Lattice Semiconductor Corp

NASDAQ:LSCC

Earnings Call Transcript 2021-Q2

[Operator]

Welcome everyone to the Lattice Semiconductor Second Quarter 2021 Conference Call. I will now turn the call over to Mr. Rick Muscha, Director of Investor Relations. Please go ahead, Mr. Muscha.

[Rick Muscha, Director, Investor Relations]

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 second quarter of 2021, and the business outlook for the third quarter of 2021. If you have not obtained a copy of our press -- 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 for 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 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 that -- are contained in our projections or forward looking-statements.

This call includes and constitutes the company’s official guidance for the third quarter of 2021. 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 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 Jim Anderson, our CEO.

[Jim Anderson, President and CEO]

Thank you, Rick, and thank you everyone for joining us on our call today. We are excited to be at the beginning of a new growth phase for Lattice, fueled by an expanded product portfolio and multiple growth vectors across our key end markets.

Let me start by covering a few highlights from Q2 of 2021. We grew revenue 25% year-over-year and 9% sequentially, with double-digit year-over-year growth in each of our key market segments.

We expanded non-GAAP gross margin by 80 basis points year-over-year to 62.1%, as we continue to execute on our gross margin expansion strategy. We achieved record non-GAAP operating profit of 29%, while non-GAAP net income increased 49% year-over-year. We also expanded our product leadership with the June launch of CertusPro-NX, our new advanced general-purpose FPGA.

Let me now provide an overview of our business by end market. In the Communications and Computing market, revenue increased 7% sequentially and 15% on a year-over-year basis. As we discussed at a recent Investor Day, our key long-term growth drivers in this segment are data center servers, client computing and 5G infrastructure.

In servers, growth was driven by expansion of both attach rate and ASPs, as we continue to drive an increase in our dollar content per server with each new server generation. Client computing is a significant greenfield opportunity for us, with multiple programs ramping in multiple ways to bring new innovation to our customers. 5G infrastructure growth is driven by our higher content in 5G systems versus 4G systems and the continued worldwide build-out of 5G infrastructure. Communications and Computing continues to be a long-term growth opportunity for the company.

Turning now to the Industrial and Automotive market, revenue increased 15% sequentially and was up 47% on a year-over-year basis. Our business grew across multiple applications such as industrial automation and robotics, where Lattice solutions provide significant competitive advantage and differentiation for our customers. We continue to deliver strong growth in the industrial segment and our product portfolio is well-positioned to drive sustained long-term growth.

Turning now to Consumer, revenue was flat sequentially and was up 13% year-over-year. The quality of the revenue stream and Consumer has improved over the past two years as we’ve targeted higher value, multigenerational designs that better leverage our FPGA portfolio. We believe our Consumer revenue is stabilized and has the potential for modest growth over the long-term.

I’ll now provide some product roadmap highlights. I continue to be very pleased with our team’s overall execution. With the June launch of CertusPro-NX, we have now launched four device families based on the Lattice Nexus platform since the platform was introduced in late 2019.

We are excited about the CertusPro-NX family, which relative to the competition offers 4x lower power, best-in-class system bandwidth and industry-leading reliability. Each of these advantages provides meaningful differentiation and value for our customers’ applications and systems.

Our first two device families CrossLink-NX and Certus-NX are in production and ramping with customers. The third device family Mach-NX is on track to generate revenue by the end of this year. We continue to be very pleased with the broad adoption of our Nexus platform across our market segments.

On our software roadmap, we continue to invest in tools, solutions and software stacks to make it easy to make it easy for our customers to adopt Lattice products and get to market quickly. During the quarter we launched Lattice Automate, our solution stack focused on factory automation and robotics applications. Automate is the fourth installment in our application-specific solutions stack portfolio and another proof point of our continued roadmap execution.

And lastly, at our recent Investor Day, we announced our new Lattice Avant platform, which will double our addressable market and will allow us to address mid-range FPGA applications. Execution is going well and we remain on track for launch in the second half of next year. We’ve engaged with over 100 customers on Avant and are pleased with customer reception of momentum.

In summary, we continued to execute well in Q2 and we are excited to be at the start of a new growth phase for Lattice, driven by our leadership, product portfolio and multiple growth vectors across our key end markets.

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

[Sherri Luther, Chief Financial Officer]

Thank you, Jim. We are pleased with our strong Q2 financial results, as we continue to execute to our financial model. We drove sequential and year-over-year revenue growth, continued to expand gross margin and delivered record profitability, while continuing to invest in our leadership product roadmap. We drove strong cash generation, increased our net cash positive position and continued to return cash to shareholders.

Let me now provide a summary of our results. Second quarter revenue was $125.9 million, up 9% sequentially from the first quarter and up 25% year-over-year. Revenue grew double-digit year-over-year in our Communications and Computing and Industrial and Automotive market segments with strong sequential growth as well. Revenue from our Consumer market segment was also up double digits year-over-year and was flat sequentially. IT revenue was down both year-over-year and on a sequential basis.

Gross margin on a GAAP basis was up 30 basis points to 61.3% in Q2 compared to the prior quarter and was up 110 basis points compared to the year ago quarter. Non-GAAP gross margin increased 40 basis points to 62.1% in Q2 compared to the prior quarter and was up 80 basis points compared to the year ago quarter. Both the sequential and year-over-year increases in gross margin continue to be driven by our margin expansion strategy, as we benefit from pricing optimization and product cost reductions.

Q2 GAAP operating expenses were $53.9 million, compared to $49.9 million in the prior quarter and $48.1 million in the year ago quarter. On a non-GAAP basis, operating expenses were $41.5 million, compared to $38.9 million in the prior quarter and $36.6 million in the year ago quarter.

Our R&D expenses increased sequentially as we continue to invest in our product portfolio. SG&A expenses increased slightly on a sequential basis, while declining to 14.6% of revenue, which is below our target model.

Q2 GAAP earnings per basic share was $0.16 per diluted share and $0.15 per diluted share, compared to $0.14 and $0.13 in the prior quarter and $0.08 in the year ago quarter. Q2 non-GAAP earnings per basic share was $0.26 per diluted share and $0.25 per diluted share, which increased from $0.23 and $0.22 in the prior quarter and increased from $0.17 in the year ago quarter. This represents 47% year-over-year growth for non-GAAP earnings per diluted share.

Driving cash flow generation continues to be a key focus area for the company. We generated approximately $71 million in cash from operations in the first half of 2021. This is up over 90% compared to the cash generated from operations in the first half of 2020. In Q2, we repurchased approximately 525,000 shares or $25 million in stock under our buyback program. This brings our year-to-date total of stock repurchased to $40 million. Finally, our cash balance increased to $188 million as we further increased our positive net cash position.

Let me now review our outlook for the third quarter. Revenue for the third quarter of 2021 is expected to be between $124 million and $132 million. Gross margin is expected to be 62% plus or minus 1% on a non-GAAP basis. Total operating expenses for the third quarter are expected to be between $42 million and $44 million on a non-GAAP basis.

We are focused on continuing to drive revenue growth and profitability expansion through the strength and differentiation of our leadership product roadmap.

Operator, that concludes my formal comments. We can now open the call for questions.

[Operator]

Thank you. [Operator Instructions] Your first question is from Matt Ramsay from Cowen.

[Matt Ramsay, Cowen]

Yeah. Good afternoon. Thank you for taking my questions. I guess, Jim, the -- it’s great to see the progress in the business, so congratulations. It’s been a couple of months now since you guys announced that at the Investor meeting the Avant program. And you mentioned a couple of things in your script, I wanted to revisit that and see what the initial engagements and customer receptions have been like. And the second part of the question is, as you guys think about moving into mid-tier FPGA products over time, any thoughts as to the sensitivity or restriction on potentially shipping those into markets like China? I know some of your higher tier competitors have had some challenges there. You guys have been largely immune to some of those challenges in the lower tiers of the market. So any initial feedback from regulators as to how much flexibility you might have in those mid-tiers to go after some of those markets that your competitors can’t? Thank you.

[Jim Anderson, President and CEO]

Thanks, Matt. Yeah. So, on Avant -- first of all, we are really pleased with the progress on Avant. I know you asked about customer momentum, but let me give a shout out to our engineering team for continuing to do a great job executing on that program. We are really pleased with the progress on execution and we remain on track for sampling and launching the device in the second half of next year.

Then on customer momentum as well, I am really pleased with the progress on that. As we shared at the Investor Day, we had engaged with over 100 customers on Avant. We continue to have very strong engagement, growing customer momentum.

Also if you recall from the Investor Day, I shared that, actually it was the customers that encouraged us to build Avant. When we introduced Nexus to our customers, we got great reception on Nexus, but the customers also ask us, hey, can you do more? Can you expand the portfolio? Can you bring your power-efficient architecture to mid-range?

And so it was really at the customer’s behest that we went ahead and started working on Avant back in 2019. And so, yeah, customer momentum continues to be good. Our sales team is very happy right now having all sorts of discussions with Avant with our customers.

On the second part of your question on export controls, so, of course, we always adhere to all U.S. regulations on export controls and we would of course do that for any new products whether those are Nexus or Avant.

Now, we’ve done extensive market research. We believe that there’s a tremendous market opportunity for Avant. We believe it’ll be a very competitive product. And as we shared at Investor Day, we believe that will open up about $3 billion of additional SAM for us additional addressable market, which will roughly double our addressable market when Avant launches. So, yeah, once again really pleased with progress on Avant and just really excited to launch it next year.

[Matt Ramsay, Cowen]

Thanks for the color there, Jim. As my follow up question, there’s no secret that most companies in the semiconductor industry right now are -- have a lot more demand than they have supply. I would assume that you guys are in that position to some extent. Maybe you could talk a bit about what the supply demand gap is? And are you maybe in a better position to supply more of that demand, given you are sourcing from SOI-based platforms versus some of the bulk CMOS that is a lot more tight at foundry? Thanks.

[Jim Anderson, President and CEO]

Yeah. Thanks, Matt. So, definitely, I think, that our supply chain team has done a great job over the past year of navigating the tightness in the overall semiconductor supply chain that we are seeing across the industry. I think our supply chain team has done a really good job of proactively figuring out how to navigate.

So just to mention a couple of things that we’ve done is, number one, of course, we’ve been working very closely with our customers to understand their needs and their forecasts, and really long-term multi-quarter forecasts. We understand exactly what they need and then turning around and working with our key strategic suppliers make sure that supply is in place. That’s number one.

Number two is we’ve proactively and strategically built inventory on especially high volume products that will last for years and years. We started that inventory -- sort of strategic inventory building program back in Q2 of last year.

We built inventory beginning in Q2 of last year and then we built more inventory in Q3, Q4 and ended the year in a very good -- in 2020 a very good inventory position. And again, from Q1 to Q2 this year we built inventory sequentially in the most recent quarter.

And so we’ve -- I think we’ve done a good job of getting inventory there to help support our customers. We -- I just want to do a thank you to the supply chain team for their great job at executing. But, yeah, I think, we are doing a good job of meeting our customers demand.

There certainly can be localized combinations of silicon and packaging that might be a bit tight here or there. But as a whole, I think, we’ve done a really good job supporting our customers and I think our customers would say exactly the same thing.

And I think that that will benefit us moving forward, because the customers certainly see that, they recognize that and they do take that into account as they decide on new designs for new systems and we are certainly seeing some benefit right now in terms of additional new designs, because we’ve executed really well on the supply chain. So I hope that answers the question, Matt?

[Matt Ramsay, Cowen]

No. Thanks very much Jim and congrats, guys. I’ll jump back in the queue. Appreciate it.

[Jim Anderson, President and CEO]

Thanks.

[Operator]

Your next question is from Alessandra Vecchi from William Blair. Your line is open.

[Alessandra Vecchi, William Blair]

Thanks everyone and I also extend the congratulations on another great quarter and for helping make us all look good. Just on the revenue by end market breakout. Maybe Jim, if you can just talk to us a little bit more about how those segments tracked versus your internal expectations going into the quarter? And then maybe a little more green early on the industrial side. Obviously, there’s been an acceleration on robotics and automation coming out of COVID. But can you maybe hone in a little bit on how much of it really is market growth versus share gain versus some of the incumbents that maybe have neglected the industrial customers in particular?

[Jim Anderson, President and CEO]

Sure. Thanks, Alex. So, on the first part of the question revenue by end market, certainly our Q2 came in better than we had expected on the topline, which we are quite pleased by. In particular, we saw strength in Communications and Computing that was up 7% sequentially and 15% year-over-year.

But also Industrial and Automotive, which was up 16% sequentially and 47% year-over-year. So, Industrial and Automotive in particular came in much stronger than we had expected. And Consumer kind of performed as we had thought in the quarter.

And those two segments of Comps and Compute and Industrial and Auto, those have really been our lead strategic growth segments. Certainly, last year both those segments grew double digits and those are really the segments that we look to in the future of driving the majority the company’s growth moving forward.

We have multiple growth vectors in each one of those markets. Comps and Compute, we have growth in servers, growth in client computing 5G infrastructure and then, of course, Industrial and Automotive a number of places as well.

And I think you asked in particular what’s kind of where some of the sources of strength in Industrial and Automotive. In that market, it’s really around new design wins, new programs around industrial automation, industrial robotics and then automotive electronics as well. Although automotive is still a relatively small part of that segment. So we are seeing just really solid growth in industrial automation and robotics applications.

And what we see there is, our industrial customer is really accelerating their plans around automation and robotics. And that kind of helped lead to new design wins for our products and certainly stronger demand.

And our products are just a great match for those types of applications. The power efficiency, the flexibility, the software, the greatest amount of software content we provide, we just launched our Lattice Automated software stack, which is specifically for industrial automation and robotics to help those customers get to market quickly, to design in our products really easily and so that’s a tremendous area of strength for us.

In terms of how much of it is end market versus share gain opportunity? I would say, there certainly is some portion of it that is end market. Certainly the Industrial and Automotive segment have recovered significantly since Q2 of last year.

But I would say a good portion of that is also a share gain, new sources of revenue that’s certainly a big contributor to that as well. So, yeah, we are quite pleased with the Industrial and Auto segment and continue to expect that to be a long-term growth area for us.

[Alessandra Vecchi, William Blair]

Great. That was extremely helpful on the color front. Just as my one follow-up, as we sort of think about R&D spend going forward. I think you guys have an internal target of about 20% of revenue. It’s been tracking a little bit below that for the last few quarters. Is that just a function of the timing of tape-outs or how should we think about that. It’s just a little bit surprising given all the new product launches and Avant coming up?

[Sherri Luther, Chief Financial Officer]

Yeah. Thank you, Alex, for the question. So, you are right, our target that we did put out at our Investor Day back in May of this year was 20% as our R&D spend target. During the quarter, we came in at about 18.4% of revenues.

So, below our target, but I will point out that an absolute dollar perspective that we did increase our R&D spend as -- to your point to really increase our investments in our products portfolio over the long-term growth of the company and we’ll continue to focus on that.

If you look at our guide and the midpoint of our guide for Q3, you see that that’s up and that’s also a reflection of continuing investments that we want to make in our product portfolio. At our Investor Day, we talked about our Avant platform, as well as our CertusPro-NX, a product that we launched. So we’ll continue investing for the long-term growth and you’ll continue to see that in our financials.

[Jim Anderson, President and CEO]

Yeah. And the one thing I would add Alex is, certainly, as Sherri said, we are continuing to invest in the product portfolio, continuing to expand the portfolio, get great products to market. But we also -- when we look to continuing to invest, we also want to do that in a controlled and disciplined way, in a disciplined way that we know we are getting ROI on that additional investment. And so we’ll continue to invest, but we’ll do that at the right rate and pace and in a disciplined way.

[Alessandra Vecchi, William Blair]

That makes a ton of sense. With that, I’ll jump back in queue.

[Operator]

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

[Tristan Gerra, Baird]

Hi. Can you hear me?

[Jim Anderson, President and CEO]

Yeah. We can hear you, Tristan.

[Tristan Gerra, Baird]

Oh! Okay. Sorry. Just a quick follow-up on the earlier question about shortages and you’ve mentioned that it’s actually helping you as some customers know that you are managing the supply chain well in terms of new design win qualification. Given the notable extension of lead times in microcontrollers and that’s the type of architecture that you are really targeting going forward in terms of share gain. Are you seeing designs or an acceleration of design shift away from MCU to your product because of the improved availability or is it not really the case yet because obviously it takes time for customers, they have to redesign the product to be qualify. But in the scheme of that supply shortage, are you seeing an acceleration in terms of your TAM expansion against the MCUs?

[Jim Anderson, President and CEO]

Thanks, Tristan. I would say we are definitely seeing new opportunities and accelerated opportunities against microcontrollers. Certainly, no secret that there’s a supply shortage on microcontrollers and also we’ve been quite clear that we are targeting parts of the microcontroller market. We are obviously competing with our traditional FPGA competitors in the FPGA market, but we are also going after portions of the microcontroller market as well.

And we are already in a good position to displace microcontrollers because of the nature of our products, the power efficiency, the ability to do parallel processing for artificial intelligence algorithms at a much higher performance, much better performance per watt than microcontrollers and all the software content and flexibility that we bring.

So we are already seeing conversions of microcontrollers to FPGAs. But I would say the supply shortage and the fact that we’ve been able to support our customers very well, that’s certainly something that our customers have noticed, they’ve taken that into account and we do have examples of customers, accelerating their plans to switch to a Lattice device.

And we are seeing that across a couple of different market segments, industrial being one of the particular market segments that we are seeing that and you are right it does take a little bit of time to redesign the systems, but we are seeing customers very motivated to do that as quickly as possible in some instances. So, yeah, we are certainly benefiting from that, Tristan.

[Tristan Gerra, Baird]

Okay. That’s great feedback. And then a question for Sherri, obviously, we know your gross margin longer term target, in the near-term, next few quarters, it is kind of the 62% gross margin tabulation something we should expect for the next few quarters as well. And if you were to comment on what you think is going to be the key pillars for gross margin to continue stepping up from current levels?

[Sherri Luther, Chief Financial Officer]

Yeah. Thank you, Tristan, for the question. So, I’ll point out though that our gross margin has improved nearly 500 basis points from 2018 to-date. So, we are really pleased with the progress that we’ve made on improving our gross margin as part of our gross margin expansion strategy for pricing optimization and product cost reductions are two key elements of that strategy.

When you look at the current quarter, the 40 basis points improvement that we’ve shown and 80 -- sequentially and then the 80 basis points improvement year-over-year, again you can see that pricing optimization, our strategy kicking in there.

I also point out that we exceeded our 2019 target that we put out at our Investor Day in 2019 a 6 -- greater than 62%, so Q2 exceeded that target. And as you pointed out in -- at Investor Day this past May, we raised our target to 65%.

So the elements of that gross margin expansion strategy continue to be pricing optimization and product cost reductions. We have a number of initiatives that we continue to work on and put in place and some are near-term and some are longer term. But we expect to continue to be able to execute on that strategy to get to our long-term target model of 65%.

[Tristan Gerra, Baird]

That’s very useful. Thank you.

[Operator]

[Operator Instructions] Your next question is from Chris Rolland from Susquehanna. Your line is open.

[Chris Rolland, Susquehanna]

Hey, guys. Thanks for the question. Given that supply doesn’t seem to be a huge constraint for you guys. Would that mean typical seasonality is a bigger driver in the back half and traditionally you guys have been more flat sequentially in the back half there or just given your strong product ramps here, would you expect to grow through that? Thanks.

[Jim Anderson, President and CEO]

Yeah. Chris, I think, other than the Consumer segment, we haven’t seen strong seasonality patterns over the last couple years. The Consumer segment we still see kind of normal consumer cycle patterns. But that remains now a relatively small part of our overall revenue.

Certainly, we provided the guidance for Q3. We are now providing guidance beyond Q3. But we do have throughout this year a number of new product ramps that continue through the second half and we certainly look forward to having a strong second half just as we had -- we believe a really good first half as well.

[Chris Rolland, Susquehanna]

Okay. Great color there. Thank you. Yeah. One thing I noticed in your report is DIST [ph] as a percent of total was up. I know a lot of vendors have actually been shorting DIST given their supply constraints that may not be the case for you. But any updates there on the channel? Why DIST was going up as a percent? And then inventories that you have there, how robust you think those are and would you expect these trends to continue? Thanks

[Jim Anderson, President and CEO]

Yeah. Thanks, Chris. Yeah. I wouldn’t read too much into that sequential increase. Our percentage of DIST versus direct can fluctuate quarter-to-quarter. And then also note that a number of our large strategic customers actually prefer to go through distribution, because it makes, it operationally easier for whatever reason, although we are happy to support our large customers in either direct or through distribution mode, but we do have a number of large customers that prefer to go through distribution.

In terms of DIST levels of inventory, we do have very good visibility into our level of DIST distribution inventory and we finished Q2, I would certainly say on the leaner side of what we’ve historically seen. So, I would call, DIST inventory lean.

And then we of course have very good visibility into what ships out of DIST into our end customers as well. And so, but again, back to the first part of your question, I wouldn’t read too much into the sequential fluctuation in percent of DIST.

[Chris Rolland, Susquehanna]

Great. Thanks, Jim, and nice quarter.

[Jim Anderson, President and CEO]

Thanks, Chris.

[Operator]

Your next question is from Hans Mosesmann from Rosenblatt. Your line is open.

[Hans Mosesmann, Rosenblatt]

Thanks, guys. Congratulations. Hey, Jim. Just a question on some customer activity in the design cycle, are you seeing the design cycles accelerating or shortening?

[Jim Anderson, President and CEO]

What I would say is, it’s a little bit market-dependent. I would say that we are certainly seeing a very high level of customer activity in general in terms of customer engagement, new design wins, design-ins. We are seeing a tremendous amount of activity.

I would say the level of customer engagement and activity is certainly the highest since I’ve been at Lattice. And I think if you ask a number of our sales employees who have been at Lattice for many years, they would say, it’s the highest they’ve seen in the -- in their many years at Lattice. And so -- and I think that’s really a testament to the strength of the product portfolio.

The Nexus platform, we’ve now launched in June our fourth family of devices based on the Nexus family. So that’s four device families that are in our customers’ hands. The first two are already in production and ramping. The third is -- which is Mach-NX, we expect to ramp into production at the end of this year. And the fourth, which we just launched, we would expect to start to see revenue next year. And so we are seeing a tremendous amount of activity around Nexus.

And then, of course, as you can imagine, Avant as well, the new platform that we announced at our Investor Day in May and that’ll launch in the second half of next year. There’s tremendous amount of customer activity around that, too. I would say definitely great customer momentum.

In terms of the design cycle shortening or accelerating, there are some instances we’ve seen of customers accelerating their design cycles. It’s more for customer-specific reasons. In some cases, for instance, in industrial customers, it’s where they are having some supply issues with their existing microcontroller customer and so they are driving a faster accelerated pace to switch to our device. So we are seeing instances that are kind of supply constrained driven that’s driving a faster transition to Lattice. But again, in general, very good customer activity right now.

[Hans Mosesmann, Rosenblatt]

Great. And just a quick follow-up and just to make sure I have got it clear. Your lead times have not changed, right?

[Jim Anderson, President and CEO]

Yeah. When you look across the general -- the full set of Lattice products, generally our lead times have been relatively stable. There are particular instances, there may be like a particular silicon package combination of one device that we may have -- some tight supply that may have a longer than normal lead time. But as a whole and generally across our broad range of products, our lead times have been relatively stable.

[Hans Mosesmann, Rosenblatt]

Great. Thank you. Congratulations.

[Jim Anderson, President and CEO]

Thanks, Hans.

[Operator]

Your next question is from Sam Peterman from Craig-Hallum Capital. Your line is open.

[Sam Peterman, Craig-Hallum Capital]

Hi, Jim. Hi, Sherri. This is Sam on for Richard. Thanks for taking my question. I guess, first, I want to follow up on the questions asked by your distributors in channel inventory. I guess could you talk about how those channel inventories compare to levels you saw in the first quarter and you said they were lean. Is that kind of across segments or are there certain spots that are more lean than others?

[Jim Anderson, President and CEO]

Yeah. I think, Sam, so in channel inventory in Q2 was sequentially down versus Q1 and if we look at where we ended in terms of channel distributor inventory at the end of Q2. And we look say the last three years to four years, it’s at the certainly the lower level of what we’ve seen over that time span. It’s -- so we see very lean levels of inventory within our distributors.

We have also as we said tried to maintain a very good level of inventory within Lattice. So Lattice inventory is at a very healthy level and we’ve strategically built inventory to allow us to build parts and allocate the inventory or allocate the parts to the right markets and make sure that we are supporting the customers very well.

And then, I think, part of your question was also about, are we seeing differences in inventory levels across different markets segment? No. I would say, it -- the inventory levels in the distributors is, we are not seeing any variance -- any significant variance across different market segments.

[Sam Peterman, Craig-Hallum Capital]

Okay. Thanks for the color. That’s helpful. Then one more quickly, just curious on the Industrial Auto segment, obviously the last four quarters have been pretty strong as that start to tick up. Q2 last year I think has been growth rates of about 8% or higher quarter-over-quarter. Just wondering as you head in the back half, if do you think we should expect kind of the rate of change or the rate growth there to slow a little bit?

[Jim Anderson, President and CEO]

Yeah. For Q3, if you look at our -- I can talk about Q3, if you look at our guide point, the midpoint of our guidance for Q3, you see that it’s sequentially up from Q2 to Q3. We would expect our two big growth segments of Comms and Computing and Industrial and Auto to track that midpoint and we would expect both of those to be sequentially up as well. So, yeah, we are certainly expecting Industrial Auto to be sequentially up in Q3.

[Sam Peterman, Craig-Hallum Capital]

Okay. Great. Thanks, guys.

[Jim Anderson, President and CEO]

Thanks, Sam.

[Operator]

[Operator Instructions] Your next question is from Derek Soderberg from Collier Securities. Your line is open.

[Derek Soderberg, Collier Securities]

Hey, everyone. Thanks for taking my questions. Jim, I was just kind of curious on the various end markets, what you are seeing on the progression from Q2 to Q3, just unpacking third quarter guidance from a revenue perspective, if you could sort of provide any directional commentary on that, it would be helpful?

[Jim Anderson, President and CEO]

Yeah. Certainly, Derek. So Q2 to Q3, we expect Q3 to be sequentially up. We expect Comms and Computing to be sequentially up. Within Comms and Computing, we have three really good growth drivers within that segment. We have data center servers, which we continue to expand our dollars of content per server and we are expanding that through a combination of higher ASPs as we bring more value to each server platform and higher attach rates as well.

And we had shared at our Investor Day that, with the new generation of servers that’s ramping, we are expecting a significant increase in our dollars of content per server, driven by one of the things that’s driving that is attach rates that are -- we expect to now exceed one, meaning we are shipping more than one Lattice device per server, client computing, 5G infrastructure, also growth areas for us in Comms and Compute.

And then in Industrial Auto, we certainly saw a very strong quarter in Q2. We are seeing just very good strength in some of our new programs that are ramping in industrial automation, robotics, as I had mentioned earlier. So we expect to see sequential growth there as well. Consumer, we would expect to be flat to slightly up from Q2 to Q3. So, hopefully, that’s a little bit of additional color for you, Derek.

[Derek Soderberg, Collier Securities]

Yeah. That’s great. And then, as my follow up, just curious about any incremental competition, low power, I think, there’s some new FPGA players listing on the market, seeing anything incremental in terms of competition there and are there any interesting companies out there for you guys to buy to maybe build on your hardware or software platforms? Thanks.

[Jim Anderson, President and CEO]

Yeah. Thanks, Derek. I think on the competitive landscape for the part of the market that we are addressing today with our products, I think the competitive landscape has been pretty stable. We haven’t seen any dramatic changes.

We believe we are absolutely leading the market in terms of our product portfolio for small FPGAs at a very power efficient and very flexible easy to use and we definitely think we are leading the market.

We have a significant advantage especially with our Nexus devices. And we’ve shown a number of competitive comparisons, if you remember, at our Investor Day back in May, we guided quite a bit of competitive comparisons and data there. So we think we are still in a very good spot with respect to competitive landscape and our positioning in the market.

And I think the second part of your question was about potential M&A opportunities. I would start by saying, first, we are never confused about what job one is and job one is to drive growth in our organic business and so that’s always a top of mind and that’s always priority one.

But, certainly, in parallel, we are always scanning the landscape for any potential inorganic options that would be very adjacent very complementary to our existing product portfolio that could be either from a hardware or a software perspective. But they would be very additive in a way that would accelerate our organic strategy, and again, be very complementary. So that’s kind of the way we approach looking at inorganic options.

[Derek Soderberg, Collier Securities]

Perfect. Thanks for the detail.

[Jim Anderson, President and CEO]

Thanks, Derek.

[Operator]

And I am showing no further question at this time. I would like to turn the call back to Lattice Semiconductor’s CEO, Mr. Jim Anderson, for closing comments.

[Jim Anderson, President and CEO]

Yeah. Thank you, Operator. And thanks again for everybody for joining us on the call today. So we are really excited to be at the start of really a new growth phase for Lattice, and again, driven by our leadership product portfolio and multiple growth vectors across our key end markets. So we look forward to updating you on our continued progress on our next earnings call. Thanks, Operator. That concludes today’s call.

[Operator]

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation and have a great day.