Lattice Semiconductor - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $120.1M, non-GAAP gross margin 69.0%, and non-GAAP diluted EPS $0.22; adjusted EBITDA margin reached 33.4%, reflecting disciplined OpEx and resilient mix. Versus S&P Global consensus, revenue was essentially in line (120.1M vs 120.1M*) and EPS matched ($0.22 vs $0.22*). Values retrieved from S&P Global.
• Management flagged “record level of design wins,” sequential revenue growth, and sustained margin leadership; Communications & Computing delivered its first YoY growth in two years, while Industrial & Automotive grew 6% sequentially.
• Q2 2025 guidance implies steady sequential growth: revenue $118.5M–$128.5M, non-GAAP GM ~69% (+/−1%), OpEx $50.5M–$52.5M, and non-GAAP EPS $0.22–$0.26 (raised vs Q1 guidance).
• Stock-relevant catalysts: accelerating server AI content and attach in top-10 OEMs, expanding PQC security deployments, and continued new product mix shift (Nexus/Avant) targeting mid-20% growth in 2026; tempered by tariff uncertainty and a longer channel inventory normalization timeline.

What Went Well and What Went Wrong

What Went Well

• “First quarter of 2025 developed as expected, with sequential revenue growth, a record level of design wins, and a further expansion of our operating margins.” (CEO).
• Communications & Computing delivered first YoY growth in two years; Industrial & Automotive up 6% sequentially, supported by wireline and factory automation/robotics exposure (prepared remarks).
• New products revenue continues to grow at strong double-digit rates QoQ and YoY, with a path to “high teens” mix of new product revenue in FY25 (CEO prepared remarks).

What Went Wrong

• Client PC subsegment dragged Communications & Computing sequentially due to older platforms; server and wireline remained strong (Q&A).
• Channel inventory normalization will likely take “a couple of few quarters longer” than mid-year target; company continues to ship under consumption to reduce disti levels (CFO, Q&A).
• Tariffs pose indirect macro risk despite limited expected direct impact given supply chain localization and non-U.S. revenue mix; management remains cautious on 2H outlook (prepared remarks).

Transcript

Operator (participant)

Greetings and welcome to the Lattice Semiconductor First Quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Muscha, Senior Director of Investor Relations. Please go ahead.

Rick Muscha (VP of Investor Relations)

Thank you, Operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice's CEO, and Lorenzo Flores, Lattice's CFO. We will provide a financial and business review of the first quarter of 2025 and the business outlook for the second quarter of 2025. If you have not obtained a copy of our earnings press release, it can be found at our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks.

These documents contain and identify important risk factors that could cause the actual results to differ materially from those 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 latticemi.com.

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

Ford Tamer (CEO and Director)

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 impacts. As a result, we, like others in the semiconductor industry, are actively monitoring the situation, especially as it relates to potential impact to our second-half outlook. To that end, we're being highly proactive by continuing to focus on cost controls, increase operational efficiency, and above all else, deliver value for our shareholders. At the same time, we continue to aggressively execute our strategy, diligently deliver on our product roadmap, and prioritize and support our customers' deployments.

We have also expanded our new design win rates on small and mid-range FPGAs at record levels. Let me now turn to Q1 highlights, which Lorenzo will expand upon in his prepared remarks. At a high level, we delivered revenue of $120.1 million in line with our prior guidance. Our non-GAAP gross margin of 69% reflected the resilience of our business and the value of our product in the face of a challenging environment. Our 33.4% adjusted EBITDA demonstrated the results of our financial discipline. In the near term, we continue to ship 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-sized 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 a full slate of very productive meetings with key customers and partners, during which we reinforced our strategic relationships and aligned our roadmaps. These discussions further built on our pipeline of opportunities that we expect will translate into future designs and revenue growth. We recently wrapped up our internal quarterly business reviews that showed continued momentum in our Nexus and Avant product families. We continue to take share in the small to mid-range FPGA market segments.

We're also seeing revenue and design win growth in exciting areas like generative AI in data centers, robotics and 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 a 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 markets. Looking ahead, we continue to expect a U-shaped recovery long-term. Our Q2 guidance reflects our expectation for steady growth in both revenue and profitability. Another positive indicator is that channel inventory is also continuing to decrease. 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 Flores (CFO)

Thank you, Ford, 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 attained most of last year, despite the lower revenue level. Non-GAAP operating expense was $51.4 million, a 3% decrease compared to Q4 and a 6% decrease compared to the year-ago period. This was in line with our guidance and reflects our diligent focus on operational efficiency. Our non-GAAP operating margin was 26.2%, and our EBITDA margin was 33.4%, which reflects both the durability of the business model and our continued focus on operational efficiency. These factors 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 realize that the macro environment and geopolitical situation, particularly tariffs, are top of mind. I'd like to spend some time describing the most relevant factors pertaining to the potential impact on Lattice before I provide our outlook.

The first factor I would point out is that over the past couple of years, about 80% of our revenue came from outside the U.S. Our assessment is that this likely mitigates the potential direct impact of a tariff on our overall business. The second factor is the structure of our supply chain. We rely on foundries in Taiwan, Korea, and Japan for wafers for our semiconductor products, and we primarily rely on our assembly and test partners in Malaysia and Taiwan. Much of our product flow does not cross the U.S. border. That said, we think it is prudent to work with our customers and distribution partners to mitigate the logistical and economic disruption from potential tariff regimes. The takeaway is that based on available information, we expect the direct impact of tariffs on our business to be limited, but we are highly aware of potential indirect impacts.

As Ford described in his prepared remarks, we are, like others, actively monitoring the situation and preparing for multiple scenarios. Now to guidance. For Q2 2025, we expect revenue to be in the range of $118.5-$128.5 million. Gross margin is expected to be 69%, ± 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 roadmap, revenue generation, and customer support. Operator, that concludes our formal remarks. We can now open the call for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question comes from Melissa Weathers with Deutsche Bank. Please go ahead.

Melissa Weathers (Director)

Hi there. Thank you for letting me ask a question. 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 did not hear any commentary in your prepared remarks. Any update to that 2025 outlook? I know it is highly uncertain.

Ford Tamer (CEO and Director)

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

Melissa Weathers (Director)

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

Ford Tamer (CEO and Director)

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. The compute segment has been driven by the strengths in our server segment. The communication segment has been driven by the strengths of the wireline applications, such as data center infrastructure, NIC cards, switches, security appliances, routers. We are very positive on that segment. The only drag you are seeing is that Client decline. Other than that, the server and comms are both very strong.

Melissa Weathers (Director)

Perfect. Thank you.

Operator (participant)

Next question, Srini Pajjuri with Raymond James. Please proceed.

Srini Pajjuri (Managing Director and Senior Research Analyst)

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

Ford Tamer (CEO and Director)

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. All the discussion we've had with our cloud customers points to the fact that 2025 CapEx is strong, and they're actually signifying that 2026 will be an improvement over 2025. That has us very positive on the server segment. As I said before, we continue to see strengths in our wireline communication that's helping our communication segment. 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, you could see industrial has been up, and that's a positive. Discussion we're having with customers on the industrial side of the business points to the fact that we are seeing some improvements in those businesses. We're cautiously optimistic there. From the fundamentals of the business, we're very positive. We don't control the tariff and resulting situation, and that's the only reason for our cautiousness. Other than that, the fundamentals for our business that we can control are positive.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Great. That's very helpful. In terms of your new products, you talked about design 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? Also, if you can talk about if the environment is having any impact on the design wins momentum. It doesn't seem like it. It doesn't sound like it based on what you said, but just want to hear your thoughts if you're seeing any impact on the new designs given the environment. Thank you.

Ford Tamer (CEO and Director)

Yeah, we continue to see strengths on 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. The strength is really driven by the differentiation in our product that we think is related to the architecture choices we've made and this is 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. We will continue to see both of these trends helping us in the future.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Thanks, Ford.

Operator (participant)

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

Christopher Rolland (Senior Equity Analyst of Semiconductors)

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

Lorenzo Flores (CFO)

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

Christopher Rolland (Senior Equity Analyst of Semiconductors)

Yeah, I mean, I guess you guys are mostly.

Lorenzo Flores (CFO)

Or inventory?

Christopher Rolland (Senior Equity Analyst of Semiconductors)

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

Lorenzo Flores (CFO)

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

Christopher Rolland (Senior Equity Analyst of Semiconductors)

Gotcha. That was channel inventory that you were talking about? You do not think it will normalize mid-year, or that was internal?

Lorenzo Flores (CFO)

Yeah. That was channel. Internal inventory is a pretty good news story. It dropped $8 million quarter-on-quarter, a really significant drop. 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 sale. The math works a little strangely due to the liability for materials we recognized in Q4. 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 (Senior Equity Analyst of Semiconductors)

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

Lorenzo Flores (CFO)

Honestly, I haven't thought about it from a perspective of being differential to my predecessor. I'll tell you that I approached this business and any other business very fundamentally. It's like, what do we need to do to drive growth of shareholder value faster than the market? 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 new product launches through design win into revenue faster than ever before. The things that you have stepped 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. Working with Ford, an overall big strategic picture view of what the opportunities are for Lattice. I am sure he can add on to that if he wants. I do not think of myself differentially. I just think of myself as the way I want to drive the business.

Christopher Rolland (Senior Equity Analyst of Semiconductors)

Fantastic. Thank you.

Operator (participant)

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

David Williams (Equity Research Analyst)

Hey, good afternoon. Thanks for taking my question. Area of strength for you.

Ford Tamer (CEO and Director)

Go ahead.

David Williams (Equity Research Analyst)

Sorry, can you hear me?

Ford Tamer (CEO and Director)

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

David Williams (Equity Research Analyst)

Apologies. Server's been an area of strength, and you've talked about it for some time, especially in the AI and the server side. Just kind of curious how you're thinking about your penetration going forward in terms of content, and what areas do you think you may be more resilient, just kind of given this macro backdrop? Thank you.

Ford Tamer (CEO and Director)

Yes, thank you, David. We continue to find new opportunities in servers around AI, around security, around connectivity. 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 (Equity Research Analyst)

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

Ford Tamer (CEO and Director)

Yeah, 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 opportunities that have moved to win, they're both quite strong. 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 continues to grow. We are very confident that that funnel is going to result into the growth that we are expecting into 2026 and to 2027. The way we're thinking about it is the magnitude 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 a very significant dollar number, multiple and multiple times the revenue. And we're confident that this is very strong and sustainable.

David Williams (Equity Research Analyst)

Great. Thanks for the color.

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

Ruben Roy (Managing Director)

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

Lorenzo Flores (CFO)

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

Ruben Roy (Managing Director)

Okay. Thanks for that. I guess a follow-up, Ford 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 either the channel or your customers are trying to figure out how the tariff situation ends up?

Lorenzo Flores (CFO)

Yeah. I'll start, and Ford can fill in with more color around customer specifics. When we're looking at the data, we're looking at the data hard on a very weekly basis and talking to our salesforce 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. I think the more qualitative color comes from Ford.

Ford Tamer (CEO and Director)

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

Ruben Roy (Managing Director)

That's helpful. Thank you, Ford.

Operator (participant)

Gary Mobley with Loop Capital. Please go ahead.

Gary Mobley (Managing Director and Senior Equity Analyst)

Hi, guys. Thanks so much for taking my question. 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. As we think about the contribution to product mix for the balance of fiscal year 2025, 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? For a benchmark for long-term gross margins, looking at 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?

Ford Tamer (CEO and Director)

Thank you, Gary, for that question. We've been at this 70% gross margin now for about 10 quarters, right? Especially in a 2024 and Q1 2025 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. Our current model long-term calls for 70%, and we're confident that we will achieve that.

Lorenzo Flores (CFO)

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

Gary Mobley (Managing Director and Senior Equity Analyst)

Yeah. This is 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. I think there's been some new architectures with some smaller lookup table counts and whatnot. 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?

Ford Tamer (CEO and Director)

Yeah. Gary, the fact that you're shrinking your lookup table doesn't change your fundamental architecture of a LUT4 versus LUT6. So Xilinx and Altera are still stuck on that LUT6 architecture. Nothing they can do unless they totally change and come to a LUT4, which we'd welcome because that means that they would follow us into that sector. Fundamentally, we have a very different architecture on that small and medium-sized FPGA. That results in, for certain applications, call it under a million LUTs, which we are for both Avant and Nexus well below this currently. Nexus is below 100K. We've announced a Nexus 2 below 200K. That's well within the envelope of a LUT4 architecture. Avant currently is at 500K, again, well inside that envelope.

Inside that million and under envelope, we feel very confident that our LUT4 architecture is going to have sustainable long-term size, power, and performance, all kinds of advantages. You do not want to have a humanoid robot walk around with these heavy Xilinx Altera FPGAs. Or same for a server rack when you have 100 of these things in a rack. I mean, power matters, size matters. And we feel good about where we are.

Gary Mobley (Managing Director and Senior Equity Analyst)

Thanks again.

Ford Tamer (CEO and Director)

Tristan Gerra with Baird, please go ahead.

Tristan Gerra (Senior Research Analyst)

Hi. Good afternoon. When should we expect revenue from Nexus to start rolling over? Historically, at least in a high-end FPGA, that's typically on the seventh year of a new FPGA product ramp, which for Nexus would be in 2026. Are you seeing any signs of slowdown in growth? What's the confidence about new products offsetting that if that's the case? Would you expect Nexus to continue ramping year over year beyond the next year?

Ford Tamer (CEO and Director)

Yeah. No, thank you. Tristan, as you and I discussed when we met, I'm new to this FPGA market. I'm learning it takes a long time to ramp. Lorenzo reminds me from his Xilinx days. I'm going to go to Lorenzo first. I'll answer the question next. Yes, the FPGA does take a long time to ramp because we introduced the first product, then you've got to introduce the next ones and mature the tools, mature the IP. The good news on this, longevity is very long. Most of our customers designed for 20, 30-year life. Our 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. We're very positive on where that ramp becomes. Nexus accelerates in 2026.

Avant accelerates in 2027. That is what is going to create the next year and then year after that growth. 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 Flores (CFO)

11.

Ford Tamer (CEO and Director)

11 years, sorry. 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. Please go ahead, Lorenzo.

Lorenzo Flores (CFO)

Yeah. I think the key thing that Ford talked about in terms of the design timeframe and the product ramp, that's all consistent with the behavior of the industry. The other aspect of the product family approach is, as time goes on, we introduce more variants and continue to expand the footprint of the new products into different end markets and different segments, different price points, and so on. That will accelerate the growth from any new product that you launch. That's just a systematic expansion of the footprint of the new products through time.

I think, as I said earlier, what we're looking for ways to do to help Ford overcome this anxiety he has of the time to market is apply approaches where we are focused on helping our customers bring their products to market faster by providing more complete solutions, broader sets of IP, and design help so that they accelerate their time to revenue. That has also the benefit of increasing the intimacy we have with our customers and providing more opportunities to deploy the next generation of products as they come up.

Tristan Gerra (Senior Research Analyst)

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

Lorenzo Flores (CFO)

I'll take the first part of the question on inventory, and then I think it's appropriate for Ford to take the second. On our inventory, both in-house and in the channel, the nature of FPGAs and our products and their applications is that it's very long-lived. While we see some occasional instances of obsolescence, we generally don't see anything significant. We're not expecting anything significant. Obviously, our guide shows continued strength in margin. That obviously is not impacted in any way by product write-downs or inventory write-offs. We're 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. That's the inventory picture for the M&A outlook and thoughts.

Ford Tamer (CEO and Director)

Yeah. On M&A, we, number one, are very focused on our organic growth and making sure that we deliver on what 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, as well as potentially strategic sockets that sit around us. We, over the long term, could potentially be more acquisitive. We get paid to look at both organic and inorganic, but we also get paid to make sure that we don't overpay for any of these assets. 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.

Tristan Gerra (Senior Research Analyst)

Great. Thank you very much.

Operator (participant)

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

Quinn Bolton (Senior Analyst)

Hey, guys. Thanks for taking my question. I guess I wanted to start with just you went through sort of the China impact and the amount of revenue, which is pretty small flowing through the U.S. But looking at the 10Q, it looks like you had $57 million flowing to China. Just wondering first if you could walk us through any potential tariff impact on that China business. 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. Within that China for China, are you seeing any increase in competition or pricing pressure from local Chinese FPGA vendors? Thank you.

Ford Tamer (CEO and Director)

Yeah. Let me take the latter half, and maybe Lorenzo can add on the former. The % of revenue that is consumed in China is far lower than what is shipped to China. The ship-to-China also includes Hong Kong. When you look at the number that we reported in our 10Q, it includes on a ship-to both Hong Kong and China mainland. The percent that on the China mainland that stays in China is much smaller than what we report as ship-to. We haven't broken it up in the past, so we're probably not going to break it up, Quinn. As far as competition with the local Chinese vendors, they've been very strong in communications and compute.

If you look at the business of not just Lattice, but probably some of our US peers, a few years ago, this was the business that was probably dominated by some of the communication companies, the Huawei and Telecom and the ZTE, FiberHome, H3C. Today, that business is dominated by automotive and industrial. We have shifted totally from one sector to the other. The good news on the Lattice business in China is we have actually increased compared to, well, we believe the other two large U.S. guys that have decreased. They have decreased significantly. We have increased slightly. The revenue growth from the Chinese companies that are native companies in China, they have grown at the expense of the other two guys, the other two big guys. Our expense, obviously, in comms.

There is definitely going to be a mix in China where some sectors are not open to us and some sectors still are. 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 Flores (CFO)

Yeah. In the first part of your question, Quinn, as 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, Taiwan, Korea, and our OSATs or assembly test vendors are Taiwan and Malaysia primarily. That would say our current read that inbound tariffs to China aren't applicable. Any of the abnormal ones aren't applicable. Where they end up going out of China is our estimate. I mean, really, it's hard to get very precise on that. 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 is currently exempt.

As Ford said earlier, there could be sectoral tariffs coming. What we're doing is looking at ways to mitigate the economic impact of that on Lattice and our customers. We have some ways of doing that, but frankly, we're still trying to pin down what the rules would be around any tariff regime and implement solutions based on that.

Quinn Bolton (Senior Analyst)

Understood. Thank you very much.

Ford Tamer (CEO and Director)

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

Joshua Buchalter (Director and Semiconductor Research Analyst)

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

Ford Tamer (CEO and Director)

Thank you, Josh, for your question. Yes, we should expect this to accelerate. What we had discussed in the past is the new product growth being in the mid-teens in 2024, going to the high teens in 2025, going to the mid-20% in 2026. As you see, it is accelerating and expected to continue to accelerate.

Joshua Buchalter (Director and Semiconductor Research Analyst)

Okay. Thank you. 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. Yeah. Could you help clarify and maybe help with how much you would expect it to contribute next year? Thank you.

Ford Tamer (CEO and Director)

Yeah. It is back to this FPGA layering question, which is it takes an FPGA some time for the new product variants to start layering in. We are seeing an impact of Avant. We have released a couple of variants of Avant that are making an impact on 2025. There are more variants that are being released that will then layer in in 2026 and 2027. Same with Nexus. It just takes a few years for these various variants to go to market. These are longer qualifications in these industrial automotive applications.

Joshua Buchalter (Director and Semiconductor Research Analyst)

Okay. Thank you.

Ford Tamer (CEO and Director)

Blaine Curtis with Jefferies. Please go ahead.

Ezra Weener (VP of Equity Research)

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

Ford Tamer (CEO and Director)

Yeah. I mean, look, what gives us the confidence is the three improving demand signals. The reason we're keeping 2025 where it currently is, again, the same three demand signals, which is we'll continue to see improved customer consumption in light of a better market. Both in the comms compute, we did discuss the server signals being better with cloud and AI. We discussed the comms being better with the wireline in the various applications. In industrial automotive, we did discuss industrial getting better with improved PMI. I think we've been very clear on what's driving this better customer consumption across server, comms, and industrial. We're pretty open on automotive being flat, and Client is the one weakness that is hurting us, right? We do not see this as a key sector for us, actually. We're not as worried about that Client business.

Number one, improved customer consumption. Number two, we're starting every quarter now with improved beginning backlog. Number three, we're continuing to see improvements in booking resulting in much higher book-to-bill. The book-to-bill continued to grow and continue to be above one now for quite a few weeks. You put the three together, there's no reason for us to change 2025. It would be foolish to not say, "Look, there could be some risk given the whole tariff situation around us." There's a lot of anxiety in the end user. We would be remiss not to say, "Look, there are some caution." We're not alone, as in everybody else in our sector, right?

Ezra Weener (VP of Equity Research)

Got it. Thank you.

Operator (participant)

Duksan Jang with Bank of America. Please go ahead.

Duksan Jang (Analyst)

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

Lorenzo Flores (CFO)

Yes. From a—yeah. Can you hear us?

Duksan Jang (Analyst)

Yes. Yes.

Lorenzo Flores (CFO)

Yeah. Sorry. I'm not sure what just happened, but glad you're still on. If you go back, what Ford has been saying is from a fundamental basis, from the fundamental perspective, we don't see what our customers are telling us, what our design win progression is telling us, and what the actual customer deployments are looking like. We don't see any fundamental change in the outlook we have. That said, we know very well how macro factors can impact the semiconductor industry and how macro factors can specifically impact the FPGA business, right? I've been through a couple of different cycles. We want to make sure that we are communicating where our fundamental position comes from: product strength, design win strength, execution. Some of the outcomes aren't in our control. If there is something macro that happens negatively impacts everybody, we'll feel it too.

Does that make sense? Sure. That's the answer for 2025 and 2026 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)

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

Ford Tamer (CEO and Director)

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

Duksan Jang (Analyst)

Understood. Thank you so much.

Lorenzo Flores (CFO)

No problem.

Ford Tamer (CEO and Director)

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

Kevin Garrigan (Research Analyst)

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

Ford Tamer (CEO and Director)

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

Lorenzo Flores (CFO)

Yeah.

Kevin Garrigan (Research Analyst)

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

Ford Tamer (CEO and Director)

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 Flores (CFO)

Yeah. It's just a very broad segment for us. There'll be ups and downs in it as a matter of course through time.

Kevin Garrigan (Research Analyst)

Okay. Great. Thank you for that. 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?

Ford Tamer (CEO and Director)

Yeah. I think in the past, we have discussed the opportunity for us to be a companion AI chip. In the data center cloud applications, we are always a companion AI chip. We do not really do AI in our chips. We are more a supporting function to these big training or inferencing AI chips in server and AI applications. On the industrial and some pieces of equipment where the only processing element is our FPGA, we obviously have a chance to play a bigger role because we are the main processing element. FPGAs are very good as a parallel processing engine for performance, very low latency, deterministic, accurate, high performance.

We have a lot of attributes in places where we're the only processing element in some of these smaller IoT and industrial type of monitoring type of applications to run some of these tiny AI models on our FPGAs directly. In a lot of cases, these are still, if there is a bigger FPGA, say, let's say somewhere in the automotive or in the enterprise controller for industrial, we still have a pre-processing element, if you wish, that feeds some of this pre-processing AI data to the main AI inferencing or training chip. There's definitely a role for us to play in industrial that's bigger than the role we'd have to play in data center and cloud. Did I answer the question?

Kevin Garrigan (Research Analyst)

Yes, it did. I appreciate that color. Thanks, Ford.

Operator (participant)

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

Ford Tamer (CEO and Director)

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

Operator (participant)

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