-up on that quickly. Jim, the near term, do you expect to see 5G wireless start to pick up here? Is that embedded in your guidance for this quarter?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [40]

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Yes. I would say in Q1, as I mentioned earlier, in consumer, we expect to be down slightly. And then the comms, compute, industrial, auto, those segments together, we would expect to be up sequentially. In general, we would expect 5G to help contribute to growth in 2020 but also beyond that as well, since the 5G wireless infrastructure build-out could be over multiple years as it rolls out across multiple geographies.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [41]

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Okay. A quick question for Sherri. Actually, a few multiple -- or a few questions here on the financials. OpEx, up a little bit sequentially into the first quarter. Is that some sort of structural increase there? Or is that more of the -- kind of the payroll taxes that come? And then from -- for taxes in nonoperating income or other income, are those expected to be kind of similar in the first quarter that you had in the fourth?

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Sherri R. Luther, Lattice Semiconductor Corporation - CFO & Corporate VP [42]

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Yes, sure. Thanks, Richard, for the questions. So for OpEx, our guide is up slightly from Q4, and that's really a function of the timing of some of our spending. We've talked about increasing our investment in R&D, for example, to get closer to our target model of 20%. So we expect to continue to make investments in R&D. The timing of program expenses will fluctuate quarter-over-quarter. So that's sort of a normal thing that you would expect to see. That's how I would look at that.

In terms of the OIE, if you look at tax expense, I think if you look at 2019, our effective tax rate was somewhere around 2%. And so that's sort of what I would look at going forward as a good way to model. And then on our interest expense, as I mentioned, Q4, you saw the full quarter impact of our lower interest rate. And so that's what you could look at going forward.

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Operator [43]

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And for our last question, we have Hans Mosesmann from Rosenblatt.

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Hans Carl Mosesmann, Rosenblatt Securities Inc., Research Division - Senior Research Analyst [44]

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Congrats, guys, for a solid year. Hey, Jim, quarter-to-quarter, as you look now into 2020, are you at the same level of cautiousness? Are you more optimistic? Are we getting out of a down cycle like some have said? If you can just give us some color of your kind of attitude as we enter 2020. And I have a follow-up.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [45]

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Sure. I think the one positive that we saw right at the end of 2019 is related to industrial and automotive. At the end of Q3 of last year, we started to see a little bit of further weakening in that sector, and then that rolled into the beginning of Q4. But towards the end of Q4, we started to see an uptick in demand. And so that was a nice indication that we may have -- that market may have stabilized, and we may have hit the bottom there, and that'll be improved moving forward. So that's one sign that we were happy to see.

But beyond that, I would say that in general, if we look across the markets, North America looks quite strong to us. The Asian market continues to be relatively soft but I would say is stable, with kind of the unpredictable element being the coronavirus, and then Europe being kind of somewhere in between there. So that's kind of the color I'd give you by end market.

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Hans Carl Mosesmann, Rosenblatt Securities Inc., Research Division - Senior Research Analyst [46]

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Yes. That's very helpful, Jim. And then my follow-up, in terms of -- since December, past 1, 2 months for Nexus, in the designs that you're being considered, are you displacing other FPGAs? Or what kind of solutions are you coming up against for Nexus in design win space?

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [47]

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Yes. Thanks, Hans. I would say it's both classic FPGA competitors. But in some cases, in some applications, we're going up against things like, for instance, microcontrollers. And so against the FPGA competitors, we're able to bring a pretty significant power efficiency advantage. The initial Nexus device that we launched in December, we showed at our launch event some real-time measured power efficiency comparisons versus our 2 primary competitors. And we were measuring up to 75% better power efficiency versus our competitor devices. And so when we engage at the customer level, that power efficiency advantage has been a big benefit to our customers and has given us some really good strong momentum against our FPGA competitors.

And then in other applications, maybe where typically an MCU has been used in the past, there, certainly, the power efficiency advantage helps. But also, it helps that our FPGAs can be programmed for parallel data pass or for parallel processing, which is very useful in artificial intelligence, inference algorithms. So the processing of inference algorithms, we've been able to demonstrate very, very good performance and especially good performance per watt, and that's helped us to displace microcontroller applications. And so I would say we're seeing kind of good traction and good competitive footing versus both those types of competitors.

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Operator [48]

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Ladies and gentlemen, that concludes today's Q&A session. I would now like to hand the call over to Lattice's President and CEO, Mr. Jim Anderson, for closing remarks.

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James Robert Anderson, Lattice Semiconductor Corporation - President, CEO & Director [49]

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Yes. Thank you, operator, and thank you, everybody, for joining us on our call today.

So in summary, 2019 was a strong year for Lattice, and we made significant progress across many fronts, with improvements in our product road map, our execution, customer relationships and certainly our financial results. And I'd like to thank again the Lattice team for all their hard work and dedication. We're starting to see the results of that hard work. But as I often remind the Lattice team, we are still in the early stages of what we believe Lattice can achieve as we continue to execute our strategy and build shareholder value. I want to say we appreciate your support and look forward to updating you on our continued progress. Operator, that concludes today's call.

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Operator [50]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.