Lattice Semiconductor Corporation

Q2 2024 Earnings Conference Call

7/29/2024

spk06: Greetings. Welcome to the Lattice Semiconductor Second Quarter 2024 earnings call. At this time, all participants are in listen-only mode. A 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. Please note this conference is being recorded. I'll now turn the conference over to your host, Rick Mouchet. You may begin.
spk03: Thank you, operator, and good afternoon, everyone. With me today are Asam El-Shnaoui, Lattice's interim CEO, and Sherry Luther, Lattice's CFO. We will provide a financial and business review of the second quarter of 2024 and the business outlook for the third quarter of 2024. 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 latticesendline.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 natural 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 third quarter of 2024. 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 exposing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we've provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at natisemi.com. And now it's time to call over to Asana Moshnawi, our interim CEO.
spk11: Thank you, Rick, and thank you, everyone, for joining us on our call today. While many of our investors, analysts, and customers know me, I'd like to provide a brief introduction given our recent CEO transition. In the six years that I've been at Lattice as Chief Strategy and Marketing Officer, I've been deeply involved in both the development and execution of our strategy. During that time, we have significantly strengthened our product portfolio, financial performance, and competitive position. Our accelerated cadence of new product launches has created new growth opportunities and deepened our customer relationships. The opportunities that made me excited to join Lattice back in 2018 are even more compelling today. Lattice is fortunate to have a deep bench of talent throughout our organization that is committed to building on our momentum and delivering future value creation for our customers and shareholders. As was previously announced, the board of directors has commenced a search process to identify a permanent CEO and will consider both internal and external candidates. While there is no specified timeline for completion, This search is the board's highest priority. I am fully committed to that process and confident that the ultimate outcome will be in the best interest of all Lattice staples. Now moving to the second quarter of 2024. The inventory normalization and near-term cyclic corrections continue as revenue declined 12% sequentially and 35% year over year. Gross margins remained at 69% and we continue to deliver profitability. In Q2, we continued to undershift to end customer demand as inventory normalization continued. On an end market basis, demand remained soft across industrial and automotive in Q2, with revenue down 23% sequentially as customers continued to reduce their inventory levels. We remain well positioned for growth over the longer term with our differentiated hardware and software solutions. Within communications and computing, Q2 revenue was flat sequentially, Strength in data center networking and servers help offset incremental weakness in wireless communication. As we discussed previously, we expect the inventory normalization cycle to continue through the second half of this year. We are seeing signs of improvement that when combined with our new product graph, we anticipate will lead to a return to growth. In terms of our product roadmap, we intend to continue investing in and accelerating our highly differentiated value portfolio. In our small FPGA portfolio, our 7-device family is on track to start ramping in Q3. We recently announced the 8-device family, the Lattice Mock X05DNX, and the latest version of the Lattice Sentry Solution Stack. This combination extends our leadership in security-focused hardware and software solutions. Last quarter, we talked about adding new Nexus device options to address increased customer demand. We're already delivering on that roadmap expansion, having recently launched Certis NX28 and Certis NX09, which offer class-leading power efficiency, small size, and reliability with flexible migration options. These devices are designed to accelerate a broad range of communications, computing, industrial, and automotive applications. Customer feedback has been very positive as we continue to invest in innovation leads in the small FPGA segment. In our mid-range FPGA portfolio, we've already launched three Avon device families. The first device, Avon E, achieved initial revenue last December, driven by numerous applications. We expect the Avon E series to ramp throughout the course of this year. We're on track and aim for both Avon G and X to achieve initial revenue before the end of this year. Customer momentum remains robust. You'll recall 90% of the target customers for Avon are already customers of Lattice today. and Avant leveraged the same software that customers use today on Nexus. We are pleased with the market traction of Avant as it expands our SAM and DryFix, expecting additional long-term revenue acceleration. As we have mentioned in previous calls, Lattice hardware and software solutions are increasingly being used in a wide variety of AI-related applications. For example, in AI-optimized servers in the data center, where the system is running generative AI workloads, Lattice devices are used in the control, management, and security of the AI computing system. Another example is in the edge AI-enabled applications where lattice solutions are used to run the AI inference algorithms that provide features such as user presence and gaze detection in client and industrial systems. Lastly, a third example is AI-enabled applications where lattice solutions are used to aggregate and pre-process sensor data that is used for AI processes. I wanted to highlight that last quarter we began shipping of Lattice NVIDIA Edge AI solutions to customers. This solution, which we first presented at our 2023 Developers Conference, is designed to accelerate the development of Edge AI applications using the NVIDIA platform. I'm pleased to share that on December 10th and 11th, we'll be hosting our second Lattice Developers Conference, which will be held live and virtual in San Jose. Driven by our increase in ecosystem and customer base, you can expect demonstrations and new product announcements. In summary, we remain focused and continue to execute on our strategy. We believe Lattice is competitively well-positioned and in the middle of the largest product portfolio expansion in our history with strong customer momentum. I'll now turn the call over to our CFO, Sherry Luther.
spk10: Thank you, Sean. Second quarter financial results reflected continued softness with revenue coming in slightly below the midpoint of our buy-in. growth margin remained stable with continued profitability. With a strong focus on cash and capital allocation, we continued to return cash to shareholders through share buybacks. Let me now provide a summary of our results. Second quarter revenue was 124.1 million, down 12% sequentially from the first quarter and down 35% year-over-year, reflecting continued inventory normalization in the industrial and automotive marketing. Our Q2 non-GAAP growth margin was 59% in line with the prior quarter, reflecting the stability of our growth margin despite the new terms of response. Q2 non-GAAP operating expenses were $54 million compared to $54.9 million in the prior quarter and $58 million in the year before. During the quarter, we remained disciplined while continuing to invest in our long-term product portfolio. Our Q2 non-GAAP operating margin was 25.4% compared to 30% in the prior quarter. Q2 non-GAAP earnings for diluted share was 23 cents compared to 29 cents in the prior quarter. In Q2, we repurchased approximately 143,000 shares, or $10 million of stock, making Q2 our 15th consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 5.1 million shares, thereby reducing dilution by 3.8%. Let me now review our outlook for the third quarter. Revenue for the third quarter of 2024 is expected to be between 117 million and 137 million. Gross margin is expected to be 69% plus or minus 1% on a non-GAAP basis. Total operating expenses for the third quarter are expected to be between 53 million and 55 million on a non-GAAP basis, which is in line with Q2 24 at the midpoint. As we continue to navigate the near-term cyclic softness in our end markets and the industry normalization of inventory, we remain focused on supporting the expansion of our product portfolio and continued execution. Operator, that concludes my formal comments. We can now open the call for questions.
spk06: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A 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 these star keys. One moment, please, while we poll for a question. And our first question comes from the line of David William with Benchmark Company. Please proceed with your question.
spk04: Hey, good afternoon, and thanks for letting me ask a question. I guess, Assam, can you talk a little bit about the design activity and maybe how the ramps have been impacted by the down cycle? Are you seeing anything there that's worth pointing to and just kind of wondering how that traction is continuing through this down cycle? Thanks.
spk11: Yeah, good question, David. With regards to design activity, just to remind everyone, we've got the strongest product portfolio in the history of the company, and Most recently, we just talked about expanding our Nexus platform. We've got the new Mach NXD device that we just launched, and we've got Avant as well that we've been talking about. And our customer momentum and infancy has never been as strong as it is now. We've got a pretty exciting roadmap to come as well. But from a design activity perspective, we just completed two consecutive quarters of record design activity. And when I look at this, this is the type of stuff that, uh, when I talk to the team that we can control, we can't necessarily control the macro, uh, in the, in the market, but we have good control over two things that matter to me. And that's number one product development, getting differentiated products out into the market, both on the hardware and the software side. Um, and also making sure that we drive more and more customer intimacy. So I'm really proud of the team and what they've done. from a design activity perspective over the last two quarters, those being two consecutive record quarters from a design activity. Now, the second part of your question on product ramps, I love product ramps. You know that getting new products into market drives new spam opportunities, drives more market opportunities for us, but also drives new revenue streams. And even though the market is going through a cyclical downturn related to inventory normalization, What I can share with you is that if you look at our new products, for example, look at Nexus or Avant, and you look at the revenue of those products in the first half of 2024, it exceeded the revenue in the first half of 2023. And that's a testament to why we keep emphasizing new products that are very differentiated and our software strategy of making it easier for customers to adopt them. And as such, we've got good progress on our new product ramps. And I'm excited about the second half of 2024. We've talked about additional new product ramps. The seventh Nexus device should ramp this quarter. That's on track. As well as the two additional Avant devices, Avant G and X. We expect initial revenue for those two devices by the end of this year, and we're on track for that as well.
spk04: Great call there. Thanks so much. And I guess maybe secondly, Maybe for Sherry, the margin has been incredibly resilient here despite the lack of leverage. Can you walk us through maybe the incremental improvements you would expect to see as sales return and that leverage comes back? Are there structural things that you've done through the downturn that will benefit on the upside? Thank you.
spk10: Yeah, thank you, David, for the question. We're certainly pleased with the 69% gross margin that we came in at during Q2. And, you know, I think that, of course, there can be fluctuations on a quarterly basis. that can occur with respect to mix or even within our market segments. But we're really pleased with the progress there. And you may recall we've talked about it certainly a lot in terms of our gross margin expansion strategy that we've been executing now into our sixth year, where to date we've improved our gross margin by 1,200 basis points. So certainly that is something that we're really proud of. And in fact, when you think about resiliency, if I go back in time and I look at when our revenue was at similar levels as what it was in Q2, you know, gross margin was quite a bit lower at that time. I think it was somewhere in the, you know, low 62% range as compared to 69 that we achieved in Q2. And I think that really speaks to the new products. It speaks to software attach. We've talked about that before in terms of the value add that software attach provides to our gross margin. And new products, and Nissan talked about a number of the new products that we've launched, you know, even more recently. So I think that really, you know, the big driver in terms of the, you know, the improvements that we've made in gross margin over time. And, you know, when we look ahead, you know, certainly the guide of Q3, that's at the midpoint 69%, but certainly continue to expect that, you know, the strength and resiliency there. And our long-term model, you know, remains intact. We're still driving toward our long-term model of the low 70s. And that's something that we'll continue to focus on through our growth margin expansion strategy as we continue to look ahead.
spk05: Thank you again. Thank you.
spk06: Our next question comes from the line of Ruben Roy with Stifel. Please proceed with your question.
spk12: Yes, thank you. Issam, I'm wondering if you could maybe drill into the inventory commentary a little bit more. This has been a persistent issue, obviously, but last quarter you guys talked about potentially seeing some growth second half over first half. You are talking about some signs of improvement today. I was just wondering if you can maybe give us a little detail on what you're hearing from your customers around that inventory normalization. Are we getting there? Is it something that you think we'll see the end of towards the end of Q3? If so, How are you thinking about sort of the exit rate coming out of that normalization? That would be helpful. Thank you.
spk11: Yeah, I think everybody knows I love to talk to customers. I do that quite often. In fact, two weeks ago, we had one of our key industrial accounts in, and I was chatting with them. And as you can imagine, inventory normalization is one of the topics that we will always touch on. But as I talk to the customers, overall, there has been improvement in the inventory normalization, but it does vary from customer to customer. Even within a customer, as I ask them about their inventory normalization, they'll even tell me there's different product lines that are at different states. Some product lines have achieved normalization. Other product lines, they still have excess inventory that they need to go normalize. And if we call back to the beginning of the year, we said that we'd expect this inventory normalization to continue throughout 2024, but to a lesser extent on the second half of the year compared to the first half of the year. But if I look at lattice-specific items, again, the things that we control, it's the new product wraps that we talked about that are going to turn second for the year, getting the products out there. And then we're well-positioned. We think we're still well-positioned for long-term growth. We're in really good strategic core markets with comms and compute and industrial and auto with a lot of specific growth drivers. So as we get out of this normalization and get the products ramped up, we feel like we're in a very good position.
spk10: And Ruben, just to give you a little bit more color on inventory and the channel, the way that we're thinking about it is that, you know, we... Inventory in the channel is, you know, that's the inventory that's sitting at our distributors. And last quarter, as well, we had mentioned that, you know, inventory in the channel is more at pre-pandemic levels, in the range of pre-pandemic levels. And so the way that we saw it last quarter and we continue to see it this quarter, it's still towards the higher end of that range. But as we mentioned, you know, and on this call as well as last quarter, we continue to undership to what we consider to be true demand. This continued from Q1 into Q2, and certainly at the midpoint of our guide for Q3 revenue, we expect to continue to be undershipping to that true customer demand. And so that undershipping really allows for the inventory digestion or that inventory normalization that Issam was mentioning to occur and to continue the second half, albeit at a somewhat lesser extent than what occurred during the first half. And the other part of it, just to kind of complete the thought with respect to inventory normalization, is that we keep in touch very closely with our strategic customers and have a good feel for the inventory that they have, the ending inventory that is that they have. But at the same time, we have over 10,000 customers, so it's really hard to have a perfect view of how much inventory is at all of our end customers. But having said that, certainly inventorying the channel is something that we continue to focus on.
spk12: That's great, Collin. Thanks, Sherry, and I appreciate the complexity of the issue here. I guess for a quick follow-up, just to follow on David's question, it's nice to see the stability and the gross margins with the revenue coming down. And as you mentioned, the margins were a lot lower the last time we saw these types of revenues. But I guess that's testament to your pricing optimization strategy. I guess, Sherry, maybe if you can give us a little bit of an update on the pricing environment and how you're thinking about that going forward.
spk10: Sure, sure. So from a pricing perspective, we're really seeing that our pricing is durable, you know, as that continues. I think it really goes back to the fact that, you know, our products are allowing our customers to really differentiate in their applications. The number of new products that we have announced and continue to announce really help our customers differentiate. And that is, you know, that matters a lot to them. And that is something that They're willing to pay more for products that really help them improve the products that they're offering. And so new products continue to be a key part of our pricing optimization strategy. We also see trends towards where customers want higher capacity, greater capability products, again, driving the functionality of their products. So we definitely see that our pricing is durable. And it certainly continues to be a key element of our pricing optimization and growth margin expansion strategy.
spk11: And I'll add to that as well. I think you're familiar with our software strategy. We're investing in our software solution stacks. And, you know, we look at the data and clearly the customers that are leveraging our software solution stacks are demanding a higher AFC, which helps our margins as well.
spk05: Great. Thank you.
spk06: Thank you. Our next question comes from the line of John Vinh with KeyBank Capital Markets. Please proceed with your question.
spk13: Great. Thanks for taking my question. Issam, you mentioned in your prepared remarks that you're seeing signs of improvement. I'm wondering if you could just give us a little bit more color on, more specifically, where are you seeing those kind of green shoots? And then, you know, based on kind of your current visibility, when do you guys think you'll be able to return to growth again?
spk11: Yeah, so let me take the first part of that question. What are the signs of improvement we see? Well, first, it starts with the customers always. You know, I interact with the customers quite a bit. We talked about that. We do see normalization at the customer side, and we do know that we are undershipping to demand. But also some of the operational indicators that we see as well. If you look at Q2, towards the second half of Q2, we start to see an uptick in the bookings. And that was a really good sign for us. In fact, we're starting Q3 with a higher backlog than we started Q2 with. And that's a good indication as well that things are starting to turn. So when you combine the customer inventory normalization, we're shipping under demand, we see bookings increasing. And then we start to see that our backlogs going into the quarter is healthier. Those are all signs for us. Then you start looking at the new product ramps that we talked about. New product ramps drive new revenue streams. I said in the earlier question, the data points about how our new products actually grew in the first half of this year compared to the first half of last year. Those new products are expected to ramp. We've got the seventh Nexus device that will ramp this quarter, and the additional Avant E will continue to ramp throughout this year. But we've got Avant G and X will start initial, although small. Those will be small. But those are initial ramps as well, which is a good sign that it will continue to ramp further through 2025 and 2026. So when you look at these signs of improvements, we anticipate that we are in a return to growth path.
spk05: Great. Thanks.
spk13: And then just a follow up question on your server business. You know, I think one of your competitors continues to express confidence in terms of, you know, gain some traction in the area of service security or PFR. I'm just wondering if you could just talk about kind of your confidence level in terms of maintaining your position within the server business. And then as we look forward to kind of the ramp of next generation server platforms at Intel, I know your attach rate is above one as we think about Granite Rapids ramping in the second half of the year. Are there still opportunities for you to increase your attach rates in servers or your content there?
spk11: Yeah, good question. Um, from a server perspective, I think we've demonstrated that over the last several generations, we've been increasing our attachment. In fact, I remember my first investor day, which was in May of 2019, I'm looking at, uh, we had, we were talking about 25% of tax rates that forward to today, it's well above one. And if you look at the server generation that is shipping today and you contract that with the prior generation, which is ramping down, Not only has the attach rate gone up, but the complexity of the servers has driven the need for more complex FPGAs from Lattice, which is a higher ASP on average. When you combine the higher attach rate with the higher ASP, on average we're seeing about a 50% dollar increase in the generation of servers that are ramping today versus those that are ramping down. And we've got really good visibility on these architectures. And we know exactly what we're being used for, whether it be in control, management, or security-type functions. In fact, if you look at the last developers conference, we even had a major hyperscaler meta presenting the value of Lattice from a security perspective. And that does relate directly to your question on CFR. And then we have really, really good visibility, excellent visibility on the next generation of servers that are going to be deployed as well. whether it be from hyperscalers, OEMs, or even ODMs. And we see there that our tax rate is going up again. And we also know that those are also becoming more complex and that they're leveraging even more complex FPGAs. And most recently, we announced the MOC XO5D with our updated century solution stack for the next generation CFR type applications. So we feel very good about our position in the market. We continue to make good progress in increasing our tax rate generation over generation, as well as delivering products that are very compelling and differentiated from a server security perspective. And then one final thing I want to point out is why an FPGA for security, because that's really, really important. FPGAs provide programmability. And when you think about security and security threats, We provide something called crypto agility, which allows the customers to update their security crypto algorithms real-time in the field when an incident occurs. It's always a race between the adversaries and those that are trying to protect their system. And FPGA with programmability provides crypto agility that you need that from an FPGA perspective.
spk05: Great. Thank you.
spk06: Thank you. Our next question comes from the line of Matt Ramsey with TD Cowan. Please proceed with your question.
spk08: Yeah, thank you very much. Good afternoon, guys. I think you described it well in some of your opening comments. There's some things in the business that over the long term your team can control and maybe some things in the macro in the shorter term that you can't. So I have kind of a couple questions on both. I guess in the The longer term stuff with the product portfolio, I think it's a really, really good thing that, and you guys have said it in many different forums, that the vast, vast majority of the Avant customer base is the same as the Nexus customer base, and there's some learnings there and some software compatibilities there. But I wonder if there are new emerging opportunities that maybe you didn't foresee with some of those customers or maybe even new customers for Avant that opened new TAM that you weren't considering in the past? Because, I mean, I think we're all trying to figure out how big that TAM for Avant actually is as it ramps up. So are there new things that we should be thinking about or should we just sort of think about the opportunity with the customers you currently have?
spk11: Yeah, you brought up a few good points on Avant. Just as a reminder for everybody on the call, Avant more than doubles our market opportunity. If you look at small FPGA, Sam, that we provided our last investor day, which is about $4.5 billion, the mid-range devices, which is Avant, are up 5.5, so a little bit more than doubles our market opportunity. So it opens up... a good market for it that doesn't cannibalize our small FPGA. And as you mentioned, if you look at 90% of the target customers, they're already customers of Lattice and they know our software tools and our software solution stacks that we build are designed for both Avant as well as Nexus and pre-Nexus devices as well. So there's a lot of opportunities and we're making really good progress. We've launched the Avant E, which is our edge-optimized FPGA for Avant at the end of 2022. And we saw initial revenue on that. And most recently, at our last developers conference, we announced the Avon G and the Avon X, which is our general purpose, and advanced connectivity, FPGA. With regards to applications, we're really excited about the type of applications we're engaged in. Avon opens up not just control opportunities that we're very good at, low power control, but opens up data pack opportunities for us, and we see opportunities in that from a data networking, data center network perspective. which is a good growth for us. And again, we saw growth in our data center networking this quarter. But also we saw applications around storage that we did not anticipate with storage type applications that could leverage Avant as well. And then as we continue to look at our AI-related revenue, we're starting to see also opportunities where we can leverage Avant and additional AI stuff that we weren't anticipating before in key applications. The team does a really, really good job of not just selling into traditional applications, but working with our customers to find new ways to leverage our FPGAs and applications. And I think we've demonstrated that in the past when we talked about security, which was new to Lattice just in the last five years, as well as a lot of what we're doing with computer vision, which is new to Lattice as well. So excited about the opportunities ahead of us with not just Avant, but also Nexus devices as well.
spk08: Thank you for that, Itam. I guess now for the near-term stuff, I guess I have two questions. The first one is I'm not necessarily surprised, given where the macro is and what the industrial weakness we've seen from a number of your peer companies, that the guidance for the September quarter was a little bit weaker than I think we had all forecast. But this is the first time I can remember when you guys actually missed the guided quarter. in June, right? So the June results came in, I know, 5% below the original guidance. And I'm just kind of wondering what happened intra-quarter relative to the visibility that you thought you might have had when you guided the quarter originally, and were there big things that shifted intra-quarter? And I guess the second question in the near term, Issam, you gave a couple of data points in one of your earlier answers that First half this year versus first half last year, some of the new products, and that's essentially all Nexus at this point, I would think, were actually up year over year in revenue, which I guess the corollary to that is the pre-Nexus products are down $100 million plus, half over half, this year versus last year. So you guys have given a lot of commentary about where customer inventory might be, where channel inventory might be. Could you update us on those metrics on just the pre-Nexus products? Are we getting closer to being through this? And do you have visibility on the pre-nexus products, which seem to be where the majority of the headwinds have been in revenue? Thanks.
spk11: Yeah. So let me talk about the first bullet first, which is the industrial and our midpoint. We went slightly below our midpoint, and that was primarily driven by industrial and auto. And we continue to shift under to demand. I think we talked about that at a prior question as well. And we do want to get the inventory, have our customers normalize. That's really important for us, which is why we ship under to demand. But I want to point out again that if you look at that industrial segment, it's a really good growth driver for Lattice. It's a long-term secular growth related to industrial. We've demonstrated that over the past several years with strong double-digit growth in industrial, and we expect to get back to that as well. Our products are just a really good fit for industrial-type applications, examples in robotics and factory automation. And Avance helps that as well. In fact, some of the key Avance wins that we're tracking to ramp up in 2024 are with industrial accounts as well. So although there's some short-term cyclical normalization we have to go through, we feel very good about our position in the industrial market. Now, the second part of your question, Nexus versus pre-Nexus. It's always good to see new products ramping, and we love both our Nexus and pre-Nexus devices. But as customers ramp up new products, you have less normalization of inventory to worry about with the new products that are wrapping than older products that they stocked up perhaps in prior years. And this is why we love having new products that are very differentiated. They create new revenue streams, they ramp up, and they allow our customers to differentiate even more. Yes, pre-Nexus is down more, but that's probably aligned with the rest of the industry and what we're doing, which is really trying to shift on their true demand. But we are shipping Nexus. There's strong demand for Nexus, and the normalization for these new products isn't the same as the older products.
spk08: Thank you very much. I'll jump back in the queue.
spk06: Thank you. Our next question comes from the line of Melissa Weathers with Deutsche Bank. Please proceed with your question.
spk01: Hi there. Thank you for taking my question. We've talked a lot about industrial. I just want to double-click on comms and compute and what you guys saw in the quarter. At least by my model, it seems like you may have upsided expectations from what you gave last quarter. So can you talk about where you believe we are in the cycle for both the comms and the compute end market?
spk11: Yeah, so in comms and compute, what we said was it was flat quarter over quarter, and it was primarily driven by strength in server as well as data center networking. But our 5G wireless was down, as we had expected when we talked about that in our Q1 earnings call. And what we talked about from a server perspective, again, is our tax rate, dollar content, we expect that to go up. And on the data center networking, this was something that we talked about at our last investor day that we introduced for the first time. And we are now being designed into switches and routers and data center networking. And although it's a smaller portion of the overall revenue still in content, it's an area that we see growth for both Nexus as well as a lot of applications. But from a 5G wireless, I don't think we're unique that we're still seeing softness in 5G wireless. I think this is something that seems to fold. And until the price of deployments reduces, the cost of traffic reduces, I don't think anybody's anticipating a strong return in the 5G wireless end market.
spk01: Thank you. And I guess as we think about sell-in versus sell-through, how do we bridge the gap once the inventory gets cleared? Like how sharp of a snapback can we expect? I know the FPGA market has seen differing trends throughout the cycles. but is it the case where as soon as that inventory gets sold through, then things will snap back very hard, or are you expecting more of a gradual recovery in both your industrial market and your constant computing end market?
spk10: Yeah, Melissa, so the way that we're thinking about that is this inventory normalization has been occurring through the first half of the year, and it's going to continue into the second half. and then we expect it to dissipate. And so it's really, you know, us undershipping so that – undershipping demand so that this inventory consumption can occur, and that will occur at the end customers, and then as it occurs there, it comes out, you know, the distributors. Consumption goes up at the distributors as well in terms of the – racing the inventory that's in the channel. And so what we've said is we expect that to continue into the second half, but it will start to dissipate in the second half.
spk01: Perfect. Thank you.
spk06: Thank you. Our next question comes from the line of Quinn Bolton with Needham and Company.
spk14: Please proceed with your question. Hi. I just wanted to come back. I think last quarter you were pretty confident that revenue would increase in the second half over the first half as a result of the dissipation of the inventory normalization process and then the lattice-specific drivers for the 6th and 7th Nexus family, the Yvonne family, and the New Dell Latitude product ramp. I haven't heard you guys sort of make that statement yet on this call, and so I'm just wondering if you could give us your thoughts half over half. It certainly seems like you've said that many of those working pieces are still in place, but I'm just wondering, can you give us your sense? Do you still think second-half revenue is up over first-half revenue?
spk11: Yeah, and today, on today's call, we're really focusing on the Q3 guide based on the data we have today. But as we talked about, we do see signs of improvement. We do know that we're undershipping demand. We do know that the normalization with our customers will continue through the year, but to a lesser extent in the second half versus the first half. But as we get into the Q3 earnings call, we'll provide more color for Q4 and what we see for the second half of the year.
spk14: Got it. And then the second question for me, just sort of on a competitive front, wondering if you might give us an update. Back in January, one of your competitors ended life to almost 300 small FPGA parts with no replacements provided, and I think that left an opportunity for your sales and FAE team to come in and try to convert some of those designs over to Lattice. How successful have you been on converting some of those competitors' designs over to Lattice?
spk11: Yeah, I mean, every time a competitor does a favor for us, we capitalize on it. Our team's done a really good job, and it's helped that we've been building good customer momentum over the past few years. With our product differentiation, they see our roadmap, they're participating in our roadmap, they're investing time with Lattice. And that's been going well. When I talk also about the expansion of Nexus and the prepared remarks, if you recall, I said we're adding more device options for Nexus. Those device options that we're adding is to give our customers more choices. And in some cases, that helps accelerate some of these end-of-life from our competitors as well. But our sales team does a really outstanding job, and I think we've built a lot of credibility with our customers that we do capitalize every time somebody does that. end-of-life product line.
spk05: Thank you, Isa.
spk06: Our next question comes from the line of Chris Rowland with Susquehanna International. Please proceed with your question.
spk02: Hey, guys. Thanks for the question.
spk11: I'm glad to hear a voice there, Chris.
spk02: I was wondering if you guys were avoiding me or not. That would have been a sneaky way. No, seriously, just maybe a softball first. Are you guys seeing any new applications that you learned of from your customers that you think are kind of interesting or cool or needle-moving? And perhaps one of these might be in the PC space. with Lunar Lake or StrixPoint, these new things coming. I know you do human presence detection there, but any other kind of PC-driven applications or other applications that you learned of that you think could eventually be pretty big applications?
spk11: Yeah, on the PC side, I think you're aware that we do a lot when it comes to adding artificial intelligence, person detection, gaze detection on client devices. But we're also part of the ecosystem partners with the large PC OEMs because they enable AI PCs and you'll see even on their reference designs that they'll point to Lattice as well as an ecosystem partner. So we benefit from those appointments as well. The other needle-moving thing that I'll talk about that I'm excited about is when we talked about AI in a prepared remark, the NVIDIA Lattice solution for AI. And we talked about this. We introduced the concept at our Lab Developers Forum in December. And the problem statement is that a lot of companies want to have high-performance AI on the edge that they can't afford the latency to go into a data center. And if you look at all the sensor deployments that are out there in the world, over a billion sensors, there's no easy way to get those sensors to work with compute platforms. And so NVIDIA and Lattice partnered on a solution that we introduced last December on how we can aggregate that sensor data, pre-process it, and actually with some specific solutions around how do we make that compatible with NVIDIA CUDA We've actually started to ship boards to customers now, and customers are starting to deploy those systems. So that's exciting for me as well to see us bring that type of a solution to the industry. But those are, again, two examples, one referring to PCs that you talked about and another one.
spk02: That's fantastic. Thank you, Issam. And then maybe for Sherry, I didn't totally understand the channel inventory comments You guys have previously said that inventory was back to pre-pandemic levels, so I guess I missed the nuance there. Are you saying those levels are just too high, or customers have now expressed a preference to drag below? I missed the nuance there, and then perhaps we can put some numbers around some of this stuff, like If you could give us channel inventory numbers like either dollars or days, and then maybe this would also help us understand from a dollar perspective how much you're shipping below true demand, or if you guys have perhaps a normalized quarterly number in mind if you were shipping normally. And I think just quantitatively, if you guys were to provide any of those numbers, I think it would paint the picture very well.
spk10: Yeah, so what I was saying earlier was that the range that our distributor inventory, that is inventory in the channel, the range that that currently is, is at pre-pandemic levels, but it is at the higher end of that range. And so that's the similar commentary that we have provided last quarter as well. So it's within the range, but it's the highest range. And what does that mean? We haven't communicated exactly. We have not communicated what that range is, but it's, you know, the range that we consider normal for our business is at pre-pandemic levels. And so because it's at the higher end of what we consider to be, you know, sort of normal range, if you will, that is why we are undershipping demand so that that inventory consumption can occur over time. And I mean, the other color I can give you on that is that if you go back to during COVID, we had communicated, you know, multiple quarters in a row that our distributor inventory in the channel was at very low levels. And that we knew it would need to be replenished and that it would be replenished over time. So contrast that with where we are now, where it's a little bit toward the higher end of the range. And so that's why we want to undership demand so that inventory normalization can occur continue to occur over the second half will start to dissipate so that inventory digestion can occur.
spk02: And could we get a sense on how much you're shipping below true demand or if this wasn't occurring, what your normalized revenues would be?
spk11: Yeah, so there's two ways we know we're shipping under true demand. One is the customer conversations that I talked about where we We talk with them on a regular basis. We ask the questions, how are you doing? Is it getting normalized? That's number one. Number two is if you look at what the distributors shift out the door versus what we shifted the distributors, we know that they shift more to their customers than what we shift to them, which is what Sherry is alluding to that. the dollars of inventory in our channel, by definition, that would be decreasing. But we're at healthy nominal levels, but we're on the high side of that, is what she was referring to. But we're not concerned with the level of inventory we have in our channel today. Okay. Thanks.
spk06: Thank you. Our next question comes from the line of Tristan Jarrett with Bayer.
spk09: Please proceed with your question. Hi. Good afternoon. Looking at industrial and automotive, and I know you've mentioned you're under shipping and demand, if I annualize the $58 million you reported for Q2 for that segment, you're basically 50% above pre-COVID level, which was 2019. So that's inferring about a 9% CAGR. We know that the whole industry, at least on the industrial side, has been around 3%, so you've been getting share. You've probably benefited from some pricing. So the question is, what is the kind of trigger that you're looking at in industrial for the next several years, and how much contribution you've got the past few years from pricing and share gain. And where I'm trying to get at is, you know, even if we assume that Q2 is kind of a bottom, are we going to see those revenues eventually rebounding double digits because you're under shipping? Or is it kind of the new normal from which you're getting back to a normal growth rate? But any CAGR, you know, number would be growth would be useful to kind of tie this up with the 9% inferred, you know, since 2019.
spk11: Yeah, and industrial has been a really good segment for us. And you alluded to that, Christian, of the growth that we've had in the past. And what's driven that growth is our differentiated products that are just really suited well for this segment. You know, the O power, the form factor, what we can do in adding more intelligence to systems, The customers are just adopting it, and we have been growing at a higher rate than the market overall, as you alluded to as well. When you look at all those fundamentals and you combine that with the customer intimacy that's getting stronger and stronger, we're still targeting a good, healthy double-digit growth within that end market. That segment is a good portion of the lattice revenue. We gave a financial target our last investor day that we expect the company to grow in the next three to four years between 15% to 20% as a lot of revenue layers on top of our small FPGA revenue, and we're still committed to that target. Our product portfolio is as strong as it ever has been. We're introducing more products. We just introduced more devices last quarter at our developers conference. You'll hear more announcements of new products that are being announced. These are very differentiated products defined by our customers as well. So we feel good about our position in industrial markets and that we can continue with double-digit growth within that segment.
spk09: Okay, that's useful. And then I know you've said event is on track, but given the excess inventories, and it's not necessarily just at Deskies, but also at your actual industrial end customer, Could that mean that Avant could ramp it a bit lower at a lower rate than you would expect a few quarters ago just because you need to get a new product refreshes and they've got to kind of flush to all the products first? Or are you getting any indication of that at this point?
spk11: Yeah, there's really no indication that the inventory normalization is going to affect the ramp of Avant's Avant is still early in its cycle. Customers are adopting it. They're ramping up with their products. And again, if you recall to a prior question, I kind of gave a data point that new products have ramped in the first half of 24 versus the first half of 23. And so, I mean, I'm very intimate with the field and the marketing team with Avant. We don't see, there's no, let me put it this way, there's no inventory normalization problem with our online deadline. And customers want to get those new products that they're designing with the bonds to the market as fast as they can. They want to get their products out. They want to get their revenues going. They want to show differentiated products as well. Great.
spk05: Thank you very much.
spk06: Thank you. Thank you, Tristan. Thank you. And our next question comes from the line of Srini Pujuri with Raymond James. Please proceed with your question.
spk07: Thank you. A couple of short-term questions. Issam, you talked about booking stabilizing a bit and also backlog being a little better than Q2 as we look out to Q3. I'm just curious, is this primarily the inventory normalization that you talked about, or do you think the new products are driving this improvement in backlog? Or, you know, you also talked about the server, you know, cycle being strong as well. So if you could just give us some color as to what you think is driving the improvement in backlog.
spk11: Yeah, it's a combination of multiple factors. Clearly, the new product RAM says orders come in. That helps from a booking perspective. Our design wins. I did also give a data point that we had record design activity in the last two quarters. The team's been doing a really good job on getting customers to design lattice into the sockets that are opportunities for us. That drives also additional bookings as those products ramp. Part of it is normalization as well. So I think it's multiple factors that when combined, we again at the second half of Q2 saw an uptick in the bookings, which is a good sign for us.
spk07: Okay, got it. And then just to follow up on the other bucket, the compute bucket, I'm guessing the server and compute is now much bigger than the comms. If you could maybe help quantify how big compute is of that bucket. And then also talk about maybe where we are in that cycle. I know you're seeing a 50% content increase with the current generation of servers. If you can maybe talk about where we are. And then as we look out to the next few quarters, you have new platforms ramping. And just curious if you should expect a similar trend type of content increase as we go from Sapphire to Granite and then from Genoa to Turin. Thank you.
spk11: Yeah, I want to point out that there's always going to be some fluctuations quarter to quarter, but if you look at our server revenue overall, it tends to go up and the reason why is again the higher tax rate, the higher ASPs that server customers are adopting. And we also broke it out in the past. You've heard me talk about this. There's the general purpose servers, but there's also the AI specific servers. And in the AI specific servers, what we've said in the past, and it holds true, is that the attack rate is equal or higher than general purpose servers. In fact, if I look at the next generation AI servers that are being deployed, we see a good increase of attack rate there as well as in the general purpose servers as well. We have really good visibility over the next architecture for both AI specific as well as general purpose. And the Lattice team with our customers are doing a really good job and innovating and bringing more value to this market. So although we haven't quantified the dollar increase for the next generation, the current generation has a 50% dollar increase to the prior generation. We'd expect an increase in dollar as well. We just have not quantified it. And we'll do that as those start to ramp into production. But we do see a higher tax rate. And we do see the adoption of FPGAs with a higher ASP.
spk05: Got it. Thanks, Russell. Thank you, Sweeney.
spk06: Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to management for closing remarks.
spk11: All right. Thank you, operator, and thank you, everyone, for joining us on today's call. While the industry continues to go through a period of inventory normalization, we're starting to see signs of improvement. We continue to execute on our ongoing product portfolio expansion and remain well-positioned for long-term growth.
spk05: Operator, that concludes today's call.
spk06: Thank you, this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-