Lattice Semiconductor Corp 2026 Q2 Earnings Call

Thank you, operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice's CEO, and Lorenzo Flores, Lattice's CFO. We'll provide a financial and business review of the second quarter of 2026 and the outlook for the third quarter of 2026, followed by a brief overview of AMI and its business model. If you have not yet obtained a copy of our earnings press release, it can be found at 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 the documents that 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 third quarter of 2026. 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. We refer primarily to non-GAAP financial measures during this call. 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.

For historical periods, we've 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. With that, I'll turn the call over to our CEO, Ford Tamer.

Thank you, Rick, and welcome everyone to our second quarter earnings call. Lattice delivered exceptional financial results this quarter, reflecting a healthy market environment, compelling catalysts, and our own strong execution. We have a focused and consistent strategy built to create durable value by growing faster than the markets we serve. We do this by expanding into new applications, serving leadership customers, delivering differentiated innovation, and driving sustainable shareholder value as a result. We are executing against each of these strategic elements. The results are increasingly visible across the business. Following last week's close of the AMI acquisition, Lattice is now positioned to deliver even greater value to customers and our shareholders. You will hear more about this acquisition shortly. First, let me update you on our second quarter results and outlook.

Revenue for the second quarter was a record $201 million, representing 18% sequential growth and 62% year-over-year growth, with strength across all our end markets. Our compute and communications end market reached another record revenue level, growing 18% sequentially and 83% year-over-year, driven by continued momentum in data center AI applications. Demand for Lattice solutions continue to be fueled by increasing CapEx, increasing AI content per server, expanding FPGA attach rates, rising security requirements, and the shift towards more complex disaggregated architectures. We also saw a continued recovery in our industrial and embedded end market, with revenue up 17% sequentially and 36% year-over-year. We see momentum building across a diverse set of end markets, including industrial automation, aerospace and defense, medical, robotics, and other emerging physical AI applications. These applications increasingly require our Lattice differentiation in low power, small form factor, low latency, and secure processing.

With channel inventory at healthy levels and multiple new design wins beginning to ramp, we expect industrial and embedded to remain an important contributor to growth through the balance of 2026 and beyond. As we had anticipated, profitability continued to grow significantly faster than revenue, with second quarter non-GAAP EPS of $0.53, representing growth of more than 120% year-over-year. This outstanding performance underscores the operating leverage we have built into the model. We expect this momentum to continue based on demand trends building across our major end markets. This is evidenced by accelerated bookings and our backlog extending well into 2027. At the same time, design win momentum remains healthy across our FPGA portfolio and end markets. As demand continues to strengthen, we remain focused on working closely with our supply chain partners to ensure that we can support our customers' growth plans.

Taken together, we expect these trends to support a sustained multiyear growth outlook. Turning now to AMI. We're pleased to announce the successful close of the acquisition last week. It brings together Lattice's leadership in low-power programmable FPGAs with AMI's industry-leading firmware and infrastructure manageability portfolio. It positions us to create the industry's most complete secure management and control platform for AI data center infrastructure. We expect that this combination can double our addressable market. In the three months since the announcement of the transaction, we have engaged with about 100 hyperscalers, OEMs, ODMs, and ecosystem partners, including many at Computex in Taiwan. Uniformly, they have all given us unequivocal positive feedback about the time to market and value that our joint solutions can provide. This reinforces our confidence that the acquisition can provide long-term value to our shareholders.

AMI is a highly attractive business with strong profitability and durable recurring revenue characteristics. As we exit 2026, we expect the business to be operating at a revenue run rate of more than $200 million, with gross margins above 75% and EBITDA margins above 40%. These metrics underscore the strength of AMI's market position, the depth of its customer relationships, and the highly efficient operating model the company has built over many years. The AMI business is well-balanced, with approximately 60% of revenue generated from its boot firmware franchise and 40% from its infrastructure manageability solutions. Revenue includes firmware licensing, royalties, and platform enablement services. This model creates strong visibility, attractive lifetime economics, and durable customer engagements across long product cycles. We see multiple avenues to grow AMI over time, winning more platforms, increasing content per platform, and expanding further into AI infrastructure and embedded markets.

This includes new trends such as rack-scale architectures, secure boot, data center manageability, and remote monitoring and control. AMI will continue to operate with the same open, silicon-neutral approach that has earned it the trust of customers and partners across the industry for decades. We are excited to welcome the AMI team to Lattice, and we have already hit the ground running together. Looking forward to the third quarter, our revenue guidance for our FPGA business of $220 million at the midpoint represents approximately 65% year-over-year growth. When adding two months of AMI revenue contribution, our revenue guidance becomes $255 million at the midpoint, putting us at over $1 billion annualized revenue run rate. This strong outlook reflects our confidence in the accelerating momentum of the business and the breadth of demand across our end markets.

The midpoint of our EPS outlook is $0.56, which reflects roughly 100% year-over-year growth. This highlights the powerful operating leverage in our model, the differentiated value of our products, and our disciplined approach to scaling Lattice. We expect that we'll be able to consistently drive earnings growth that significantly outpaces revenue growth. Looking ahead, accelerating AI infrastructure demand, the emergence of physical AI, and the addition of AMI create a powerful foundation for Lattice's next phase of growth. The secular trends fueling our business have never been stronger. We are confident that we are in the early innings of a multi-year growth cycle, and our focus is clear: deliver sustained above-market growth while converting that growth into strong earnings and cash flow to benefit you, our valued shareholders. With that, I'll turn over the call over to Lorenzo for a comprehensive review of our second quarter results and outlook.

Lorenzo. Thank you, Ford, and good afternoon, everyone.

I will begin with a review of Lattice's second quarter 2026 financial performance, followed by our outlook for the third quarter. We'll then close with a brief introduction to AMI and its business model. Q2 financial performance was exceptional, exceeding the high end of our guidance. Revenue reached a record $201 million, growing 62% year-over-year and 18% quarter-over-quarter. Earnings growth continued to outpace our revenue growth and exceeded the high end of our guidance. Q2 non-GAAP EPS at $0.53 a share demonstrated significant leverage, growing more than 120% year-over-year and 29% quarter-over-quarter. Q2 non-GAAP gross margin was above expectation at 71.7%, up 170 basis points quarter-over-quarter and up 240 basis points year-over-year. Q2 gross margin benefited from favorable product and customer mix. Q2 non-GAAP operating expense was $67.1 million, up approximately 10% sequentially and 30% on a year-over-year basis.

The sequential increase was primarily driven by continued R&D investment. Performance-based bonuses and commissions associated with our stronger revenue and profitability also contributed. Our Q2 non-GAAP operating margin expanded 390 basis points sequentially to 38.3%, while our EBITDA margin increased 340 basis points to 43%. GAAP net cash flow from operating activities for the second quarter of 2026 was $88.3 million, compared to $50.3 million in Q1. Free cash flow in Q2 was $81.3 million, with a 40.4% free cash flow margin, up from $39.7 million and 23.2% in Q1. Strong financial performance and the fact that we paid out our 2025 annual bonus in Q1 were factors in the sequential improvement of cash flow. In summary, Q2 demonstrated the strength and leverage of our financial model with non-GAAP EPS growth significantly outpacing revenue growth.