Lattice Semiconductor Corp

NASDAQ:LSCC

Q1-2025 Earnings Call

[Operator]

Greetings, and welcome to the Lattice Semiconductor First Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rick Muscha, Senior Director of Investor Relations. Please go ahead.

[Rick Muscha, executive]

Thanks, operator, and good afternoon, everyone. With me today are Fouad 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 in 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 contained in 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 latticesemi.com.

Let me now turn the call over to our CEO, Fouad Tamer.

[Fouad Tamer, executive]

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, increased 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 road map, and prioritize and support our customers' deployments. We have also expanded our new design win rate on small and midrange 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 demonstrates 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 win momentum remains at record levels. Revenue from our new product 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 road maps. 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 win growth in exciting areas like generative AI and data centers, robotics in industrial, in-cabin and ADAS in automotive, AR/VR in consumer, and emerging security needs, including post-quantum cryptography. All of this reinforces our strong belief that Lattice is well positioned, not just for our recovery, but for sustainable growth.

Overall, we have confidence we are in the right markets with a leadership product portfolio and more than 11,000 global customers in very attractive long-term growth market.

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 Lattice 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?

[Lorenzo A. Flores, executive]

Thank you, Fouad, and good afternoon, everyone. While I was on our Q4 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 obtained most of last year despite the lower revenue level.

Non-GAAP operating expense was $51.4 million, a 3% decreases 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 combined to deliver non-GAAP EPS of $0.22, 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 would 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 realized 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 Fouad 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 million 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 $0.22 and $0.26 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 road map, revenue generation and customer support.

Operator, that concludes our formal remarks. We can now open the call for questions.

[Operator]

[Operator Instructions] First question comes from Melissa Weathers with Deutsche Bank.

[Melissa Weathers, analyst]

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 -- in your prepared remarks. So any update to that 2025 outlook? I know it's highly uncertain.

[Fouad Tamer, executive]

Yes. Thank you, Melissa. We see no change at this point. We see three improving demand segments, including improved customer consumption, higher beginning backlog and a better book-to-bill ratio that continues to be above one. So we continue to say 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.

[Melissa Weathers, analyst]

And then I guess on the different segments that you guys have, I was a bit surprised to see 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?

[Fouad Tamer, executive]

Yes. The Comms and Compute segment decline has been driven mainly by a client revenue decline related to older 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 strength in our Server segment.

Server and Communication segment has been driven by the strength of the wireline applications such as data center infrastructure NIC cards, switches, security appliances, routers. So 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.

[Operator]

Next question, Srini Pajjuri with Raymond James.

[Srinivas Pajjuri, analyst]

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

[Fouad Tamer, executive]

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 discussions we've had with our cloud customers point to the fact that 2025 CapEx is strong and actually signifying that 2026 will be an improvement over 2025. So that has a very positive on the Server segment. And as I said before, we continue to see strengths in the wireline communication that's helping our Communications 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. And 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 the fundamentals of the business, we're very positive. We don't control the tariff and the 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.

[Srinivas Pajjuri, analyst]

And then in terms of your new products, you talked about design win momentum being very strong. 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 win's momentum, so it doesn't seem like it, it doesn't sound like it based on what you said, but I just want to hear your thoughts if you're seeing any impact on the new designs given the environment.

[Fouad Tamer, executive]

Yes, we continue to see strength on our new design based on our strategic position in the small and mid-range segments with our low power, small size security, vision, Edge AI type of attributes. So the strength is really driven by the differentiation in our product that we think is related to the architectural trust were made and this 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.

[Operator]

Next question, Christopher Rolland with Susquehanna.

[Christopher Rolland, analyst]

So in your 10-Q, 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 and channel inventory levels versus target, I think that would be very useful for us as well.

[Lorenzo A. Flores, executive]

Chris, can you just -- you asked about inventory and then you injected channel inventory. Is that -- the focus is on the channel inventory or both?

[Christopher Rolland, analyst]

Yes. I mean, I guess you guys are...

[Lorenzo A. Flores, executive]

Both are [indiscernible].

[Christopher Rolland, analyst]

Yes, you're mostly channel anyway. So -- but I was really talking about channel and if you were able to break that up into end markets like you did in your 10-Q where you specifically addressed Comms and Industrial, that would be great.

[Lorenzo A. Flores, executive]

So you're right, we sell most of our -- most of our product rolls 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 Fouad 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 the 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 expecting it may take a couple of few quarters longer than that to do that. But we're going to continue to drive that down.

[Christopher Rolland, analyst]

And that was channel inventory that you were talking about. So you don't think it'll normalize mid-year, and that was internal?

[Lorenzo A. Flores, executive]

Yes, that was channel. Internal inventory is a pretty good new story. It dropped $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. Just in general, we manage all the working capital pieces aggressively.

[Christopher Rolland, analyst]

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 would be great.

[Lorenzo A. Flores, executive]

Honestly, I'm not -- I haven't thought about it from prospective of being differential to my predecessor. I'll tell you that I approached this business or any other business very fundamentally and said, what do we need to do to drive growth of shareholder value faster than the market? And it's -- 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 win into revenue faster than ever before.

But the things that step up from that execution that we look at are, 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 tuck-ins can be very advantageous to accelerating it. And then working with Fouad, 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 want. But I don't think of myself differentially. I just think of myself as the way I want to drive the business.

[Operator]

Next question, David Williams with Benchmark Company.

[David Williams, analyst]

Area of strength -- sorry, can you hear me?

[Fouad Tamer, executive]

Yes, we can hear you now. Go ahead, please.

[David Williams, analyst]

So service has been an area of strength, and you talked about it for some time, especially in the AI and the Server type -- the Service 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?

[Fouad Tamer, executive]

Yes. Thank you, David. We continue to find new opportunities in Servers, around AI, around security, 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.

[David Williams, analyst]

And then you talked about the design wins being maintaining that record pace. Is there a way to kind of -- 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 I need a sense of what that could look like from what your existing design win pipeline looks like.

[Fouad Tamer, executive]

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 opportunities as well as design win pipeline, which is more focused on the one opportunities that have moved to in are -- 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 design wins continue to grow. And we are very confident that the funnel 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 the manage 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.

[Operator]

[Operator Instructions] Next question comes from Ruben Roy with Stifel.

[Ruben Roy, analyst]

Lorenzo, I wanted to touch on the inventory again, please. And maybe if we could just -- I think Fouad 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 please tell us kind of where you exited Q1 relative to that three-month's target?

[Lorenzo A. Flores, executive]

Yes. 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're 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 under-shipping till consumption that will get us there.

[Ruben Roy, analyst]

I guess a follow-up, Fouad mentioned also that you're having a lot of discussions, I think, as most management teams are with customers and kind of trying to assess the situation, which is changing pretty constantly. Have you been able to tell whether or not there have been orders that 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 you're -- either the channel or your customers are trying to figure out how the tariff situation ends up?

[Lorenzo A. Flores, executive]

Yes, I'll start and then Fouad can fill in with more color around customer specifics. 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, it will best comes from Fouad.

[Fouad Tamer, executive]

Yes. 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 '25. Some of them has actually started guiding to a moderate rise in 2026 CapEx. So publicly, I think the statement they've all made are positive and continue to point to solid CapEx for '25 and increased, albeit maybe it's moderate into '26. So in addition to the discussion we've had with them, that gives us the confidence this is true demand.

[Operator]

Gary Mobley with Loop Capital, please go ahead.

[Gary Mobley, analyst]

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, 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, looking at that design -- 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?

[Fouad Tamer, executive]

Thank you, Gary, for that question. The -- we've been at this 70% gross margin now for 10 quarters, right? So -- and especially in a 2024 and Q1 '25 of decreased demand, it's good to see that margin continue to hold itself showing the differentiation and sustainable value we bring to customers from our products. So our current model long term costs for 70%, and we're confident that we will achieve that.

[Lorenzo A. Flores, executive]

Yes. 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, 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.

[Gary Mobley, analyst]

As my follow-up, I wanted to ask about the competitive environment for low power, small-sized 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-sized and low-power FPGA market?

[Fouad Tamer, executive]

Gary, the fact that you're shrinking, you look at table, it doesn't change your fundamental architecture of a Lot 4 versus Lot 6. So Xilinx and Altera are still stuck on that Lot 6 architecture. So nothing they can do to -- unless they totally change and come to Lot 4, which we'd welcome because that means that they will follow us into that sector.

So fundamentally, we have a very different architecture on that small and medium-sized FPGA, and that results in -- for certain application, call it, under 1 million lots, which we are -- for both Avant and Nexus, well below this currently. Nexus is below 100,000, and we've announced the Nexus still below 200,000, that's well within the envelope of a Lot 4 architecture. Avant currently is at 500,000, again, well inside that envelope.

So inside that 1 million and under envelope, we feel very confident that our Lot 4 architecture is going to have sustainable long-term size, power and performance, all kinds of advantages. You don't want to have a human or robot walk around with these heavy Xilinx and Altera FPGAs or same for a rack when you -- server rack, when you got 100 of these in a rack. I mean, power matters, size matters, and we feel good about where we are.

[Operator]

Tristan Gerra with Baird, please go ahead.

[Tristan Gerra, analyst]

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

[Fouad Tamer, executive]

Yes. Thank you. Tristan, as you and I discussed when we met, I'm new to this FPGA market. I mean, it takes a long time to ramp. And Lorenzo reminds me from his earnings 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 introduced the first product, and you've got to introduce the next ones and mature the two is mature IP. So the good news on this longevity is very long. So most of our customers designed for 20-, 30-year life.

And our partner, supply partner on both the fab and the 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 are very positive on where that ramp becomes. It accelerates -- Nexus accelerates in 2026. Avant accelerates in '27. 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?

[Lorenzo A. Flores, executive]

11.

[Fouad Tamer, executive]

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

[Lorenzo A. Flores, executive]

Yes. So I think the key thing that Fouad talked about in terms of the design time frame 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, we're looking for ways to do to help Fouad overcome this anxiety as 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 health so that they accelerate their time to revenue. And that has also been 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.

[Tristan Gerra, analyst]

And then for my second question, it's really not a question just for Lattice, but also some of the products, given about how long some products have been staying in inventories, notably at [ Lattice ]. Is there any potential for inventory obsolescence at distributors, notably, in the industrial end market, specifically for your product? And then ahead to this and you've somewhat reserved the 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 will be strategic for you?

[Lorenzo A. Flores, executive]

So I'll take the first part of the question on inventory, and then I think it's appropriate for Fouad to take the second. The -- 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 we -- while we see some occasional instances of [ us ] for instances, 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 these product write-downs or inventory write-offs. So 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. But -- so that's the inventory picture. So, Fouad the M&A outlook and thoughts.

[Fouad Tamer, executive]

Yes. 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 Nexus and Avant. As Lorenzo just pointed out, the FPGA has a set of tools and IP around them that would help customers go to market faster and as well as the 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 over pay 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.

[Operator]

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

[Quinn Bolton, analyst]

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 10-Q, 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?

[Fouad Tamer, executive]

Yes. Let me take the latter half, and then 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 in our 10-Q it include on a ship-to both Hong Kong and China Mainland, and then the percent that on the China Mainland that stays in China is much smaller than we report as ship-to. We haven't broken it up in the past, so we're probably not going to break it up, Quinn.

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, the Huawei and Telekom and ZTE, FiberHome, et cetera, H3C. And today, that business is dominated by Automotive and Industrial. So we've shifted from -- 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 growth from the Chinese companies that are native companies in China have -- they've grown at the expense of the other two guys -- the other two big guys.

We -- and our expense, obviously, in Comms. But 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?

[Lorenzo A. Flores, executive]

And so on the first part of your question, Quinn, the best I can understand it, the way we look at the current 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 fabs are Japan to Taiwan and 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 aren't applicable in -- any of the abnormal ones aren't applicable.

Then the -- where they end up going out of China, it's in -- is our estimate. I mean, we really -- 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 this currently except, as Fouad 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 we're -- frankly, we're still trying to pin down what the rules would be around any tariff regime and implement solutions based on that.

[Operator]

Next question, Joshua Buchalter with TD Cowen, please go ahead.

[Joshua Buchalter, analyst]

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 and out. But as we look into 2026, given you'll have Nexus, too, and Avant layering in and the ASPs that command, I mean, should we expect new product growth to accelerate coming out of this year? Or is it off of a higher base number, so it should be sort of in line?

[Fouad Tamer, executive]

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

[Joshua Buchalter, analyst]

And on that topic, I just wanted 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 impacting revenue more so in 2026. Can you help clarify, maybe help with how much you would expect it to contribute next year? .

[Fouad Tamer, executive]

Yes. 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 is more variants that are being released that will then layer in, in '26 and '27. So -- and same with Nexus. So it just takes a few years for this -- for these various variants to go to market. These are longer qualification in this industrial automotive applications.

[Operator]

Blayne Curtis with Jefferies, please go ahead.

[Ezra Weener, analyst]

Ezra Weener on for Blayne. Just a two-parter. One would be, you talked about inventory kind of take a little bit longer to come down, but you reiterated the year. So 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 take 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?

[Fouad Tamer, executive]

Yes. So I mean, look, what gives us the confidence is the three improving demand signals. And the reason we're keeping '25 -- it currently is, again, the same three demand signals, we'll continue to see improved customer consumption in light of better markets. So both on the Comms and Compute, we've discussed the server signals being better with cloud and AI. We discussed the Comms being better with the wireline and the various applications.

In Industrial and Automotive, we did discuss industrial is getting better with improved PMI. So I think we've been very clear on what's driving this better customer consumption across Server, Comms and Industrial. And we also -- we're 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 the Client business.

So number one, improved customer consumption. Number two, we're starting every quarter now with an improved beginning backlog. And number three, we're continue to see improvements in bookings, 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 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 will be remiss not to say, look, there are some caution, and we're not alone as and everybody else in our sector, right?

[Operator]

Duksan Jang with Bank of America.

[Duksan Jang, analyst]

Just a follow-up on this last question, and 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.

[Lorenzo A. Flores, executive]

Look, from a -- yes, can you hear us?

[Duksan Jang, analyst]

Yes, yes.

[Lorenzo A. Flores, executive]

Yes. Sorry, I'm not sure what just happened, but glad you're still on. If you go back what Fouad 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 win progression is telling us and what these actual customer deployments are looking like. We don't see 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 that have 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 -- if there is something macro that happens, negatively impacts everybody, we'll feel it, too. That makes sense. 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.

[Duksan Jang, analyst]

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? I mean, I think you said high teens this year and the 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.

[Fouad Tamer, executive]

Yes. 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 our ASPs for our peers would be the sort of smaller FPGA going to the -- sort of high end of the smaller FPGA going to the mid-range of FPGA. 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'd be very significant from one to the other. .

[Operator]

We have time for one last question. Kevin Garrigan with Rosenblatt Securities.

[Kevin Garrigan, analyst]

Fouad just a clarification, are you seeing Industrial growing across the board? Or is the end market growing in certain pockets while there may still be declining?

[Fouad Tamer, executive]

What's that?

[Lorenzo A. Flores, executive]

The Industrial growth.

[Fouad Tamer, executive]

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

[Kevin Garrigan, analyst]

Yes. Just wondering if you're seeing all basically kind of segments in the Industrial growing or are some growing or there's may be some declining?

[Fouad Tamer, executive]

I don't think we've gone to that level of detail at this point. 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.

[Lorenzo A. Flores, executive]

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

[Kevin Garrigan, analyst]

And then just 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?

[Fouad Tamer, executive]

Yes. I think in the past, we have discussed the opportunity for us to be a companion AI chip. And 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, we're -- the only processing element is our FPGA. We obviously have a chance to pay a bigger role because we are the main processing element. And FPGAs are very good as compared 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 and some of these smaller IoT and industrial type of monitoring the applications to run some of these tiny AI models on our FPGAs directly.

In a lot of cases, these are -- still, if there is a bigger FPGAs, let's say, somewhere in the Automotive and the enterprise controller for Industrial, we still have preprocessing element, if you wish, that feeds some of this preprocessing 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 have to play in data center and cloud. Did I answer the question?

[Kevin Garrigan, analyst]

Yes, it did.

[Operator]

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

[Fouad Tamer, executive]

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've been on our accelerated level of new design wins. I look forward to sharing the company's progress with you in the coming quarters. Operator, that concludes today's call.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation. Good bye.