Lattice Semiconductor Corporation

Greetings and welcome to the Lattice Semiconductor first quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during 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 Mache, Senior Director of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice's CEO, and Lorenzo Flores, Lattice's CFO. We will provide a financial and business review of the first quarter of 2025 and the business outlook for the second quarter of 2025. 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 second quarter of 2025. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum, such as a press release or publicly announced conference call. We refer primarily to non-GAAP financial measures during this call by disclosing certain non-GAAP information Management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provide reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the investor relations section of our website at latissemi.com. Let me now turn the call over to our CEO, Ford Tamer.

Thank you, Rick, and thank you, everyone, for joining us on our call today. This has been a period of historic volatility and uncertainty around the new tariffs as they affect the global economy and our industry. In general, we're not seeing any material impact from the new tariffs at this time, and we are highly aware of potential indirect impact. As a result, we, like others in the semiconductor industry, are actively monitoring the situation. especially as it relates to potential impact to our second half outlook. To that end, we're being highly proactive by continuing to focus on cost controls, increase operational efficiency, and above all else, deliver value for our shareholders. At the same time, we continue to aggressively execute our strategy, diligently deliver on our product roadmap, and prioritize and support our customers' deployments. We have also expanded our new design win rates on small and mid-range FPGAs at record levels. Let me now turn to Q1 highlights, which Lorenzo will expand upon in his prepared remarks. At a high level, we delivered revenue of $120.1 million in line with our prior guidance. Our non-GAAP gross margin of 69% reflected the resilience of our business and the value of our product in the face of a challenging environment. And our 33.4% adjusted EBITDA demonstrated the results of our financial discipline. In the near term, we continue to shift below estimated true demand as we work closely with customers to ensure alignment with our evolving product needs. As the broader industry navigates a dynamic macro environment, we're encouraged by the continued improvements in our bookings. With respect to end markets, communications and computing delivered its first year-on-year growth in two years, and industrial and automotive grew 6% sequentially. marking its first quarter of sequential growth in six quarters. The broad reach of our innovative and differentiated solutions is enabling us to expand our footprint in both general-purpose and AI-optimized servers, as well as in industrial applications such as factory automation and robotics. Design wind momentum remains at record levels. Revenue from our new products continues to grow at a strong double digit pace, both sequentially and year on year. I'm also pleased to report that we remain on track to hit our goal of high teens percentage of new product revenue for the full year 2025. Our customers continue to express enthusiasm for Lattice's differentiated low power and small size solution for their mission critical applications. Lattice is uniquely positioned to help enable the next wave of innovation across key verticals, which we expect will be a powerful catalyst for our business. In mid-March, we showcased our innovative solutions at Embedded World in Nuremberg, one of the industry's top industrial and automotive events. Our exhibit featured compelling demonstrations of Lattice technology across a broad range of high-growth applications, including security, far-edge AI, video, and connectivity. In addition, we had the full slate of very productive meetings with key customers and partners, during which we reinforced our strategic relationships and aligned our roadmaps. These discussions further built on our pipeline of opportunities that we expect will translate into future designs and revenue growth. We recently wrapped up our internal quarterly business reviews that showed continued momentum in our Nexus and Avant product families. We continue to take share in the small to mid-range FPGA market segments. We're also seeing revenue and design wind growth in exciting areas like generative AI in data centers, robotics in industrial, in-cabin and ADAS in automotive. AR, VR, and consumer, and emerging security needs, including post-quantum cryptography. All of this reinforces our strong belief that LALIS is well-positioned, not just for a recovery, but for sustainable growth. Overall, we have confidence we are in the right market with a leadership product portfolio and more than 11,000 global customers in very attractive long-term growth markets. Looking ahead, we continue to expect a U-shaped recovery long-term. Our Q2 guidance reflects our expectation for steady growth in both revenue and profitability. Another positive indicator is that channel inventory is also continuing to decrease. And as we discussed in my opening remarks, we remain cautious on the second half outlook aligned with the rest of the industry. This will be dependent on the continuing resolution of the tariff situation and corresponding customer demand. To wrap up, Q1 was a solid quarter with results in line with expectations and strong execution across the board. We remain focused on driving innovation and expanding our customer engagements. The team at Thaddeus is confident, energized, and committed to our long-term strategy and excited by the many opportunities ahead. Thank you again for your time and your continued support. Let me now turn the call over to Lorenzo for a detailed review of our results. Lorenzo?

Thank you, Ford, and good afternoon, everyone. While I was on our queue for a call, This marks my first official call as Lattice's CFO, and I'm very happy to be here. We will begin with a brief overview of our first quarter 2025 financial performance, followed by our second quarter outlook. We delivered on expectations with revenue, gross margin, and operating profit, all in line with our outlook for the first quarter of 2025. For Q1 2025, we reported revenue of $120.1 million, reflecting a 2% increase compared to Q4, and a 15% decline compared to the year-ago period. Our gross margin remained strong at 69% on a non-GAAP basis. Gross margin was up 690 basis points compared to Q4, but I want to remind you that Q4 included a liability for materials that impacted gross margin by 600 basis points. This performance reflects the durability of our business model as we return to the gross margin levels we attained most of last year despite the lower revenue level. Non-GAAP operating expense was $51.4 million, a 3% decrease compared to Q4, and a 6% decrease compared to the year-ago period. This was in line with our guidance and reflects our diligent focus on operational efficiency. Our non-GAAP operating margin was 26.2%, and our EBITDA margin was 33.4%. which reflects both the durability of the business model and our continued focus on operational efficiency. These factors combine to deliver non-GAAP EPS of 22 cents, in line with our guidance. GAAP net cash flow from operating activities for the first quarter of 2025 was $31.9 million, with a GAAP operating cash flow margin of 26.5%. Free cash flow in Q1 was $23.3 million with a 19.4% free cash flow margin. We are investing in CapEx in support of engineering and operations projects. As we go through the year, our free cash flow margin is expected to improve despite increased CapEx. Now I'd like to turn to capital allocation. Our balance sheet remains strong. We are debt-free and have ready access to capital if we need it. We believe we are well-positioned to navigate macro uncertainties and invest for future growth. The growth opportunities we will pursue, particularly in R&D and product innovation, target further strengthening of our leadership in small and mid-range FPGA markets. We believe this is the best way to maximize the ROI of our investments and maximize long-term shareholder value. Given our balance sheet strength and our business model, returning capital to shareholders remains a key component of our capital allocation strategy. During the quarter, we repurchased approximately $25 million of common stock under our existing buyback program. The company has now repurchased a total of approximately 6.4 million shares, reducing dilution by 4.6%. Last quarter's purchases were made in our open window before the recent market volatility and dislocation of our stock price. We have approximately $75 million remaining under the most recent board authorization, and we will deploy it considering our opportunities to invest in growth and the market environment. As we move into our outlook for Q2, we realize that the macro environment and geopolitical situation, particularly tariffs, are top of mind. I'd like to spend some time describing the most relevant factors pertaining to the potential impact on Lattice before I provide our outlook. The first factor I would point out is that over the past couple of years, about 80% of our revenue came from outside the U.S. Our assessment is that this likely mitigates the potential direct impact of a tariff on our overall business. The second factor is the structure of our supply chain. We rely on foundries in Taiwan, Korea, and Japan for wafers for our semiconductor products, and we primarily rely on our assembly and test partners in Malaysia and Taiwan. Much of our product flow does not cross the U.S. border. That said, we think it is prudent to work with our customers and distribution partners to mitigate the logistical and economic disruption from potential tariff regimes. The takeaway is that based on available information, we expect the direct impact of tariffs on our business to be limited, but we are highly aware of potential indirect impacts. As Ford described in his prepared remarks, we are, like others, actively monitoring the situation and preparing for multiple scenarios. Now to guidance. For Q2 2025, we expect revenue to be in the range of $118.5 to $128.5 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis. Q2 total OPEX is expected to be between $50.5 million and $52.5 million on a non-GAAP basis. Income tax rate for Q2 is expected to be between 5% and 6% on a non-GAAP basis. Net income for Q2 is expected to be between 22 and 26 cents per share on a non-GAAP basis. We will continue to drive the business with new designs and accelerate our design wins into production. Our previous actions have put us on solid ground with respect to cost structure. We are driving shareholder value by prioritizing investments in our product roadmap, revenue generation, and customer support. Operator, that concludes our formal remarks. We can now open the call for questions.

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 your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question comes from Melissa Weathers with Deutsche Bank. Please go ahead.

Hi there. Thank you for letting me ask a question. So I guess it seems like the U-shaped recovery that you guys have been talking about is playing out pretty much as expected, but you are flagging some caution on the macro on this call. Last quarter, I think you talked about 2025 revenues growing low single digits this year, and I didn't hear any commentary on your prepared remarks. So any update to that 2025 outlook? I know it's highly uncertain.

Yeah, thank you, Melissa. We see no change at this point. We see three improving demand signals, including improved customer consumption, higher beginning backlog and a better book to build ratio that continues to be above one. So we continue to stay steady as it is on 2025. We just have caution just because there could be sectoral tariffs that impact us and the rest of the semiconductor industry and we're watching those.

Okay, great. Thank you. And then I guess on the different segments that you guys have, I was a bit surprised to see, I know it's nitpicky, but a slight decline on the comms and computing side sequentially. So is there anything we should be thinking about between those two segments, like a difference in growth rates for 2025? Like, which one do you see growing faster or slower? Are they both kind of in line with each other? Thank you.

Yes, the comms and compute segment Segment decline has been driven mainly by a client revenue decline related to all the platforms. Both our server and communication businesses have grown sequentially nicely for the past two quarters. And the compute segment has been driven by the strengths in our server segment. And our communication segment has been driven by the strengths of the wireline applications, such as data center infrastructure, NIC cards, switches, security appliances, routers. We're very positive on that segment. The only drag you're seeing is that client decline. But other than that, the server and comms are both very strong.

Perfect. Thank you. Next question, Srini Pajuri with Raymond James. Please proceed.

Thank you. Ford, on the tariffs, I know you said the indirect impact. is unclear at this point. But as you look out to the second half, maybe you can discuss some of the conversations that you've had with your customers, how they're positioning. And in terms of the end markets, which end markets do you think you might see a larger impact versus a smaller impact?

Yes, thank you, Srini. We continue to see the cloud to be very strong, and we continue to have discussions with them on whether that's natural demand, and we continue to get confirmation that it is. So all the discussion we've had with our cloud customers point to the fact that 2025 CapEx is strong, and they're actually signifying that 2026 will be an improvement over 2025. So that has us very positive on the server segment. And as I said before, we continue to see strengths in a wireline communication that's helping our communication segment. So on the comms and compute, we continue to be very positive. On the industrial, for the second quarter in a row, the PMI is above 50 for the past four years. So we see this as a positive. Automotive has been flat. So you could see industrial has been up. And so that's a positive. Discussion we're having with customers on the industrial side of the business point to the fact that we are seeing some improvements in those businesses. So we're cautiously optimistic there. So from the fundamentals of the business, we're very positive. We don't control the tariff and resulting situation, and that's the only reason for our cautiousness. But other than that, the fundamentals for our business that we can control are positive.

Great. That's very helpful. And then in terms of your new products, you talked about design momentum being very strong. I'm just curious, when you kind of talk about double-digit growth year-on-year and sequentially in new products, is it more driven by the ASP strength of the new products? Is it units? And also, if you can talk about if the environment is having any impact on the design winds momentum. It doesn't seem like it. It doesn't sound like it based on what you said, but just want to hear your thoughts if you're seeing any impact on the new designs given the environment. Thank you.

Yeah, we continue to see strengths on a new design based on our strategic position in the small and mid-range segments with our low power, small size, security, vision, agile type of attributes. So the strength is really driven by the differentiation in our product that we think is related to the architecture choices we've made and that's long-lasting and sustainable. As far as ASP versus units, it's a mix. Units are recovering. At the same time, you do get ASP improvements as we go from pre-Nexus to Nexus to Avant. So we'll continue to see both of these trends helping us in the future. Thanks, Ford.

Next question, Christopher Roland with Susquehanna. Please go ahead.

Thanks for the question, guys. So in your 10Q, I think you guys discussed ongoing inventory digestion. I think it was comms and industrial. If you could update us on inventory in these segments, you know, and channel inventory levels versus target. I think that would be very useful for us as well.

So, Chris, you asked about inventory and then you injected channel inventory. Is that the focus is on the channel inventory?

Yeah, I mean, I guess you guys are most... Yeah, you're mostly channel anyway. But I was really talking about channel and if you were able to break that up into end markets like you did in your 10Q where you specifically addressed comms and industrial, that would be great.

So you're right. We sell most of our product roles through distribution. We haven't provided granularity in the different end markets that are in the channel. For one, we don't actually have perfect visibility, but the strengths and weaknesses of the individual markets, as Ford described earlier, with the strong expected growth in server AI-related products and the fundamental strength we have in industrial and auto based on our position, we see the channel inventory decline. We are, by design, shipping under consumption, so we're bringing down that channel inventory. We had earlier provided commentary that we're trying to get back to more normal levels of inventory by the middle of the year, but I think at this point we're We're expecting it may take a couple, a few quarters longer than that to do that. But we're going to continue to drive that down.

Got that. And that was channel inventory that you were talking about? So you don't think it'll normalize?

That was channel. Internal inventory is a pretty good news story. It dropped recently. $8 million quarter-on-quarter, a really significant drop. And I want to point out that if you look at the days calculation, it may not look like that, but that's because we had a distortion in Q4 cost of sales. So the math works a little strangely due to the liability for materials we recognized in Q4. But on a dollars basis, very good performance in reducing inventory, and we continue to manage that aggressively. In general, we manage all the working capital pieces aggressively.

Excellent. And Lorenzo, just since I have you, do you have any thoughts on how you might be different strategically or financially from your predecessor as CFO, even just at the margin? That'd be great. Thank you.

Honestly, I haven't thought about it from a perspective of being differential to my predecessor. I'll tell you that I approach this business and any other business very fundamentally. It's like, what do we need to do to drive growth of shareholder value faster than the market And we focus on the day-to-day execution across the board. We just talked about inventory as one of those. I give full credit to our head of operations for leading that. We're focusing on driving the products, new product launches through design wind into revenue faster than ever before. But the things that you step up from that execution that we look at, are there ways to accelerate the growth of the products by investing wisely? It may be a little bit more aggressively in the ways that we think about driving our revenue experience in this particular industry. I know the ecosystem can help a lot. I know that Tuckins can be very advantageous to accelerating it. And then, you know, working with Ford, an overall big strategic picture view of what the opportunities are for Lattice. And I'm sure he can add on to that if he wants. But, you know, I don't think of myself differentially. I just think of myself as the way I want to drive the business.

Fantastic. Thank you.

Next question, David William with Benchmark Company. Please go ahead.

Good afternoon. Thanks for taking my question. Area of strength.

Sorry, can you hear me? Yeah, we can hear you now. Go ahead, please. Okay, my apology. So the server's been an area of strength, and you've talked about it for some time, especially in AI and the server type. out of the server side. Just kind of curious how you're thinking about your penetration going forward in terms of content, and what areas do you think you may be more resilient, just kind of given this macro backdrop?

Thank you. Yes, thank you, David.

We continue to find new opportunities in servers around AI, around security, you know, around connectivity. And so we are going to continue to expand our design wins and offerings along these three areas. We do see this as a durable trend moving forward.

Great. And then you talked about the design wins being maintaining that record pace. Is there a way to size the magnitude of those design wins? How should we be thinking about that? Just as those come into market, it seems like that pipeline would be very strong over the next couple of years. Just trying to get a sense of what that could look like from what your existing design pipeline looks like.

David, the way to think about it is we do feel like the design win pipeline that we have, the funnel number one, which includes design opportunities as well as DesignWin pipeline, which is more focused on the one opportunities that have moved to win, they're both quite strong. And so both from an opportunity point of view on the new product, we've got actually pre-Nexus product, Nexus and Avant product, all three continue to do very well. Opportunities continue to grow. The conversion into DesignWin has continued to grow. And we are very confident that Fanon is going to result into the growth that we are expecting into 26 and to 27. And so the way we're thinking about it is, you know, the managed of it that gives us confidence in the future. And we're quite confident. We have not broken up. We've discussed many times, should we start opening up the dollar number? They're very significant dollar number, multiple, multiple times the revenue. And we're confident that this is very strong and sustainable.

Great. Thanks for the color.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Next question comes from Ruben Roy with Stiefel. Please go ahead.

Yes, thank you. Lorenzo, I wanted to touch on the inventory again, please. And maybe if we could just, I think Ford said that the channel inventory came down during the quarter, and you mentioned that it could take a few quarters longer to get to your target level, which I believe is three months. Can you tell us kind of where you exited Q1 relative to that three-month target?

Yeah, we haven't disclosed that. Ruben, and what we will say is we're trying to get down to that target level. Again, originally, as you pointed out, we were trying to get to that by the middle of the year, and we think right now it's going to take us a couple more quarters, and some of that relates to the uncertainty in the overall market, but it's just a continual push of the programs we have with the channel and our commitment to undershipping uh, true consumption, uh, that will get us there.

Okay. Um, thanks for that. I guess a follow up, uh, Ford mentioned also that you're having a lot of discussions. I think it's most management teams are with customers and, you know, kind of trying to assess the situation, uh, which is changing, um, you know, pretty constantly. Um, Have you been able to tell whether or not there have been orders in any of your end markets that are maybe abnormal? We've heard a little bit about pull-ins and that type of activity. Are you seeing anything like that while either the channel or your customers are trying to figure out how the tariff situation ends up?

Yeah, I'll start and then Ford can fill in with more color around customer specific. So we're looking at the data, we're looking at the data hard on a very weekly basis and talking to our sales force about what they see and asking these specific questions. We don't see any material changes in behaviors based on what we're seeing. in our data. But I think the more qualitative color that best comes from Ford.

Yeah, we've had discussions, as you expect, with all of them. And the results of these cloud companies have been already published. And you see from these results that actually some of them have grown their 2025 CapEx from last quarter guidance to this quarter guidance in 2025. Some of them have actually started guiding to a moderate rise in 2026 capex. So publicly, I think the statements they've all made are positive and continue to point to solid capex for 2025 and increased, albeit maybe moderate, into 2026. So in addition to the discussion we've had with them, that gives us the confidence this is true demand.

That's helpful. Thank you, Ford.

Gary Mobley with Loop Capital. Please go ahead.

Hi, guys. Thanks so much for taking my question. And it's a privilege to be on your earnings call for the first time. I wanted to ask about the achievement of the long-term gross margin target of low 70%. I would assume that's going to be largely dependent on mix. But as we think about the contribution to product mix for the balance of fiscal year 25, you know, what are the different considerations? Will you see more of a snapback in legacy products and thus that legacy mix will go away slower? How about IP-related revenue in the fiscal year? And then for a benchmark for long-term gross margins, you know, looking at that design, you know, the design wins that you referenced, how much of it is comprised of newer products and as well the attach rate for software in those?

Well, thank you, Gary, for that question.

We've been at this 70% gross margin now for about 10 quarters, right? So, you know, and especially in a 2024 and Q125 of decreased demand, it's good to see that margin continue to hold itself, showing the differentiation of sustainability value we bring to customer from our products. So our current model long-term calls for 70% and we're confident that we will achieve that.

I think there will be some benefit of scaling as revenue returns, that's just going to happen. But the mix strengthens and what you see is the dynamic of continued cost reduction across all of our product lines. But in general, the magnitude or the degree of cost reduction in new products happens faster than mature products. So we believe that will be advantageous to our mix going forward as we grow the new products. I heard your question, and I think we've got to it. But if not, please follow up. And by the way, thank you for being on the call, Gary. Appreciate it.

This is my follow-up. I wanted to ask about the competitive environment for low-power, small-size FPGAs. I think there's been a lot more noise from the two big players in the market about trying to supplement their growth by moving into this particular segment. And I think there's been some new architectures with some smaller lookup table counts and whatnot. So all things considered, considering that one of the big competitors is transitioning to a private equity firm? How do you see the competitive landscape in the small size and low power FPGA market?

Gary, the fact that you're shrinking your lookup table doesn't change your fundamental architecture of a lot four versus a lot six. Xilinx and Altair are still stuck on that lot 6 architecture, so nothing they can do to, unless they totally change and come to our lot 4, which we'd welcome, because that means that they would follow us into that sector. So fundamentally, we have a very different architecture on that small and medium-sized FPGA, and that results in, you know, for certain applications, call it under a million lots, which we are, for both Avant and Nexus, well below this currently. Nexus is below 100K, and we've announced a Nexus 2 below 200K. That's well within the envelope of our lot for architecture. Avant currently is at 500K, again, well inside that envelope. So inside that million and under envelope, we feel very confident that our lot for architecture is going to have sustainable long-term size, power, and performance, all kinds of advantages. You don't want to have a humanoid robot walk around with these heavy Xilinx Altera FPGAs, or same for a rack, a server rack, when you've got 100 of these things in a rack. I mean, power matters, size matters, and we feel good about what we are.

Thanks again.

Tristan Guerra with Baird. Please go ahead.

Hi, good afternoon. When should we expect revenue from Nexus to start rolling over? Historically, at least in high-end FPGA, that's typically on the seventh year of a new FPGA product ramp, which for Nexus would be in 26. Are you seeing any signs of a slowdown in growth? And what's the confidence about new products of setting that if that's the case, or would you expect Nexus to continue ramping year over year beyond the next year?

Yeah, no, thank you. Tristan, as you and I discussed when we met, I'm new to this FPGA market. I'm learning it takes a long time to ramp, and Lorenzo reminds me from his Xilinx days. I'm going to go to Lorenzo first, and I'll answer the question next, but Yes, the FPGA does take a long time to ramp because we introduce the first product and you've got to introduce the next ones and mature the tools, mature the IP. So the good news on this, longevity is very long. So most of our customers design for 20, 30-year life. And our partner, supply partner on both the FAB and OSAT are very focused on providing that longevity that some of our other competitors I don't think would be able to ascertain and provide. So we're very positive on where that ramp becomes. Nexus accelerates in 2026. Avant accelerates in 2027. And that's what's going to create the next year and the year after that growth. And then these things are going to stay around for 20, 30 years. Now, with that, let me turn it over to Lorenzo, because Lorenzo at Xilinx spent, what, nine years, Lorenzo, maybe?

11.

11 years, sorry. Yeah. And when he first showed up, he said, I sound like the prior CEO of Xynex, who's a good friend of mine, by the way, but please go ahead, Lorenzo.

Yeah, so I think the key thing that Fort talked about in terms of the design timeframe and the product ramp, that's all consistent with the behavior of the industry. The other aspect of the product family approach is as time goes on, we introduce more variants and continue to expand the footprint of the new products into different end markets and different segments, different price points and so on. And so that will accelerate the growth from any new product that you launch. So that's just a systematic expansion of the footprint of the new products through time. I think, as I said earlier, what we're looking for ways to do to help Ford overcome this anxiety has of the time to market is apply approaches where we are focused on helping our customers bring their products to market faster, but providing more complete solutions, broader sets of IP, and design help so that they accelerate their time to revenue. And that has also the benefit of increasing the intimacy we have with our customers and providing more opportunities to deploy the next generation of products as they come up.

Okay, that's very useful. And then for my second question, It's really not a question just for Lattice, but also some of the products. Given how long some products have been staying in inventories, notably at this stage, is there any potential for inventory obsolescence at distributors, notably in the industrial and market, specifically for your product? And then tied to this and your somewhat reserved outlook for the second half, which obviously we've heard this from other companies as well, are you rethinking your growth strategy in terms of acquisitions? And could you be more acquisitive? And what areas would be strategic for you?

So I'll take the first part of the question on inventory, and then I think it's appropriate for Ford to take the second. On our inventory, both in-house and in the channel, the nature of FPGAs and our products and their applications is that it's very long-lived. And while we see some occasional instances of obsolescence, we generally don't see anything significant and we're not expecting anything significant. Obviously, our guide shows continued strength in margin and so that obviously is not impacted in any way by this product write-downs or inventory write-offs. generally comfortable. I think it is something we manage like every other part of our business on an ongoing basis and continue to look for ways to move the inventory because that's better for us. So that's the inventory picture for the M&A outlook and thoughts.

Yeah, on M&A, we, number one, are very focused on our organic growth and making sure that we deliver on what the investments, the return on investments for the investment we've made in our next event. As Lorenzo just pointed out, FPGA has a set of tools and IP around them that would help customers go to market faster. And, you know, as well as potentially strategic sockets that sit around us and So we, over the long term, could potentially be more acquisitive. We get paid to look at both organic and inorganic, but we also get paid to make sure that we don't overpay for any of these assets. So we'll continue to grow both organically and inorganically, keeping in mind that the investments we make have to return good value for our shareholders.

Great. Thank you very much.

Next question, Quinn Bolton, Needham & Company. Please go ahead.

Hey, guys. Thanks for taking my question.

I guess I wanted to start with just you went through sort of the China impact and the amount of revenue, which is pretty small, flowing through the U.S., but looking at the 10Q, it looks like you had $57 million flowing to China. Just wondering first if you could walk us through any potential tariff impact on that China business. And then a second question, since China is now almost half of revenue on a ship-to basis, can you give us a sense of how much of that actually stays in China? So China for China revenue and within that China for China, are you seeing any increase in competition or pricing pressure from local Chinese FPGA vendors? Thank you.

Yeah, let me take the latter half and maybe Lorenzo can add on the former. The percent of revenue that is consumed in China is far lower than what is shipped to China. And the ship to China also includes Hong Kong. So when you look at the number that we reported on 10Q yesterday, It includes on a ship to both Hong Kong and China mainland, and then the percent on the China mainland that stays in China is much smaller than what we report as ship to. We haven't broken it up in the past, so we're probably not going to break it up. As far as competition with the local Chinese vendors, they've been very strong in communications and compute. So if you look at the business of not just Lattice, but probably some of our peers, U.S. peers. A few years ago, this was a business that was probably dominated by some of the communication companies, you know, the Huawei and Telecom and ZTE, Fiberhome, et cetera, H3C. And today, that business is dominated by automotive and industrial. So we've shifted totally from one sector to the other. The good news on the lattice business in China is we've actually increased compared to what we believe the other two large U.S. guys that have decreased. So they've decreased significantly. We've increased slightly. So the revenue grows from the Chinese companies that are native companies in China. They've grown at the expense of the other two guys, the other two big guys. And our expense, obviously, incomes. There's definitely going to be a mix in China where some sectors are not open to us and some sectors still are. And the fact that we've grown our business in China slightly shows the differentiation of our products in power, size, cost, effectiveness, and solutions. Lorenzo?

And so in the first part of your question, Quinn, as best I can understand it, the way we look at the current situation tariff regimes is, it depends on where the, if you're thinking about China, it depends on where the country of origin is determined to be. Our products are, the FAFSA are Japan to Taiwan, Korea, and our OSATs or assembly test vendors are Taiwan and Malaysia primarily. So that would say our current read that inbound tariffs to china uh aren't applicable in any of the abnormal ones aren't applicable um then the you know that with where they uh end up going out of china it's an it's our is our estimate i mean we really uh it's hard to get very precise on that But if you then look at maybe a follow-on of your questions, coming back to the U.S., as everybody knows, we're right now viewing it as currently exempt. As Ford said earlier, there could be sectoral tariffs coming. What we're doing is looking at ways to mitigate the impact, the economic impact of that on Lattice and our customers. We have some ways of doing that, but frankly, we're still trying to pin down what the rules would be around any tariff regime and implement solutions based on that.

Understood. Thank you very much.

Next question, Joshua Buchalter with TD Cal, and please go ahead.

Hey, guys. Thank you for taking my question. I wanted to ask about the new product growth. So I think if you sort of land it where you're guiding new products this year would grow around like low to mid 20% range. I know it's far out, but as we look into 2026, given you'll have Nexus 2 and Avant layering in and the ASPs that commands, I mean, should we expect new product growth to accelerate coming out of this year or, you know, is it off of a higher base number? So it should be sort of in line. Thank you.

Thank you, Josh, for your question. Yes, we should expect this to accelerate. So what we had discussed in the past is the new crop growth being in the mid-teens and 24, going to the high teens and 25, going to the mid-20s percent and 26. So as you see, it is accelerating and expected to continue to accelerate.

Okay, thank you. And on that topic, I just want a quick clarification. I think in response to a prior question, you mentioned Avant layering in more meaningfully in 2027. I thought on some of your prior comments, you've mentioned that being, you know, impacting revenue more so in 2026. Yeah, can you help clarify, maybe be a help with how much you would expect to contribute next year? Thank you.

Yeah, it's back to this FPGA layering question, which is it takes an FPGA some time for the new product variants to start layering in. So we're seeing an impact of Avant. We've released a couple of variants of Avant that are making an impact on 25. And there's more variants that are being released that will then layer in in 26 and 27. And same with Nexus. It just takes a few years for these various variants to go to market. These are longer qualification in these industrial automotive applications.

Okay, thank you.

Blaine Curtis with Jefferies. Please go ahead.

Hi, Ezra Wiener. I'm for Blaine. Thanks for taking my questions. Just a two-parter. One would be, You talked about inventory kind of taking a little bit longer to come down, but you reiterated the year. So I just kind of want to get a little bit of color on what gives you that confidence in the reacceleration in the back half despite inventory kind of taking a little bit longer. And then part B to that question is what are the moving pieces for the full year guidance and for the quarter from a segment basis?

Yeah, so I mean, look, what gives us the confidence is the three improving demand signals. And the reason we're keeping 25 where it currently is, again, the same three demand signals, which is we continue to see improved customer consumption in light of a better market. So both on the comms compute, we did discuss the server signals being better with cloud and AI. We discussed the comms being better with the wireline in the various applications. In industrial automotive, we did discuss industrial getting better with improved PMI. So I think we've been very clear on what's driving this better customer consumptions across server, comms, and industrial. And we also were pretty open on automotive being flat. And clients is the one weakness that is hurting us, right? But we don't see this as a key sector for us, actually. So we're not as worried about that client business. So number one, improved customer consumption. Number two, we're starting every quarter now with improved beginning backlog. And number three, we're continuing to see improvements in booking, resulting in much higher book-to-bill. And the book-to-bill continues to grow and continue to be above one now for quite a few weeks. So you put the three together, there's no reason for us to change 25. But it would be foolish to not say, look, there could be some risk given the whole tariff situation around us. And there's a lot of anxiety in the end user. And so we would be remiss not to say, look, there are some caution. And we're not alone, as in everybody else in our sector, right?

Got it. Thank you.

Dukesan Jain with Bank of America. Please go ahead.

Hi. Thank you for taking my question. Just a follow-up on this last question. I don't mean to put you on the spot, but last call, you also soft-guided 2026 to be up kind of back to your 15% to 20% growth rate. Should we also expect that to remain in place, just given the demand drivers that you just talked about?

Yeah, can you hear us?

Yes, yes.

Yeah, sorry. I'm not sure what just happened, but glad you're still on. If you go back, what Ford has been saying is from a fundamental basis, from the fundamental perspective, we don't see what our customers are telling us, what our design wind progression is telling us, and what the actual customer deployments are looking like, we don't see any fundamental change in the outlook we have. That said, we know very well how macro factors can impact the semiconductor industry and how macro factors can specifically impact the FPGA business. I've been through a couple of different cycles. So we want to make sure that we are communicating where our fundamental position comes from product strength, design win strength, execution, but some of the outcomes aren't in our control. And so that, you know, if there is something macro that happens negatively impacts everybody, we'll feel it too. Does that make sense? Sure. You know, so that's the answer for 2025 and 26 as well and beyond, right? we're not ignorant of the environment. We're focusing on what we can see and influence directly.

Yep. That makes sense. Then as a follow-up, I want to ask about gross margins. Is there any way to quantify the impact of new product to margins? So 15% exiting 2024, when I think you said high teens this year, and then mid-20s next year. So we have the mix, but how should we think about the impact to margins or any qualitative color would be helpful as well. Thank you so much.

I think what we had said last time is there's a nice ASP increase from pre-Nexus to Nexus, and there's another nice ASP increase from Nexus to Avant in line with where the ASPs for our peers would be for this sort of smaller FPGA going to the sort of high end of the smaller FPGA going to the mid-range of PGA. We're not giving ASP guidance on these broad calls, but I think there is an understanding in the market of what the ASP increase would be, and it would be very significant from one to the other.

Understood. Thank you so much. Okay.

We have time for one last question. Kevin Garrigan with Lowe's and Glass Securities. Please proceed.

Kevin Garrigan Yeah. Hi, all. Thanks for squeezing me in. For just a clarification, are you seeing industrial growing across the board, or is the end market growing in certain pockets while others may still be declining?

Kevin Garrigan

So the question is, do we see segments of industrial growing versus others? Is that the question?

Yeah, just wondering if you're seeing all basically kind of segments in the industrial growing or are some growing while others may still be declining?

I don't think we've gone to that level of detail at this point yet. We definitely are seeing some of the segments that are growing faster. We did discuss the data center, but we do have other segments like aerospace defense and medical that seem to be also growing faster.

It's just a very broad segment for us, so there will be ups and downs in it as a matter of course through time. Well,

Okay, great. Thank you for that. And then just, you know, staying on industrial, can you just give us some puts and takes on how big your opportunity is in AI there as things continue to go to more inference-related workloads?

Yeah, I think in the past, we have discussed the opportunity for us to be a companion AI chip. And in the data center cloud applications, we are always a companion AI chip. So we don't really do AI in our chips. We were more a supporting function to these big training or inferencing AI chips and server and AI applications. On the industrial and some pieces of equipment where the only processing element is our FPGA, we obviously have a chance to play a bigger role because we are the main processing element. And FPGAs are very good as parallel processing engine for performance. very low latency, deterministic, accurate, high performance. So we have a lot of attributes in places where we're the only processing element in some of these smaller IoT and industrial type of monitoring type of applications to run some of these tiny AI models on FPGAs directly. In a lot of cases, these are still, if there is a bigger FPGA, let's say somewhere in the automotive or in the enterprise controller for industrial, we're still a pre-processing element, if you wish, that feeds some of this pre-processing AI data to the main AI inferencing or training chip. So there's definitely a role for us to play in industrial that's bigger than the role we'd have to play in data center and cloud. Did I answer the question?

Yes, it did.

I appreciate that color. Thanks, Forde.

I would like to turn the floor over to Ford Tamer for closing remarks.

Thank you, operator. Thank you, everyone, for joining us on today's call and for your continued support. We remain focused on execution, working closely with our customers to drive innovation and expanding market opportunities as we build on our serious level of new design. I look forward to sharing the company's progress with you in the coming quarters. Operator, that concludes today's call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you.