Lattice Semiconductor Corp

NASDAQ:LSCC

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. And I'd like to welcome everyone to the Lattice Semiconductor First Quarter Fiscal Year 2020 Earnings Release Conference Call. [Operator Instructions] A replay will be available approximately two hours after the call today. The replay dial-in number is [phone]. The conference ID number is 8369259. The replay will also be accessible on Lattice website at latticesemi.com.

I'd now like to turn the call over to Rick Muscha. Please go ahead.

[Rick Muscha, IR]

Thank you, Operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice's President and CEO; and Sherri Luther, Lattice's CFO. We will provide a financial and business review of the fourth quarter of 2020 and the business outlook for the second quarter of 2020. If you have not obtained a copy of our earnings press release, it can be found in our company website in the Investor Relations section at latticesemi.com.

I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available, and actual results may differ materially. We refer you to the documents 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 2020. 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.

Some financial information that we present during the call will be provided on both a GAAP and a non-GAAP basis. 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. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. For historical periods, we provide reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at latticesemi.com.

Let me now turn the call over to Jim Anderson, our President and CEO.

[Jim Anderson, President and CEO]

Thank you, Rick, and thank you everyone for joining us on our call today.

I'm pleased with the results we delivered in Q1 of 2020 given the dynamic environment around COVID-19. We took action quickly at Lattice to safeguard the health and well being of our employees, which is a top priority. I want to take the opportunity to thank all of our employees for how well they managed this situation. I want to thank the engineering team for staying focused on executing our roadmap, our operations team for staying focused on supply chain management, and our business team for continuing to make progress with our customers. I could not be more proud with the Lattice team.

Let me cover a few key points from the first quarter of 2020. Relative to our Q1 guidance, we experienced a roughly 3% impact to Q1 revenue due to COVID-19 with the impacted demand concentrated in Asia, and primarily in our consumer segment. However, we saw strong year-over-year revenue growth in both our communications and computing segment, as well as our industrial and automotive segment. Also, we continue to make progress on gross margin expansion, with a non-GAAP gross margin increase of 120 basis points year-over-year as we continue to execute on our gross margin improvement strategy.

We also continue to drive improvements to profitability with a 39% year-over-year increase in our non-GAAP net income. And we ended the quarter with a healthy balance sheet including a strong cash position. Also, despite many of our employees working from home over the past weeks, we continue to make steady progress on our key product roadmap milestones and continue to build customer momentum on the products that we launched last year.

Let me now provide an overview of our business by end market. In the communications and computing market, revenue was approximately flat sequentially, and up 8% on a year-over-year basis. In computing, our revenue grew sequentially and year-over-year, as we continue to see adoption of our products used in both servers, as well as client computing platforms. Growth in servers was driven by both our higher attach rate and ASP versus the prior generation of servers. We continue to work closely with our key server customers to bring greater value to next generation platforms.

In the communications market, although revenue was down sequentially due to declines in older generation systems, we continue to benefit from 5G infrastructure deployments with both sequential and year-over-year in 5G revenue in Q1. We continue to expect the deployment of 5G infrastructure to be a long term multi-year growth opportunity for Lattice.

Turning now to the industrial and automotive market. Revenue increased 5% sequentially in Q1 and 14% on a year-over-year basis. Q1 growth in the industrial segment reflects increased demand for our products used in a broad range of applications, including factory automation, robotics, and embedded vision. Although automotive remains a small portion of this segment at this time, we believe that it will be a long term growth factor as new customer programs ramp and demand in the automotive market returns.

Turning now to the consumer market, revenue declined 24% sequentially in Q1 and 32% year-over-year. The decline reflects weakness due to COVID-19 particularly in the Asia geography, as well as the expected shift in the mix of revenue towards our other market segments over time.

In consumer, we remain focused on applications with consistent multi-year revenue streams and higher margins where our solutions are enabling customers to differentiate their products. I'll now provide some highlights of our recent product roadmap execution.

As we discussed at our Nexus platform launch in December, we're investing in a portfolio of higher level software that allows your devices to be easily used, adopted quickly, and introduced to the market much faster. The first installment in our software solution portfolio was our award winning sensAI software stack, which is focused on low power imprints processing at the edge of the network.

I'm very pleased that we launched our second installment in our software solution portfolio on time in Q1, which is our embedded vision stack called mVision. mVision is a complete hardware software solution that enables customers to accelerate and simplify the implementation of embedded vision across our key markets. The response has been very positive from both our customer's and the industry as our mVision solution stack recently received Best in Show award at the 2020 Embedded World Exhibition.

We also remain currently on track for the launch of the third installment in our software solutions portfolio, which is our security solution stack, which is planning for delivery to customers in the second half of 2020.

With regard to our device roadmap, when we launched our Nexus FPGA platform this past December, we also launched our first device based on the platform, the CrossLink-NX device. At that time, we committed to releasing two additional Nexus based devices in 2020. I'm pleased to report that execution remains on track for both programs. We expect to launch our second Nexus based device in Q2, and our third device is on track to launch in the second half of 2020.

The Nexus platform has been architected for power efficiency, which enables significant power reduction for our customers across a broad range of applications. We also offer significantly better performance compared to the competition in applications that require video connectivity, such as AI and embedded vision. We're very pleased with the broad adoption of our Nexus platform, as the number of both customer engagements and opportunities continues to build.

In summary, while COVID-19 creates some uncertainty in the near term business environment, we remain focused on our long term strategy. We continue to accelerate the cadence of new products and solutions that we're bringing to market. And we continue to build momentum with customers across our market segments with our expanding product portfolio. Our team remains focused on executing our strategy. And I want to once again thank our employees for their creativity, dedication and continued execution.

I'll now turn the call over to our CFO, Sherri Luther.

[Sherri Luther, CFO]

Thank you, Jim.

First quarter revenue was $97.3 million down 2.9% sequentially from the fourth quarter and down about 1% year-over-year. The year-over-year decline was primarily in the consumer segment and was offset by strong growth in both our communications and computing segments, as well as in our industrial and automotive segment.

Gross margin on a GAAP basis was 59.1% compared to 59.2% in the fourth quarter, up from 58.8% in the year ago first quarter. Our non-GAAP gross margin expanded to 59.8% compared to 59.6% in the prior quarter, and was up from 58.6% in the year ago first quarter. So 120 basis points of non-GAAP gross margin expansion, year-over-year was driven primarily by execution on our pricing optimization strategy, as well as product cost reduction.

Q1 GAAP operating expenses were $47.8 million, compared to $43.8 million in the fourth quarter, and $45.2 million in Q1 2019. On a non-GAAP basis, operating expenses were $36.1 million compared to $35.3 million in the fourth quarter, and $38 million in Q1 2019.

In Q1, R&D increased sequentially to $19.1 million as we continue to invest in our product roadmap. SG&A declined sequentially to $17 million as we continue to drive SG&A spending closer to our target model. Q1 GAAP earnings per basic and diluted share was $0.06, compared to $0.10 in Q4 2019, and $0.06 per basic share and $0.05 per diluted share in Q1 2019.

Q1 non-GAAP earnings per basic and diluted share was $0.15 compared to $0.17 in Q4 and $0.11 in the year ago quarter. We continue to focus and execute on cash generation, with approximately 21 million in cash from operations in Q1. In addition, given the current environment, we preemptively drew down $50 million on our revolver during the quarter to further solidify our cash position. Our leverage ratio as defined in our credit agreement after the drawdown is 1.7 compared to a leverage ratio of 2.4 in the year ago quarter. Our ending cash balance was approximately $177 million.

Let me now review our outlook for the second quarter. Revenue for the second quarter of 2020 is expected to be between $95 million and $105 million. Gross margin is expected to be 60% plus or minus 1% on a non-GAAP basis.

Total operating expenses for the second quarter are expected to be between $36 million and $37 million on a non-GAAP basis. As we manage through COVID-19, we believe that our long term growth drivers remain firmly intact. Our focus on execution, our differentiated and innovative product portfolio, and our solid balance sheet, ensure that we are well positioned to capitalize on increasing customer and market opportunities.

Operators, we can now open the call for questions.

[Operator]

[Operator Instructions] Your first question is from Matt Ramsay from Cowen. Your line is now open.

[Matt Ramsay, Cowen]

Thank you very much. Good afternoon. And considering all that's going on, congratulations on the results. Jim, I wanted to ask a couple of questions on by division of the revenue that you guys reported and are talking about going forward. Obviously, some pretty big moves in mobile and consumer down, and also the industrial and automotive business quite a bit higher than then at least I have thought about it coming into this call. So any puts or takes in the supply chain that maybe artificially accelerated some sales in one division or restricted them and others and just maybe some commentary on how those two divisions play out in the second quarter would be helpful. Thanks.

[Jim Anderson, President and CEO]

Sure. Thanks, Matt. Yes, so if you look at Q1, we did see strong performance from our industrial and automotive segment, I think it was 5% up sequentially, 14% up year-over-year. I will point out that actually over the last couple of years, that segment has performed quite well for us, certainly relative to the broader market performance and this is one of the segments that we expect to be a long-term growth driver for the company.

There is, you know, particularly in the Industrial segment, there is a number of customer and a new customer revenue streams are design wins that continue to ramp and perform well. And so we're quite pleased with the progress in that segment. And again, we do view that as a long-term growth driver for the company.

Now, moving forward into Q2, kind of sequentially from Q1 to Q2 in the industrial and auto segment, I would expect that segment to kind of be flat to slightly down sequentially. We would expect to start to see some COVID-19 demand related impact to that segment in Q2.

On the Consumer segment, in Q1, our Consumer segment was certainly impacted by COVID-19 consumer demand that was primarily localized to the Asia geography, but pretty broad based across our consumer customers in Asia.

So that yes, we certainly saw softer demand in Q1 and consumer than we had originally anticipated. I would expect that to continue on into Q2. I would expect the consumer to again be sort of flat to slightly down into Q2.

And then our third segment comms and computing. From a sequential standpoint it was flat, year-over-year was 8% year-over-year. Going into Q2, I would expect that segment to be sequentially up, we're seeing quite strong demand in that segment. Yes, just a little additional color there is I think, with COVID-19, you know, that's obviously put a lot of people working from home, that's placed a different - additional pressure on infrastructure.

So we're seeing higher demand from the computing segment things like servers and client computing, and we'd expect a little bit higher demand from the communications segments as well. So hopefully, Matt hopefully that was the color you were looking for.

[Matt Ramsay, Cowen]

Thanks, Jim. That's great. Sherri, a quick one for you, hopefully but maybe it's just the mix of revenue by division or something about the way that you guys have managed working capital. But DSOs have gone up quite a bit over the last, I don't know, three or four quarters and obviously, the results have been strong. So I don't want to nitpick but if you can walk me through sort of what's going on there and just how we expect that to - is that a new normal or in the way that you're going to manage the working capital, or is there something we should expect to change there going forward? Thank you.

[Jim Anderson, President and CEO]

Yes, thanks, Matt for the question. I'm going to fill in for Sherri. I'm going to do my best since apparently her line dropped. But hopefully we'll get her back soon, but I'll do my best here. So on DSO, yes, we did see an uptick in DSO in Q1. What's happening there is, it has to do with where the demand ends up being serviced within the quarter. So if you look at Q1 demand, our February was quite weak. Our January was kind of normal, February was quite weak versus historicals and even March was got off to a slow start.

But demand started pickup in March. And so what happened is more of our demand was loaded in the back the last month of the quarter than what is then typical prior quarters. And so what that did is that has the effect of driving up our DSO since the collections for those shipments in the last month of the quarter ended up being in the following quarter.

We saw a little bit of that in Q4 as well where demand was loaded a little bit further back in the quarter than prior. So a DSO is something we will work to get back down to more normal levels, we view the current level as elevated, and we will work to get DSO back to more normal levels.

Sherri, are you are back on?

[Sherri Luther, CFO]

Yes, sorry about that. I got dropped off.

[Jim Anderson, President and CEO]

Okay. I did my best to cover for you. So thanks Matt.

[Sherri Luther, CFO]

Okay.

[Jim Anderson, President and CEO]

Operator, next question.

[Operator]

Your next question is from Tristan Gerra from Baird. Your line is now open.

[Tristan Gerra, Baird]

So with the guidance in gross margin about 200 basis points away from your target, which is a longer term target, which is a great achievement. Do you have more leverage in terms of gross margin expansion with existing product and mix to get to that longer term target or do you need the ramp of Nexus and the next generation platform to get there?

[Jim Anderson, President and CEO]

Yes, thanks, Tristan for the question. I think it's a combination of both. Certainly, as you're aware, in late 2018, we put in place a strategy to drive better pricing. We called it our pricing optimization strategy on existing products. And we also put a strategy in place to drive, multiyear product cost reductions and so both of those strategies, we continue to execute on that.

And we will continue to execute on that moving forward. There is still room for more improvement on pricing optimization, even on the products that are already in production. And there's certainly more room on product cost improvements. In fact, we have long-term roadmap to drive product cost improvements.

So we certainly expect to see gross margin expansion from products already in production. But also, as you mentioned, as we bring some of the new products online, for instance, the products based on our Nexus platform, we do expect those new products to be accretive to the company's overall gross margin. So those will help drive margin improvements as well.

Then, we are certainly very focused on our long-term goal, which is to get above 62% gross margin, and we've made steady progress towards that goal, and we expect to continue to make progress.

[Tristan Gerra, Baird]

Great. You've mentioned 5G infrastructure at a time when companies have been targeting the past few quarters to kind of maintain revenue in that segment, what percentage is it roughly of your total top line right now, is that low single-digit. And also, if you could remind us what, Huawei was as a percent of revenue last quarter? And do you expect Huawei to grow in the next - in the coming quarter?

[Jim Anderson, President and CEO]

Yes, thanks, Tristan. Yes, in terms of overall revenue, we don't break out 5G specifically, but it's still a relatively small part of our overall revenue, but because we view it as a good long-term, multi-year growth driver, it's something we watch very carefully. So, for instance, in Q1, again, we saw sequential growth in 5G wireless infrastructure related revenue, we saw year-over-year growth in Q1. And we expect 5G infrastructure revenue to be a growth driver over a multi-year period, not just for Lattice, but for the industry overall.

And so it's something we watch very closely and we believe we're well positioned. If you'll recall from our Investor Day, which was above a year ago, almost a year ago, we shared that in 5G systems, we enjoy a roughly 30% more dollar content in the 5G system than we did in sort of similar 4G systems. So as 5G ramps, we expect to see good growth from that revenue line.

And then, to your question on Huawei, yes, just as a reminder, we said in the past, that in 2018, Huawei accounted for roughly single digits overall revenue for Lattice revenue in 2018. We saw that revenue decline in 2019 and we would expect Huawei revenue to decline again this year.

[Operator]

Your next question is from Charlie Anderson from Dougherty & Company. Your line is now open.

[Charlie Anderson, Dougherty & Company]

Yes, thanks for taking my question. I guess you answered my question. If you're sitting around a conference table, six feet away are all calling in so that one's out of the way. So…

[Jim Anderson, President and CEO]

Yes, we are adhering to the social distancing, we are following. Sorry, go ahead.

[Charlie Anderson, Dougherty & Company]

Excellent, very good. So, Jim, I wonder if you can maybe just update us on channel inventory, distributor inventory. How are people acting during this pandemic versus normal? Is there any buffers safety stock being created. Just any general comments there and then I've got a follow-up?

[Jim Anderson, President and CEO]

Sure, thanks Charlie on Channel inventory, as we have very good visibility on our distributor inventory. And where we ended Q1 was I would call it a very healthy level. If we look at just historically what is normal levels of inventory for our distributors. We ended right in the middle of the range of what we review as normal inventory for our distributors. And so, we view it as healthy at this point and healthy from two perspectives healthy from the standpoint of not being too much inventory, but also healthy from the standpoint of being able to serve as customer demand, as well.

And so, yes distributor inventory in good shape. And we have not to-date seen any signs of as you said buffering or safety stock, but it's something that we're watching very closely and we definitely keep a close eye on it. So hopefully that's the color you were looking for in channel inventory.

[Charlie Anderson, Dougherty & Company]

No, that's perfect. And then my follow-up you mentioned client computing within computing was also a popular strength. And I know others are seeing that trend as well. Maybe if you could just update us Jim, roughly, where Lattice stands as far as client computing as a market and

what are some of the opportunities that you see arising in terms of the designs that you could potentially pursue within that end market? Thanks.

[Jim Anderson, President and CEO]

Yes thanks, Charlie yes so in client-computing that in addition to computing in the server segment, that's been a nice growth area for us as well. In client computing there's a couple areas that we see as good potential opportunity for us. If you think about, we've been talking about how our products are used for artificial intelligence for inference at the edge of the network for building intelligence into devices at the edge of the network.

While certainly client devices, client computing devices our edge devices. And so, we do see opportunity for our products to bring artificial intelligence capabilities to client devices. And so, that's one potential area of growth. Similarly we've talked about our MachXO3D product, which is our FPGA with special security processing. And that is that's used for platform root of trust in server applications, while that same security concept could be applied to actually a variety of devices, including client computing devices, but also networking devices, et cetera.

So we do see some opportunity for potential growth in providing security or platform root to trust type security in client devices. So that's a couple places that we see for future growth in the client computing space.

[Operator]

Your next question is from Christopher Rolland from Susquehanna. Your line is now open.

[Christopher Rolland, Susquehanna]

Just wanted to follow-up on consumer and I know it's hard to quantify. And I certainly understand the Asian consumer dynamics there, but was part of the weakness. You guys shying away from lower margin business? If so how do you kind of quantify that and bigger picture? How much more pruning of lower margin consumer do you guys have to go what kind of a headwind do you think it might be for this year?

[Jim Anderson, President and CEO]

Yes, it’s a good question, Chris. And so in addition to clearly in Q1 we saw, we saw an impact to our consumer segments due to COVID-19 and also consumers normally just seasonally down from Q4 to Q1. So we have both of those plus, as you mentioned, if you step back and look over a multiyear period, we had shared this back at our Investor Day a year ago. We are expecting our revenue to shift over time and for greater percentage of our revenue to come from our other market segments, industrial and automotive and communications and computing.

And for a smaller percentage of overtime to come from consumer, what we're doing within the consumer segment is we're changing - really transitioning the type of revenue and the type of design wins that we are winning within consumer. So we're focus much more on Prosumer applications. So these are high end consumer applications. These type of applications are applications where our products can really help differentiate our customers systems.

And they have longer multiyear revenue streams. They have higher gross margins since we are executing that transition within consumer right now. So, but we do you know consumer is an important segment for us. It's just a segment where we're in the middle of that transition to longer revenue streams and higher margins.

[Christopher Rolland, Susquehanna]

Great. And on the industrial side of things, and I appreciate that new industrial programs are ramping. But with industrial and auto that segment for others, there seems to be some more structural worries with the virus here. Do you think these programs are going to be enough to give you a material difference versus your peers? Or is this more of a nearer term phenomenon for you? Do you think you can kind of grow through what could be a downturn here? And do you think that there any supply chain issues buying ahead for example, on supply chain worries, that are boosting that in the near term? Thank you.

[Jim Anderson, President and CEO]

Thanks, Chris. See as sort of first of all in the industrial and automotive segment maybe be it will be helpful for me to point out that the vast majority of revenue within industrial and automotive is industrial. And so automotive still remains a relatively small part of our industrial auto segment. Now, we do think that automotive is a longer term growth opportunity for the company, we have one - several employee design wins in the automotive segment that we expect to be ramping over the course of time.

And you know, those design wins do you ramp slower in automotive. But we do expect automotive to be a nice growth factor for the company over time, but at this point in time - it is a small portion of that revenue segment. Now industrial, which is the bulk of the revenue if you look at over the last couple years at how our industrial auto segment has performed relative to market, we've actually had quite strong performance for the last couple of years relative to market.

And, we expected this segment to continue to be a long-term growth opportunity for us. Our products are just very well suited for a number of the secular trends that we're seeing in industrial that I think will grow will be over a multiyear period. You know things like industrial automation, increased use of robotics, touchless control where the operator doesn't have to touch the machine, whether it's through voice command or through hand gestures, better vision.

So, these are the type of applications that our products are just very, very well suited for low power small FPGAs I can do inferencing in these applications are well suited. And so, we’re seeing nice designer win traction within this segment and we expect it to be long-term growth. Now in the short term, more tactically for instance, moving in from Q1 to Q2 yes, we would expect some, some potential shopping in similar segment due to COVID-19 impact on demand in the industrial segment.

So moving into Q2, we would expect this segment to be flat to down. In this in Q2, but overall, over the long-term, we expect it to be a growth area for us. You did ask about supply chain. What we're seeing?

[Christopher Rolland, Susquehanna]

Yes, just a [indiscernible].

[Jim Anderson, President and CEO]

Right now yes I was going to say we don't see any signs of that. I think I don't know if your question was specific to industrial or just in general. But we haven't we haven't seen any signs of buy ahead yet. It's something that we're watching very carefully for. We're very sensitive to that we watch very carefully what we ship into distributors and what skill gets shipped out of our distributors, but today we haven't seen any signs of by hands.

[Operator]

[Operator Instructions] Your next question is from Alessandra Vecchi from William Blair. Your line is now open.

[Alessandra Vecchi, William Blair]

Hi everyone, congratulations on a great quarter and outlook in a tough environment. Just on the on the Nexus platform, I know it's very early with the launch starting then in December. But the time you talked about 65 customers 35. Early Access, have you sort of seen any of these early access customers push out interest or indicate any product delays at this point that are COVID related? Or how do we sort of think of that, even if revenue is not really expected till 2021?

[Jim Anderson, President and CEO]

Yes, I would say the it's a good question Alex in general, not just our Nexus platform, but some of the other products or new products that we launched last year. In general, we're seeing very healthy levels of customer activity and just customer intensity on our design wins and in the designing programs that we're working with our mine. You know today we haven't seen any COVID-19 impact in terms of customer programs, First of all our Lattice team.

I believe both our sales and our application engineering team have done just a great job continuing to support our customers, despite COVID-19 despite work from home. And we continue to see good healthy levels of activity and for things to and things are progressing well. On Nexus in particular, yes when we launched Nexus in December, we had 65 customers engaged that's certainly grown since then we're now over 100 customers engaged. We continue to see very strong, interest in the platform. Very strong design interest, good design funnel.

The platform is quite competitive. it's the only FPGA products that are on FD-SOI technology, which is semiconductor technology that offers very good power efficiency. And combined with our own architectural enhancements, we're able to deliver up to 75% better power efficiency versus our competition. And so that's really compelling to our customer base and receiving just very strong design traction. So we're quite pleased with the progress.

And, you know, obviously, despite COVID-19, we're very focused on making sure that we continue to make good progress with our customers across Nexus and in dollar, all of our all of our new products.

[Alessandra Vecchi, William Blair]

Great. And then just one more to that extent, you've always talked about sort of broad customer adoption sorry interest across markets for Nexus, including robotics and industrial automation and communication. As the customer count has sort of grown is for in terms of initial

interest or which end market could maybe sort of lead the charge is anything standing out in particular?

[Jim Anderson, President and CEO]

No, we continue to see really good broad based adoption across multiple markets that value proposition that I mentioned earlier of 75%, better power efficiency versus competitive devices. that's a tremendous advantage to customers in just about every market segment, every customer is faced with power constraints at the system level. And so that sort of power efficiency is a big benefit our customers, regardless of their application.

I think if you would ask, which market segments would likely enter production most quickly, typically our consumer segment is the one that is fastest in terms of time to revenue. So as our first Nexus devices enter production, I would expect them to first be probably consumer related devices or devices for the computing segment. Those are typically our segments that are past us in terms of time to revenue. But in terms of design win funnel, we're seeing good funnel across all the market segments.

[Alessandra Vecchi, William Blair]

Great, that's very helpful. And then one last one if I can, I know you touched already on gross margin and sort of the three levers you have to pull this quarter was quite impressive from a product gross margin - growth perspective in the face of down sequential licensing revenue, and obviously some of that mix for what you said pricing optimization and product cost reduction. But I'm just curious as you’re sort of a year later a year plus later from the Analyst Day if you've uncovered sort of additional shoots or levers to pull within pricing optimization and cost reductions. I think you've talked about nine initiatives in the past. Just curious if that number is sort of grown over time?

[Jim Anderson, President and CEO]

Absolutely, so we continue to find areas to continue to improve pricing, and pricing optimization. We put that initial strategy in place at the end of 2018, and started executing in 2019. We saw great progress in gross margin in 2019. And those nine initiatives that we first put in place, many of those initiatives are continuing into 2020. But we have added some additional focus areas as well over time. And so we view pricing optimization as an ongoing process.

And we don't believe we're kind of ever done with that there's always room for improvement. And so, we continue to be focused there. And also product cost reductions at the end of 2018 we did put in place some multiyear roadmap of product cost reductions that we're executing to - we could expect to execute to that in 2020 and beyond all to help carry us to that goal of driving to greater than 62% gross margin, which is the business model target that we gave at our Investor Day last year.

The other thing that, as I mentioned earlier that will help improve margins as well as we bring some of the new products online for instance, the next products that you asked about. We expect those products to be accretive to our overall corporate gross margin. So those should help drive by our gross margin expansion as well.

[Operator]

Your next question is from Richard Shannon from Craig-Hallum. Your line is now open.

[Richard Shannon, Craig-Hallum]

Thanks, Jim and Sherri, for taking my questions as well. Jim I guess the first one in the industrial and automotive segments. I'm curious what how does that segment end up in terms of revenues versus your original expectations you gave us some early February? And could you give us also what the relative trends were - between North America and rest of world specifically Asia?

[Jim Anderson, President and CEO]

Yes, first of all on the first part of your question on relative to our original expectations, I would say it ended up being, you know, a little bit better than what we had expected pretty much in line with what we had expected, maybe slightly better. And that helped to offset, a little bit of the worse consumer results that that we are - our worst results than what we had expected. And then, Richard, the second part of your question, Can you remind me those?

[Richard Shannon, Craig-Hallum]

Geographic differences North America versus rest of world specifically Asia?

[Jim Anderson, President and CEO]

Yes, thank you. So in Q1 North American and Europe performed pretty much as we had expected. They were kind of right on target. It was really Asia that was weaker or softer than we had expected and again, particularly in the consumer segment and also mostly in the China, geography. And so, yes that's where the softness relative to our original guidance for Q was.

[Richard Shannon, Craig-Hallum]

Okay, that's helpful. And my follow-up question is in your comms and computing segment, I think you said to a prior question, you expect that segment to grow sequentially in the second quarter curious if both the comms and computing parts are expected to grow and within comms, do you see the non-5G part continue to grow as well?

[Jim Anderson, President and CEO]

Yes, so comms in computing, overall, we expect to grow I think that's primarily we're expecting that to primarily be driven by compute. What we're seeing with COVID-19, with people working from home that's bringing a lot of pressure on the infrastructure. We're certainly seeing, strongly strong orders from our server customers and our computing customers in general which we think will help drive sequential growth in that segment. We would expect, you know 5G revenue to continue to be strong into Q2, the non-5G revenue in our communications segments that we would expect to probably be flattish sequentially. So hopefully that gives you a little bit more color in that segment.

[Operator]

[Operator Instructions] Your next question is from Ruben Roy from Benchmark. Your line is now open.

[Ruben Roy, Benchmark]

Hi Jim, thanks for let me ask a question. I had and congrats for executing so well in the challenging environment. I had a question on some earlier comments around China. I understand kind of the Huawei dynamics. But there are I think, some new rules that the DIS is putting out there, which potentially remove some civilian exceptions. I'm wondering if you've had a chance to think about potential implications, because it seems like they've called out FPGAs and FPGA shipments amongst other tech into China and some other countries. So any really, thoughts on that would be helpful? Thanks.

[Jim Anderson, President and CEO]

Yes thanks, Reuben. So, clearly that announcement was just made yesterday and we've only had about a day to digest and to assess what sort of impact it would have to Lattice. But, our initial read of that is that based on where our products are manufactured and then also based on the current export control classifications for our products, we don't believe there would be an impact to the products that we're currently shipping.

And so the other thing that I would add is that our understanding is that there is a 60-day feedback and comment period for the industry to provide over the next 60 days that would before this would potentially take effect. And so we don't believe this would have any impact to our Q2 business.

But of course, that's our early read, we'll continue to assess the situation as it evolves. And then I probably just take the opportunity to reiterate of course, you know, we comply with all export restrictions today, and we would absolutely continue to do that.

[Ruben Roy, Benchmark]

Yes, that's very helpful Jim. I appreciate that, and I understand it certainly. So we'll see how that plays out. Just a quick follow up on some of the commentary around software. It's great that you guys are continuing to execute on the plan for the products later this year. You know, as you think about the success and the initial feedback around sensAI, wondering if you're planning on additional software stacks beyond the two that you mentioned today on the call and are you getting customer feedback on these software stacks? I'm wondering if they're helping you define some of the IP that's going to be included, and if that's helping kind of point your direction into how you are thinking about that part of the business, and product categories as you think longer-term. Thanks, Jim.

[Jim Anderson, President and CEO]

Yes, thanks, Ruben. So certainly, we're seeing good customer activity on sensAI that was the first installment in our software solution stack portfolio. We continue to see actually good traction across a number of different markets. In February, just this past February, we put in place a second installment that was our machine vision, mVision, embedded vision, software stack, again, really good customer reception, but also a great reception from the industry.

We won Best in Show award from one of the industry exhibitions. And so that was good to see. So that's two of the software stacks in our portfolio. The third software stack comes out in the second half of this year, that brand remains on track for delivery to our customers in the back half of this year. And that's for security. So basically, think about it as security, hardware level security for all sorts of edge applications. And so we'll launch that in the second half of this year.

And then we are contemplating additional software solution packages beyond that. We haven't announced which ones beyond that. We are certainly working closely with our customers to understand what additional software solutions would be helpful beyond that. This is a key part of our R&D strategy.

Of course, we're - clearly we're investing in our hardware part of our roadmap and bringing new devices out, bringing them out at a faster cadence. But the other big part of our R&D strategy is to really beep up and improve the software level solutions that we have, so that we can allow customers to adopt the devices much more quickly, bring them to market much more quickly. So this is definitely a key part of our strategy moving forward.

[Operator]

[Operator Instructions] Your next question is from David Duley from Steelhead Securities. Your line is now open.

[David Duley, Steelhead Securities]

Yes, thanks for squeezing me in very much appreciate it. I had just a couple of follow-up questions to topics that have already been discussed. I guess first, what - you mentioned the COVID impact I think in the first quarter, what do you think the impact to revenue would be in the second quarter. And maybe as a follow on to that if you could just talk about what you're hearing from your customers for the second half of the year?

[Jim Anderson, President and CEO]

Okay. Thanks, David. So in Q2, our guidance really factors in what we think is the impact to COVID, or to our demand, our Q2 demand from COVID-19. If you look at the midpoint of our guidance, that's really our best estimate based on all the data we have to-date time, they'll look for our revenue that's based on the billings and backlog that we have to-date, as well as the forecast for the remainder of the quarter from both our [indiscernible], as well as our direct to customers in terms of what they need for the remainder of the quarter.

So that midpoint is our best estimate based on the data we have to-date. And then if you notice we did actually widened the range that we gave this quarter versus prior quarter's a little bit wider range plus or minus 5%. And that's to account for potential variability due to COVID-19 variability on either the downside or the upside off that midpoint.

And then in terms of second half, it's still very difficult to gauge, I think you had asked what our customers say, I think it's very difficult for our customers to gauge what will be the COVID-19 impact to demand in the back half of this year. Certainly, we're very close to our customers talking to them on a regular basis. And they're, the customers we do have customer forecast for the second half of the year. Now, we don't generally provide guidance that far out, but we're working really closely with our customers to make sure that we meet their demand for not just Q2, but for a second half. And yes, I think it's just it's really tough to tell what sort of impact COVID-19 will have further out this year.

[David Duley, Steelhead Securities]

So I guess that's safe to say that the customers haven't really changed their forecast for the second half, because they just don't know.

[Jim Anderson, President and CEO]

Usually we get pretty good forecasts out through Q3. So for instance, we're seeing billing and backlog now for - sorry, just backlog for Q3. And we have forecasts for, in particular for programs that are ramping in the back half of the year, we would have forecasts of that second half ramp to ensure that we have the supply to meet those ramps, so that would be the visibility that we have in the back half of the year.

[David Duley, Steelhead Securities]

Okay. And then as your business or do you see signs of recovery in your business in Asia or in China, specifically to those would seem to be the geographic regions that most likely saw demand impact first. I'm just wondering if they're starting to get better at this point?

[Jim Anderson, President and CEO]

Yes, Thanks, David. We certainly saw in China in particular, we certainly saw very slow demand through the end of February and into the beginning of March. That started to pick up significantly at the end of March and we've seen that strong demand in China or in Asia in general, continue on through the beginning of the quarter. And so yes, we definitely saw a pickup in China demand kind of in - I would say it started in kind of mid part of March and into the second half of March.

[David Duley, Steelhead Securities]

Excellent. Final thing from me is, have you seen your - what currently are your lead times and have they extended because of any sort of supply issues via foundries and shipments or anything like that? Any information there you could share with us would be most helpful. Thank you.

[Jim Anderson, President and CEO]

Sure. We are working really closely with our suppliers to make sure that we meet all customer demand. I would say that right now we are absolutely meeting all customer demand. We're working closely with our suppliers to make sure that stays the case. We are taking the opportunity in Q2 to probably build a little bit of Lattice inventory, it should be inventory internal Lattice on high demand products and high running products that we could potentially see a snapback or a surge in demand. And so we'll probably be building a bit of inventory from Q1 to Q2 on those high demand programs.

And then we are also - where we have some long lead time ingredients for our products, things like substrates, we are making sure that we order well in advance and that we're well covered for demand moving forward. So certainly something we're watching very carefully and making sure that we continue to do a good job to meet our customer demand.

[David Duley, Steelhead Securities]

So lead times have not extended?

[Jim Anderson, President and CEO]

We've seen lead times extend a little bit on some products, but we're working very carefully with our suppliers to keep lead times from extending and to make sure that we're meeting the demand for our customers.

[Operator]

And there are no further questions at this time. I will turn the call over to Lattice CEO, Jim Anderson for closing comments.

[Jim Anderson, President and CEO]

Thank you, Operator, and thanks everyone for joining us on the call today. I want to take the opportunity again to thank the Lattice team and our partners for all of their professionalism and dedication in the current environment. We really appreciate it. Despite some of the recent challenges, we continue to make very steady progress and remain focused on executing to our strategy. We appreciate your support and hope you and your families remain healthy.

Operator that concludes today's call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.