This Little-Known Semiconductor Company Can Generate Sizable Returns

You may or may not have heard of Lattice Semiconductor (NASDAQ: LSCC  ) , but the company has done well this year. Lattice makes programmable chips that are supplied to different end markets such as mobile, communications, automotive, industrial, etc. The second-quarter results released in July saw Lattice post record revenue.

However, Lattice has gradually lost momentum after spiking in January, and its year-to-date gain is now just 12%.

LSCC Chart

LSCC data by YCharts

Shares jumped in January after Lattice posted better-than-expected results. However, at that time, revenue was shrinking and Lattice had posted a loss on a non-GAAP basis. Cut to the present and things look a lot better.

On a stronger footing
Lattice grew revenue almost 20% on a year-over-year basis in the second quarter, reporting $84.7 million. Also, its net income improved to $0.04 per share in the quarter from a net loss of $0.11 per share in last year’s period.

The company's guidance for the ongoing quarter also turned out to be decent. Revenue is once again expected to grow 20% from the year-ago quarter when Lattice reports results next time. These improvements indicate that Lattice's end markets are doing well and the company's products are finding traction.

More importantly, Lattice's new products seem to be gaining momentum. New products accounted for 46% of total revenue and witnessed robust growth of 41% sequentially. Lattice claims to have designed the "smallest FGPA form factors on the planet" and this has probably helped it win over more mobile customers. FGPA, or field-programmable gate arrays, are integrated circuits that can be configured by a customer after manufacturing.

Lattice’s management also claimed to have recorded design wins at several mobile handset companies. Also, the communications end market, which accounted for 46% of total revenue in fiscal 2012 and was the reason behind Lattice's weak performance, seems to be making a comeback. 

Communications on a roll
The majority of Lattice's revenue comes from telecommunication equipment providers, including the two major telecom equipment companies in China. Hence, it is not surprising to see that Lattice's communications business is getting back on track. The build-out of the TD-LTE network in China by China Mobile (NYSE: CHL  ) seems to have provided a boost to Lattice as it counts Huawei, and possibly ZTE also, as a customer. 

Huawei expects $2 billion in revenue this year through sales of its 4G equipment. Both Huawei and ZTE have together won more than half of the initial 4G contracts worth $3.2 billion doled out by China Mobile, as reported by Reuters.

Now, things could get even better as China Mobile is expected to boost its capital expenditure by around 50% this year to $30.5 billion, according to China Daily. The telco giant is planning to build 207,000 base stations in 31 provinces. So, the deployment of 4G in China would probably be a big catalyst for Lattice as its major customers win tenders from China Mobile. In addition, Lattice is also witnessing an uptick in telecom spending in North America as well.

Small-cell opportunity
Lazard Capital Markets analyst Ian Ing (via Barron's) is of the opinion that Lattice is also well-positioned to benefit from the deployment of small-cell wireless base stations. These base stations improve the performance of 4G networks. Ing believes that Lattice has got good exposure at Cisco (NASDAQ: CSCO  ) to benefit from small cells.

Cisco has made some notable moves to strengthen its position in femtocells and small cells. It had purchased Ubiquisys earlier this year for $310 million, following its acquisition of Intucell and BroadHop in January. The Ubiquisys acquisition has enabled Cisco to further fortify its position in small-cell technologies. Ubiquisys had around 70 customers on its books, including the likes of T-Mobile, Google, SFR and SoftBank.

The deployment of these small cells is important to improve the efficiency of the 4G network. That's why the likes of Verizon and AT&T have been adding small cells in urban areas as they focus on making their network better.

The bottom line
Strength in Lattice's communications business has helped the company recover and it has reported good growth of late. Looking ahead, analysts expect earnings to improve a massive 75% in the next fiscal year ending December 2014. In addition, at a forward P/E of around 13.5, investors won't be paying too much for Lattice's expected growth. As such, Lattice may be a good investment at its current price.

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