Lattice Semiconductor Corp

NASDAQ:LSCC

Earnings Call Analysis

Lattice Semiconductor navigates market challenges with stable margins and growth potential.

Lattice Semiconductor reported Q3 2024 revenue of $127.1 million, up 2% sequentially but down 34% year-over-year, influenced by inventory adjustments. The company maintained a gross margin of 69% and non-GAAP operating margin of 26.6%. Despite a workforce reduction of 14%, operating expenses remained stable. Looking ahead, Lattice expects Q4 revenue of $112 million to $122 million and anticipates low single-digit revenue growth in 2025. The long-term revenue growth target remains 15% to 20%, with a confident outlook for AI-driven solutions enhancing future performance.

Q3 2024 Performance in Context

In the third quarter of 2024, Lattice Semiconductor reported revenues of $127.1 million, marking a 2% increase from the previous quarter but a sharp 34% decline year-over-year. This decline reflects continuing normalization in inventory levels across the industry. The company has observed a sequential growth of 12% in its Communications and Computing segment, particularly driven by strong performance in Computing, indicating a robust demand even amid overall market softness. Despite these challenges, Lattice has maintained its GAAP and non-GAAP gross margin at a steady 69%, showcasing resilience in profitability amidst a fluctuating market.

Cost Management and Workforce Adjustments

To align resources with current business needs, Lattice implemented a 14% workforce reduction resulting in a one-time GAAP charge of $6.5 million. This strategic move aims to sustain operational efficiency and is reflected in non-GAAP operating expenses being flat compared to the prior quarter at $54 million, while also decreasing 7% year-over-year. The company's disciplined management of operating expenses has boosted its non-GAAP operating margin to 26.6%, up from 25.4% in the previous quarter.

Cash Flow and Capital Management

Lattice's operational cash flow more than doubled sequentially to $44 million in Q3. This significant growth reflects the company's strong cash generation capabilities, with a free cash flow margin that improved to 31%, a notable rise from 12% in the preceding quarter. The firm continues to deliver shareholder value through share buybacks, repurchasing approximately 370,000 shares, or $17 million, during the quarter. This consistent strategy resulted in a notable 4.1% reduction in dilution over the last 16 quarters.

Guidance for Q4 and Beyond

Looking ahead, Lattice anticipates Q4 2024 revenues to range between $112 million and $122 million, with a gross margin expected to hold steady at approximately 68%. Operating expenses for the forthcoming quarter are projected to fall between $52 million and $54 million. Additionally, the expected tax rate for the fourth quarter is set between 5% and 6%. The management forecasts an EPS ranging from $0.15 to $0.23, indicating an intention to manage profitability and expense control effectively.

Expectations for 2025

Management projects a challenging environment in 2025, expecting low single-digit revenue growth due to ongoing inventory digestion. However, they remain confident in a return to the long-term revenue growth target of 15% to 20% by 2026, driven by recovery anticipated in the second half of 2025. The concerted efforts to align channel inventory closer to target ranges will be crucial in this recovery phase. Additionally, earnings per share are expected to grow in the low double-digit percentage range, outperforming projected revenue growth due to operational efficiencies from the recent workforce reductions.

Strategic Focus on AI and New Products

Lattice continues to capitalize on growth in artificial intelligence, noting strong traction in AI applications across servers, laptops, and industrial sectors. Their presence in designs for significant AI clients, including NVIDIA and several top-tier automotive manufacturers, is expanding. Upcoming product launches, particularly with the Avant series, are anticipated to create significant revenue opportunities in 2025, with expectations of achieving double-digit growth for new products through this year.

Market Position and Competitive Outlook

Despite headwinds in the industrial and automotive sectors, Lattice is optimistic about its competitive positioning, particularly in the small to mid-range FPGA market, where they have gained market share. The company's strategy emphasizes differentiation through low-power, small-sized FPGA solutions, which has garnered favorable customer feedback and trust. Their roadmap for innovation remains strong, and with ongoing product advancements, Lattice aims to enhance shareholder value while navigating through economic fluctuations.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the Lattice Semiconductor Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Rick Muscha, Senior Director of IR. Thank you. You may begin.

[Rick Muscha, executive]

Thank you, operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice's CEO; and Tonya Stevens, Lattice's Interim CFO. We'll provide a financial and business review of the third quarter of 2024 and the business outlook for the fourth quarter of 2024. If you have not yet 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 the next results may differ materially.

We refer you to 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 fourth quarter of 2024. 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 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.

[Fouad Tamer, executive]

Thank you, Rick, and thank you, everyone, for joining us on our call today. Seven weeks ago, I joined Lattice as CEO, with great anticipation about the company's prospects. And I'm even more excited today about our potential and a significant opportunity for stockholder value creation ahead of us.

One of the key messages since joining Lattice has been stability. I love the team, customers, products, partners and end markets. Over the past few years, the team at Lattice has done an impressive job, transforming itself into the low-power program leader in the small to mid-range FPGA market.

For that, I extend my sincere thanks for everyone's hard work and continued dedication. I also want to thank Esam Elashmawi, for providing continuity and stability as interim CEO. Esam has played a key role over the past 6 years in setting and executing Lattice's strategic direction. I look forward to building on our partnership.

Many of the investors and analysts on today's call have a history with me from Inphi, Broadcom and Agere. One of the biggest factors and drivers on my previous successes has been focused on product differentiation, which I believe creates customer benefits and market leadership.

In my opinion, that combination ultimately build long-lasting value for all stakeholders. For example, I joined the Inphi team in 2012 post IPO. And over the next 10 years, we took it from $35 million in telecom revenue to a multibillion-dollar cloud NAI revenue business. That's now an important part of Marvell. The Inphi transformation story created over 20x value appreciation for all shareholders. I'm confident that Lattice has similar potential in many ways.

Now moving to our Q3 results. From a high-level third quarter 2024 revenue was in line with our guidance at $127.1 million. On an end market basis, communications and computing was up 12% sequentially, driven by both general purpose and AI servers.

Industrial and Automotive was down 7% sequentially, primarily due to broader market demand and continued inventory normalization. Gross margin held at 69% demonstrating the stability of our business model. Overall, while our results continue to be impacted by industry headwinds, we've been outperforming our direct peers by taking share in the small FPGA market segment.

In a positive outlook, Lattice's new product revenue continues to grow year-over-year. Design momentum continues to be robust as the total number of wins year-to-date exceeds those in the same period last year.

We are also encouraged with our stronger backlog and continued improvement in our book-to-bill, which bodes well for our business moving forward. As we look ahead to Q4, we expect revenue to be in the range of $112 million to $122 million.

Based on our discussions with customers and partners, we now expect more of a U-shaped recovery than a V-shaped one in 2025. With that in mind, we anticipate low single-digit revenue growth in 2025 compared to 2024 with the expectation that churn inventory will begin moving back to the midpoint of our target range and enable Lattice to execute to our long-term revenue growth targets of 15% to 20%.

That said, when you consider our strategic plan, strong team, differentiated product line, breadth of market applications, leadership position in low power and robust ecosystem, we strongly believe that Lattice is still a sound investment opportunity with clear visibility into the upside.

Since joining Lattice, I've had very productive meetings with customers, partners, suppliers and employees. These included multiple customer meetings and reviews across all segments, specifically communications, computing, industrial and automotive.

I have been pleasantly surprised at Lattice's deep consultative relationships where we are the trusted partner for small and mid-range FPGAs. This is because our team understands customer pain points and can jointly develop win partnerships.

Our industry-leading road map includes low power, small size, large number of interfaces, differentiated features, solutions task and support. All this has generated positive feedback from our global customers and partners. And from here, we plan to double down on our small to mid-range FPGA offerings.

This focus would be a key enabler in Lattice's transformation to the next level in our business. We are optimistic that we have everything in place to become a much larger company and to accomplish our goal of reaching the $1 billion revenue mark. We have high confidence in this goal given the size of our addressable market and tremendous number of market opportunities in front of us.

Now there are 3 reasons why Lattice remains strategically well positioned for growth. First and foremost, Lattice has a history of diligent financial discipline aligning our investments behind what we believe to be the highest return opportunities. These efforts directly extend to our operating expense plan going forward.

After careful consideration, we implemented a 14% headcount reduction last week. This is the first headcount reduction of this magnitude in recent history at Lattice. We do not expect any additional reductions will be needed. We reduced non-headcount operating expenses by a similar 14% as well.

The actions were primarily done as part of our shift, our targeted resources from high-cost to low-cost regions as we work to drive for more efficiency across the business. Importantly, even though we took these actions, we intend on maintaining the integrity of our product road map and our customer support and demand creation.

There is no expected change in what we're delivering to our customers. For example, our seventh Nexus device family achieved initial production in Q3, and Avant-G and X remain on track for initial production in Q4 of 2024.

As you recall, we expected more of a U-shaped recovery than a V-shaped one in 2025 with low single-digit revenue growth. We are confident and expect that anticipated revenue growth combined with the 14% OpEx reduction will help drive annual earnings expansion in the low double-digit range in 2025.

The second reason Lattice remains attractive is our leadership position in our strategic core markets of communications, computing, industrial and automotive. We intend to lean into and leverage Lattice's rich history of innovation and differentiation to drive and sustain that leadership.

There is considerable value in our low-power and small sized leadership position. And this has been reinforced by the many customers and partners across all of our end market segments.

I heard firsthand about the benefits under our Nexus small FPGA family and our Avant midrange FPGA family are offering. And from a feature differentiation, our customers are increasingly standardizing on Lattice low-power solutions in multiple applications including security, video processing and Edge AI.

The third reason, Lattice remains attractive is our focus on Edge AI, a fast-growing market by all measures. We have strong traction with AI in servers, laptops and early traction in industrial and automotive applications.

In data center services, example is applications include control, management and security in support of generative AI workloads. At the recent open compute project or OCP, there was a great deal of interest in our data center solutions, where our OEM partners showcased the broad use of Lattice FPGAs and AI servers. We estimate one of our OEM partners uses over 50 Lattice FPGAs within each rack and expect this partner to have a significant demand for server AX in 2025.

AI-enabled clients Natus FPGAs are being used to run the AI inference algorithms that provide features such as user presence and gauge detection. And in Q3, lattice devices began powering AI and computer vision on the Dell XPS modern, high-performance AI laptop. This is in addition to the ramping design win on select latitude models Labs has previously discussed.

And lastly, Lattice solutions are being used to aggregate and preprocess sensor data and AI processing and the data path for industrial and ADAS systems. Lattice has now been designed in 5 of the top 6 LiDAR companies for automotive and many industrial vision panels.

In summary, because of our financial discipline, market-leading position and inroads an early action in the accelerating AI market, I am confident that if you stay with Lattice during this period, you'll be in a position to grow along with us into 2025.

Finally, I'm pleased to share that on December 10 and 11, we will be hosting a developers conference in San Jose. We look forward to showcasing Lattice's broad portfolio. This includes our next-gen small FPGA platform, additional Avant portfolio expansion and enhancement in our software tools and solutions. I am personally looking forward to meeting you, our customers and partners.

I will now turn the call over to our Interim CFO, Tonya Stevens, who will provide a few details about her background before discussing the financial review of the quarter. Tonya, I look forward to working with you in your expanded role. Please go ahead with your view.

[Tonya Stevens, executive]

Thank you, Ford. While my corporate finance career spans more than 30 years, for the last 5.5 years, I've worked very closely with the executive leadership team at Lattice, especially the former CFO. I worked as corporate controller, but also doing many other aspects of the CFO role. I'm confident this will help ensure continued stability and precision in all our processes and financial reporting as we move forward.

Let me now provide you with a summary of our third quarter 2024 results. From a high level, Q3 results were in line with expectations. Our profitability expanded. Our operating cash flows more than doubled sequentially, and we continued to return cash to shareholders through share buybacks.

Specifically, third quarter 2024 revenue was $127.1 million, up 2% from the second quarter, down 34% year-over-year, which reflects continued inventory normalization. Communications and Computing grew sequentially 12%, driven by strength in Computing, which more than offset softness in Industrial and Automotive. These 2 strategic end markets comprise over 90% of total Lattice revenue.

Our Q3 GAAP and non-GAAP gross margin was 69%, reflecting the continued stability of our gross margin despite the overall market softness. Q3 non-GAAP operating expenses were flat with the prior quarter at $54 million and down 7% compared to the year ago quarter. This is a result of our continued discipline in managing our operating expenses, particularly SG&A.

As Ford told you earlier, we implemented a workforce reduction of 14% last week, which resulted in a onetime GAAP charge of $6.5 million for the third quarter 2024. This action better aligns our resources to support the current business level.

Our Q3 non-GAAP operating margin was 26.6% compared to 25.4% in the prior quarter, driven by stability in our gross margin, coupled with disciplined management of operating expenses. Q3 EBITDA margin was 33.7%, up 160 basis points from the second quarter. In Q3, diluted shares outstanding was $137.9 million, resulting in Q3 non-GAAP earnings per diluted share of $0.24 compared to $0.23 in the prior quarter.

Moving to our cash flow and balance sheet. Cash flow from operations in the third quarter was $44 million. This was more than double the cash flow from operations in the second quarter. Free cash flow margin increased to 31%, up from 12% in the prior quarter.

Our inventory at the end of the third quarter was $104.5 million, which is an increase of $3 million from the prior quarter. On a year-over-year basis, inventory was flat. In Q3, we repurchased approximately 370,000 shares or $17 million of stock making Q3 our 16th consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 5.6 million shares thereby reducing dilution by 4.1%.

Let me now review our outlook for the fourth quarter. Revenue for the fourth quarter of 2024 is expected to be between $112 million and $122 million. Gross margin is expected to be 68% plus or minus 1% on a non-GAAP basis.

Total operating expenses for the fourth quarter are expected to be between $52 million and $54 million on a non-GAAP basis. Our tax rate in the fourth quarter is expected to be in the 5% to 6% range. Based on the above inputs, our EPS is expected to be in the range of $0.15 to $0.23.

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

[Operator]

[Operator Instructions] Our first question here is from Tristan Gerra from Robert W. Baird.

[Tristan Gerra, analyst]

Just a couple of high-level questions. The first one is regarding Nexus, which you launched in December 2019. Obviously, it's been a resounding success since then. And the typical ramp of an FPGA historically has been 7 years before revenue peak. And that suggests on this, there's something really different about Nexus that Nexus revenue could peak sometime late '26.

So the question is, given that it takes obviously some time between design and volume ramp for a new product, should we expect a new product line? And I know you have new iterations of Nexus every 6 months, but I'm thinking of a new node or something that will be different -- very different architecturally that could potentially succeed Nexus at a time when the ramp starts slowing down.

[Fouad Tamer, executive]

Thank you, Tristan. This is Ford. Yes, we're very excited about the Nexus and Avant ramps. The current revenue growth, the first 3 quarters of 2024 are -- were over the first 3 quarter of 2023 as far as new product and is driven primarily by Nexus and secondarily by Avant.

So we continue to see that ramp. As you're suggesting, we are actually doubling down on both the small and large and mid-range FPGA segments. You will hear more of this leadership position at our developer conference in December. So we're very pleased with the differentiation that our customers are indicating we have and the benefits that the small power, small-size differentiation like security and video streaming FPGA are providing with both Nexus and Avant.

[Tristan Gerra, analyst]

Okay. That's very useful and great to hear. And then I wanted to see if you're able to elaborate a little bit on the traction that you're seeing in AI. It was previously quantified, but at the same time, we know that traditional data center inventory digestion has a little bit of an impact on everybody's top line a year ago.

And could you elaborate -- now you seem to have a lot of design win traction and elaborate a little bit on the dollar content per FPGA, the adoption rate and what makes you believe that this is sustainable and of course, as a derivative, how should we be looking at computing and data center revenue going forward, given this very promising traction that you're now getting in AI?

[Fouad Tamer, executive]

Excellent. Tristan. Yes, so we, in the past, have broken up that number to be about $100 million, and we believe we're about slightly in the same range or slightly above that. So as a percent of revenue, you could see our AI revenue is growing. We just talked about engagement, new opportunities with server and clients.

So on the client side, we announced on my script that the XPS design opportunity that is increasing our footprint above the dead latitude that was already shipping. On the server side, we started shipment of our Lattice NVIDIA Edge AI Board.

And we did discuss the phenomenal progress we had at OCP, the Open Compute Conference with many OEMs where at one data center server platform, we had in excess of 50, 5-0, Lattice devices in one of these platforms.

And then finally, on my prepared remarks, we also discussed the fact that we are in the top 5 LiDAR Tier 1s and they were into many industrial display panels. So we are excited about the continuing progress we're making on the client, on the servers, on the automotive and industrial with Edge, AI and please stay tuned for more. We encourage you to come see the many demos that we're going to have and the many partners we have at the developer conference in December, a very exciting development for us.

[Operator]

Our next question is from Melissa Weathers from Deutsche Bank.

[Melissa Weathers, analyst]

Ford, welcome to the call. I'm excited to work with you going forward. I guess I wanted to double-click on your U-shaped recovery that you're talking about. Should we be thinking about the December quarter as kind of the bottom of this cycle? And do you believe that you're shipping to true end demand now? Or is there still some inventory in the channel so that maybe you could -- that burn should end at some point, and you would see a snapback? Just any more color on your U-shape recovery would be helpful.

[Fouad Tamer, executive]

Yes. Thank you, Melissa. Yes, we do believe that what we're seeing is consistent with the broader market that's also indicating a U-shape versus a V-shape recovery. Overall, we continue to see softness in our largest end market, which is Industrial and Automotive. And in that market, we're 4 quarters in what's typically an 8-quarter recovery. So you could see that, that would point to a flattish Q4 through sort of midyear 2025 for this inventory to sort of clear itself up.

And on purpose, what we've done, we've worked with our channel partner to glide down that inventory position in the channel to where it goes back to normal inventory by sort of Q2, Q3 of 2025. And we're being applauded by this channel partner for being good partners and helping them do that and sort of getting inventory levels in the channel to normal level, which is about 2 to 3 months, okay?

So when we look at our long-term fundamentals, the demand recovers in sort of the -- around the second half and then start driving back to our regular run rate of 15% to 20% revenue growth in '26. And then if you combine all this with the sort of operating expense action we've taken, we do believe that the financial discipline that Lattice has shown in the past will shine again and show double-digit earning growth expansion in '25 and definitely beyond that in '26.

Hopefully, that answers the question. I'm happy to give you a lot of data. We've obviously spent a lot of time on this topic, and we could spend a lot of time on this, if needed.

[Melissa Weathers, analyst]

Maybe a little bit more color on that. Is there anything you're seeing from a pricing perspective or from a competitive perspective that could be weighing on your outlook into 2025? Or do you think this is mostly market-wide dynamics?

[Fouad Tamer, executive]

Yes, we believe it's mostly market-wide. We have been very disciplined, and we believe more disciplined on our peers in price and supply assurance. We've talked about our pricing optimization strategy and pricing ability in the past. We -- during this difficult supply situation, we strike the right balance to ensure that our broad-based 10,000 customer had minimal disruption for their supply chain, and we're able to continue to operate without disruption and meet their obligations.

And this was very important to us to be customer-friendly as opposed to just focusing on a few large customers aligned with certain segments. So we did a really good job. We believe in a supply-constrained world to see it really be a very strong trusted partner for our customer and ensure that they didn't see any disruption.

And so we -- at this point, you could see from a gross margin that our -- the stability of our gross margin despite a product mix that's gone more towards a Compute and Comms, which typically harder than Industrial and Automotive. And despite a lower revenue trend, we've been able to maintain our gross margin, which shows the durability and strength of our financial model.

[Operator]

Our next question is from Christopher Rolland from Susquehanna International Group.

[Christopher Rolland, analyst]

So Ford, welcome aboard, I guess, for the second time. But I just wanted to kind of bigger picture ask you, just given your heritage in kind of AI and networking. Did you have some early thoughts on how FPGA is either low end or mid-tier could have a role there? I don't know if it could ever make it into a transceiver, if it could ever be paired with, I don't know, a DSP or something like that.

I don't see a logical fit, but just anywhere in these interconnects or of maybe some AI applications that we haven't thought about and/or even IoT at the Edge, AI IoT at the Edge. I don't know. But just given your heritage, maybe you can talk to these opportunities? And are these some of the brightest you see for Lattice?

[Fouad Tamer, executive]

Thank you, Chris. I appreciate the question. So maybe I'll divide the answer into 2 parts. Since joining, I've been talking about Seth. And you've got a bit of background, if you don't mind muting, Chris, I don't know if that's you, but can you mute? Okay. So I'll answer the question in 2 parts. Number one, from -- since I joined, I've been talking about SELF, S-E-L-F, which says we control our own destiny. And what that is, is stabilize, execute, lead and focus.

So stabilize, we've got a good team, good product, good strategy. We execute on the road map that we currently have. And lead with low power, small size differentiation like security, video and AI. And number four, F, for focus. And here, we're focused on really Nexus and Avant. So that's what we're doing.

Coming to AI now, we're actually above all the trends you've discussed. So for example, when you talk about a transceiver, the device that sits between that switch and the many optical module to light LED and provide things like telemetry and all kinds of measurement function as sort of this bridge between if you wish to switch and the optical transceiver. We're sitting in there providing this bridging and sort of LED and control type of function.

If you look at the server, we've got many application on servers. And we're designing a top 10 server in the world today. So that's many applications on server. Same with IoT, same with clients, same less -- so all the applications you mentioned were designed in doing things like preprocessing, HMI using an object detection, gesture engage, defect detection, security, 3D audio with head tracking.

So many applications of AI were not always in a data path. Sometimes we are -- in most of the time, we're probably going 80%, 20% in the data path and 80% more of a sort of supporting function, not the main chip. But you're going to see us all of the applications and given our current focus on AI, you're going to see us in more applications. So I do expect our percent of revenue coming from AI to grow over time, Chris.

And you are on mute if you have another question.

[Christopher Rolland, analyst]

Yes. I appreciate. And maybe for a follow-up, some of your FPGA competitors have married their kind of FPGA fields with a hardened arm core. I think there's also the potential for even a microcontroller. I think the last management team didn't seem particularly interested in this. I was wondering if maybe you would revisit this and whether you think this is interesting at all.

[Fouad Tamer, executive]

Yes. Thank you, Chris. You should come to our developer conference, which I think you'll be attending, and see the many partners we have on the microcontroller side. And so whether it's -- it's a long list, whether it's NXP or ST or Renaissance or many of the other ones, we're going to have many microprocessor partners that are designed in with us.

So instead of having our own, we partner with them. And again, instead of having our own AI accelerator, we partner with companies like NVIDIA and others, including Havana and AMD to provide companion chips on all of these. So we believe that not having our own is actually an advantage because we end up being the friendly partner.

And furthermore, we have developed and delivered to our partners, SoC development tools. It's called PROPL, P-R-O-P-L. PROPL that is our development tool that actually enables some of this design designs to go to market.

[Operator]

Our next question is from Quinn Bolton from Needham & Company.

[Quinn Bolton, analyst]

Ford, welcome to Lattice. I guess a couple of questions, Ford, it sounds like you're describing a lot of the headwinds that the company is facing as being more industry-wide, but I guess I look at your competitors, and Altera, both of those companies saw revenue trough in the March quarter, and they saw sequential growth throughout the rest of 2024.

Lattice has seen sort of the opposite pattern where it looks like Q1 may be the highest revenue in the quarter and Q4 is the lowest. And so you're showing a different trend than the 2 largest competitors. And so I'm wondering if you had any thoughts why you may be saying something different than your big competitors? And then I've got a follow-up question as well.

[Fouad Tamer, executive]

Yes. Look, it's a good question. We've got very detailed data. I've got a graph right in front of me here that tracks this back to Q1 of 2023. And if you track this back to Q1 of 2023, our performance is twice as good as the worst one of these 2 and 50% better than the other guys. So we're doing -- based on sort of tracking longer term, view from where the peak was.

So if you take a 2023 view, you'll see us do much better. Of course, you can always take data and come up with any trends you want, so sure. If you map this, over the past 6 months, you may see something different. But we believe the really fair way to do this is to track this over a longer-term period, and you see us do better than competitors by a long shot. We're not even close as far as our performance and clearly have been taking share.

So if you look at our view of the share against these 2 companies, we believe that we have continued to expand our share. We're introducing new products, and especially if you track this in the small to mid-range FPGA without SoC because we're not into that market. We don't have SoC. So if you look in the apple-to-apple SAM, which is small and midrange non-SoC, we'll show you we're taking share.

[Quinn Bolton, analyst]

Got it. Okay. And then I guess I just wanted to maybe follow up on Melissa's question just about sort of where do you think consumption is. If I take your guidance for fiscal '25, it looks like revenue up low single digits year-on-year, probably puts you at about $525 million for the year, something like $130-or-so million a quarter.

Is that the right level to be thinking about what end consumption or POS data support? Or would you -- are you looking at POS even though revenues below that level is POS sort of higher than that $130-or-so million a quarter level?

[Fouad Tamer, executive]

Yes. I think those numbers for revenue are right. I'm going to let Tonya chime in here. Tonya, do you want to take this question?

[Tonya Stevens, executive]

Sure. And that's a great question. And you're exactly right. When we look forward to 2025, as you heard in Ford's prepared remarks, we believe that Lattice inventory currently is at the high end of the pre-pandemic levels. And we believe through 2025, that will get more to the mid-range of our target range. So as a result of that, we do believe our revenue will be lower than the actual end consumption, depending on, of course, the specific market.

[Quinn Bolton, analyst]

So POS should be sort of at 130 or higher next year, it sounds like since you're going to be consuming inventory at least. Certainly, it looks like through the first half of the year?

[Fouad Tamer, executive]

Yes, that's correct. That's correct.

[Operator]

Our next question is from Srinivas Pajjuri from Raymond James.

[Srinivas Pajjuri, analyst]

A couple of questions. For the very near term, as we look out to the next quarter, and also into the first half of next year. I look at your 2 different segments. One, obviously, going through a cyclical correction in auto and industrial fairly well known. But the other one, you're basically doing quite well when it comes to servers because of the content increases, those are, I believe, secular.

And also, you talked about AI design wins. So I'm a little surprised as to why we are seeing the weakness in the short term. Is it primarily still auto industrial correcting? Or are you seeing some correction in the Comms and Compute as well?

[Fouad Tamer, executive]

Srini, I think -- let me share with you numbers that are public that -- so if you were to go back, let's say, to Q1 of 2023. At that time, in Q1 of '23, Industrial and Auto was 59% of revenue and Comms and Compute was 36% of revenue. And so if you fast forward now to this quarter we just announced in Q3, Industrial and Auto is 43% and Comms and Compute is 48%. So you can see a pretty big shift from one to the other.

And so despite that, we -- and despite this product mix and despite lower revenue, we have been able to maintain a solid gross margin and solid financial operating metrics on EPS, EBITDA and free cash flow, which jumped nicely quarter-on-quarter. And furthermore, going forward into 2025 and '26, we should be back up and to the right and back in good shape.

But you've had a pretty big change here from -- in these end segments that they have been able to weather because of the growth in the Compute and Comps. And again, if you look at Compute and Comms, obviously, Comms has not been very strong because of the 5G being delayed. So you could even read further into that, that Comms and Compute is actually quite strong.

[Srinivas Pajjuri, analyst]

Okay. And you expect that to continue in the next few quarters, Ford? Are you seeing any here as well?

[Fouad Tamer, executive]

No, we do expect that to continue. And as Tonya just answered that we do expect the POS now being higher than revenue. And so we continue to glide down that inventory to mid-year of 2025. And then after that, we're back up to the right. It's just -- we're a couple of quarters away from this. And in the meantime, we'll have the financial discipline to continue to drive good earnings expansion.

[Srinivas Pajjuri, analyst]

Fair enough. And then a quick follow-up on the workforce reduction. The guidance for the next quarter, $52 million to $54 million, does that fully reflect the 14% workforce reduction? And then, Ford, I think at the Analyst Day, you're still maintaining that 15% to 20% that was communicated at the Analyst Day. And at that time, I think the management communicated about 30% OpEx. Is that still valid? Or given the cost cuts, should we expect something below the 30% longer term?

[Tonya Stevens, executive]

Yes. And I'll take that. This is Tonya. Your first question on our OpEx guidance, of course, the workforce reduction, it isn't done at the beginning of the quarter and takes time to fully implement, but our operating expense guidance does contemplate our assumptions around that workforce reduction. And we do expect that to continue to benefit our 2025 results as well.

So if you're thinking about our 2025 model, Ford mentioned in his prepared remarks that we expect low single-digit revenue growth in 2025 compared to '24 improving as the year goes on, and we come out of the inventory digestion cycle about mid-2025.

We expect margin to be primarily flat year-over-year but we expect sort of high single-digit OpEx reduction compared to '24 -- mid to high compared to '24 as a result of both the headcount and non-headcount OpEx reductions. And it's a 14% reduction in our headcount and our higher OpEx run rate.

We also -- you saw guided our non-GAAP tax rate. It's expected to be in the mid- to high single digits then as we carry forward into 2025. And all of those factors provides a low double-digit EPS earnings expansion outpacing revenue growth. So that's kind of how we're thinking about it.

[Operator]

[Operator Instructions] And our next question here is from Ruben Roy from Stifel.

[Ruben Roy, analyst]

I wanted to ask, Ford, just on new products, and it's great to hear that the new product growth has continued. But when I think about 2025, obviously, we've got these industry headwinds, which are well known, I guess, at this point. But we are also expecting higher Avant to kind of roll into the model. I guess the question is, the incremental from Avant, has anything changed?

Given what's going on with the end market in the way you're thinking about the Avant rollout for next year? Is it maybe delayed a little bit from sort of earlier expectations or no changes there and it's really just the core products and the core markets that are creating these sort of headwinds that are driving the U-shape recovery expectation?

[Fouad Tamer, executive]

Yes. Thank you, Ruben. Nice to reconnect. Yes, no change on Avant. We're pleased with the traction of Avant. We continue to drive increased design win with revenue from new products expected to be in the double digits for '24, and continue to grow from there led by Avant.

So the opportunity for the Avant is bigger as shown from the funnel opportunity that we're seeing for Avant is quite bigger than the same time ramp in Nexus. So we're seeing early revenue of Avant-E, which is what we have introduced some time ago. Avant-G and X are on track for practization in Q4 and early revenue. And then we expect Avant revenue in the second half -- the second year of the platform launch will exceed what we sell for Nexus in that second year. And so we're excited about Avant, and we'll tell you more about them at the developer conference.

[Ruben Roy, analyst]

Okay. And then if I could just ask a quick follow-up on the comment you made as -- in reference to the Communications part of Communications and Computing. We've seen sort of the progress and the success in the Compute part, as you mentioned. On the Communications part, we are starting to hear some data points that would suggest that there's a bottoming on Comm infrastructure and maybe even a little bit of improvement here exiting the year. Is that kind of the way you're thinking about that business? Or is the Comm part still a potential area of headwind as we look ahead to 2025?

[Fouad Tamer, executive]

Yes. I mean, Ruben, I think your characterization is correct. And so we do expect Comms to normalize and second half of '25 be on track to grow along with the rest of the portfolio.

[Operator]

Our next question is from Joshua Buchalter from TD Cowen.

[Joshua Buchalter, analyst]

Congrats on the first earnings call at Lattice. I wanted to ask about some of the assumptions and follow-up on some of the earlier comments that are going into the low single-digit percent growth next year. I know you've given us a time frame of when you expect digestion to cease. But any way you can quantify the magnitude?

And I guess the real reason to ask is the prior management team had put out the 15% to 20% long-term growth target. Is that still the right number you're thinking about? Or is that under evaluation right now?

[Fouad Tamer, executive]

Yes. Thank you, Josh. The prior target of 15% to 20% revenue growth is still the correct target. We're not changing that. We're saying in my prepared remarks, we did comment that we expect that -- we expect to come back to that guide of 15% to 20% in 2026. We also said this U-shape recovery would probably -- we expect the revenue to be flattish in Q4, Q1, Q2 of next year. And then as this inventory situation normalizes to start seeing growth in the second half of next year, leading to this stronger growth into 2026.

[Joshua Buchalter, analyst]

Got it. And then for my follow-up, I think the prior management team had mentioned that inventory in the channel was a little at the high end but still within a range that it was comfortable with but they are more concerned about end customer inventory levels. Is that how you're seeing it too?

It sounds like a little bit of a change in that you're trying to get the channel level down as well. And I'd be -- I'd just be curious to hear how you feel about visibility into end customer inventory in particular for pre-Nexus as Nexus and Avant ramp and become more of a mix and you go through the digestion.

[Fouad Tamer, executive]

Yes. Thank you. I've been -- Josh, been pretty impressed with the long data the team has here on POS, on what's at the channel, what's at Lattice, what's at customers. So a lot of data. And we've been tracking this. Our book-to-bill has steadily improved over the past 4 quarters from a very low level to close to 1.

And so we're seeing that normalization happen. It's taking a bit longer in Industrial and Automotive than maybe prior expectations. But I think it's in line with the broader market trends than our peers. And so again, we expect this channel inventory to be back to the midpoint in 2025. And Tonya, I think you have a bit more data.

[Tonya Stevens, executive]

Yes. I think it's consistent with what you said. I think we've always said that this inventory can fluctuate on a quarterly basis. We have pretty good visibility into the Disty inventory, as Ford said, tracking end consumption out of the Disty. It is the inventory all the way at the end customer because like Ford said, we have over 10,000 end customers that it's a little harder to see. But we think we now have a better handle on it. We're, like Ford said, looking to get to that Disty inventory more to the midpoint of our target range through mid-2025.

[Operator]

Our next question is from Duksan Jang from Bank of America.

[Duksan Jang, analyst]

You mentioned that Q1 and Q2, you expect revenue to be flattish. Is that a company overall number? Or is that industrial specific? Because I've heard from your peers and also other industrial-exposed semis that Q1 tends to be pretty seasonal. So any comment would be helpful.

[Fouad Tamer, executive]

Yes. Thank you, Duksan. We're saying that the revenue will be flattish from Q4 of '24 through Q1, Q2 of '25. We're obviously not guiding. It just beat our expectations. We're not guiding to to those quarters, but that's the expectation.

[Duksan Jang, analyst]

I see. And then one on servers. The previous management team has been pretty big in talking about the content expansion gen over gen in the servers. Are you still seeing that sort of coming through in the current generation of CPUs? And should we still expect this trend to continue into the next one as well?

[Fouad Tamer, executive]

Yes. Thanks, Duksan. Yes, we're seeing it, as I said, the open compute show where we had many OEMs and ODM designs on the show floor. Lattice is on display on many of these boards with over 50, 5-0 Lattice at PGA was in ETC and expect these partners to have very significant demand for ServerEX in 2025. So not only have we increased the content per server, we've also increased the design footprint where we now design into the top 10 server makers for this market. So very excited about both trends. That should increase our revenue in '25.

[Operator]

We have time for 1 additional question. A question here is from David Williams from Benchmark Company.

[David Williams, analyst]

Let me ask the question here and for let me also send my congrats and welcome. One I wanted to ask just quickly on the pipeline of design wins you have, it seems quite strong. And just kind of wondering if you think we'll see a potential inflection as the markets improve and just kind of how you -- some customers are likely delaying their product launches. Are you seeing that? Are you hearing it? Just maybe any caution around their product launches and how that can inflect?

[Fouad Tamer, executive]

Yes. Thank you, David. I'm very excited about the footprint of these design wins because they range anywhere from the top 10 server and storage. The top 10 leading comes, the top 10 factory automation, the top-tier auto OEMs, the top PC OEMs across many of the applications, we talked about GI, imaging and vision, robotics, motion control, various automotive both in car and ADAS type application, test and measurement, video broadcast, system control or power interfacing, security, sensor integration and fusion. And then many in specialized harsh environments, including avionics and defense type applications.

So the applications are varied. We continue to be very pleasantly surprised about the wide range of applications that our customers are using Nexus and Avant for, and we're very confident that we continue to have some great differentiation from our low power and low size, small size and cost-effective solutions and security, video streaming.

So very excited about what the future brings across thousands of applications across 10,000 customer base. So stay tuned and please look forward to seeing you in person at Developer Conference in December 10, 11 in San Jose.

[David Williams, analyst]

And then just one last one, if I may here. Just it seems like the prior leadership was -- they ran a fairly lean organization -- and surprised here the 14% OpEx or headcount reduction there. Could you give maybe some color just around where you're able to define those cuts and what that means do you think in terms of further development down the road? Does it impact you at all?

[Fouad Tamer, executive]

Yes. Thank you, David. So we took action, we're done is behind us, and now we're back to execution. And we had to do it to maintain the financial discipline of our model, and you'll see the benefits and very strong EPS and EBITDA next year. We -- you did hear us in Q3 of '24. We talk about an EBITDA of 33.7%. And so if you grow this at low double digit into next year, you could see we end up with very strong EBITDA next year. And so that's the financial discipline and benefit of doing this. But we're done.

There's no impact on the prior road map from -- because we moved a lot of these resources from sort of high-cost geography to lower-cost geography. I just came back from Penang and Manila and I'd be on my way to Shanghai and Montreal and Austin and after this to Taiwan and Pune, India. And so we've done a good job sort of balancing the headcount between these geographies. And right now, we feel like we've got the right level of investment to support our growth and the numbers we discussed with you on this call.

[Operator]

I'd like to turn the floor back to Lattice Semiconductor's CEO, Mr. Ford Tamer.

[Fouad Tamer, executive]

Thank you, operator, and thank you, everyone, for joining us on today's call. As you heard earlier, I am excited about the opportunity to build on Lattice's strong foundation, broad customer base, highly differentiated products and strong partner ecosystem.

We intend to leverage that foundation with our 3-part strategy of continuing our diligent financial discipline to achieve the highest ROI, maintaining market leadership and implementing our laser focus on AI applications.

Thank you for being on today's call and for your continued support. I look forward to sharing the company's progress with you in the coming quarters. Operator, that concludes today's call.

[Operator]

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