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spk03: Greetings and welcome to Lattice Semiconductor Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Mouchet, Senior Director of Investor Relations. Thank you. You may begin.
spk01: Thank you, Operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice's president and CEO, and Sherry Luther, Lattice's CFO. We will provide a financial and business review of the third quarter of 2022 and the business outlook for the fourth quarter of 2022. If you have not 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 the next results may differ materially. We refer you to 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 containing our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the fourth quarter of 2022. 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 will 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 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 lattice-semi.com. Let me now turn the call over to Jim Anderson, our CEO.
spk13: Thank you, Rick, and thank you, everyone, for joining us on our call today. We delivered strong results in Q3 with record quarterly revenue, which grew 31% year over year, and non-GAAP net income growth of 68% year over year. We're very pleased with the growth in our current product portfolio, and we're excited about the launch of our newest FPGA platform, Lattice Avant, on December 5th. Avant will double our addressable market and create new greenfield revenue opportunities for Lattice. Let me touch on a few Q3 highlights. In addition to the strong revenue growth, we expanded non-GAAP gross margin by 590 basis points year over year to a record 69.5%. We achieved record non-GAAP operating profit of 39.7%, which was an increase of 930 basis points year over year. And we continued to expand our roadmap with the introduction of an automotive version of our Sirtis Pro NX. Let me now provide an overview of our business by end market. In the communications and computing market, revenue was roughly flat sequentially and up 26% on a year-over-year basis. We remain on track to deliver our fourth consecutive year of double-digit growth for this segment. The three key long-term growth drivers in this segment continue to be content expansion in data center servers, new greenfield client computing design wins, and growth in 5G wireless infrastructure. Turning now to the industrial and automotive market, revenue increased 15% sequentially and was up 45% on a year-over-year basis. We expect this to be our third consecutive year of double-digit revenue growth in this segment. We continue to see this market as a strong long-term growth opportunity for Lattice as we address growing applications in industrial automation and robotics, as well as automotive, ADAS, and infotainment systems. Turning now to consumer, revenue declined 11% sequentially and was down 13% year-over-year, reflecting macroeconomic softness in the consumer electronics end market. Given that consumer represents only 6% of our total revenue in Q3, the revenue decline in consumer was more than offset by growth in our other segments. I'll now provide some product roadmap highlights. I'm pleased that in our most recent quarter, we launched an automotive version of our Certus Pro NX family, with market leading power efficiency, performance, and small form factor. This new product based on our Nexus platform adds to our solutions that are optimized for the automotive market, which we continue to see as a long-term revenue driver for the company. In addition to our leadership position with Nexus, we're looking forward to further expanding our product portfolio with the launch of our Lattice Avant platform. Avant will double our addressable market and will create new greenfield revenue opportunities for Lattice. We're excited to share more details at the upcoming Avant launch event. Turning now to our software strategy, we've been increasing investment in our software portfolio over the past few years. These investments are focused on making it easy for our customers to adopt Lattice products and get to market quickly. As we mentioned on our last earnings call, over half of our new silicon design wins are now enabled by at least one of our five software solution stacks. Avant will also leverage the same software that our customers are using today on our current products. In summary, while we recognize there are macroeconomic headwinds and we continue to watch demand signals very carefully, we're pleased with our continued progress and the growth of our existing product portfolio, including the continued ramp of our Nexus platform. In addition, we're excited about the launch of our new Avant platform and the continued expansion of our product portfolio. I'll now turn the call over to our CFO, Sherry Luther.
spk07: Thank you, Jim. We are pleased with our strong financial results in Q3 with record profitability driven by double-digit revenue growth and continued growth margin expansion. We remain focused on free cash flow, continue to invest in our product roadmap, and return capital to our shareholders through share buybacks. Let me now provide a summary of our results. Third quarter revenue was a record $172.5 million, up 7% sequentially from the second quarter, and up 31% year-over-year. Revenue grew double digits year-over-year in our two strategic market segments of industrial and automotive and communications and computing, more than offsetting macroeconomic weakness in consumer. Our non-GAAP gross margin increased 40 basis points to a record 69.5% in Q3 2020, compared to the prior quarter and was up 590 basis points compared to the year-ago quarter. Both the sequential and year-over-year increases in gross margin continue to be driven by strong execution of our gross margin expansion strategy, which we started in early 2019. Non-GAAP operating expenses were $51.3 million compared to $49.9 million in the prior quarter and $43.8 million in the year-ago quarter. Both R&D and SG&A expenses increased sequentially as we continue to make investments in our product portfolio and demand creation. Our non-GAAP operating margin increased 160 basis points to a record 39.7% in Q3 compared to the prior quarter and was up 930 basis points compared to the year-ago quarter. We continue to balance operating margin expansion with investments that will drive the long-term growth of our business. Q3 non-GAAP earnings per diluted share was $0.48 compared to $0.28 in the year-ago quarter, which represents 71% year-over-year growth. We are pleased with the strong cash flow generation, which continues to be a priority for us. In Q3, we drove a 41% year-over-year increase in operating cash flow. We returned $40 million of capital to our shareholders repurchasing approximately 685,000 shares, making Q3 our eighth consecutive quarter of executing share buybacks. Additionally, in August, our board of directors expanded the share buyback program with a new $150 million authorization that goes through the end of 2023. Let me now review our outlook for the fourth quarter. Revenue for the fourth quarter of 2022 is expected to be between $170 million and $180 million. Gross margin is expected to be 69.5% plus or minus 1% on a non-GAAP basis. Total operating expenses for the fourth quarter are expected to be between $51 million and $53 million on a non-GAAP basis. In closing, we are pleased with our strong results and progress and remain focused on driving further revenue growth and profit expansion. Operator, we can now open the call for questions.
spk03: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Ruben Roy with Stiefel. Please proceed with your question.
spk15: Thank you. Hi, Jim and Sherry. Congrats on another solid quarter. I wanted to start, Jim, and see if we could talk a little bit about the puts and takes around the two core segments, communications and then automotive and industrial, just sort of any detail around the quarterly quarter. performance in Q3 and then how you're thinking about, you know, those two segments relative to the guidance for Q4. Thank you.
spk13: Yeah, thanks for the question. Appreciate it. So, first of all, you know, I'm very pleased with the progress in both of those segments in Q3. If we start with comms and compute, 26% growth year over year, excuse me, flat sequentially, but great growth year over year. We continue to see really good progress in our three main growth vectors there, which are content expansion in servers, 5G wireless infrastructure, enterprise networking, as well as client computing growth. And so, yeah, I'm really happy with the performance there. As we look forward into Q4, I would expect comms and compute to be flat to sequentially up. And then in industrial and automotive, that segment in particular, we were very, very happy with the progress there. 15% sequential growth in Q3 and 45% on a year-over-year basis. You know, the growth drivers in that segment are industrial automation and robotics, as well as we had really strong performance in the automotive segment as well. And, you know, in that segment, both industrial and automotive, Lattice products are just a great fit for that market. The combination of the power efficiency, the small size, the flexibility and adaptability is just a great advantage for our customers. And we've seen, you know, very strong design wind growth in that segment and a very healthy design wind pipeline. And then going into Q4, we would expect that segment to be flat to sequentially up as well. And in fact, if you combine those two segments, comms and computing and industrial and auto, that now represents about 90% of our revenue. And comms and computing, we're expecting this year to be our fourth consecutive year of double-digit revenue growth. And industrial and auto, we expect it to be our third consecutive year of double-digit growth. And we do expect those segments to be the long-term growth drivers for the company over the coming years as well.
spk15: Great. Thanks a lot for that detail, Jim. As a follow-up, I'm wondering if we can spend a few minutes on Nexus. So we're three years into Nexus here, getting ready for the Avant launch next month. And you recently released earlier this year the fifth family of Nexus. Just wondering if you can give us a little bit of color around what customer feedback has been. One of the attributes that you guys talked about with Nexus at launch was The fact that FDSOI brought a number of inherent attributes that your customers were excited about, things like inherent low soft error rates, lower power, etc. Any detail on how you're feeling about the Nexus launch three years in? And maybe if you can give us a little bit of a preview, you talked about... greenfield revenue opportunities for Avant. Are the end markets going to look similar, would you say, or any preview on some of those greenfield revenue opportunities would be great.
spk13: Yeah, thanks. Always happy to talk about our product portfolio expansion. We're really, really happy about that. Let me start with Nexus. Really pleased with the continued progress on Nexus. You asked about customer feedback. Customer feedback is very, very good. Our competitive position on Nexus is very strong. The power efficiency is up to four times better than our competition. Great performance, really good size, physical size advantage versus our competitors. So we continue to see really strong customer engagement and momentum there. We've launched five different device families based on Nexus to date. And of those five, four are in production and ramping. And then fifth, the most recent family that we introduced, that fifth family will go into production in the first half of next year. So we have kind of a layering effect of each new family entering production and beginning to ramp revenue. And you should expect more devices on the Nexus roadmap to come as well. And I think the combination of Nexus on top of our existing pre-Nexus portfolio, I believe we have the strongest product portfolio in the company's history and we'll turn 40 years old as a company next year. But we have a great product lineup and really pleased with continued ramp of Nexus. And then, of course, goes without saying, we're super excited about Avant. Avant will launch this quarter. We have the public launch event scheduled for December 5th. Really excited to share more details about Avant at that launch event. But Avant will double our addressable market. It will move the company into an adjacent part of the FPGA market. It's completely additive to our existing products. And so as Avant enters production in future quarters, that will create a brand-new revenue stream for the company that's additive to our existing revenue streams today. Again, customer engagement, really, really good. In fact, it was customers that pushed us to invest in Avant back when we started a couple years ago. And, yeah, happy to share more details at the December 5th launch event.
spk15: Looking forward to it. Thanks, Jim, for all the detail. Yeah, thank you.
spk03: Our next question comes from the line of Christopher Rowan with Susquehanna. Please proceed with your question.
spk09: Thanks for the question, guys. This one's for Sherry. Sherry, regarding gross margin, I guess there were some puts and takes in September, some beneficial stuff, including mix. And it looks like it's carried over into December. But I was wondering if maybe you could kind of double click for us on gross margin, what we're seeing there, and whether this is sustainable or even you think you can build into 2023. Thanks. Thank you, Chris.
spk08: So we're really pleased with our gross margin results for Q3. Another record, 69.5%, 40 basis points improvement sequentially, 590 basis points improvement year over year. As I mentioned in our prepared remarks, we've been executing on our gross margin expansion strategy since 2019. So we're now in our fourth year. And as a result of that, over that period of time, we've driven 1,280 basis points of improvement in gross margin since we started this strategy. And when you look back in terms of the elements or the drivers of that gross margin expansion, it's been multiple factors. Pricing optimization has been one. New products have added value to gross margin. Mix has also been a contributor, as well as the product cost efficiencies over time has also been a contributor. So we've been able to execute on the strategy. And, you know, as we've talked before, some of those initiatives have been, you know, effective in the near term and some have been more longer term initiatives. But it's really the way that we think about things in terms of how we do business. And when you look at our guide, it's a range, right? 69.5% plus or minus 1% it's a range. And so we continue to focus on gross margin expansion just the way that we do business.
spk09: Great. Thanks, Sherry. And maybe one for you, Jim. I guess as we think about supply overall, inventories, you built inventories into September. We've seen some weakness from some other guys out there in the market. I was wondering if this has freed up some supply for you and whether you want some extra supply on top of that inventory or if you could explain why you were building inventories as well. And then lastly, as there's a little bit of slack in the supply chain, are you seeing some of those pricing pressures or are you even seeing some opportunities for better pricing moving forward?
spk13: Yeah, thanks, Chris. So first of all, on supply, we are seeing supply improve across the supply chain in general and certainly the lattice supply chain. That's actually something that we flagged on prior earnings calls that we did expect to see some incremental supply capacity in our supply chain in the second half of this year and actually going into next year as well. And so we have seen the realization of that additional supply here in the second half. And we do expect supply to continue to improve into next year as well. So we view that as very positive. We did We did intentionally grow inventory from Q2 to Q3, and that was really to support new product ramps. So as we ramp, as we were mentioning, we were talking earlier about the Nexus product ramp, as we ramp Nexus and the multiple versions of that. But even as we ramp new design wins on pre-Nexus products as well, we want to make sure that we have the inventory in place to support those new product or new design win ramps. And for us, our product life cycles are very long. And so the risk of obsolescence around inventory is relatively low for us. And so it just makes sense to us to make sure we position the right level of inventory so we're well positioned for design wind growth. And then I think the last part of your question was around pricing pressure. We've seen pretty good durability in our pricing. I think Sherry touched on pricing optimization as part of overall gross margin expansion. You know, we put as part of our gross margin expansion strategy that we started executing at the beginning of 2019. I know that may seem like a long time ago, but, you know, we had a pricing optimization strategy at the beginning of 2019 that we've continued to execute on now in our fourth year plus of executing on that. And we've seen very good durability in our pricing and I would anticipate that continuing.
spk16: Thanks guys, congrats.
spk03: Our next question comes from the line of Matt Ramsey with Cowen. Please proceed with your question.
spk05: Yeah, good afternoon, happy Halloween. Jim, I guess the first question I had was, I guess it was no surprise seeing the results that maybe a little bit of weakness in consumer the part of the computing business that touches PCs maybe a little bit weaker, but then some big upside in the auto industrial segment. So I guess the first question on that is, did you pull in supply to service some more demand on that segment in auto industrial? I'm just trying to make sure we didn't pull some stuff in there. It seems like the organic business trends remain pretty strong, but that was a big up quarter in that segment. And I just kind of wanted to check on sustainability there as we look forward.
spk13: Yeah, it was really demand driven. We've seen stronger than expected demand in industrial and auto than actually we had anticipated at the beginning of the quarter. If you recall from earnings calls that we did even a year prior, we were talking about seeing an increasing level of design win conversions from competitor design wins to us over the last couple of years. And those are now have started entering production over the last few quarters and are ramping into production. And some of those design wins have ramped faster, frankly, than we had anticipated. And so it's really a reflection of the really good demand that we're seeing in that segment. You know, as I've mentioned in the past, you know, lattice products are just a great fit for our customers in this space. And as we look forward over the long term, we continue to see this segment as a really good source of long-term growth for the company as well. The customer relationships over the last two to three years in this segment have only strengthened. And then you asked about consumer at the very beginning of your question. I just want to touch on that too. That is certainly a place that we've seen weakness in the most recent quarter in Q3. And we had some weakness and softness in Q2 as well. So we see that as certainly driven by macroeconomic overall weakness in the consumer electronics sector. So that certainly has been a weak spot in our business. But definitely in industrial and automotive, that's been an area of good strength that we've seen.
spk05: Thanks, Jim, for that. I appreciate it. Just kind of following up the question that I've gotten, in the last hour or so since the results came out, was just to ask you about sustainability, right? I mean, you guys have bucked a pretty big trend here. You've seen what's been going on around you guys in the different end markets with inflation and other competitors and companies in the ecosystem talking about certainly weakness in consumer, but that extending into certain markets of enterprise, maybe a little bit of concern on industrial. a wall of worry out there, which is totally understandable, but amazingly good results from your company tonight. I think the question that I got, and I don't know how to ask it five different ways, but the big, the nexus of the question is just your, your visibility in the order book. Have you seen anything? It's sort of the end of the order book that that's moved up or down and just thoughts about, um, visibility from here. Cause the results are really strong and a really choppy outlet and I'm really choppy macro.
spk13: Yeah, thanks, Matt. I would say, you know, first of all, we only guide the current quarter Q4 and, you know, the guidance, if you take the midpoint of our guidance, we're expecting revenue to be up slightly sequentially. But I think if you step back and look more broadly, we're certainly, you know, the company is certainly not immune to any macroeconomic softness or, you you know, demand downturns that we might see broadly across the market. Certainly, consumer electronics has been weaker. I think the industry is now experiencing a softer environment around servers, for instance, in data center, especially in the enterprise segment. So we're certainly not immune to that. You know, that said, you know, I think we are going through some new product cycles that are beneficial to the company. The combination of the Nexus ramp, even our pre-Nexus products, are doing well. And then I think within specific segments, there are particular places where the company has done well in terms of securing design wins and demand. Particular places, for instance, just one example in servers. If you look at servers over the past year, our growth has really primarily been driven by content expansion, not actually by the end of market, but really by the The expansion of the dollars of content per server and that's been driven by higher attach rates so greater number of lattice chips being used in servers over time. Also higher ASPs on our chips as customers select devices with additional content with additional software and hardware content. And that higher ASP and higher attach rates have combined to give us really good growth over multiple years in the server space. And we continue to see opportunities for new content expansion in servers as just one example. So, and we talked earlier about industrial and auto and some of the places that we see there for continued growth. So, you know, certainly cognizant of the macroeconomic pressures and the company certainly isn't immune to to the broader market trends, but I think there are some lattice-specific growth areas that we're pretty excited about.
spk05: Thank you for that, Jim. Remarkable results, and look forward to seeing you guys at the Avant launch. Thanks, Matt.
spk03: Our next question comes from the line of Alessandra Vecchi with William Blair. Please proceed with your question.
spk06: I echo the congratulations on the remarkable results in this environment. Jim, if I can just follow up on one comment you made where you alluded to new design wins ramping on pre-Nexus products. I think some investors kind of forget that the pre-Nexus products are still strong and progressing there. Is it getting a second life from some of the software attach rates or is this really just that long life product?
spk13: Yeah, thanks, Alex. Actually, great question. We really appreciate it. Yeah, I'll take any opportunity I can to talk about the pre-Nexus products as well, because we do see, we have seen strong growth of Nexus products. And actually, you're spot on on your question. The software layers that we've been adding have really helped reinvigorate some of our pre-Nexus products. Our software strategy, which we really kicked off in earnest about four years ago, was really about investing in software to make it very easy for our customers to adopt our products and get to market quickly, but also to give them software that would allow our devices to be used in maybe new applications that they hadn't been used in the past. And that applies to not just our new products, Nexus, but it applies to our pre-Nexus products too. And so, yeah, I do believe that the software that we've built over the past years has helped reinvigorate some of those products. You know, just as one example, in particular, we've invested in application software solution stacks. We now have five different solution stacks that we have brought to market. And I think those solution stacks have certainly helped extend the life and reinvigorate the DesignWin pipeline around some of those prenexus products.
spk06: Awesome. That's really helpful. And then just an extension of that question as well as Matt's, you know, some competitors or not competitors, but some other semi-companies in the last week have definitely pointed to, you know, weakening industrial, granted the industrial portion that's closer to consumer, whereas things like factory automation and robotics and vision still sound quite strong. Can you kind of split for us or at least give some color on how much of the business or how much of industrial you think tends more towards that consumer centric side versus how we normally think about lattice being leveraged to the value add portion of industrial?
spk13: Yeah, thanks, Alex. It's certainly our industrial revenue base is certainly much more weighted towards what I would call deep industrial, right? Industrial robotics, automation, Um, and definitely less weighted towards the more consumer centric, uh, industrial. And again, we, you know, we, as a company, we're certainly not immune to any general broad market trends. But as we talked about, you know, I think well over a year ago, we did say that we were starting to see real strengthening and growth in our design lens in industrial and automotive over the last couple years. Part of that, to your prior question, I think part of that was related to new software that we were bringing that was making it easier for our customers to to design our products and to switch to our devices more quickly, to design out a competitor in favor of our devices. And as we've accumulated those design wins over the past years, now you're starting to see those transfer into revenue growth. And we're quite pleased with that. We do continue to see industrial and automotive as a long-term growth area for the company.
spk06: Great. Thank you. With that, I'll jump back into Q. Thank you.
spk13: Thanks, Alex.
spk03: Our next question comes from the line of Tristan Guerra with Robert W. Baird. Please proceed with your question.
spk11: Hi, good afternoon. Just as a follow-up to a prior question, any sense or qualitative commentary you could give us in terms of the mix of Nexus as a percent of your total revenue? Are we kind of in the halfway there, or is it still early innings? Any commentary there?
spk13: Yeah, thanks, Tristan. To give you a sense of kind of where we're at in the ramp, I would characterize the stage that we're at as still relatively early, and that's because we're only in our second full year of production of Nexus-based devices, and we're still bringing out new Nexus devices that have even yet to enter production, right? As I mentioned earlier, we've launched five device families for our in-production and ramping That fifth device family, which we launched earlier this year, that'll enter production first half of next year. And so we're still building multiple Nexus devices that are entering production. And you should expect additional Nexus devices, which we have on our roadmap, to be launched in future quarters. And so we would expect Nexus to continue to ramp and become a greater percentage of revenue over time, really over at least the next few years.
spk11: Great. Thanks for the color. And then into next year, if you could talk about, you know, what percentage of your orders are non-cancelable right now, and would you expect, you know, that trend to continue in 23? I mean, obviously a lot of your end markets right now are still very, very resilient relative to peers, but just wanted to get some color as to how you're positioning your product in terms of, you know, customers thinking of in some weak areas, you know, doing push outs and, you know, how's the cancelable policies?
spk13: Yeah, there hasn't been any change in our policies around cancellations or rescheduling. You asked about NCNR in particular. I'll say that our philosophy or approach on NCNR is that's something that we only use in more specific circumstances. There would have to be a specific reason why we would ask a customer for an NCNR. It's not something that we would broadly do. And the reason is because we wouldn't want to you know, to force a customer to take a product or volume that they really don't need, because that would only delay the issue over time. Where we use NCNR is in the case where, let's say, I'll give one example. Let's say a a customer orders an unusually large quantity of a particular part that maybe is lower volume for us where we don't have a lot of other customers that use that part. And in that case, if we were going to go off and build that volume for that customer, we would ask for an NCNR order because it would exceed the normal volume for that part with other customers. So that might be a situation where we ask for an NCNR order just to give you a sense of of where we use that, but it's more in specific circumstances and instances. And then I would say, you know, with respect to, if I just look at our backlog for the current quarter Q4, very healthy level of backlog for the current quarter. You know, we're not seeing any unusual cancellations or reschedulings with respect to that backlog for the current quarter. So I think we're at a healthy level for this quarter.
spk11: Great.
spk03: Very useful. Thank you. Thanks, Tristan. Our next question comes from the line of Mark Lipsitz with Jefferies. Please proceed with your question.
spk14: Hi. Great. Thanks for taking my question. I had two. First, on Avant, Jim, can you tell us, can you give us a sense, like, how do you think Avant ramps relative to how Nexus ramps? Is Is it something that you would expect to ramp faster than Nexus or slower? Are there idiosyncrasies with one or the other that we should expect it should be better or worse? And maybe just talk about how you think production revenues ramp. Because I think it's interesting because I think you had the launch of Nexus in late 2019. So here we are three years later. with a late 2022 launch of Avant. So I think it would be interesting just to compare and contrast if you could. And I believe in the previous question, I don't know if I heard the answer, are you able to help us out? Like how big is Nexus as a percent of your revenues? Are we talking single digits, the teens? Is there any help you could give us on that just so we could benchmark Avant? And then I had a follow up, thanks.
spk13: Okay, thanks Mark. On the first part of your question around Avant and the ramp expectations, so the way we're modeling it internally in terms of timing is we're using the Nexus timing as kind of the model for what we would expect for Avant as well. So when we launched Nexus and when we brought the first device in, to market, we saw revenue start in the kind of 12 to 18 months later. And so we're using that as the same, we're expecting the same kind of time to initial revenue. with Avant as well. So with a launch this quarter, we would expect revenue from Avant to start 12 to 18 months from now. So maybe a little bit of revenue at the end of 2023 from Avant with a more material contribution into 2024 and beyond. So that's kind of how we're thinking about the timing of the revenue ramp. Now a couple, maybe just a couple things to note. that are beneficial to the Avant ramp is, first of all, the software that Avant will use is basically the same software that customers will leverage from their use of Nexus and pre-Nexus devices. So the same development environment, the same software stacks that I was talking about earlier, those are leverageable onto Avant. So that's certainly beneficial and helpful to our customers. Secondly, if you look at the customer overlap, the target customers for Avant, there's over 90% of the target customers for Avant are already customers of Lattice today. These are really existing customers that we're expanding the product line with over time. From those aspects, we feel really well positioned to drive revenue growth of Avant, but we're using Nexus as the modeling tool. baseline for a bond.
spk14: Fair enough. And then for Sherry, so the inventories did grow. Is this a new level that we should think about for inventories? Do you want to keep a higher level of inventories on the balance sheet relative to the past?
spk08: Yeah. Thanks, Mark, for the question. So we feel good about the level of inventory that we have right now. It's really to support our growing business. I think Jim talked a little bit earlier about, you know, the increase in inventories to support the growth of our business, whether it be in design wins for our customers, as well as product ramps. And we talked about the Nexus 4 devices that are ramping currently. So that's very important to make sure that we've got inventory to support those ramps. But, you know, there are other, you know, inventory levels can fluctuate, you know, depending on what's happening in the business. So that can always happen. But the other thing to note about our products that's really cool is that, you know, our products have very low life cycles. And so the risk of obsolescence is really low. And so, you know, we feel like that, you know, the inventory that we have is certainly, you know, it certainly is not perishable and has a very long life. And so that's really good as well. The other thing is that I'll just highlight is that our cash generation for the quarter was, you know, 41% year over year. So very strong cash generation. Our free cash flow is 35%. Our cash generation as a percentage of revenue for the quarter alone was about 40%. And so really, really strong cash results there. And so that's something that we'll continue to focus on as we manage the business.
spk14: Very helpful. Thank you.
spk03: As a reminder, it's Star 1 to ask a question. Our next question comes from the line of Hans Mosesman with Rosenblatt Securities. Please proceed with your question.
spk04: Thank you. Congratulations, guys. Great execution. Still on that inventory question, what are the expectations for inventories in the channel? Are you seeing any evidence of customers bringing down some inventories? Could that be impacting your business to some degree and maybe offsetting a little bit of the momentum from the new designs?
spk13: Yeah, thanks, Hans. So in terms of channel inventory, we have very good visibility on the inventory that sits with our distributors. Most of our revenue ships through distribution, and so we have good visibility there. If you look at where we ended Q3 on distributor inventory, Relative to historic normals, it's really quite on the lean side. And so we will need to replenish distributed inventory over the coming quarters, as it makes sense, because it is on the lean side. And then in terms of end customer inventory, we do have over 9,000 customers. So, you know, difficult to have perfect visibility on end customer inventory. inventory, but we do know with our strategic customers, we work closely with them to make sure they're getting the right supply from us without either building unnecessary inventory or being unnecessarily lean in terms of inventory. So we work closely with the strategic customers, and so we have relatively good visibility there. But again, in distribution, I would say we're on the lean side.
spk04: Okay, that's helpful. And then one more question. Based on the designs that you guys are working on, do you envision platforms using pre-Nexus and Nexus and Avant on the same platform, on the same board?
spk13: That's possible, Hans, but I think more likely is the usage model. Let's say that we have a particular customer that's got many different types of systems, and maybe today they use Nexus or pre-Nexus devices. on, say, a portion of their systems, let's say a third of their systems, what Devont would allow us to do is address a higher percentage of their systems and their applications. So it would allow us to move on to new systems or applications in new systems that we haven't been able to service in the past. So think about it more as an expansion in share of wallet or product coverage at the accounts.
spk12: Thank you. Thanks, Hans.
spk03: Our next question comes from the line of David Williams with Benchmark. Please proceed with your question.
spk10: Hey, good afternoon. Thanks for letting me ask the question, and congrats on the execution here, guys. Very solid. I guess, Sherry, if I could start with you, and we've kind of talked about the gross margins, but just as we kind of think about Avant, as it launches, should we expect maybe some early pressure on the ramp that improves over time? Or is there enough uplift maybe that that will offset any of the initial ramp and maybe any of the yielding issues you may see there?
spk08: Yeah, so thanks, David, for the question. So, you know, our Avant, all of our new products, Avant included, is designed to be gross margin. So that's, you know, that's one of the elements of our gross margin expansion strategy, new products, adding value. So that's the way you can think about that.
spk13: And, David, I think you shared in the past, too, that just a little bit more color is on ASPs, that Avant ASPs relative to today's product portfolio or existing product portfolio, we expect Avant ASPs to be 10 to 20 times higher than today's ASPs.
spk10: Great. Thanks for that, Jim. And, Jim, I guess now that we've got auto and industrial about 50% of revenues, How do you think that mix will trend over time? Is there an ideal mix that you think maybe gives you the best of all worlds? Or would you think that auto and industrial remains kind of this half the revenue over time?
spk13: Yeah, if I take you back to actually 2019, the first investor day that Sherry and I did, what we said in 2019 is you should really expect industrial and automotive and comms and computing to be the growth engines of the company. And we reiterated that two years later in 2021 and that's kind of exactly what you've seen over the last four years, both of those two segments growing very well. Maybe in one particular year, one segment may grow a little faster than the other segment, but overall quite pleased with the growth of those segments and they now account for about 90% of our revenues. We're pleased with that mix. We believe those Those four markets and those two segments all have long-term secular growth trends underneath those markets. And then we also believe that Lattice is particularly well-positioned to continue to grow our content, grow our revenue in those markets, especially not just with the existing products, but with the addition of Avant as we launch that this quarter and expand that product line in the coming quarters.
spk03: Our next question comes from the line of Richard Shannon with Craig Hallam. Please proceed with your question.
spk12: Thanks, Jim and Sherry, for taking my questions. I guess my first one kind of revisiting the topic of software and the benefit it's given you. Maybe if you can quantify or characterize the revenue benefit here or pricing dynamics that you think about it per application and to the degree to which it's beneficial to Nexus versus pre-Nexus. and also buy in marketing and characterization would be great, please.
spk13: Yeah, thanks, Richard. First of all, in terms of revenue or pricing benefit, when we look at, say, the last 12 months of design wins, these are silicon design wins. One of the things that we track is what is the software attached. So when we win a silicon design win with our customers, What software are they using along with that piece of silicon as we sell that as an overall solution? And what we can see is that over 50% of our design wins now have a software attached, specifically meaning the customer is using one of the five software solution stacks that we've brought to market. And so we view that as very positive because that, first of all, that just helps them get to market quicker, that helps us bring more value to our customers. And then we also believe that that helps make our solution much more sticky over time as well. And then the other thing that we can measure is we measure the ASP or the price that that design win is won at. And what we've seen from that data is that the design ones that include a software attach generally have a higher ASP than the design ones that don't have a software attach. And so we know that our customer is valuing that software because we can measure it with the higher price that we get when we have a software attach. And then on the last part of your question around just sort of where are we seeing the attach on software, We're seeing it in both pre-Nexus and Nexus devices. So I don't think there's a dramatic difference between the attach that we're seeing in either pre-Nexus or Nexus. And then across the markets, we're certainly seeing really good software attach in things like computing, in industrial automation, robotics, automotive electronics. So I would say it's across... quite a number of our markets. And it depends a little bit on the particular software stack. You know, one of the five software stacks, some are actually more targeted to particular markets. For instance, one of the software stacks is specifically for industrial automation. Another software stack is specifically around computer vision, which would be more applicable in a computing context or an industrial context, for instance. And so it can depend on the particular stack, but I would say we're seeing good adoption across the markets.
spk12: Great feedback there, Jim. My second question is, you know what, I apologize. I've got some Halloween busyness going on here. If you could take me out of the queue, I'll jump back in later. Sorry.
spk02: This Richard was getting a quick retreat. Somebody just came.
spk03: Our next question comes from the line is a follow-up question from Christopher Rowland. Please proceed with your question.
spk09: Hey, guys. Just really quickly on the compute side of things, are you guys going to benefit from Sapphire Rapids and or Janawa on the server side? And then on the client side, Are you continuing to see a ramp in that mirror metrics portfolio that you guys have as well?
spk13: Yeah, thanks, Chris. On the first part, yeah, we are expecting dollars of content per server or the amount of value that we're bringing per server to continue to expand. And on those platforms you listed, yeah, we are anticipating a higher level of content on those platforms, and we expect those to be beneficial there. to us. And again, just reiterating my point from earlier in the call, that it's really content expansion that's been the primary driver of our growth in the server segment over the past years. And so we do anticipate additional growth in the future. And then on client in mirror metrics, Uh, we certainly are focused on continuing to expand the footprint and mirror metrics across client computing, but I'll note that we also, uh, believe that there is opportunity to bring that same technology to other markets as well. Um, for instance, in the industrial and automotive space. And so that is something that we're working on in parallel is not just expanding the footprint and client, but finding new applications for the software. in industrial and automotive as well.
spk02: Great. Thanks, guys.
spk16: Thanks, Chris.
spk03: Our next question is a follow-up question from the line of Richard Shannon with Craig Hallam. Please proceed with your question.
spk12: All right. Sorry about that, guys. Nine-year-olds, they really get excited about Halloween, so I hope this won't happen again. My follow-on question is in an earlier response to a question, I think you talked, Jim, about share gains. And I'm forgetting the context of it, but I think it was maybe in reference to newer Nexus platforms and a reason for the outsized industrial growth here recently. Maybe if you can add some color to that to the degree to which that is related to newer Nexus products and gaining share against competitors who don't seem to be as focused in your focus areas, that'd be great, please.
spk13: Yeah, thanks, Richard. Certainly understand the Halloween excitement at my house, too. But yeah, Yeah, what I would say is that going back to the comments around industrial is, you know, we've seen a very good growth in that design wind pipeline. I think this would apply to automotive electronics as well. And we've seen a nice design wind growth over the past couple years. And that is in certainly our Nexus products, but also our pre-Nexus products. I think Alex asked a question earlier in the call around software and the ability of software to rejuvenate older products. And so I think some of the software that we brought to market has helped drive some of the design wind growth on some of the pre-Nexus products as well. And so Yeah, some of those share gains or where we've seen design outs of competitors in favor of lattice devices, I would say that crosses both Nexus and pre-Nexus and certainly aided by our software portfolio.
spk16: Perfect. Thanks, Jim.
spk02: There are no further questions.
spk03: I'd like to hand the call back over to Mr. Anderson for closing remarks.
spk13: Thank you, Operator, and thanks for everybody for joining us on today's call. We're pleased with our continued execution and strong results and really excited about the opportunities for Lattice. We're certainly cognizant of the macroeconomic headwinds that are out there, but excited about the Lattice-specific growth drivers that we see ahead of us. And then, of course, very much looking forward to sharing more details about Avant at the launch event that we'll host on December 5th. Operator, that concludes today's call.
spk03: Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.
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