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Operator
Greetings and welcome to the Lattice Semiconductor Third Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the 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, Rick. You may begin.
Rick Mouchet
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'll provide a financial and business review of the third quarter of 2023 and the business outlook for the fourth quarter of 2023. 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 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 containing our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the fourth quarter of 2023. 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 latticemi.com. Let me now turn the call over to Jim Anderson, our CEO. Jim Anderson
Jim Anderson
Thank you, Rick, and thank you, everyone, for joining us on our call today. We delivered solid results in Q3 with quarterly revenue growth of 11% year-over-year while maintaining healthy gross margins and operating margins. Today, Lattice has the strongest product portfolio in our history in terms of both hardware and software solutions, and we continue to expand our product portfolio at a rapid rate. We're looking forward to the expected launch of the two newest members of our Avant mid-range FPGA family at the Lattice Developers Conference in December. Let me touch on a few Q3 highlights. In addition to the Q3 revenue growth, we achieved a record non-GAAP gross margin of 70.6%, which was an increase of 110 basis points year-over-year. We expanded non-GAAP operating margin by 60 basis points year-over-year to 40.3%, and we generated 40% pre-cash flow margin. Let me now provide an overview of our business by end market. In the communications and computing market, revenue is up 6% sequentially and down 6% on a year-over-year basis. We're pleased to see the sequential uptick in this segment given some of the macroeconomic challenges this end market has experienced over the past quarters. The sequential growth was driven in part by growth in data center servers for both general purpose and AI optimized applications. And we expect growth in servers to continue into the current quarter, offset by software demand and 5G telecom infrastructure. Over the long term, we continue to believe we are well positioned for growth in this segment. given our growing content per shiver in both general-purpose and AI-optimized data center shivers, as well as long-term growth opportunities in data center networking and telecom infrastructure. Turning now to the industrial and automotive market, revenue declined 5% sequentially and was up 28% year-over-year. While we're very pleased with the year-over-year growth, we did experience sequential softness in this market consistent with broader industry trends, and we expect this market softness to continue into the current quarter. However, we continue to expect this market to be 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. I'll now provide some product roadmap highlights. We're driving the largest product portfolio expansion in the company's history, which we believe continues to create new future revenue streams for Lattice. UNX, the seventh device family built on the Lattice Nexus platform. This newest device family is the industry's first FPGA in its class with integrated USB functionality, which is applicable to many diverse use cases. We also continue to be pleased with the progress on our new Lattice Abond platform, which creates new greenfield revenue opportunities for Lattice. We look forward to further extending the platform with the expected launch of two new Avant device families at our Linus Developers Conference in early December. Software is a key component of our strategy as our software accelerates customer adoption and enables faster time to market for our customers, while driving long-term multi-generational stickiness for our solutions. Avant will also leverage the same software that our customers are already using today on our current Nexus products, which enables faster customer adoption on our new Avant platform. We look forward to sharing new details about our software portfolio at our Developers Conference in December. Overall, I'm pleased with our continued execution. While we're not immune to macroeconomic headwinds in our end markets, we're excited about the continued rapid expansion of our product portfolio, and we believe that we continue to be well positioned for long-term growth across our core markets. I'll now turn the call over to our CFO, Sherry Luther.
Rick
Thank you, Jim. We are pleased with our solid Q3 financial results. On a year-over-year basis, we drove double-digit revenue growth, continued gross margin expansion, and strong profitability. We generated a record level of cash from operations, continued to invest in our leadership product portfolio, and returned capital to shareholders through our 12th consecutive quarter of share buybacks. Let me now provide a summary of our results. Third quarter revenue was a record $192.2 million, up 1% sequentially and up 11% year over year. Sequential growth in the quarter was driven by communications and computing. Year-over-year revenue growth was driven by industrial and automotive. Our non-GAAP gross margin increased 10 basis points in Q3 compared to the prior quarter to a record 70.6% and was up 110 basis points on a year-over-year basis. Both the sequential and year-over-year increases in gross margin continue to be driven by our gross margin expansion strategy. which is in its fifth year. Non-GAAP operating expenses were $58.2 million compared to $58 million in the prior quarter and $51.3 million in the year-ago quarter. R&D expenses increased both sequentially and on a year-over-year basis as we continue to make investments in our product roadmap. Our non-GAAP operating margin was 40.3% in Q3 and was up 60 basis points compared to the year-ago quarter. Q3 earnings per diluted share was 53 cents compared to 48 cents in the year-ago quarter, which represents 10% year-over-year growth. Driving strong cash flow generation continues to be a key focus area for the company. In Q3, we generated a free cash flow margin of 40% and returned capital to our shareholders by repurchasing $10 million in stock or approximately 110,000 shares. in the 12th consecutive quarter of our share repurchase program. We ended the quarter with $114 million in cash. Let me now review our outlook for the fourth quarter. Revenue for the fourth quarter of 2023 is expected to be between $166 million and $186 million. Growth margin is expected to be 70.5% plus or minus 1% on a non-GAAP basis. Total operating expenses for the fourth quarter are expected to be between $57 million and $59 million on a non-GAAP basis. In closing, I am pleased with our financial results and continued execution. While we are experiencing softness in some of our end markets, we remain focused on driving profitable long-term growth. Operator, we can now open the call for questions.
Operator
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd 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 keys. One moment please while we pull for questions. Thank you. Our first line question comes from the line of Mark Lapacis with Jefferies. Please proceed with your question.
Mark Lapacis
Hi. Thanks for taking my question. I had a question on geographic trends. Can you talk about what you saw in the quarter geographically and how things are playing out so far in Q4? Would you expect those trends to continue in Q4? Thank you.
Q4
Yeah, thanks, Mark. And I'll also talk about it in the context of the end markets as well. So, first of all, for Q3, first of all, we're pleased with the revenue results in Q3, the sequential growth and the year-over-year 11% growth. In the comms and computing segment, If we look at Q3, we did see sequential uptick in revenue. We were pleased with that. That was one of the main drivers of that sequential growth from Q2 to Q3 is data center servers, both general purpose servers as well as AI optimized servers. From a geo perspective, it would be very much the geomix that you would expect for data center servers that go into both OEM server vendors as well as hyperscalers. Just as a reminder on that new generation of servers that's starting to ramp here in the second half of the year and into next year, we do have significantly higher level of content in that new generation of servers. So that's a tailwind that we saw from Q2 to Q3. We expect that to continue into Q4. Now we are seeing in Q4, although we see servers being sequentially up, within that communications and computing segment, We do see some headwinds in software demand and communication, specifically in 5G telecom infrastructure. And that's both wireless and wireline infrastructure. We're seeing lower demand. We view that as really from lower CapEx spending, driven by lower CapEx spending from telecom operators. And that would be the geography. That would be more from the European geography, some Asia as well. that softness around telecom infrastructure. And then net-net for that comms and computing segment, we expect as we go into Q4 from a sequential basis, we would expect that segment to be flat to sequentially down with, as I said, with kind of server demand being up and 5G telecom infrastructure being down sequentially. And then if I move over to the industrial auto segment, our other big segment, In Q3, first of all, quite pleased with year-over-year growth that we saw in Q3, 28% year-over-year. But towards the end of Q3, really in the last kind of four to six weeks of Q3, we started to see demand soften from our industrial and automotive customers. I would say that was really localized to the Asia geography. And we expect that softness that we started to see at the end of Q3 extend into the current quarter, Q4. And that's both a comment relative to the Asia geography as well as in Q4, the current quarter, we're starting to see demand softness in the Europe geography as well. And so we think that a softening of demand that we saw towards the end of Q3 extends into Q4. And the net then is our industrial and auto segment. We're expecting that to be sequentially down from Q3 to Q4. So hopefully that gives you some color both by segment, but also to your question by geography as well.
Mark Lapacis
That's very helpful. Thank you. And if I may, on a follow-up, can you talk about Avant? It sounds like you're queuing up two more products or products in that family to launch. How should we think about Avant relative to Nexus, and what do you think you really hit your stride on Avant in terms of revenues?
Q4
Yeah, great. Thanks, Mark. Happy to talk about Avant. We're always excited about Avant. So, first of all, just in general, we're really pleased with the continued progress on Avant overall. You know, we launched that platform towards the end of May. last year. And just as a reminder, Avant is our new mid-range FPGA platform. It doubles our addressable market. And what we're really excited about is it basically creates an entirely new greenfield revenue growth stream for the company. We feel really good about just the continued progress and execution on Avant. You asked relative to Nexus, when we look at the design wind pipeline for Avant, It's very strong. It continues to grow. And relative to Nexus, in terms of kind of at the same relative point in time, the Avant pipeline is significantly larger, which we view as really positive. In terms of revenue, we continue to expect a small amount of initial revenue from Avant this quarter, Q4. as we've talked about in the past. It would be a small amount of initial revenue, but it's an important milestone for us because it marks the beginning of that revenue ramp for Avant into 2024, 2025, and beyond. We're also really excited about launching the next two device families in the Avant lineup. That's the Avant G and X. We're expecting to launch that at the Developers Conference, Lattice Developers Conference in June. early December. So, you know, stay tuned. You'll hear more about that at the developers conference. But what's great about that is by the time of the developers conference, we'll now have, with the addition of GNX, we'll have three device families, three different Avant device families in the hands of our customers that address a really wide range of applications across that mid-range FPGA market. and a lot of diverse applications across our customer base. And so really excited about that and excited now once we put all the samples in the hands of customers to really focus on driving that revenue ramp as we move forward. And one other, I guess, note as a reminder on Avant is it does leverage the same software as Nexus. So we leverage the same software investments that we've been making on the Nexus platform Avant takes advantage of those as well. So anyway, happy to certainly share more about Avant, the new versions GNX at the Developers Conference in December.
Mark Lapacis
Very helpful. Thank you.
Operator
Thank you. Our next question comes from the line of Tristan Guerra with Baird. Please proceed with your question.
Tristan Guerra
Hi, good afternoon. So it sounds like the revenue shortfall relative to expectation for Q4 is all industrial and automotive related. So assuming that gives us about 95 million in Q4 for that segment, that's still above the run rate of 22. So the question, and I know you've mentioned weakness in China, how much further downside could there be in that segment that's growing very meaningfully over the past two years. Where do you think your true demand, quality, revenue, run rate baseline is in that market? And what was the significant growth in the past few quarters? Was it driven by inventory build versus content gains? So just trying to see, you know, where we could land from a stable run rate, quality run rate in future quarters in that segment.
Q4
Yeah, thanks, Tristan. So on the kind of back half of your question, we really see the growth that we drove through the first three quarters of this year. And remember, that follows multiple years of double-digit growth, really as content gains. You know, we've had significant design wind growth over the past really three to four years, and that's led to to multiple years of double-digit growth. And yeah, if you look at, if you can sort of take the midpoint of our guide for Q4, we would still expect industrial and automotive segment to be up on a year-over-year basis for Q4. And for full year this year, we would expect industrial and automotive to have, again, significant growth for the full year for 2023. And so, as we said, we really view that as driven by content gains, and those content gains we believe, are multi-year revenue streams, right? A lot of those design wins that we win are which, you know, begun production, those stay in production in the industrial and automotive segment for sometimes three, five, seven years or longer. So those are really long lifetime revenue streams. And so when we talk to our customers, though, about the kind of near-term headwinds, What our customers are saying is that is near-term demand softening based on their customers, so their customers placing lower number of orders on them. What they've shared with us is they believe that that's really driven by lower CapEx spending by their customers due to higher interest rates, higher cost of capital. et cetera. So, but if we step back, you know, we're really quite pleased with the growth that we've driven in this segment over the past year, certainly this year as well. And we continue to see industrial and automotive as a long-term growth opportunity for the company. We believe that industrial automation and robotics, automotive electronics, that these applications are in multi-year secular growth trends that will last for many years over the long term, and that Lattice and Lattice devices are really well-positioned to take advantage of those secular growth trends and well-positioned to gain more content with our customers, especially with not just the continued expansion of our Nexus product line, but the beginning ramp of our Avant product line and the build-out of our Avant product line as well.
Tristan Guerra
Thank you. That's very useful. And then for my follow-up, you've mentioned in the past that you have very little in terms of LTSA. What's your expectation for pricing next year? I know you're not providing a guidance, but given the weakness, do you think that we get back to maybe a low single-digit decline in pricing? That's what a couple of analog companies have reported so far this earnings season. And where are your lead times currently relative to a quarter ago?
Q4
Yeah, thanks, Tristan. On pricing, we see our pricing as generally stable and durable. You know, we're in our, as Sherry said in her prepared remarks, we're in our fifth year of our gross margin improvement strategy, which included better pricing optimization. And I would say over those five years, which, you know, there have been many different sort of market conditions over those five years, that over those five years we found that our pricing was very durable, very stable, and, you know, we don't have any reason to think that that would change, right? So we believe that our pricing will remain durable. On lead times, the second part of your question, I would say that lead times for us are really back to normal, which normal we would say is kind of pre-COVID time. There can always be a particular silicon package combination that might be in tight supply. But overall, I would say our lead times are generally back to normal. And then just more broadly, I would say just we view the semiconductor supply chain overall as really kind of back to normal in terms of supply availability.
Tristan Guerra
Great. Thank you very much.
Operator
Thank you. Our next question comes from the line of Blake Friedman with Bank of America Securities. Please proceed with your question.
Blake Friedman
Hi. Thanks for taking my question. I just wanted to go back to Avant. And just relative to 90 days ago, have there been any changes related to your thoughts on how Avant is expected to ramp next year? And have any of the recent macro developments impacted the timing of any customer ramps?
Q4
Thanks, Blake. I would say no. You know, in terms of changes on Avant, the only changes we've seen over the last 90 days would be, you know, continued growth in the design wind pipeline, which we would have expected, right, as we continue to engage with customers. As new device, Avant devices get closer to launch, et cetera, we expect that overall pipeline to continue to grow. So, but that's certainly one change is pipeline continuing to grow. And then the only other changes, you know, are just our continued execution and progress on, you know, getting Avant GNX ready for launch at the developers conference. So, and then the second part of your question, No changes relative to our thinking on how Avant would ramp next year or over the following years. That's really driven less by any macro changes, more by just the level of customer engagement and design-win progress, and then the natural timing of our customers on when they selected a device to just their natural timeline to when they would enter production with those devices.
Blake Friedman
Got it. Helpful. And then just as a quick follow-up on OpEx, if I look over the past few years, you know, OpEx has kind of grown in this mid-teen range on an annual basis. Just kind of given the potential macro weakness over the next few quarters, just curious how we should think about kind of the trajectory of OpEx moving forward. Thanks.
OpEx
Yeah, thanks, Blake. So from an OpEx perspective, I mean, while there can be fluctuations from quarter to quarter based on the timing of programs and things like that, But you certainly have seen that over the past several years that we've been investing quite a bit in our long-term product portfolio and demand creation. So that's been going on now for several years. And even in the current quarter, in the Q3 quarter, sequentially as well as year over year, you've seen that we've increased our R&D spend and the investments that we're making. And investing in our product portfolio for the long-term growth of the company, that continues to be an area of focus for the company. You know, we've talked about the fact that we're in the most rapid expansion of our product portfolio in the company's history. And so, you know, making sure that we make the right investments are very important there. And so that's definitely important to us. We want to make sure that we do it in a disciplined way, of course, but we're really pleased with the, you know, And, you know, as we look ahead, you can expect to continue to see us want to make sure that we are investing the right amount in our product portfolio. The other just reminder that I'll provide is from our investor day earlier this year, we talked about, you know, our OPEX, you know, 30% of revenue and then R&D target at 18 to 20%. So, you know, that long-term investment continues to be an area of focus for us.
Blake Friedman
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Christopher Rolland with Susquehanna. Please proceed with your question.
Christopher Rolland
Hi, guys. Thanks for the question. So there have been a number of companies that have reset revenue guidance recently, and it's kind of spurred a reevaluation of customer inventory and channel inventory out there. Have you guys begun this process? Are you really comfortable with understanding the level of inventory out there, particularly after this downtick in demand, at least evident for Q4? And are there any patterns geographically or end markets? or actually by DSTI themselves that you've noticed?
Q4
Yeah, thanks, Chris. In terms of inventory, let me start with distribution or channel inventory. Most of our revenue flows through, vast majority of our revenue flows through distribution, so that's certainly really important to us. We have very good visibility on distributor inventory. When we look at distributor inventory where it ended in Q3, I would say very much within the normal historical range for us or for Lattice in terms of levels of disty inventory. So we see that as as healthy. There are one or two distributors that I would say are still on the relatively lean side in terms of inventory, so they're a bit lean, but overall in aggregate, our inventory level in the channel I would view as healthy and within normal range. And then if we move to end customer inventory, so we have thousands of end customers, so we don't have perfect visibility of and customer inventory. There are some of our large strategic customers that give us visibility into their levels of inventory. With those large strategic customers, we don't see any obvious signs of excess inventory or pockets of inventory with those large strategic customers. But again, we don't have perfect visibility into that and customer inventory across all of our thousands of customers.
Christopher Rolland
Great. Thanks, Jim. And perhaps another one for you. So Altera came out. They had kind of an interesting update on a kind of pre-IPO track. I guess first of all, they talked about a decline in revenue. It looks like maybe a third of their revenue peaked a trough is their expectation for a decline. I was wondering how you guys, in terms of an overall decline in revenue, how you might see that. But also, I just wanted your kind of take on refocusing on the low end with new products they have coming in the first quarter of next year, and also refocusing on the channel and industrial and auto, I believe, an area where you've taken some considerable share over the past few years. Thanks.
Q4
Yeah, so in the first part of your question, you know, I can only speak to our business and what we see, you know, what we see largely covered, I think, in one of the earlier questions, which is, you know, overall for the full year, you know, we're looking forward to another strong year for the full year in terms of overall growth, kind of despite the sequential guide down for Q4. If you look at where we're tracking for full year, you know, we're pleased with the overall growth. the overall track that we're on, especially given some of the macroeconomic conditions that we're seeing in some of the end markets. So we're pleased with our progress this year and this year to date. Now, on the second part of your question, what I would say is on competition is I would start by saying the same thing that I said over five years ago when I joined the company, and probably the lattice employees are tired of hearing me say this, but I continue to repeat it, which is we will always assume there's robust competition in every market that we serve and every product that we build, right? That's our philosophy. And so beginning in 2018 when I joined the company, we assumed that there would be robust competition. We plan our products accordingly. And we feel really good about the competitive positioning of our products. Both our small FPGA portfolio, the Nexus product line is very, very competitive on power efficiency, on size efficiency, on feature set. You know, we just launched our seventh device family based on the Nexus platform. Five are in production and ramping. Number six and number seven will go, we expect to go into production next year in the first and second half of next year, respectively. And then Avant, again, we feel really good about the competitive position of Avant as we shared at the launch event. last year, the power efficiency of Avant feature set, the size efficiency are great. So we feel really good about that competitive positioning. And clearly, we'll share more about that at the developers conference that we have in December when we launch Avant GNX. But yeah, I would say that, you know, we'll always assume that there's robust competition. And so, and we'll Our goal is to always make sure our products are absolute leadership in the markets and segments that they're targeting. Great. Thanks so much, Jim.
Operator
Thank you. Our next question comes from the line of Srini Pajuri with Raymond James. Please proceed with your question.
Pajuri
Thank you. Jim, given the macro weakness, Are you seeing any change in your customers, I guess, adaption of some of the new products? I understand you have a lot of them coming up and a lot of design activity out there. But given the macro, do you see any impact at all to the Avant ramps in the next few quarters?
Q4
Yeah, thanks, Srini. And let me address it in the more broad sense across all of our products, and I can come back and and touch on Avant specifically, but across all of our products, which would include Avant, but not just, but also Nexus and even pre-Nexus products. If I look at the design wins and the design win pipeline through the first three quarters of this year, we're seeing another very, very healthy year of growth in our design wins this year and that follows multiple years of significant growth and so we're quite pleased with the continued expansion of the DesignWinds pipeline and of course that pipeline converts to revenue over the coming quarters so we're pleased with that and we're actually pleased with that across not just Avant but Nexus and as I said even pre-Nexus devices. An important part of that design when growth is our software strategy I mentioned this in the prepared remarks, but you know for over five years now we've been investing in our software portfolio we've been building out. A set a portfolio of application specific solutions tax that are targeted for specific and use cases and applications. that make it very easy for customers to adopt our products and get to market quickly. They help our customers either switch from a competitor's device to our device or customers that have maybe never used a Lattice device before or are using a Lattice device in a new application, they help speed up that process. And so software, which has been one of the places that we've invested significantly over the past years, that certainly had a positive impact on the rate and pace of our design wins, and that benefits the Nexus products, the pre-Nexus products, and because Avant leverages that same software base that we've been building over the past five years, it benefits Avant as well. And so, you know, we're pleased with, back to kind of one of the original parts of your question, we're pleased with the rate and pace of Avant design wind growth, and we're looking forward to the revenue ramp, you know, starting, as we expect, at the very end of this year, but benefiting us in 2024 and 2025 and beyond.
Pajuri
Got it. Thank you. And as a follow-up, Jim, you talked about auto and industrial kind of weakening in Asia and maybe spreading beyond Asia into Europe as well. I guess nobody has perfect visibility, but to the extent you can share with us what your customers are saying about how long these macro headwinds are going to continue and when some of this demand and I guess cross-currents will kind of bottom out. Any thoughts in any color on that would be really helpful. Thank you.
Q4
Yeah, thanks, Srini. Yeah, I think our customers are struggling a little bit with how long that will be. I think their visibility is a bit cloudy right now. When we talk with our customers, they're seeing that demand softness as they're really attributing that to, again, to a pullback in CapEx related to those higher interest rates, higher cost of capital. And as I shared earlier, we certainly saw that initially in the Asia geography towards the end of our Q3, expecting that to continue into Q4. And then we expect to see that softening extended to Europe as well. And, you know, we'll give, at our next earnings call, we'll give more thoughts on what we're seeing in Q1 and next year at our next earnings call. Thank you.
Operator
Thank you. Our next question comes from the line of Matt Ramsey with TD Cowan. Please proceed with your question.
Matt Ramsey
Yes, thank you very much. Good afternoon, guys. Jim, I wanted to dig into the trends in industrial and auto in that segment. So a few questions there. So apologies for the multi-part thing. But could you help us a little bit, first of all, to break down that segment between the industrial and auto business, just roughly percentages Second part, are you seeing any drastic differences in lead time trends between the industrial business and the auto business, like which one's holding up better, which one worse? And then lastly, if you could give us some visibility into specific customer or specific applications where you're seeing this weakness. I mean, the call so far has talked about things very generally, and I wanted to get a bit more specific, if you could, as to where you're seeing things that are holding up. and where you're seeing things that are really weakened from an end application standpoint. Thanks.
Q4
Yeah, thanks, Matt. I think that was three parts, so I'll do my best to hit each one of those. On the breakdown of industrial and auto, just as a reminder, for Lattice, if you look at that segment, we are definitely more heavily weighted towards industrial than automotive. Automotive is a relatively small percentage. We don't break out into subsegments. But just qualitatively, the majority of our revenue is industrial. Auto is a smaller part of that segment, but it has been over the past quarters the faster-growing segment. part of the segment. Industrial, I think we talked about a number of times, so I won't kind of repeat the comments on industrial. Automotive, more specifically, we do anticipate automotive, the automotive market overall, to start to soften in, for instance, this quarter. Just the belief is that higher interest rates and the fact that there's been the restocking of car lots is largely behind us start to affect the end market demand in terms of new automotive sales. And so we're assuming that that market begins to soften this quarter. On the second part of your question, on the lead time differences between the two, I don't think we see any significant lead time differences between the two But, again, that segment for us is much more heavily weighted towards industrial, and so we tend to be a little bit more focused on the industrial impact because of its heavier weighting. On the third part of your question, which I think was around specific customers and applications, What I would say is that the demand softness that we've seen is really broad-based. We kind of talked about by geography, but within those geographies, broad-based across many customers, many different applications. So we're certainly seeing that across things like industrial automation applications, robotics applications. Yeah, I would really, and we anticipate automotive electronics, I would really categorize it as a pretty broad-based softening.
Matt Ramsey
Got it. Thank you, Jim, and I appreciate the patience with the multi-part question. My second question, really quick for Sherry, you and I talked a lot about the performance of the company on a free cash flow margin basis, and I think you got a question earlier about OPEX, but when you think about sort of floors and margins on an operating basis or a floor and free cash flow margin, is there a certain trend that you would see in the end markets that would make you dial back spending? Or is this an environment where you have all these new products with Avant that are about to launch and you guys are going to sort of spend through the cyclicality and see where we end up on the other side because of the confidence in the products? Thanks.
OpEx
Yeah, Matt, so I would say that on the OPEX front, investing for the long-term growth of the company is definitely something we've been focusing on. We've been doing that quite a bit with all of the new products that we've launched. But that continues to be important, and the target that we put out at our Investor Day for R&D spend in particular is 18% to 20%. So as a long-term model, that model remains intact. I think, though, what I would say is that, you know, the way we've been investing has always been in what we consider to be a disciplined way, and so we'll continue looking at the way that we're making those investments in a very disciplined way. And, you know, in terms of, you know, you can see the guide for Q4 in terms of what that's looking like. You know, the company has very strong free cash flow, strong cash generation, free cash flow. We're really pleased with that. We, you know, are thrilled that we, you know, 40%... free cash flow margin for the quarter was really good results. And we'll continue to focus on that. We'll continue to focus on making sure that we're investing in the right things. Gross margin, we believe our gross margin is durable. We'll continue to execute on our gross margin expansion strategy and focus on that area. So we just really view that we'll continue to execute toward our long-term model that we put out earlier this year.
Operator
Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of David Williams with Benchmark. Please proceed with your question.
David Williams
Hey, good afternoon. Thanks for taking my question. So I guess, Jim, first, just kind of understanding how small the auto is relative to the industrial segment. It is a greenfield opportunity for you, and just wondering if you could maybe talk about where you see the growth opportunities there and what you think the mix optimization would be if you think about those two. Would it be a 50-50 or is there maybe less of a mix that would be more optimal for the business?
Q4
Yeah, thanks, David. So definitely, you know, the auto – within industrial and auto, auto is the smaller component. But it has been a faster-growing area for us over the past quarters. The applications that we would address – would be ADAS and infotainment systems. Actually, one of the recent wins that we announced with a customer was in Mazda, new Mazda models of cars were used in their ADAS system. The lattice device gets used between the camera that's at the front or the rear of the vehicle. It gets used in that data stream to do some pre-processing. of the video stream. And so that's a very typical, that Mazda application, very typical application that we get used in in automotive applications. But there's many other examples as well. So we do see, you know, automotive electronics over the long term as, first of all, kind of an obvious secular growth area for the semiconductor industry overall, but definitely a great growth area for Lattice as well. The combination of our devices being very power efficient, very size efficient, having an incredible amount of flexibility in terms of the interconnect that we can service. and the ability to reprogram those devices and customize those for specific applications. We see all those kind of feature and power efficiency benefits as being really well positioned to support automotive applications. And that's why we continue to see automotive electronics as just a really strong growth area for the company over the long term.
David Williams
Thanks for the color there. And then secondly, just Sherry, you know, we've talked about the gross margin, and it's been surprisingly robust here. And you pointed to that resiliency in the past, but I think this is the first time that we're seeing it really maintained on this softer outlook. And I guess, does that give you greater confidence just in that trajectory and the sustainability of it? And then does this maybe signal there could be more upside opportunity incrementally on the rebound? Thank you.
OpEx
Yeah, thanks, David. So, you know, gross margin, you know, 70.6% a record, so we're really thrilled with that, and the sequential improvement as well of 110 basis points, or year-over-year, rather, improvement. But gross margin is something, an area that we continue to focus on. I mean, we're in our fifth year now, as I mentioned in my prepared remarks, and, you know, the factors that we've been executing on there, we continue to focus on. You can see fluctuations in gross margin from one quarter to the next quarter, But, you know, at the midpoint of our guide, it is a range, right, 70.5% plus or minus 1%. It is a range. We will continue to focus on gross margin, and we believe our gross margin is durable. And, you know, when you look at our investor day earlier this year where we, you know, increased our gross margin target to the low 70s, you know, that's our long-term target model, and we'll continue to drive toward that.
Q4
Yeah, and maybe I'll just add... You know, one of the benefits we've seen on gross margin is software attach rate. You know, as Sherry mentioned, you know, gross margin can fluctuate quarter to quarter based on things like just mix of product. But one of the longer-term trends that we think benefits our gross margin is software attach. As we've seen a higher percentage, actually now over half of all lattice silicon design wins, have what we call a software attach, which means they're using one of the six software solution stacks that we've launched into the market. And when customers adopt that solution stack, that combination of silicon and software generally has a higher ASP, and that higher ASP design win usually has a higher gross margin associated with it. I think that's one of the tailwinds over time, that higher software adoption and the benefit that we see over time.
Operator
Thank you. Our next question comes from the line of Ruben Roy with Stifel. Please proceed with your question.
Ruben Roy
Thank you. Jim, you said you like to talk about Avant, so I was going to ask another question on Avant, and specifically around the pipeline and your comment on the pipeline at this point being significantly larger than kind of the same timeline for Nexus. And the question is, I think if I remember correctly, the initial Avant SKU had a feature set, I guess, that was targeted towards edge processing and potentially edge AI. Is that sort of the area where you're seeing, you know, most of the design activity or, you know, at this point has that broadened for whatever reason? If it has, if you could maybe talk about that a bit.
Q4
Yeah, thanks, Ruben. I'll never get tired of talking about a bond, so no problem with asking another question on a bond. Yes, as I said, we are seeing really good growth of the pipeline. And actually, Edge AI applications are some of the initial growth that we've seen in the pipeline and where we expect some of the initial revenue to come from in the initial ramp And that actually has more to do with the sequence of the products coming out. When we launched the Avant platform about a year ago, the first device family that we launched along with the platform was the Avant E, and E actually stands for Edge. And the Avant E was actually optimized more around Edge applications, things like doing artificial intelligence or inference processing at the Edge, in lots of different applications, industrial applications, automotive applications, other applications as well. And so because that was the first product family that we launched and the first samples that we delivered to customers, that'll be the first product that begins to deliver revenue. And so that's where, and because that product's more optimized around edge applications, edge AI in general, That's where the kind of initial design wind pipeline started to build, and that's where the first revenue streams we expect to start to generate. Now, the follow-on device families of Avant G and X, we're very excited about those products as well. And as I shared earlier, we'll launch those at the developers conference in December. Now, those will address a range of other applications that we're excited about, too, and we'll certainly talk more about that at the Developers Conference in December, and so, you know, stay tuned. You'll hear more about that in December.
Ruben Roy
Got it. Great. Okay, so if I could ask a quick follow-up. I don't think you've talked about client-side PCs. I don't think you mentioned it this quarter, or maybe not last. Maybe you could give us an update, especially with some new processor SKUs coming out and some excitement around potentially AI-centric notebook computers being done. Is there an opportunity for you folks with either content gains or are you seeing any design activity around that front at this point or is it too early?
Q4
Yeah, in fact, thank you for asking that. Happy to touch on that. Yeah, so in client, we continued to view client as a very large system TAM opportunity for us. And we've announced a number of customers that we're already engaged with. In the past, we had announced that Lattice devices and software are coming. used on Lenovo ThinkPad devices, LG Gram series, ASUS, but there are other client OEMs that we're working with as well. It's a little too early to talk about those publicly, but we're really excited about those engagements and We'll definitely share more about that as those get launched and enter production. But yeah, Lattice devices are a great solution for doing edge AI applications in client devices. In particular, We can help drive battery savings. We can help improve security of the system, a number of different applications that we're getting designed into. And, yeah, we continue to see this as a good growth area for the company, and we'll share additional OEM engagements and design wins as those come closer to production.
Ruben Roy
Great. Thank you, Jim.
Q4
Thanks. Thanks.
Operator
Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.
Needham
Thanks for taking my questions. First for Sherry and then the last question for Jim. Sherry, on the gross margin as revenue pulls back, is there any sort of significant under-absorption or operations costs that could start to be a factor for gross margin. And then second, looks like at the analyst day, or sorry, investor day, you set a target for OPEX to be 30% of sales. At the midpoint of guidance in December, looks like OPEX is going to be about 33% of sales. Is there an upper threshold where you would start to cut absolute OPEX, or could you see OPEX moving into the mid-30s for a period of time as you invest in the long-term business?
OpEx
Yeah, thanks, Quinn. So from a gross margin perspective, you know, the way I would look at it is, you know, we've contemplated all of those sorts of things into the guide for Q4, so 70.5% plus or minus 1%. Now, the gross margin expansion strategy that we've been executing on now for five years or in its fifth year, you know, there are multiple factors there that we've talked about in the past that have enabled us to really get value for our products, and some of those do include product cost efficiencies, Jim talked about the software attached, new products, mix. There are so many various factors that are built into our gross margin expansion strategy that those are all fully contemplated as part of the guide that we provided for Q4. And again, we believe our gross margin is durable and will continue to drive toward the long-term target model that we put out at our investor day earlier this year. From an OPEX perspective, The 30% is a long-term model. That's our target. And within that, we talked about the R&D at 18% to 20% and SG&A 10% to 12%. So in terms of an upper limit on our OPEX, the way that I would answer that is that we continue to focus on making sure that we're making the right investments for the company for the long-term growth. of the company. We want to do it in a disciplined way, and we'll continue to manage the business in that way. We've made a ton of progress in terms of all the investments we've made with the products that we've launched to date, and we want to continue that focus because that's the long-term growth of the company. And so you can see fluctuations on a quarterly basis, as I mentioned before, from an OpEx perspective, but we'll still drive toward our target model that we put out at our investor day.
Needham
Great. And then for Jim, I know you've said multiple times the Avant pipeline is bigger than the Nexus pipeline at the given point in time. But I guess I'm wondering, and I hope this doesn't come across as a very simple question, but does that translate into a faster revenue ramp for Avant? Or is it just that the TAM is much bigger for Avant? It's 10x higher or And so the pipeline's bigger, but it doesn't, you know, people shouldn't necessarily read into a faster event revenue ramp than Nexus. And I guess where I'm getting this is, you know, getting lots of questions from investors after the close, kind of, you know, hey, can Avant Ramp help offset some of this macro weakness that you're seeing and still allow you to sort of grow in 2024? Thank you.
Q4
Yeah, I think that what I would say is that Avant Design Wind Pipeline being larger than Nexus is obviously positive. We certainly expected that, but it's still good to see that. The pipeline, the whole idea of the pipeline is that it converts to revenue over time. I think the major... If you look at the major limiter or governor over the revenue ramp over time, once we put the samples in the hands of customers, it's actually more the customer's rate and pace of being able to bring that product to market. They're on their own natural beat rate and natural platform refreshes. And so they'll, as we win designs, they'll design Avanti and at the next platform refresh rate. And so that's more of the governor of that growth rate over time of Avant once we put the samples in customers' hands. And then what I would say is I would refer you back to the investor day that we did earlier this year where we tried to characterize or give a sense of how to think about both the continued ramp of our small FPGA products, we expect those to continue to grow over the long term, but then how to think about how Avant layers on top of that over a multi-year period.
Needham
Got it. Thank you, Jim.
Q4
Thanks.
Operator
Thank you. Ladies and gentlemen, that was our final question. I would now like to turn the floor back over to Lattice's President and CEO, Jim Anderson, for closing comments.
Q4
Yeah, thank you, Operator, and thanks again, everybody, for joining us on the call today. We're pleased with the solid results in Q3, and we're really excited to continue to execute on what we see as the biggest product portfolio expansion in the company's history and excited to share more about that at our developers conference in December. So thanks for the time, and, Operator, that concludes today's call.
Operator
Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.
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