Lattice Semiconductor Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2024

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Lattice Semiconductor Third Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Rick Muche, Senior Director of IR.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice's CEO and Tonya Stephens, Lattice's Interim CFO. We'll provide a financial and business review of the Q3 of 2024 and the business outlook for the Q4 of 2024. If you have not yet obtained a copy of our earnings press release, it can be found at our company website in the Investor Relations section atlatticemi.com. 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.

Speaker 1

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 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 contained in our projections or forward looking statements. This call includes and constitutes the company's official guidance for the Q4 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 public announced conference call.

Speaker 1

We will refer primarily to non GAAP financial measures during this call. By disclosing certain non GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we 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 latticesemhi.com. Let me now turn the call over to our CEO, Ford Tamer.

Speaker 2

Thank you, Rick, and thank you everyone for joining us on our call today. 7 weeks ago, I joined Lattice as CEO with great anticipation about the company's prospects. And I'm even more excited today about our potential and a significant opportunity for stockholder value creation ahead of us. One of the key messages since joining Lattice has been stability. I love the team, customers, products, partners and end markets.

Speaker 2

Over the past few years, the team at Lattice has done an impressive job, transforming itself into the low power programmable leader in the small to mid range FPGA market. For that, I extend my sincere thanks for everyone's hard work and continued dedication. I also want to thank Isam El Ashmawi for providing continuity and stability as Interim CEO. Isam has played a key role over the past 6 years in setting and executing Livus' strategic direction. I look forward to building on our partnership.

Speaker 2

Many of the investors and analysts on today's call have a history with me from Inphi, Broadcom and AGEAR. One of the biggest factors and drivers of my previous successes has been focused on product differentiation, which I believe creates customer benefits and market leadership. And in my opinion, that combination ultimately builds long lasting value for all stakeholders. For example, I joined the Inphi team in 2012 post IPO. And over the next 10 years, we took it from $35,000,000 in telecom revenue to a multibillion dollar cloud NAI revenue business that's now an important part of Marvell.

Speaker 2

The in flight transformation story created over 20 times value appreciation for all shareholders. I'm confident that Lattice has similar potentials in many ways. Now moving to our Q3 results. From a high level, Q3 2024 revenue was in line with our guidance at $127,100,000 On an end market basis, communications and computing was up 12% sequentially, driven by both general purpose and AI servers. Industrial and Automotive was down 7% sequentially, primarily due to broader market demand and continued inventory normalization.

Speaker 2

Gross margin held at 69%, demonstrating the stability of our business model. Overall, while our results continue to be impacted by industry headwinds, we've been outperforming our direct peers by taking share in the small FPGA market segment. In a positive outlook, Lattice's new product revenue continues to grow year over year. Design momentum continues to be robust as the total number of wins year to date exceeds those in the same period last year. We are also encouraged with our stronger backlog and continued improvement in our book to bill, which bode well for our business moving forward.

Speaker 2

As we look ahead to Q4, we expect revenue to be in the range of $112,000,000 to $122,000,000

Speaker 3

Based on our discussions with customers and partners, we now expect more of

Speaker 2

a U shaped recovery than a V shaped one in 2025. With that in mind, we anticipate low single digit revenue growth in 2025 compared to 2024, with the expectation that channel inventory will begin moving back to the midpoint of our target range and enable Navios to execute to our long term revenue growth targets of 15% to 20%. That said, when you consider our strategic plan, strong team, differentiated product line, breadth of market applications, leadership position in low power and robust ecosystem. We strongly believe that Lattice is still a sound investment opportunity with clear visibility into the upside. Since joining Lattice, I've had very productive meetings with customers, partners, suppliers and employees.

Speaker 2

These included multiple customer meetings and reviews across all segments, specifically communications, computing, industrial and automotive. I have been pleasantly surprised at Lattice's deep consultative relationships where we are the trusted partner for small and mid range FPGAs. This is because our team understands customer pain points and can jointly develop win win partnerships. Our industry leading roadmap includes low power, small size, large number of interfaces, differentiated features, solutions stacks and support. All this has generated positive feedback from our global customers and partners.

Speaker 2

And from here, we plan to double down on our small to mid range FPGA offerings. This focus would be a key enabler in Lattice's transformation

Speaker 3

to

Speaker 2

the next level in our business. We are optimistic that we have everything in place to become a much larger company and to accomplish our goal of reaching the $1,000,000,000 revenue mark. We have high confidence in this goal given the size of our addressable market and tremendous number of market opportunities in front of us. Now there are three reasons why Lattice remains strategically well positioned for growth. 1st and foremost, Lattice has a history of diligent financial discipline, aligning our investments behind what we believe to be the highest return opportunities.

Speaker 2

These efforts directly extend to our operating expense plan going forward. After careful consideration, we implemented a 14% headcount reduction last week. This is the first headcount reduction of this magnitude in recent history at Lattice. We do not expect any additional reductions will be needed. We reduced non headcount operating expenses by a similar 14% as well.

Speaker 2

The actions were primarily done as part of our shift our targeted resources from high cost to low cost regions as we work to drive for more efficiency across the business. Importantly, even though we took these actions, we intend on maintaining the integrity of our product roadmap and our customer support and demand creation. There is no expected change in what we're delivering to our customers. For example, our 7th Nexus device family achieved initial production in Q3 and Avant G and X remain on track for initial production in Q4 of 2024. As you recall, we expected more of a U shaped recovery than a V shaped one in 2025 with low single digit revenue growth.

Speaker 2

We are confident and expect that anticipated revenue growth combined with the 14% OpEx reduction will have drive annual earnings expansion in the low double digit range in 2025. The second reason Lattice remains attractive is our leadership position in our strategic core markets of communications, computing, industrial and automotive. We intend to lean into and leverage Lattice's rich history of innovation and differentiation to drive and sustain that leadership. There is considerable value in our low power and small size leadership position. And this has been reinforced by the many customers and partners across all of our end market segments.

Speaker 2

I heard firsthand about the benefits that our Nexus small FPGA family and our Avant mid range FPGA family are offering. And from a feature differentiation, our customers are increasingly standardizing on Lattice low power solutions in multiple applications, including security, video processing and edge AI. The third reason Lattice remains attractive is our focus on edge AI, a fast growing market by all measures. We have strong traction with AI in servers, laptops and early traction in industrial and automotive applications. In data center servers, example, various applications include control, management and security in support of generative AI workloads.

Speaker 2

At the recent Open Compute Project or OCP, there was a great deal of interest in our data center solutions where our OEM partners showcase the broad usage of Lattice FPGAs in AI servers. We estimate one of our OEM partners uses over 50 Lattice FPGAs with an e track and expect this partner to have a significant demand for server racks in 2025. In AI enabled clients, Lattice FPGAs are being used to run the AI inference algorithms that provide features such as user presence and gaze detection. And in Q3, Lattice's devices began powering AI computer vision on the Dell XPS model high performance AI laptop. This is in addition to the ramping design win on select Dell Latitude models Lattice has previously discussed.

Speaker 2

And lastly, Lattice solutions are being used to aggregate and pre process sensor data and AI processing in the data path for industrial and ADAS systems. Lagus has now been designed in 5 of the top 6 LiDAR companies for automotive and many industrial vision panels. In summary, because of our financial discipline, market leading position and enrolls in early action in the accelerating AI market, I am confident that if you stay with Lattice during this period, you'll be in a position to grow along with us into 2025. Finally, I'm pleased to share that on December 10 2011, we'll be hosting a developers conference in San Jose. We look forward to showcasing Lattice's broad portfolio.

Speaker 2

This includes our next gen small FPGA platform, additional Avant portfolio expansion and enhancement in our software tools and solutions. I am personally looking forward to meeting you, our customers and partners. I will now turn the call over to our Interim CFO, Tania Stephens, who will provide a few details about her background before discussing the financial review of the quarter. Tania, I look forward to working with you in your expanded role. Please go ahead with your review.

Speaker 4

Thank you, Ford. While my corporate finance career spans more than 30 years, for the last five and a half years, I've worked very closely with the executive leadership team at Lattice, especially the former CFO. I worked as Corporate Controller, but also doing many other aspects of the CFO role. I'm confident this will help ensure continued stability and precision in all our processes financial reporting as we move forward. Let me now provide you with a summary of our Q3 2024 results.

Speaker 4

From a high level, Q3 results were in line with expectations. Our profitability expanded, our operating cash flows more than doubled sequentially, and we continued to return cash to shareholders through share buybacks. Specifically, Q3 2024 revenue was $127,100,000 up 2% from the 2nd quarter, down 34% year over year, which reflects continued inventory normalization. Communications and Computing grew sequentially 12%, driven by strength in Computing, which more than offset softness in Industrial and Automotive. These 2 strategic end markets comprise over 90% of total Lattice revenue.

Speaker 4

Our Q3 GAAP and non GAAP gross margin was 69%, reflecting the continued stability of our gross margin despite the overall market softness. Q3 non GAAP operating expenses were flat with the prior quarter at 54,000,000 dollars and down 7% compared to the year ago quarter. This is a result of our continued discipline in managing our operating expenses, particularly SG and A. As Ford told you earlier, we implemented a workforce reduction of 14% last week, which resulted in a one time GAAP charge of $6,500,000 for the Q3 2024. This action better aligns our resources to support the current business level.

Speaker 4

Our Q3 non GAAP operating margin was 26.6% compared to 25.4% in the prior quarter, driven by stability in our gross margin, coupled with disciplined management of operating expenses. Q3 EBITDA margin was 33.7%, up 160 basis points from the 2nd quarter. In Q3, diluted shares outstanding was 137,900,000 dollars resulting in Q3 non GAAP earnings per diluted share of $0.24 compared to $0.23 in the prior quarter. Moving to our cash flow and balance sheet. Cash flow from operations in the 3rd quarter was $44,000,000 This was more than double the cash flow from operations in the 2nd quarter.

Speaker 4

Free cash flow margin increased to 31%, up from 12% in the prior quarter. Our inventory at the end of the 3rd quarter was $104,500,000 which is an increase of $3,000,000 from the prior quarter. On a year over year basis, inventory was flat. In Q3, we repurchased approximately 370,000 shares or $17,000,000 of stock, making Q3 our 16th consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 5,600,000 shares, thereby reducing dilution by 4.1%.

Speaker 4

Let me now review our outlook for the Q4. Revenue for the Q4 of 2024 is expected to be between $112,000,000 $122,000,000 Gross margin is expected to be 68%, plus or minus 1% on a non GAAP basis. Total operating expenses for the 4th quarter are expected to be between $52,000,000 $54,000,000 on a non GAAP basis. Our tax rate in the 4th quarter is expected to be in the 5% to 6% range. Based on the above inputs, our EPS is expected to be in the range of $0.15 to $0.23 Operator, that concludes my formal comments.

Speaker 4

We can now open the call for questions.

Operator

Great. Thank you. At this time, we will be conducting a question and answer Our first question here is from Tristan Gerra from Robert W. Baird. Please go ahead.

Speaker 5

Hi, good afternoon. And

Speaker 6

just

Speaker 5

a couple of high level questions. The first one is regarding Nexus, which you launched in December 2019. Obviously, it's been a resounding success since then. And the typical ramp of an FPGA historically has been 7 years before revenue peak. And that suggests unless there's something really different about Nexus that Nexus revenue could peak sometime late 2026.

Speaker 5

So the question is, given that it takes obviously some time between design in and volume ramp for new product. Should we expect a new product line? And I know you have new iterations of Nexus every 6 months, but I'm thinking of a new node or something that will be different very different architecturally that could potentially succeed Nexus at a time when the ramp starts slowing down?

Speaker 2

Thank you, Tristan. This is Ford. We're very excited about the Nexus and Avant ramps. The current revenue growth, the 1st 3 quarters of 2024 are well over the 1st 3 quarters of 2023 as far as new product and as driven primarily by Nexus and secondarily by Avant. So we continue to see that ramp.

Speaker 2

As you're suggesting, we are actually doubling down on both the small and large and mid range of PGA segments. You will hear more of this leadership position at our developer conference in December. But we're very pleased with the differentiation that our customers are indicating we have and the benefits that the small power, small size differentiation like security and video streaming and edge AI are providing with both Nexus and Avant.

Speaker 5

Okay, thanks. That's very useful and great to hear. And then wanted to see if you're able to elaborate a little bit on the traction that you're seeing in It was previously quantified, but at the same time, we know that traditional data center inventory digestion had a little bit of an impact on everybody's top line a year ago. And could you elaborate now that you seem to have a lot of design win traction and elaborate a little bit on the dollar content per APGA, the adoption rate and what makes you believe that this is sustainable and of course as a derivative, how should we be looking at computing and data center revenue going forward given this very promising traction that you're now getting in AI?

Speaker 2

Excellent, Tristan. Yes, so we in the past have broken up that number to be about $100,000,000 and we believe we're about slightly in the same range or slightly above that. So as a percent of revenue, you could see our AI revenue is growing. We just talked about engagement new engagement opportunities with server and clients. So on the client side, we announced on my script, the Dell XPS design opportunity that is increasing our footprint above the Dell Latitude that was already shipping.

Speaker 2

On the server side, we started shipment of our Lattice NVIDIA Edge AI boards, and we did discuss the phenomenal progress we had at OCP, the Open Compute Conference, with many OEMs, where at one data center server platform, we had in excess of a 50, 50 Lattice devices in one of these platforms. And then finally, on my prepared remarks, we also discussed the fact that we are in the top 5 LIDAR Tier 1s and they were into many industrial display panels. So we are excited about the continuing progress we're making on the client, on the servers, on the automotive and industrial with Edge I. And please stay tuned for more. We encourage you to come see the many demos that we're going to have and the many partners we'll have at the developer conference in December, very exciting development for us.

Speaker 5

Great. Thank you very much.

Operator

Our next question is from Melissa Weathers from Deutsche Bank. Please go ahead.

Speaker 7

Hi, guys. Thank you for letting me ask a question. Ward, welcome to the call. I'm excited to work with you going forward. I guess I wanted to double click on your U shaped recovery that you're talking about.

Speaker 7

Should we be thinking about the December quarter as kind of the bottom of the cycle? And do you believe that you're shipping to true end demand now? Or is there still some inventory in the channel, so that maybe you could that burn should end at some point and you would see a snapback? Just any more color on your U shaped recovery would be helpful.

Speaker 2

Yes. Thank you, Melissa. Yes, we do believe that what we're seeing is consistent with the broader market that's also indicating a U shaped versus a V shaped recovery. Overall, we continue to see softness in our largest end market, which is industrial and automotive. And in that market, we're 4 quarters in what's typically an 8 quarter recovery.

Speaker 2

So you could see that, that would point to a flattish Q4 through sort of mid year 2025 for this inventory to sort of clear itself up. And on purpose, what we've done, we've worked with our channel partner to glide down that inventory position in the channel to where it goes back to normal inventory by sort of Q2, Q3 of 2025. And we're being applauded by this channel partner for being good partners and helping them do that and sort of getting inventory levels in the channel to normal level, which is about 2 to 3 months, okay. So when we look at our long term fundamentals, the demand recovers in sort of around the second half and then starts driving back to our regular run rates of 15% to 20% revenue growth in 26%. And then if you combine all this with the sort of operating expense action we've taken, we do believe that the financial discipline that Lattice has shown in the past will shine again and show double digit earning growth expansion in 2025 and definitely beyond that in 2016.

Speaker 2

Hopefully, that answers the question. I'm happy to give you a lot of data. We've obviously spent a lot of time on this topic, and we could spend a lot of time on this if needed.

Speaker 7

Yes. Thank you so much. Maybe a little bit more color on that. Is there anything you're seeing from a pricing perspective or from a competitive perspective that could be weighing on your outlook into 2025? Or do you think this is mostly market wide dynamics?

Speaker 2

Yes. We believe it's mostly market wide. We have been very disciplined and we believe more disciplined than our peers in price and supply assurance. We've talked about our pricing optimization strategy and pricing ability in the past. We during this difficult supply situation, we strike the right balance to ensure that our broad based 10,000 customer had minimal disruption for their supply chain and were able to continue to operate without disruption and meet their obligations.

Speaker 2

And this was very important to us to be customer friendly as opposed to just focusing on a few large customers aligned with certain segments. So we did a really good job, we believe, in a supply constrained world to see really be a very strong trusted partner for our customer and ensure that they didn't see any disruption. And so we at this point, you could see from our gross margin that our the stability of our gross margin, despite a product mix that's gone more towards a compute and comms, which is typically harder than industrial automotive. And despite a lower revenue trend, we've been able to maintain our gross margin, which shows the durability and strengths of our financial model.

Speaker 7

Thank you, Ford.

Operator

Our next question is from Christopher Rolland from Susquehanna International Group. Please go ahead.

Speaker 6

Hi, guys. Thanks for the question. So Ford, welcome aboard, I guess, for the 2nd time. But I just wanted to kind of bigger picture ask you just given your heritage in kind of AI and networking, did you have some early thoughts on how FPGAs either low end or mid tier could have a role there? I don't know if it could ever make it into a transceiver, if it could ever be paired with, I don't know, a DSP or something like that.

Speaker 6

I don't see a logical fit, but just anywhere in these interconnects or maybe some AI applications that we haven't thought about and or even IoT at the edge, AI IoT at the edge, I don't know. But just given your heritage, maybe you can talk to these opportunities and are these some of the brightest you see for Lattice?

Speaker 2

Thank you, Chris. I appreciate the question. So maybe I'll divide the answer into 2 parts. Since joining, I've been talking about Seth. And you've got a bit of background, if you don't mind muting, Chris, I don't know if that's you, but can you mute us?

Speaker 2

Okay. Thank you so much. So I'll answer the question in 2 parts. Number 1, from since I joined, I've been talking about self, SELF, which says we control our own destiny. And what that is, is stabilize, execute, lead and focus.

Speaker 2

So stabilize, we've got good team, good product, good strategy. E, execute on the road map that we currently have and lead with low power, small size differentiation like security, video and AI and number 4, F for focus. And here, we're focused on really Nexus and Avan. So that's what we're doing. Coming to AI now, we're actually above all the trends you discussed.

Speaker 2

So for example, when you talk about a transceiver, the device that sits between that switch and the many optical module to light the LED and provide things like telemetry and all kinds of measurement function as sort of this bridge between, if you wish, the switch and these optical transceiver. We're sitting in there providing this bridging and sort of LED and control type of function. If you look at the server, we've got many application on servers. And we're designing the top 10 server in the world today. So that's many applications on server, same with IoT, same with client, same with so all the applications you mentioned were designed in doing things like pre processing, HMI, user and object detection, gesture and gaze, defect detection, security, 3 d audio with head tracking.

Speaker 2

So many applications of AI, we're not always in a data pass. Sometimes we are and most of the time, we probably call it 20%, 80%, 20% in the data pass and 80% more of a sort of supporting function, not the main chip. But you're going to see us in all of the applications and given our current focus on AI, you're going to see us in more applications. So I do expect our percent of revenue coming from AI to grow over time, Chris. And you're on mute if you have another question.

Speaker 6

Yes. Thank you for that, Ford. I appreciate. And maybe for a follow-up. Some of your FPGA competitors have married their kind of FPGA fields with a hardened ARM core.

Speaker 6

I think there's also the potential for even a microcontroller. I think the last management team didn't seem particularly interested in this. I was wondering if maybe you would revisit this and whether you think this is interesting at all? Thank you.

Speaker 2

Yes. Thank you, Chris. You should come to our developer conference, which I think you'll be attending and see the many partners we have on the microcontroller side. And so whether it's it's a long list, whether it's NXP or ST or Renesas or many of the other ones, we're going to have many microprocessor partners that are designed in with us. So instead of having our own, we partner with them.

Speaker 2

And again, instead of having our own AI accelerator, we partner with companies like NVIDIA and others, including Habana and AMD to provide companion chips on all of these. So we believe that not having our own is actually an advantage because we end up being the friendly partner. And furthermore, we have developed and delivered to our partners SoC development tools. It's called PROPEL, p r OPEL, that is our development tool that actually enables some of this design designs to go to market.

Speaker 6

Thank you.

Operator

Our next question is from Quinn Bolton from Needham and Company. Please go ahead.

Speaker 8

Hey, Ford. Welcome to Lattice. I guess a couple of questions. Ford, it sounds like you're describing a lot of the headwinds that the company is facing as being more industry wide. But I guess I look at your competitors Xilinx, Ultera, both of those companies saw revenue trough in the March quarter and they saw sequential growth throughout the rest of 2024.

Speaker 8

Lattice is seeing sort of the opposite pattern where it looks like Q1 may be the highest revenue in the quarter and Q4 is the lowest. And so you're showing a different trend than the 2 largest competitors. And so I'm wondering if you had any thoughts why you may be seeing something different than your big competitors? And then I've got a follow-up question as well.

Speaker 2

Yes, Quinn, look, it's a good question. We've got very detailed data. I've got a graph right in front of me here that tracks this back to Q1 of 2023. And if you track this back to Q1 of 2023, our performance is twice as good as the worst one of these 2 and 50% better than the other guys. So we're doing based on sort of tracking a longer term view from where the peak was.

Speaker 2

So if you take a 2023 view, you'll see us do much better. If of course, you can always take data and come up with any trends you want. So sure, if you map this over the past 6 months, you may see something different. But we believe the really fair way to do this is to track this over a longer term period, and you see us do better than competitors by a long shot. We're not even close as far as our performance.

Speaker 2

And Quinn have been taking share. So if you look at our view of the share against these two companies, we believe that we have continued to expand our share. We're introducing new products. And especially if you track this and the small to mid range FPGA without SoC, because we're not into that market, we don't have SoC. So if you look in the apple to apple SAM, which is small and mid range non SoC, which show you we're taking shares.

Speaker 8

Got it. Okay. Thanks for that. And then I guess just wanted to maybe follow-up on Melissa's question just about where do you think consumption is? If I take your guidance for fiscal 2025, looks like revenue up low single digits year on year probably puts you at about $525,000,000 for the year, something like $130,000,000 or so a quarter.

Speaker 8

Is that the right level to be thinking about what end consumption or POS data supports? Or would you are you looking at POS even though revenues below that level? Is POS sort of higher than that $130,000,000 or so a quarter level?

Speaker 2

Yes. I think those numbers for revenue are right. I'm going to let Tania chime in here. Tanya, do you want to take this question?

Speaker 4

Sure. And that's a great question. And you're exactly right. When we look forward to 2025, as you heard in Ford's prepared remarks, we believe that disti inventory currently is at the high end of the pre pandemic levels and we believe through 2025 that'll get more to the mid range of our target range. So as a result of that, we do believe our revenue will be lower than the actual end consumption depending on of course the specific end market.

Speaker 8

So POS should be sort of at $130,000,000 or higher next year, it sounds like, since you're going to be consuming inventory at least, yes, certainly it looks like through the first half of the year?

Speaker 2

That's correct. That's correct,

Operator

Okay. Thank you. Our next question is from Srini Pajjuri from Raymond James. Please go ahead.

Speaker 9

Thank you. A couple of questions. For the very near term, as we look out to the next quarter and also into the first half of next year, I look at your 2 different segments. 1, obviously going through a cyclical correction in auto and industrial, fairly well known. But the other one, one, you're basically doing quite well when it comes to servers because of the content increases.

Speaker 9

Those are, I believe, secular. And also you talked about AI design wins. So I'm a little surprised as to why we are seeing the weakness in the short term. Is it primarily still auto industrial correcting? Or are you seeing some correction in the comps and compute as well?

Speaker 2

Srini, I think the let me share with you numbers that are public that you know. So if you were to go back, let's say, to Q1 of 2023, at that time, in Q1 of 2023, industrial auto was 59% of revenue and comms compute was 36% of revenue. And so if you fast forward now to this quarter we just announced in Q3, industrial auto is 43% and comms and compute is 48%. So you could see a pretty big shift from one to the other. And so despite that, we and despite this product mix and despite lower revenue, we have been able to maintain a solid gross margin and solid financial operating metrics on the EPS, EBITDA, free cash flow, which jumped nicely quarter on quarter.

Speaker 2

And furthermore, going forward into 2025 and 2026, we should be back up into the right and back in good shape. But you've had a pretty big change here from in these end segments that we've been able to weather because of the growth in the compute and comps. And again, if you look at compute and comps, obviously, comps has not been very strong because of 5 gs being delayed. So you could even read further into that, that compute is actually quite strong.

Speaker 9

Okay. And you expect that to continue in the next few quarters, Ford? Are you seeing any

Speaker 2

changes there as well? No, we do expect that to continue. And as Tanja just answered that we do expect the POS now being higher than revenue. And so we continue to glide down that inventory to mid year 2025. And then after that, we're back up to the right.

Speaker 2

It's just we're a couple of quarters away from this. And in the meantime, we have the financial discipline to continue to drive good earnings expansion.

Speaker 9

Fair enough. And then a quick follow-up on the workforce reduction. The guidance for next quarter $52,000,000 to $54,000,000 does that fully reflect the 14% workforce reduction? And then, Ford, I think at the Analyst Day, you're still maintaining that 15% to 20% that was communicated at the Analyst Day. And at that time, I think the management communicated about 30% OpEx.

Speaker 9

Is that still valid or given the cost cuts, should we expect something below the 30% longer term? Thank you.

Speaker 4

Yes. And I'll take that. This is Tanya. Your first question on our OpEx guidance, of course, the workforce reduction isn't done at the beginning of the quarter and takes time to fully implement, but our operating expense guidance does contemplate our assumptions around that workforce reduction. And we do expect that to continue to benefit our 2025 results as well.

Speaker 4

So if you're thinking about our 2025 model, Ford mentioned in his prepared remarks that we expect low single digit revenue growth in 2025 compared to 2024, improving as the year goes on and we come out of the inventory digestion cycle about mid-twenty 25. We expect margin to be primarily flat year over year, but we expect sort of high single digit OpEx reduction compared to 2024 mid to high compared to 2024 as a result of both the headcount and non headcount OpEx reductions. And it's a 14% reduction in our headcount and our higher OpEx run rate. We also you saw guided our non GAAP tax rate. It's expected to be in the mid to high single digits then as we carry forward into 2025.

Speaker 4

And all of those factors provides a low double digit EPS earnings expansion outpacing revenue growth. So that's kind of how we're thinking about it.

Speaker 9

Got it. Thank you.

Operator

And our next question here is from Ruben Roy from Stifel. Please go ahead.

Speaker 10

Hey, thank you. Hi, Ford. I wanted to ask for just on new products and it's great to hear that the new product growth has continued. But when I think about 2025, obviously, we've got these industry headwinds, which are well known, I guess, at this point. But we are also expecting higher ASP Avant to kind of roll into the model.

Speaker 10

I guess the question is, the incremental from Avant, has anything changed given what's going on with the end market in the way you're thinking about the Avant rollout for next year? Is it maybe delayed a little bit from sort of earlier expectations or no changes there and it's really just the core products and the core markets that are creating these sort of headwinds that are driving the U shaped recovery expectation?

Speaker 2

Thank you, Ruben. Nice to reconnect. Yes, no change on Avant. We're pleased with the traction of Avant. We continue to drive increased design win with revenue from new product expect to be in the double digits for 2024 and continue to grow from there led by Avant.

Speaker 2

So the opportunity for the Avant is bigger as shown from the funnel opportunity that we're seeing for Avant is quite bigger than the same time ramp in NEXUS. So we're seeing early revenue for Avant E, which is what we have introduced some time ago. Avant G and X are on track for prioritization in Q4 and early revenue. And then we expect Avant revenue in the second half the second year of the platform launch will exceed what we sell for Nexus in that second year. And so we're excited about Avant, and we'll tell you more about them at the developer conference.

Speaker 10

Okay. Thanks for that, Ford. And then if I could just ask a quick follow-up on the comment you made as in reference to the communications part of communications and computing. We've seen sort of the progress and the success in the compute part as you mentioned. On the communications part, we are starting to hear some data points that would suggest that there is a bottoming on comm infrastructure and maybe even a little bit of improvement here exiting the year.

Speaker 10

Is that kind of the way you're thinking about that business? Or is the comm part still a potential area of headwind as we look ahead to 2025? Thank you.

Speaker 2

Yes. I mean, Ruben, I think your characterization is correct. And so we do expect comps to normalize and second half of twenty twenty five be on track to grow along with the rest of the portfolio.

Speaker 10

Okay. Thank you, Ford.

Speaker 2

Thank you, Umer.

Operator

Our next question is from Joshua Buckwalter from TD Cowen. Please go ahead.

Speaker 11

Hey, guys. Congrats on the first earnings call at Lattice and thank you for taking my question. I wanted to ask about some of the assumptions and follow-up on some of the earlier comments that are going into the low single digit percent growth next year. I know you've given us a timeframe of when you expect digestion to cease, but any way you can quantify the magnitude? And I guess the real reason I ask is the prior management team had put out the 15% to 20% long term growth target.

Speaker 11

Is that still the right number you're thinking about? Or is that under evaluation right now?

Speaker 2

Thank you. Yes. Thank you, Josh. The prior target of 15% to 20% revenue growth is still the correct targets. We're not changing that.

Speaker 2

We're saying in my prepared remarks, we did comment that we expect that we expect to come back to that guide of 15% to 20% in 2026. We also said the C shaped recovery will probably we expect the revenue to be flattish in Q4, Q1, Q2 of next year. And then as this inventory situation normalizes, to start seeing growth in the second half of next year, leading to this stronger growth into 2026.

Speaker 11

Got it. Thank you. And then for my follow-up, I think the prior management team had mentioned that inventory in the channel was a little at the high end, but still within a range that it was comfortable with, but they are more concerned about end customer inventory levels. Is that how you're seeing it too? It sounds like a little bit of a change in that you're trying to get the channel level down as well.

Speaker 11

And I'd be curious to hear how you feel about visibility into end customer inventory in particular for pre DEXIS products as DEXIS and Avant ramp and become more of a mix and you

Speaker 2

go through the digestion? Thank you. Yes. Thank you. I've been Josh, been pretty impressed with the amount of data the team has here on POS, on what's at the channel, what's at Lattice, what's at customers.

Speaker 2

So a lot of data and we've been tracking this. Our book to bill has steadily improved over the past 4 quarters from very low level to close to 1. And so we're seeing that normalization happen. It's taken a bit longer in industrial automotive than maybe prior expectations. But I think it's in line with the broader market trends in our peers.

Speaker 2

And so again, we expect this channel inventory to be back to the midpoint in 2025. And Tania, I think you have a bit more data.

Speaker 4

Yes, I think it's consistent with what you said. I think we've always said that disti inventory can fluctuate on a quarterly basis. We have pretty good visibility into the disti inventory, as Ford said, tracking end consumption out of the disti. It is the inventory all the way at the end customer because like Ford said, we have over 10,000 end customer because like Ford said, we have over 10,000 end customers that is a little harder to

Speaker 2

see, but we think

Speaker 4

we now have a better handle on it. We're like Ford said, looking to, get to that disty inventory more to the midpoint of our target range through mid-twenty 25.

Speaker 11

That's helpful color. Thank you. I appreciate it.

Speaker 2

Thank you, Jeff.

Operator

Our next question is from Doxong Jang from Bank of America. Please go ahead.

Speaker 3

Hi. Thank you for taking my question. You mentioned that Q1 and Q2, you expect revenue to be flattish. Is that a company overall number? Or is that industrial specific?

Speaker 3

Because I've heard from your peers and also other industrial exposed semis that Q1 tends to be pretty seasonal. So any comment would be helpful. Thank you.

Speaker 2

Yes. Thank you, Dachshund. We're saying that the revenue will be flattish from Q4 of 2024 through Q1, Q2 of 2025. We are obviously not guiding. It's just these are expectation.

Speaker 2

We're not guiding to those quarters, but that's the expectation.

Speaker 3

I see. And then one on servers, the previous management team has been pretty big in talking about the content expansion gen over gen in the servers. Are you still seeing that sort of coming through in the current generation of CPUs? And should we still expect this trend to continue into the next one as well?

Speaker 2

Yes. Thanks, Dusan. Yes, we're seeing it, as I said, at the open compute show where we had many OEMs and ODM designs on the show floor, Lattice was on display on many of these boards with over 50, five-zero Lattice of PGA within each rack and expect these partners to have very significant demand for server racks in 2025. So not only have we increased the content per server, we've also increased the design footprint where we now design into the top 10 server makers for this market. So very excited about both trends that should increase our revenue in 2025.

Speaker 3

That's great. Thank you, Ford.

Speaker 2

We

Operator

have time for one additional question. Question here is from David Williams from Benchmark Company. Please go ahead.

Speaker 6

Hey, good afternoon. Thanks for letting me ask the question here and Ford let me also send my congrats and welcome. One I wanted to ask just quickly on the pipeline of design wins you have seems quite strong. And just kind of wondering if you think we'll see a potential inflection as the markets improve and just kind of how some customers are likely delaying their product launches. Are you seeing that?

Speaker 6

Are you hearing it? Just maybe any caution around their product launches and how that can inflect?

Speaker 2

Yes. Thank you, David. I'm very excited about the footprint of these design wins because they range anywhere from the top 10 server and storage, the top 10 leading comms, the top 10 factory automation, the top tier auto OEMs, the top PC OEMs. Across many applications, we talk about AGI, imaging and vision, robotics motion control, various automotive, both in car and ADAS type application, test and measurement, video broadcast, system control, power interfacing, security, sensor integration and fusion. And then many in specialized harsh environment, including avionics and defense type of applications.

Speaker 2

So the applications are varied. We continue to be very pleasantly surprised about the wide range of applications that our customers are using Nexus and Avon for. And we're very confident that we continue to have some great differentiation from a low power and low size, small size and cost effective solutions and security, video streaming. So very excited about what the future brings across thousands of applications across 10,000 customer base. So stay tuned and please look forward to seeing you in person at developer conference December 10, 2011 in San Jose.

Speaker 6

Thanks so much for that. And then just one last one if I may here. Just it seemed like the prior leadership was they ran a fairly lean organization and surprised here the 14% OpEx or the headcount reduction there. Could you give maybe some color just around where you're able to define those cuts and what that means you think in terms of further development down the road? Does it impact you at all?

Speaker 2

Yes. Thank you, David. So we took action. We're done. It's behind us.

Speaker 2

And now we're back to execution. And we had to do it to maintain the financial discipline of our model and you'll see the benefits and very strong EPS and EBITDA next year. We you did hear us in Q3 of 2024, we talk about an EBITDA of 33.7%. And so if you grow this at low double digit into next year, you could see we end up with very strong EBITDA next year. And so that's the financial discipline and benefit of doing this, but we're done.

Speaker 2

There's no impact on the product roadmap from because we moved a lot of these resources from sort of a high cost geography to lower cost geography. I just came back from Penang and Manila, and I'd be on my way to Shanghai and Montreal and Austin and after this to Taiwan and Pune, India. And so we've done a good job sort of balancing the headcount between these geographies. And right now, we feel like we've got the right level of investment to support our growth and the numbers we discussed with you on this call.

Operator

Thank you. I'd like to turn the floor back to Lettuce Semiconductor's CEO, Mr. Ford Tamer.

Speaker 2

Thank you, operator, and thank you, everyone, for joining us on today's call. As you heard earlier, I am excited about the opportunity to build on Lattice's strong foundation, broad customer base, highly differentiated products and strong partner ecosystem. We intend to leverage that foundation with our 3 part strategy of continuing our diligent financial discipline to achieve the highest ROI, maintaining market leadership and implementing our laser focus on AI applications. Thank you for being on today's call and for your continued support. I look forward to sharing the company's progress with you in the coming quarters.

Speaker 2

Operator, that concludes today's call.

Operator

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

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Earnings Conference Call
Lattice Semiconductor Q3 2024
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