Lattice Semiconductor - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $117.4M, in line with prior guidance ($112–$122M), but down 7.6% q/q and 31.2% y/y; non-GAAP diluted EPS was $0.15 (at the low end of $0.15–$0.23 guidance) as a ~$7M one-time assembly/test materials charge reduced non-GAAP gross margin to 62.1% (would have been 68.1% ex-charge).
• Operating discipline continued: non-GAAP opex fell 2% q/q and 5% y/y; free cash flow margin was 33.8% and operating cash flow margin 38.7% in Q4, with the Board authorizing an additional $100M repurchase through 2025.
• Management guided Q1 2025 above Q4 guide midpoints: revenue $115–$125M, non-GAAP GM 69% ±100 bps, opex $50–$52M, EPS $0.20–$0.24; CEO said Q1 EPS guidance is above current consensus, with backlog strengthening and book-to-bill >1 for the first time in six quarters, signaling early-cycle recovery and potential stock catalysts.
• Strategic positives: record 2024 design wins; double‑digit growth from new products (Nexus/Avant); far‑edge AI and post‑quantum cryptography (PQC) adoption highlighted as share-gain vectors; leadership strengthened with a new CFO, Chief People Officer, and WW Sales leader.

What Went Well and What Went Wrong

• What Went Well

  • “Record design wins” in 2024; new products Nexus and Avant grew double-digits y/y, with Avant ramping faster than Nexus at comparable points in the cycle.
  • Cash generation and cost discipline: Q4 free cash flow margin 33.8%, opex reduced via a 14% workforce transformation and resource realignment (Pune R&D center opened).
  • Demand signals improved: stronger backlog and book-to-bill >1 for the first time in six quarters; management expects a U‑shaped 2025 recovery with mid-channel inventories guided to mid‑point by mid‑2025.

• What Went Wrong

  • Top‑line/mix pressure: revenue down 31.2% y/y and 7.6% q/q on continued inventory normalization and macro softness; Industrial & Automotive revenue roughly halved y/y (to $49.2M).
  • Gross margin hit: ~$7M one‑time materials charge drove non‑GAAP GM to 62.1% (vs would‑be 68.1% and prior 69.0% in Q3).
  • GAAP charges: Q4 included a $13.9M impairment of acquired intangibles and a write‑off of a nonrecoverable cost‑basis investment, masking underlying opex progress on a GAAP basis.

Transcript

Operator (participant)

Greetings and welcome to the Lattice Semiconductor Fourth Quarter Fiscal Year 2024 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Rick Muscha, Senior Vice President of IR. Please go ahead.

Rick Muscha (Senior VP of Investor Relations)

Thank you, Operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice's CEO; Tonya Stevens, Lattice's Chief Accounting Officer and former interim CFO; and Lorenzo Flores, Lattice's CFO. We'll provide a financial and business review of the fourth quarter of 2024 and the business outlook for the first 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 first 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 will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends.

For historical periods, we've provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at latticesemi.com. Let me now turn the call over to our CEO, Ford Tamer.

Ford Tamer (CEO)

Thank you, Rick, and thank you everyone for joining us on our call today. I've just returned from customer and partner meetings and sales conferences in North America, Asia-Pacific, and Europe. We capped off the European Sales Conference with a very productive and promising executive summit with our top European customers from the industrial, automotive, communications, and aerospace and defense sectors. We also visited Pune, India, where we inaugurated our new state-of-the-art R&D site. All of this came on the heels of our Lattice Developers Conference in December 2024. This was a highly successful event with 6,000 registrants and over 90 show floor demos. Many of you were able to hear directly from some of our leading customers and see firsthand how they're deploying the impressive innovations from Lattice in their systems.

As a result of these events, I'm even more energized and confident in the long-term outlook for Lattice. Today, we're pleased to announce a further strengthening of our executive leadership team with three new additions. Lorenzo Flores is joining Lattice as Chief Financial Officer from Intel, where he was CFO for their Foundry business. Prior to that, Lorenzo was Vice Chairman at Kioxia and CFO at Xilinx. Nicole Singer is coming on board as our Chief People Officer from SiFive, where she was CHRO. Prior to that, she was CHRO at Synaptics and Vice President of Human Resources at Xilinx. And we're promoting Erhan Shaikh to Senior Vice President of Worldwide Sales. Erhan has been at Lattice for over four years, and prior to that, he spent over 20 years in executive sales and field engineering roles at Altera, Xilinx, and Fungible.

I am confident that this new team will make significant contributions to Lattice's next phase of growth. I'm also pleased to announce the appointment of Tonya Stevens to the role of Chief Accounting Officer. In her nearly six years at Lattice, Tonya has been a tremendous asset, most recently serving as our interim CFO. We are thrilled she will stay on this new role and look forward to continuing to work closely with her. Tonya's expanding scope, along with Erhan's promotion, demonstrates Lattice's bench strengths. And when you combine Tonya's and Erhan's deep company backgrounds with the experienced industry veterans choosing to join Lattice, it is clear that we're building one of the semiconductor industry's strongest management teams, which will enable us to build near-term and future shareholder value.

At a high level, the overall FPGA market is continuing to grow in importance, driven by five secular trends acting as tailwinds, and Lattice is uniquely positioned to leverage those trends. First, AI is driving shorter system design cycles, which provide less time to integrate auxiliary functions, and FPGAs are best positioned to enable those functions. Second, as ASIC and ASSP development costs continue to increase, the bar rises for which functions could justify that ROI, and that pushes more designs towards FPGAs. Third, as the cost of advanced nodes skyrockets, mature process FPGAs are much more economical to perform certain functions. Fourth, emerging applications like security have fast-changing requirements. A perfect example is post-quantum cryptography, or PQC. Programmability is a much more effective solution than a fixed-function ASIC that cannot easily be respawned. Lastly, edge AI is requiring contextual intelligence near the sensor.

Lattice is already in these sockets today, performing other functions, which gives us a critical advantage with customers. It is far better to implement tiny AI models in our far-edge devices, which save processing power off the near-edge inference chips for other tasks. Furthermore, the small and mid-range FPGA segments are growing faster than the rest of the market, led by new applications, among them data centers and cloud, robotics, industrial automation, self-driving cars, electrification, IoT, telematics, medical devices, as well as artificial intelligence across all these segments. These applications have driven an explosion of sensors everywhere, which require massive amounts of data to be bridged, aggregated, and fused to upstream processing units. Lattice has done a good job in these markets, and our goal is to lead in this growing far-edge AI market segment.

This is an example of just one of the catalysts that gives us added confidence in Lattice's long-term growth opportunities as we continue to execute. Over the near term, we're seeing improvement in customer consumption. We continue to ship below estimated true demand and are working closely with our customers to ensure we're effectively supporting their product roadmaps. We also continue to be encouraged with our stronger backlog, and for the first time in six quarters, our book-to-bill ratio has been over one for the past few weeks. Taken together, this bodes well for our business in the coming quarters. Now moving on to our Q4 results. From a high level, fourth quarter 2024 revenue was in line with our guidance at $117.4 million and developed as expected.

On an end-market basis, communications and computing was down 5% sequentially, and industrial automotive was down 9%, primarily due to continued inventory normalization. We continue to make significant progress in the realignment of our resources to best support customer demand and ensure the long-term success of our company. In Q4, this included taking the opportunity to clean up a material liability we discovered after a comprehensive internal review. Tonya will provide more details in her prepared remarks. We do not expect any additional one-time charges and are confident that this is another example of the specific actions we're vigorously implementing to position Lattice for sustained long-term success. Revenue for the full year 2024 was $509.4 million, with a strong EBITDA margin of 31.8%. A bright spot to highlight is that our computing subsegment grew in 2024.

Design win momentum continues to be robust as we achieved record design wins in 2024. Additionally, our new product momentum continues to be a highlight as revenue from our new products, including Nexus and Avant, grew double digits in 2024 compared to 2023. Earlier, you heard about our successful Developers Conference in December. There, with the launch of the Nexus 2 platform and two new Avant devices, we expanded our leadership in the small to mid-range FPGA segments. This further builds on Lattice's differentiation in low power, small size, cost-effective solution, and ease of use. These new offerings add connectivity advancements, performance optimizations, and leading security and reliability capabilities to meet the increasing demand for edge applications. We had multiple customer keynotes at our Developers Conference that demonstrated the significant benefits of using Lattice solutions in their systems.

Furthermore, because of our focus on ease of use, we also introduced new tools and solutions to speed up our customers' deployments and time to market. If you're not able to attend in person, our website has multiple videos showcasing applications like Lattice SenseAI for edge AI, Lattice mVision for embedded vision, Lattice Automate for factory automation, and Lattice Drive for automotive designs. We also introduced new versions of our award-winning Lattice Radiant and Lattice Propel software tools. This continued innovation in our software tools and solutions will enable customer differentiation and make our solutions stickier and multi-generational. Looking ahead, as you heard during last quarter's earnings call, we expect more of a U-shaped recovery in 2025. We are very pleased to be guiding our Q1 EPS above the current consensus estimates in a quarter when other companies in our industry are expecting a guide down.

For the full year 2025, we continue to anticipate low single-digit revenue growth compared to the full year 2024. We expect that channel inventory will begin moving back to the midpoint of our target range and enable Lattice to execute to our long-term revenue growth target of 15% to 20% in 2026 and beyond. In summary, over the past five months since I joined Lattice, we've taken significant actions to drive the next phase of our growth. As you heard earlier, some of these actions included our holding three recent successful sales conferences across North America, Asia-Pacific, and Europe, inaugurating our new state-of-the-art R&D design center in Pune, India, holding another highly successful Developers Conference, and expanding our product portfolio with Nexus 2, Avant, and associated IP tools and solutions.

We're also continuing to focus on financial discipline, including a strategic and comprehensive 14% workforce transformation we implemented in Q3, a material liability charge that was taken in Q4 after a thorough year-end review, and the further strengthening of our executive team with key additions. All these actions, combined with an improvement in customer consumption, a stronger backlog, and book-to-bill ratio reaching over one for the past few weeks, provide us increased confidence. Overall, Lattice remains committed to our long-term strategy, and we're very optimistic about 2025 and beyond. Let me now turn the call over to Tonya for a detailed review of our results. Tonya.

Tonya Stevens (Chief Accounting Officer)

Thank you, Ford. Working closely with you as the interim CFO has been both a rewarding personal and professional experience. I'm excited to continue my growth in my new role alongside Lorenzo, one of the most respected and accomplished CFOs in our industry.

I also want to welcome Nicole and congratulate Erhan, with whom I've worked closely. With the strengthening of Lattice's executive team, we have a tremendous opportunity to build on Lattice's strong track record and expanded leadership product portfolio to drive Lattice's next phase of growth. In 2024, we continued to generate solid operating, adjusted EBITDA, and free cash flow margins, and returned cash to shareholders through share buybacks, while experiencing continued customer inventory normalization and shipping under true demand. Additionally, as we mentioned on the Q3 2024 earnings call, we implemented a workforce reduction of 14%, which better aligns our resources to support the current business level. We are confident that this action will be a key driver for double-digit earnings expansion in 2025. Let me now provide a summary of our results.

Fourth quarter revenue was $117.4 million, down 8% sequentially from the third quarter and down 31% year-over-year, which reflects a combination of continued inventory normalization and macroeconomic softness. Full year 2024 revenue was $509.4 million, down 31% from 2023. While computing was up for the year, both segments of communications and computing, and industrial and automotive, declined double digits for the year. We started to see signs of improvement in communications and computing in the second half of 2024 and expect to build on that in 2025. Our Q4 non-GAAP gross margin was 62.1%. This included a $7 million one-time charge related to materials purchased by our assembly and test partners during a supply constraint that, due to the current business environment, are no longer expected to be used before expiration. Absent that charge, our non-GAAP gross margin would have been 68.1%.

Our non-GAAP gross margin for the full year 2024 was 67.4%. Adjusting for the one-time charge, our full year non-GAAP gross margin would have been 68.7%. Q4 non-GAAP operating expenses were $52.8 million, down 2% sequentially and down 5% year-over-year. We are making significant progress on the realignment of our resources to best support the current business environment. These efforts are already driving results of reduced operating expenses. Non-GAAP operating expenses for the full year 2024 decreased 4% to $215.6 million. This was primarily driven by diligent operating expense management and the partial impact of the workforce transformation implemented in Q4, which we will start to see more benefit from in Q1. Our Q4 non-GAAP operating margin was 17.1% and included the $7 million one-time charge mentioned earlier. Q4 adjusted EBITDA margin was 24.9%.

Our non-GAAP operating margin for the full year 2024 was 25.1%, and adjusted EBITDA margin was 31.8%. Excluding the one-time charge, we delivered non-GAAP operating margin of 26.4% and adjusted EBITDA margin of 33.2%. We continue to have a disciplined approach to investing in the long-term growth of the company. In Q4, non-GAAP EPS was $0.15 per share, with 138.3 million diluted shares outstanding. Without the impact of the $7 million one-time charge, Q4 non-GAAP EPS would have been $0.20 per share. Non-GAAP diluted earnings per share for the full year 2024 was $0.90. Without the impact of the $7 million one-time charge in Q4, 2024 full year non-GAAP EPS would have been $0.95 per share. Now let me provide you with an update related to our taxes.

GAAP income taxes for the fourth quarter of 2024 included tax benefits of $27.7 million related to the release of certain long outstanding tax matters, which were previously reserved as uncertain tax positions. This tax benefit was adjusted out for non-GAAP reporting, resulting in a non-GAAP effective tax rate of 5.3% for the full year 2024. Moving to our cash flow and balance sheet, cash flow from operations in the fourth quarter was approximately $45.4 million, up slightly from Q3. Free cash flow margin increased to 34%, up from 31% in the third quarter. Our inventory at the end of the fourth quarter was $103.4 million, which is a decrease of approximately $1 million from the prior quarter. In Q4, we repurchased approximately 367,000 shares, or $20 million of stock, making Q4 our 17th consecutive quarter of executing share buybacks.

Over that period, we have repurchased approximately six million shares, thereby reducing dilution by 4.3%. Additionally, our board recently approved a $100 million share buyback for 2025. We will continue to prioritize investing in the organic growth of our business, but intend to continue returning capital to our shareholders through share repurchases. Let me now review our outlook for the first quarter. Revenue for the first quarter of 2025 is expected to be between $115 million and $125 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis. Total operating expenses for the first quarter are expected to be between $50 million and $52 million on a non-GAAP basis. Our non-GAAP tax rate in the first quarter is expected to be in the 5% to 6% range.

Based on the above inputs, our non-GAAP EPS is expected to be in the range of $0.20 to $0.24 per share. Operator, that concludes my formal comments. We can now open the call for questions.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 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. One moment, please, while we poll for questions. Thank you. Our first question is from Melissa Weathers with Deutsche Bank.

Melissa Weathers (Director of Equity Research)

Hi there. Thank you for letting me ask a question. Congrats on the new role, Tonya, and welcome to the call, Lorenzo.

I guess my first question is, cyclically, it seems like you're starting to see some improvements. You talked about the backlog improvement and the improved B2B. So any particular end markets that are performing better than others that you're seeing? And how much of this is Lattice-specific versus kind of the distance you're making progress on getting rid of the channel inventory?

Ford Tamer (CEO)

Thank you, Melissa. I think there are three factors. As you said, number one, the channel inventory, we're making progress as expected. We do expect to continue to glide down inventory, as we previously discussed, to get to regular inventory level by mid-year 2025. So that's probably factor number one. Factor number two, if you compare this against the backdrop of other companies in our sector that are guiding down, we do believe we're taking share in our markets.

So we are encouraged by the continued design wins on our Nexus, Avant, and new product lines, and continue to take share. And number three, we have seen improvements across our industrial automotive as well as the communication sectors. Computing has always been strong, continues to be strong, but we're seeing recovery in the other segments as well. So three factors, Melissa.

Melissa Weathers (Director of Equity Research)

Got it. On that comms and computing side, I know computing did grow in 2024. I don't think you've given us a mix of how big the comms side is versus the computing side, but can you just, at a high level, talk about what are the different trends you're seeing in those two subsegments and what should we be expecting in the coming years between those two businesses?

I think we've heard from your peers that the comms side is a little bit weaker, so help us think about those two different subsegments.

Ford Tamer (CEO)

So I think the percent of comms and compute is roughly the same as last quarter between Q3 and Q4. We see a slight increase in that segment, but not very meaningful. And the percent industrial, auto, and consumer, again, are pretty much the same, a slight decrease in those segments. Within industrial and automotive, we have seen a nice recovery in automotive this past quarter. So that's a positive. And we do expect all segments to grow into Q1. And anything on communications in particular? Communications in particular is slightly stronger in Q4 compared to Q3 and expected to be steady going to Q1.

Melissa Weathers (Director of Equity Research)

Got it. Thank you.

Operator (participant)

Thank you. Our next question is from David Williams with the Benchmark Company. Please proceed with your question.

David Williams (Equity Research Analyst)

Hey, good afternoon, and thanks for asking me to ask a question and congrats on the solid progress here. So I guess maybe first, Ford, if you kind of think about where you're seeing demand across that automotive segment, where are you seeing that picking up in terms of the market? Is it on the electrification side or more on just the general ADAS side? And should we think about maybe the traditional versus EV or hybrid platforms where you have greater exposure or potential strengths?

Ford Tamer (CEO)

Yeah. Thank you, David. We're designed in across all the various applications, and we're in production today in infotainment and display and ADAS and charging applications, as well as the other electrification factors. So we continue to see newer applications and do see automotive as a long-term growth driver for us.

We're also getting increasingly more convinced that we are going to have a stake in this far-edge AI where our chips are the first hop, if you wish, from a sensor. The sensor could be an image sensor, could be a LiDAR, could be a radar, could be other sensor. The FPGA, the small and mid-range FPGA, are the perfect first hop from that sensor before it goes to a near-edge, if you wish, AI engine. And so we're the perfect place to do all kinds of functions to make that near-edge device more productive. And I do believe that having these far-edge applications in our FPGAs are going to be a great place for us to provide value in automotive moving forward.

If you think of a car, you've got literally tens of these sensors in the car, and they all need to be aggregated, fused, and processed before they go to this near-edge device. And again, our FPGAs are the perfect place to do that.

David Williams (Equity Research Analyst)

Great. No, fantastic color there. Thanks so much. And then maybe secondly, just as you kind of think about the R&D center in India, is that a market that you think is an opportunity for you all, or is this more about maybe just the cost structure? And does this give you an opportunity, do you think, in that geo to maybe drive sales and really add to your portfolio there? Thank you.

Ford Tamer (CEO)

I know. Great question, David. I think, again, maybe three factors. Number one, we are excited about the opening of this R&D center.

We are finding a great skill set over there, including AI. Some of the new graduates are all steeped into these AI type of technologies in Pune, and we should be able to double down not just on chips, but also on software and AI type of skills in that market, and then number two and three, I would say from a customer and sales point of view, there are two types of opportunities, if you wish, one is the direct customers there, and obviously, we're engaged with some of the industrial automotive in that geography, but even more importantly, a lot of the OEMs and tier one that we are doing business with are actually increasing their sort of manufacturing and system builds in that geography, so it could become a global OEM and tier one building in the geography.

And again, our support center there could support them directly. So R&D, local customer, as well as global customer setting up a shop in India.

David Williams (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question is from Christopher Rolland with Susquehanna. Please proceed with your question.

Hi, this is Aaron Kankel in for Chris. Thanks for taking the question. In doing an acquisition, would you be interested in just the low to mid-range of the FPGA portfolio, or would you have a preference towards moving higher up in capabilities?

Ford Tamer (CEO)

Thank you, Aaron. Good question. As we look at the market, we do believe that the small and mid-range FPGA segments are the most interesting ones. They're the ones growing faster. If you look at the large FPGA, the ROI in that category has not been stellar over the past, I don't know, 15 years, probably.

If you look at the usage of these larger FPGA and cloud or wireless infrastructure type applications, they've been challenging. And so we do believe that the investment that we've made in the small and mid-range or focus on small and mid-range is where the money is and where the growth is. So we're going to continue to focus on those segments. Having said this, we do want to continue to broaden our portfolio. And so over time, we'd be open to address the various segments that our low-power program and offerings can address. But we'll do it in a differentiated way, not try to follow incumbents that have been there for many years.

Thank you for that. And given your history in networking and AI, can you talk about new products that you can develop using FPGAs in these areas?

Yes. Again, we are very mindful of our place in the hierarchy and the food chain. So we are a partner to the NVIDIAs, the Amazon, the many training and accelerator companies in the space. We work with them on reference design, as well as the partners that they have on the switch and the NIC and storage. So we work, obviously, with the Broadcom, the Marvell, and other companies that are developing switches and networking equipment very closely on reference design and partnership opportunities. So we see these companies as partners. We have no ambition or desire right now to go do an FPGA for cloud. We believe in those spaces, you're much better off with a fixed-function ASIC that is optimized. These are multi-hundreds of million dollar type of ASICs that are not well suited for FPGAs.

On the other hand, if you go so that's all the way on the cloud and the high-end. Then if you look at the edge devices, there's been talk about the far edge and the near edge. The far edge is those devices where we are near the sensor, and the near edge are sort of these main brains inside some of these systems. We do believe they were better suited for the far edge. And the far edge is near the sensor. And so what you need there is you need a low-power device, which we provide. You need a low-latency device, which we provide. You need fast boot time. And we've shown at our latest developer conference a 10 times faster boot time compared to competition. We just totally smoked the competition in those spaces. Actually, we smoked them on small size and low power as well.

I mean, the chip was small enough I had to drop it at the developer conference. The power is, we're talking milliwatts of power. FPGAs are great at parallel processing, and that's what we do. And we are focused on these tiny AI models like a YOLO MobileNet. We've got our own version of these models for vision and speech and text that are very well suited for these far-edge, near-sensor type applications. If you look at the Dell Customer Presentation from our developer conference at our website, you'll see Dell refer to the contextual intelligence. And so we're in these laptops sitting next to the camera inside that laptop, looking at the glare, at the glance from the user and powering down the laptop as an example if there's no user there to save battery power.

We're being looked at today in many applications in industrial and automotive for far edge. So we're very excited about our place in the ecosystem and being able to provide additional value to make our partners shine in their near-edge and bigger inference and training engines.

Thank you.

Operator (participant)

Thank you. Our next question is from Ruben Roy with Stifel. Please proceed with your question.

Ruben Roy (Managing Director)

Thank you. Ford, I wanted to start by asking about one of the trends that you mentioned. I think trends two through five, we thought a little bit about over, I don't know, the last several years. But the first trend that you mentioned, that AI is driving shorter system design cycles, it's sort of new to me. I think it's starting to show up here and there, but I'm wondering if you could drill into that a little bit and how you're thinking about that.

And I ask that because when I think about Avant and moving into the mid-range and getting into slightly more complicated FPGA structures and designs, it would seem like those types of system designs would take longer to design and put out into the market. So I guess the question is, do you think this might accelerate the pace at which we would see Avant start to gain some traction in the marketplace?

Ford Tamer (CEO)

Yeah. Thank you, Ruben. Good question. What I was referring to there is the cadence of accelerators and switches and other fixed-function devices being released every two years. And companies in that space like NVIDIA and others trying to get to a one-year cadence. The cadence probably somewhere is in between right now.

What I was referring to is as you drive to this faster cadence between different releases of these chips, there can be some offload functions that could not be accommodated. And so we could be a good place to put these functions, especially that we're still on older technologies. Avant is on 16-nanometer, Nexus is on 28-nanometer. So some of these functions could be much better done in our older processes as opposed to put it in a bleeding-edge 2-nanometer expensive die, right? And so that's what I'm referring to. And we've got some evidence that point to that trend.

Ruben Roy (Managing Director)

All right. Got it. Thank you, Ford. And then as a follow-up, can you kind of give us an idea of where inventories are today and sort of what you're targeting? I think you said by mid-year you're expecting to hit the target.

And here too, I'm asking. It's great to see that the book-to-bill crept over one over the last several weeks, and it sounds like things are getting better in some of these markets that have been weak for a while. And so I'm just trying to figure out your inventory commentary relative to bookings and then sort of maintaining the low single-digit growth for the year. Just how you're thinking about those, the puts and takes of how to get to how you're thinking about the year would be helpful. Thank you.

Ford Tamer (CEO)

Yeah. Let me get started and turn over to Tonya for additional color. As I said, we're encouraged by the early sign of recovery in industrial automotive. That book-to-bill has been a steady climb for the past two years.

It was at a low, call it seven quarters ago, and then steadily climbing back to where we are right now. So we're excited about this. The second one, as you mentioned, is the consumption demand is another very important metric that we track, and that's up. And so that, again, is positive. We're working with our channel partner to continue to glide to this healthy range of inventory, and they've been very supportive. So we expect this more vibrant demand to come back in the second half of 2025. Now, let me turn over to Tonya to give you a bit more color.

Tonya Stevens (Chief Accounting Officer)

Yes. As we said last quarter, just the inventory can fluctuate on a quarterly basis, and it was at the high end of our normal range, but we're in the process of actively bringing that down from the high end to the midpoint of our target range, which is three months of inventory, and we're seeing good progress on that. As Ford mentioned last quarter, we expect to see that back to the midpoint of our target range in 2025. We're making progress on that, and we see positive signs, like Ford said, with consumption and POS picking up. The other two pieces of the inventory equation is inventory at the end customers, then in the middle is the inventory of our disties, and then, of course, Lattice-owned inventory. We're seeing the same positive trend on Lattice-owned inventory.

We do expect to be bringing that down in Q1 as well. But a reminder relative to FPGAs and our products tend to have a very long product life cycle, selling 15, 20, 28 years. So the risk of obsolescence with some of that inventory is very low. And more important to ensure that we have the right amount of inventories to support our customers, their design win ramps, new product revenue ramps, the Avant, the Nexus, and any upticks in customer demand.

Ruben Roy (Managing Director)

Very helpful. Thank you, Tonya. Thank you, Ford. Thank you.

Operator (participant)

Our next question is from Quinn Bolton with Needham & Company. Please proceed with your question.

Nick Doyle (Equity Research Analyst)

Hi. This is Nick Doyle on for Quinn Bolton. Thanks for letting me ask a couple of questions. Sorry to keep asking about inventory, but maybe I'll just ask a little differently.

To get to channel inventory to the three months by end of June-ish timeframe, can that be done with just solid execution, or do you need to see the market start to recover to really get that inventory to your target?Thanks.

Tonya Stevens (Chief Accounting Officer)

What was the last part of that question, Nick?

Nick Doyle (Equity Research Analyst)

Just if you need to see the market recover to get the channel inventory to your target in that timeframe, that June-July timeframe.

Ford Tamer (CEO)

Yeah. I mean, look, I mean, it's been a gradual recovery, as I said, for like 18 months now. So I mean, the low end has been probably 18 to 20 months ago. And we are seeing early signs of recovery, and we expect a more vibrant recovery in the second half.

So yes, we continue to see the market recover along the same trends we're seeing now to get to these targets, Nick.

Nick Doyle (Equity Research Analyst)

That makes sense. Thank you. And you pointed out the 2024 computing revenue grew year over year. Can you talk about some of the drivers there? Anything you can tell us about server or networking attach rates would be really helpful. Thanks.

Ford Tamer (CEO)

Yeah. I think the trend there has been the same trend as you've seen in data centers. So we are designed into quite many applications across the server. So at their developer conference, we had a rack from one of our customers showing up with over 50 FPGAs per rack. We're not disclosing the exact amount, but it's well over that number.

So applications all the way from security to I/O expansion to bridging to doing some control pass functions across the board. And so that market has been strong for us, as I said, not only across GPU and accelerator, but also across networking function, across controller, across storage cards, across the board and the server. And the computing segment has been driven by servers. For the full year, server grew double digit and driven by both the general purpose and AI servers.

Nick Doyle (Equity Research Analyst)

Thank you, Ford.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question is from Duksan Jang with Bank of America. Please proceed with your question.

Duksan Jang (VP Equity Research)

Hi. Thank you for taking my question. I have a follow-up on the server question just now.

Could you talk about how much of your server and computing business is driven by content gains and how much by units? Because I think we're expecting some weakness into Q1 from some of the larger [CQ] vendors.

Ford Tamer (CEO)

Yeah. So that's a good question. We have had a nice probably 50% increase in content from one generation to the next, Duksan.

Duksan Jang (VP Equity Research)

I see. And that applies to this currently ramping generation as well?

Ford Tamer (CEO)

Yes, it does.

Duksan Jang (VP Equity Research)

Understood. And then I have a longer-term question. I think you mentioned that by 2026, you expect to get back to your longer-term 15%-20% growth rate. It seems like, though, that the industry has historically grown maybe high single digit at best. So I know you're embedding some share gains in there, but I'm just curious about the puts and takes into what's driving the 15%-20% gain longer term. Thank you so much.

Ford Tamer (CEO)

Yeah. So I think this would be driven by new products. The new products have been growing double digit. We had a really nice growth in double digit product this year. Actually, if you look at our Nexus Avant in Q4, it's probably a historical high, very healthy growth in Nexus Avant from Q3 to Q4. And we expect that to continue to grow into 2026 and 2027, driven by we see now the funnel increase nicely. We see design wins increase nicely. We're just at the early phases of rolling out these new generations. So you've seen us announce new variants of Avant at the developer conference. You've seen us announce a new Nexus 2 platform. Avant today, in its current time in the ramp, is actually much faster ramping than Nexus in that same sort of timeframe in its ramp.

So we're excited about all of the new products. We continue to also roll out new solutions to make it easier to use for our customer and increase their time to revenue and time to market. So I think it's going to be a fact. You put all these factors together, that's what's contributing to it.

Duksan Jang (VP Equity Research)

Thank you.

Operator (participant)

Thank you. Our next question is from Joshua Buchalter with TD Cowen. Please proceed with your question.

Joshua Buchalter (Director and Semiconductor Analyst)

Hey, guys. Thank you for taking my question and congrats on the results and congrats to Lorenzo on the new role. I guess it was great to see the new products contribute double-digit growth in 2024 despite a correction year. Any metrics you can give us on sort of how you expect them to contribute to growth in 2025 as Avant starts to ramp and Nexus 2 also begins to layer into revenue? Thank you.

Ford Tamer (CEO)

Yeah. I think what we could tell you is Avant was almost nonexistent in 2023. It's now making a difference in 2024. It will continue to grow and make a bigger difference in 2025 and beyond. Same with Nexus. I mean, so they went from sort of think about it in 2023, Nexus Avant to our single-digit percent of our revenue to now their mid-teens percent of our revenue. So in one year, we almost doubled the percent of revenue coming from Nexus Avant, and that should continue to get better into 2025 and beyond.

Joshua Buchalter (Director and Semiconductor Analyst)

Okay. Thank you. And then I guess with Avant out for a couple of quarters now, at least with the EG and X families, anything you can give us on sort of how you view the competitive environment?

Because it's obviously a different competitive set with mid-range FPGAs than what you've traditionally competed for in the market. Thank you.

Ford Tamer (CEO)

Yeah. I think there what I could refer you to is if you look at our developer conference, we're on the boards, and we have the videos and the photos on the website to remind people. We've done well in showcasing a lot of these Avant wins. Again, the power and size of these offerings, these are offerings that are tailor-made, custom-made for these markets. These are not large FPGAs that we're taking, or even mid-range FPGA we're taking and then cutting them for small or taking large, cutting them for mid. These are custom-made, low power, low size. Our competitors have taken this. We have this unique architecture, the Slot 4 Architecture. And we love the fact they're taking shots at us on this.

We do believe the Slot 4 Architecture is ideally suited for the sort of 700K logic cells and below, which we're playing. Avant at this point goes to 500K. And so we're optimized for the architecture, the whole offering, the power techniques are optimized for the small to mid-range. And so we're very confident that we'll be able to continue to grow and win because the customers are telling us we've got tremendous benefit in these markets.

Joshua Buchalter (Director and Semiconductor Analyst)

Thank you.

Operator (participant)

Thank you. We have time for one more question. Srini Pajjuri from Raymond James. Please proceed with your question.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Hi guys. Thanks for squeezing me in. A couple of follow-ups. Ford, first on one of the trends that you mentioned of the five drivers that you talked about is the Post-Quantum Cryptography threat.

I know it's early days, but at the same time, I think your customers need to prepare for that sooner than later. So just trying to understand what you're hearing from your customers in terms of the timeline for that. And also, if you can talk about how actually Lattice benefits from that. Does it require new products, or is it more content? Is it a combination? Or any color you could provide us in terms of how we should think about this market potential.

Ford Tamer (CEO)

Yeah. Feanny, this is one of the most exciting trends we have. I mean, actually, we're the only ones today that have a solution today available for PQC or post-quantum cryptography. And what that is, is that the bad actors are storing people's data today for decrypting tomorrow. And there's some NIST regulation that says you've got to be post-quantum ready by next year.

And we're being designed across the board by our networking and security customers at major tier-one OEMs across the world. And none of our FPGA competitors have a solution. None of the fixed-function ASIC have a solution. And the solutions, by the way, are still being defined. And so even our solutions today are going to need to be potentially changed as this post-quantum world evolves. So we're very positive and confident that this solution is actually one of the solutions that's enabling us to take share. It's being adopted, as I said, widely across the board. And we're surprised about how quickly people are designing them in. I would refer you to the Microsoft keynote at our developer conference where Bharat talked about Caliptra and the adoption of Lattice for PQC alongside with that.

And it's probably a good example of how this security and FPGA is not an FPGA anymore. It's now, all of a sudden, almost like a fixed-function solution made for security. So very excited about it.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Okay. Great. Thank you. And then a question on OpEx. Obviously, you took some costs out last quarter, Ford. But at the same time, if I look at the trends that you're talking about, shortening design cycles and share gains and new products, it seems like a lot of opportunity out there. So just wondering how to kind of think about OpEx and R&D spend because it looks like there's a lot of opportunity where you could potentially spend even more to be able to capture that, to address that market potential. Thank you.

Ford Tamer (CEO)

Yeah. So I'll start and then let Tonya take it from here. I think we are in the middle of a transformation where we are growing in international locations. So we've moved a lot of the jobs to international location. We're aggressively hiring. Pune in India was zero people eight months ago. We're at 70 now, and we're expected to get to about 100 people in that location at the one-year mark. So aggressively hiring in these international locations to transform our OpEx in those geographies. And then I think we're maintaining financial discipline, and we expect to continue to grow R&D as we grow revenue and recover. So, Tonya?

Tonya Stevens (Chief Accounting Officer)

Yeah. I'll just add to that. So of course, we took the action after very careful consideration and balancing exactly what you've said with R&D and the focus on investments there. So cutting OpEx, especially in the R&D area, doesn't mean less resources.

In fact, moving to the lower-cost GOs has enabled us to be able to add resources, and we're aggressively ramping up, like Ford said, so that we'll have even more capabilities in that department with even lower costs.

Srini Pajjuri (Managing Director and Senior Research Analyst)

Got it. Thank you.

Thank you. Our next question is from Nick Doyle with Needham. Please proceed.

Quinn Bolton (Managing Director of Equity Research)

Hey, this is Quinn. I don't know. Can you hear me?

Ford Tamer (CEO)

You can, Quinn. Hey, Ford. Sorry I jumped on late. Got the names crisscrossed. But I just want to come back to your comments about the revenue contribution for Avant and Nexus. You said it was sort of mid-teens up from single digits last year. Was that a cumulative that it's mid-teens across both Nexus and Avant? Is it both or at that level?

I guess the related question is, if it's cumulative, it sounds like then pre-Nexus is still roughly 85% of revenue?

If you remember last quarter, Quinn, we had broken it up at 13%, and we said we're not going to break it up moving forward. All I could tell you in Q4 is that number is higher than that 13%. So but we're going to try not to break it up. So we've made good improvements from last quarter. And yes, last year was single digits. So you could see we're making good improvement on Nexus Avant moving forward.

Quinn Bolton (Managing Director of Equity Research)

Got it.Okay. Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Lattice Semiconductor CEO, Mr. Ford Tamer, for any closing comments.

Thank you, Operator.

Ford Tamer (CEO)

Thank you, everyone, for joining us on today's call and for your continued support. Our focus is to continue to drive innovation, create value for our customers and stakeholders, and proactively adapt to market conditions to maintain the stability and integrity of our leadership product roadmap, customer support, and demand creation infrastructure. I look forward to sharing the company's progress with you in the coming quarters. Operator, that concludes today's call.