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Greetings. Welcome to the Lattice Semiconductor Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Rick Muscha. You may begin.

Thank you, operator, and good afternoon, everyone. With me today are Esam Elashmawi, Lattice's Interim CEO and Sherri Luther, Lattice's CFO. We will provide a financial and business review of the Q2 of 2024 and the business outlook for the third quarter of 2024. If you have not obtained a copy of our earnings press release, it can be found at our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the third 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'll 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 Esam Elashmawi, our Interim CEO.

Thank you, Rick, and thank you, everyone, for joining us on our call today. While many of our investors, analysts and customers know me, I'd like to provide a brief introduction given our recent CEO transitions. In the six years that I've been at Lattice as Chief Strategy and Marketing Officer, I've been deeply involved in both the development and execution of our strategy. During that time, we have significantly strengthened our product portfolio, financial performance and competitive position. Our accelerated cadence of new product launches has created new growth opportunities and deepened our customer relationships. The opportunities that made me excited to join Lattice back in 2018 are even more compelling today. Lattice is fortunate to have a deep bench of talent throughout our organization that is committed to building on our momentum and delivering future value creation for our customers and shareholders. As was previously announced, the Board of Directors has commenced a search process to identify a permanent CEO and will consider both internal and external candidates. While there is no specified timeline for completion, this search is the Board's highest priority. I am fully committed to that process and confident that the ultimate outcome will be in the best interest of all Lattice stakeholders. Now moving to the second quarter of 2024. The inventory normalization and near term cyclic corrections continued as revenue declined 12% sequentially and 35% year-over-year. Gross margins remained at 69% and we continue to deliver profitability. In Q2, we continue to under-ship to end customer demand as inventory normalization continue. On an end market basis, demand remained soft across industrial and automotive in Q2, with revenue down 23% sequentially as customers continue to reduce their inventory levels. We remain well positioned for growth over the longer term with our differentiated hardware and software solutions. Within communications and computing, Q2 revenue was flat sequentially. Strength in data center networking and servers help offset incremental weakness in wireless communications. As we discussed previously, we expect the inventory normalization cycle to continue through the second half of this year. We are seeing signs of improvement that, when combined with our new product reps, we anticipate will lead to a return to growth. In terms of our product road map, we intend to continue investing in and accelerating our highly differentiated value portfolio. In our Small FPGA portfolio, our seven to five family is on track to start ramping in Q3. We recently announced today [indiscernible] device family, the Lattice MachXO5D-NX and the latest version of the Lattice Sentry solution stack. This combination extends our leadership in security-focused hardware and software solutions. Last quarter, we talked about adding new Lattice device options to address increased customer demand. We're already delivering on that road map expansion having recently launched Certus-NX-28 and Certus-NX-09, which offer class-leading power efficiency, small size and reliability with flexible migration options. These devices are designed to accelerate a broad range of communications, computing, industrial and automotive applications. Customer feedback have been very positive as we continue to invest in innovative [indiscernible] in the Small FPGA segment. In our mid-range FPGA portfolio, we've already launched three Avant devices family. The first device, Avant-E, achieved initial revenue last December driven by numerous applications. We expect Avant-E series to ramp throughout the course of this year. We're on track and aim for both Avant-E and NX to achieve initial revenues before the end of this year. Customer momentum remains robust. You'll recall, 90% of the [indiscernible] customers for Avant are already customers of Lattice today and a long [indiscernible] same software that customers use today on Nexus. We are pleased with the market traction of Avant as it expands our TAM and drives expected additional long-term revenue acceleration. As we have mentioned in previous calls, Lattice hardware and software solutions are increasingly being used in a wide variety of AI-related applications. For example, an optimized servers in the data center when the system is running generative AI workloads. Lattice devices are used in the control, management and security of the AI computing system. Another example is in the Edge AI enabled applications, where Lattice solutions are used to run the AI inference algorithms that provides features such as user presence engage detection. and client and industrial systems. Lastly, third example is AI-enabled applications where Lattice solutions are used to aggregate and preprocess sensor data that is used for AI processing. I wanted to highlight that last quarter, we began shifting a Lattice NVIDIA Edge AI solutions to customers. This solution, which we first presented at our 2023 Developers Conference, is designed to accelerate the development of Edge AI applications using the NVIDIA platform. I'm pleased to share that on December 10 and 11, we'll be hosting our second Lattice Developers Conference, which will be held live and virtual in San Jose. Driven by our increase in ecosystem and customer base, you can expect industry [indiscernible] presentations and breakout sessions, a robust showcase of FPGA-based technology demonstrations and new product announcements. In summary, we remain focused and continue to execute on our strategy. We believe Lattice is competitively well positioned and in the middle of the largest product portfolio expansion in our history with strong customer momentum. I'll now turn the call over to our CFO, Sherri Luther.

Thanks, Esam. Second quarter financial results reflected continued softness with revenue remain slightly below the mid-point of guidance. Gross margin remained stable with continued profitability. With a strong focus on cash and capital allocation, we continue to return cash to shareholders through share buybacks. Let me now provide a summary of our results. Second quarter revenue was $124.1 million, down 12% sequentially from the first quarter and down 35% year-over-year, reflecting continued inventory normalization in the industrial and automotive market segments. Our Q2 non-GAAP gross margin was 69%, in line with the prior quarters, reflecting the stability of the gross margin despite the near-term cyclic softness. Q2 non-GAAP operating expenses were $54 million compared to $54.9 million in the prior quarter and $58 million in the year ago quarter. During the quarter, we remained disciplined while continuing to invest in our long-term product portfolio. Our Q2 non-GAAP operating margin was 25.4% compared to 30% in the prior quarter. Q2 non-GAAP earnings per diluted share was $0.23 compared to $0.29 in the prior quarter. In Q2, we repurchased approximately 143,000 shares or $10 million of stock, making Q2 our 15th consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 5.1 million shares, thereby reducing dilution by 3.8%. Let me now review our outlook for the third quarter. Revenue for the third quarter of 2024 is expected to be between $117 million and $137 million. Gross margin is expected to be 69% plus or minus 1% on a non-GAAP basis. Total operating expenses for the third quarter are expected to be between $53 million and $55 million on a non-GAAP basis, which is in line with Q2 2024 at the midpoint. As we continue to navigate the near-term cyclic softness in our end markets, and the industry normalization of inventory, we remain focused on supporting the expansion of our product portfolio and continued execution. Operator, that concludes my formal comments. We can now open the call for questions.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of David Williams with Benchmark Company. Please proceed with you question.

Hey, good afternoon and thanks for letting me ask a question. I guess, Esam, can you talk a little bit about the design activity and maybe how the ramps have been impacted by the down cycle? Are you seeing anything there that's worth pointing to? And just kind of wondering how that traction continuing through the down cycle. Thanks.

Yes. Good question, David. With regards to design activity, just to remind everyone, we've got the strongest product portfolio in the history of the company. And most recently, we just talked about expanding our Nexus platform. We've got the new [Mach-NX-D] (ph) device that we just launched, and we've got Avant as well that we've been talking about in our customer momentum and [indiscernible] now. We've got a pretty exciting road map to come as well. But from a design activity perspective, we just completed two consecutive quarters of record design activity. And when I look at this, this is the type of stuff that when I talk to the team that we can control. We can't necessarily control the macro in the market. But we have good control over two things that matter to me. And that's number one, product development, getting differentiated products out into the market, both on the hardware and the software side, and also making sure that we drive more and more customer intimacy. So I'm really proud of the team and what they've done from a design activity perspective over the last two quarters. Those being two consecutive record quarters from a design activity. Now the second part of your question on product ramps, I love product ramps. You know that. Getting new products into market, drive new [indiscernible] opportunities that drives more market opportunities for us, but also drives new revenue streams. And even though the market is going through a cyclical downturn related to inventory normalization, what I can share with you is that, if you look at our new products, for example, look at Nexus or Avant, and you look at the revenue of those products in the first half of 2024, it exceeded the revenue in the first half of 2023. And that's a testament to why we keep emphasizing new products that are very differentiated in our software strategy of making it easier for customers to adopt them. And as such, we've got good progress on our new product ramps. And I'm excited about the second half of 2024. We've talked about additional new product ramps. The seventh Nexus device should ramp this quarter, that's on track as well as the two additional Avant devices, Avant-G NX, we expect initial revenue for those two devices by the end of this year, and we're on track of that as well.

Great color there. Thanks so much. And I guess maybe secondly, maybe for Sherri, the margin has been incredibly resilient here despite the lack of leverage. Can you walk us through maybe the incremental improvements you would expect to see as sales return and that leverage comes back? Are there structural things that you've done maybe through the downturn that will benefit on the upside? Thanks you.

Yes. Thank you, David, for the question. We're certainly pleased with the 69% gross margin that we came in at during Q2. And I think that -- of course, there can be fluctuations on a quarterly basis that can occur with respect to mix or even within our market segment, but we're really seeing the progress there. And you may recall, we've talked about it certainly a lot in terms of our gross margin expansion strategy that we've been executing now into our sixth year, where to date, we've improved our gross margin by 1,200 basis points. So certainly, that is something that we're really proud of. And in fact, when you think about resiliency, if I go back in time and I look at when our revenue was at similar levels as what it was in Q2, gross margin was quite a bit lower at that time. I think it was somewhere in the low 62% range as compared to 69% that we achieved in Q2. And I think that really speaks to the new products, it speaks to software attach, and we talked about that before in terms of the value add that software attach provides to our gross margin and new products, and Esam talked about a number of the new products that we've launched even more recently. So, I think that's really the big driver in terms of the improvements that we've made in gross margin over time. And when we look ahead, certainly, the guide of Q3, that's at the midpoint, 69%, we certainly continue to expect that the strength and resiliency there. And our long-term model remains intact. We're still driving toward our long-term model of the low 70s. And that's something that we'll continue to focus on through our gross margin expansion strategy as we continue to look ahead.

Thank you again.

Our next question comes from the line of Ruben Roy with Stifel. Please proceed with you question.

Yes. Thank you. Esam, I was wondering if you could maybe drill into the inventory commentary a little bit more. Last quarter -- this has been a persistent issue, obviously, but last quarter, you guys talked about potentially seeing some growth second half over first half. You are talking about some signs of improvement today. And so, I was just wondering if you can maybe give us a little detail on what you're hearing from your customers around that inventory normalization? Are we getting there? Is it something that you think we'll see the end of -- towards the end of Q3? And if so, how are you thinking about sort of the exit rate coming out of that normalization, that would be helpful. Thank you.

Yes. I think everybody knows I love to talk to customers. I do that quite often. In fact, two weeks ago we had one of our key industrial accounts in, and I was stating with them. As you can imagine, inventory normalization is one of the topics that we will always touch on. But as I talk to the customers, overall, there has been improvement in the inventory normalization, but it does vary from customer to customer. Even within a customer, as I ask them about their inventory normalization, they have even tell me there's different product lines that are at different stages. Some product lines have achieved normalization, other products lines, they still have excess inventory that they need to go normalize. And if you recall back to the beginning of the year, we said that we'd expect the inventory authorization to continue throughout 2024, but to a lesser extent in the second half of the year compared to the first half of the year. But if I look at Lattice specific items, again, the things that we control, it's the new product ramps that we talked about that are going to start in second half of the year, getting the products out there. And then we're well positioned. We think we're still well positioned for long-term growth. We're in really good strategic core markets with comps compute and industrial and auto with Lattice specific growth drivers. As we get out of this normalization and get the products to ramp up, we feel like we're in a very good position.

And Ruben, just to give you a little bit more color on inventory in the channel, the way that we're thinking about it is that we -- inventory in the channel is -- that's the inventory that's sitting at our distributors. And last quarter as well, we had mentioned that inventory in the channel is more at pre-pandemic levels -- in the range of pre-pandemic levels. And so the way that we thought last quarter and we continue to see it this quarter is still towards the higher end of that range. But as we mentioned on this call as well as last quarter, we continue to under-ship to what we consider to be true demand. This continued from Q1 into Q2 and certainly at the midpoint of our guide for Q3 revenue, we expect to continue to be under-shipping to that true customer demand. And so that under-shipping really allows for the inventory digestion or that inventory normalization that Esam was mentioning to occur and to continue in the second half, albeit at a lesser -- somewhat lesser extent than what occurred during the first half. And the other part of it, just to kind of complete the thought with respect to inventory is that, we keep in touch very closely with our strategic customers and have a good feel for what the inventory that they have, the [indiscernible] inventory, that is that they have, but at the same time, we have over 10,000 customers. So it's really hard to have a perfect view of how much inventory is at all of our end customers. But having said that, certainly, inventory in the channel is something that we continue to focus on.

That's great color. Thanks, Sherri. And I appreciate the complexity of the issue here. I guess for a quick follow-up, just to follow on David's question. It's nice to see the stability in the gross margin with the revenue coming down. And as you mentioned, the margins were a lot lower the last time we saw these types of revenues. But I guess that's a testament to your pricing optimization strategy. I guess, Sherri, maybe if you can give us a little bit of an update on the pricing environment and how you're thinking about that going forward?

Sure, sure. So from a pricing perspective, we're really seeing that our pricing is durable as that continues. I think it really goes back to the fact that our products are allowing our customers to really differentiate in their applications. The number of new products that we have announced and continue to announce really help our customers differentiate. And that is -- that matters a lot to them. And that is something that they're willing to pay more for products that really help them improve the products that they are offering. And so, new products continue to be a key part of our pricing optimization strategy. We also see trends towards where customers want higher capacity, greater capability products, again, driving the functionality of their products. So we definitely see that our pricing is durable, and it certainly continues to be a key element of our pricing optimization and gross margin expansion strategy.

And I'll add to that as well. I think you're familiar with our software strategy. We're investing in our software solution stacks, and we look at the data and clearly, the customers that are leveraging our software solutions are demanding a higher ASP, which helps our margins as well.

All right. Thank you.

Our next question comes from the line of John Vinh with KeyBanc Capital Markets. Please proceed with you question.

Great. Thanks for taking my question. Esam, you mentioned in your prepared remarks that you're seeing signs of improvement. I'm wondering if you could just give us a little bit more color on, more specifically, where are you seeing those kind of green shoots. And then, based on kind of your current visibility, when do you guys think you'll be able to return to growth again?

Yes. So let me take the first part of that question, what are the signs of improvement we see. Well, first, it starts with the customers always. And I interact with the customers quite a bit. We talked about that. We do see normalization at the customer side, and we do know that we are under-shipping through demand. But also some of the operational indicators that we see as well. If you look at Q2, towards the second half of Q2, we started to see an uptick in the bookings, and that was a really good sign for us. In fact, we're starting Q3 with a higher backlog than we started Q2 with. And that's a good indication as well that things are starting to turn. So when you combine the customer inventory normalization, we're shipping under demand, we see bookings increasing, and then we start to see that our backlog going into the quarter is healthy, those are all signs for us. Then you start looking at the new product ramps that we talked about. New product ramps drive the new revenue streams. I said in the earlier question, the data points about how our new products actually grew in the first half of this year compared to the first half of last year. Those new products are expected to ramp. We've got the seventh Nexus device that will ramp this quarter and the additional Avant-E will continue to ramp throughout this year, but we thought Avant-GX will start initial although small, those are all for those are initial ramps as well, which there is a good sign that it will continue to ramp further to the 2025 and 2026. So when you look at these signs of improvement, we anticipate that we are in a return to growth path.

Great. Thanks. And then just a follow-up question on your server business. I think one of your competitors continues to express confidence in terms of gaining some traction in the area of service security or PFR. I'm just wondering if you could just talk about kind of your confidence level in terms of maintaining your position within the server business. And then as we look forward to kind of the ramp of next-generation server platforms at Intel, I know your attach rate is above 1. As we think about Granite Rapids ramping in the second half of the year, are there still opportunities for you to increase your attach rates in servers or your content there?

Yes. Good question. From a server perspective, I think we've demonstrated that over the last several generations, we've been increasing our attach rate. In fact, remember my first Investor Day, which was in May of 2019, I'm looking at [indiscernible] we had -- we were talking about 25% attach rates that forward to today. It's well above one. And if you look at the server generation that is shipping today, and you contract that with the prior generation, which is ramping down, not only the attach rate has gone up, but the complexity of the server has driven the need for more complex FPGAs from Lattice, which is a higher ASP on average. And when you combine the higher attach rate with the higher ASP, on average, we're seeing about a 50% dollar increase in the generation of servers that are ramping today versus those that are ramping down. And we've got really good visibility on these architectures. And we know exactly what it will be used for, whether it be in control, management or security type functions. In fact, if you look at the last developers conference, we even had a major hyperscaler Meta presenting the value of Lattice from a security perspective. And that does relate directly to your question on DFR. And then we have really, really good visibility, excellent visibility on the next generation of servers that are going to be deployed as well, whether it be from hyperscalers, OEMs or even OEMs, and we see there that our tax rate is going up again. And we also know that those are also becoming more complex and that they're leveraging even more complex FPGAs. And most recently, we announced the [indiscernible] with our updated Century solution stack for the next-generation PFR type applications. So we feel very good about our position in the market. We continue to make good progress in increasing our tax rate generation over generation as well as delivering products that are very compelling and differentiated from a server security perspective. And then one final thing I want to point out is why an FPGA for security because that's really, really important. FPGAs provide programmability. And when you think about security and security threats, we provide something called crypto agility, which allows the customers to update their security, crypt their algorithms real time in the field when an incident occurs. It's always a race between the adversaries and those that are trying to protect their system an FPGA with programmability provides crystal agility that unique to that from an FPGA perspective.

Great. Thank you.

Thank you. Our next question comes from the line of Matt Ramsay with TD Cowen. Please proceed with you question.

Yes. Thank you very much. Good afternoon, guys. I think you described it well in some of your opening comments. There are some things in the business that, over the long term, your team can control and maybe some things in the macro in the shorter term than that you can't. So I have kind of a couple of questions on both. I guess in the longer-term stuff with the product portfolio, I think it's a really, really good thing that -- and you guys have said it in many different forums that the vast, vast majority of the Avant customer base is the same as the Nexus customer base, and there's some learnings there and some software compatibilities there. But I wonder if there are new emerging opportunities that maybe you didn't foresee when some of those customers or maybe even new customers for Avant that opened new TAM that you weren't considering in the past. Because I mean I think we're all trying to figure out how big that TAM for Avant actually is as it ramps up. So are there new things that we should be thinking about? Or should we just sort of think about the opportunity with the customers you currently have?

Yes. You've obviously good points on Avant. Just as a reminder for everybody on the call. Avant has more than doubles our market opportunity. If you look at small FPGA [TAM] (ph) that we provided at our last Investor Day, which is about $4.5 million, the midrange devices, which is Avant 5.5. So a little bit more than doubled our market opportunity. So it opens up a good market for us that doesn't cannibalize our small FPGA. And as you mentioned, we look at 90% of the target customers they are already customers of Lattice and they know our software tools and our software solution stacks that we built are designed for both Avant as well as Nexus and [indiscernible] Nexus devices as well. So there's a lot of opportunities, and we're making really good progress. We've launched the Avant-E, which is our edge optimized FPGA for Avant at the end of 2022, and we saw initial revenue on that. And most recently at our last developers conference, we announced the Avant-E and Avant-G, which is our general purpose and advanced connectivity FPGA. With regards to applications, we're really excited about the type of applications we're engaged in. Avant opens up not just control opportunities that we're very good at and low power control, but opens up data pack opportunities for us, and we see opportunities in that from a data networking -- data center network perspective, which is a good growth for us. And again, we saw growth in our data center networking this quarter, but also, we saw applications around storage that we did not anticipate, the storage type applications that could leverage Avant as well. And then as we continue to look at our AI-related revenue, we're starting to see also opportunities where we can leverage Avant in additional AI stuff that we weren't anticipating before in the applications. So the team does a really, really good job of not just selling into traditional applications, but working with our customers to find new ways to leverage our FPGAs and applications. And I think we've demonstrated that in the past when we talked about security, which was new for Lattice for just in the last five years as well as a lot of what we're doing with computer vision, which is net to Lattice as well. So excited about the opportunities ahead of us, but not just Avant, but also Nexus devices as well.

Thank you for that, Esam. I guess now for the near-term stuff, I guess I have two questions. The first one is, I'm not necessarily surprised given where the macro is and what the industrial weakness we've seen from a number of your peer companies that the guidance for the September quarter was a little bit weaker than I think we had all forecast. But this is the first time I can remember when you guys actually missed the guide a quarter in June, right? So the June results came in, I don't know, 5% below the original guidance. And I'm just kind of wondering what happened intra-quarter relative to the visibility that you thought you might have had when you guided the quarter originally and with our big things that shifted intra-quarter. And I guess the second question in the near term, Esam, you gave a couple of data points in 1 of your earlier answers that first half this year versus first half last year, some of the new products, and that's essentially all Nexus at this point, I would think, we're actually up year-over-year in revenue, which I guess the corollary to that is the pre-Nexus products are down $100 million plus half over half this year versus last year. So you guys have given a lot of commentary about where customer inventory might be, where channel inventory might be. Could you update us on those metrics on just the pre-Nexus product? Are we getting closer to being through this? And do you have visibility on the pre-Nexus products would seem to be where the majority of the headwinds have been in revenue. Thanks.

Yes. So let me talk about the first bullet first, which is the industrial midpoint. We met slightly below our midpoint and that was primarily driven by industrial and auto. And we continue to shift under true demand. I think we talked about that at a prior question as well. And we do want to get the inventory as our customers normalize. That's really important for us, which is why we ship under to demand. But I want to point out again that if you look at that industrial segment, it's a really good growth driver for Lattice. It's a long-term secular growth related to industrial. We've demonstrated that over the past several years, with strong double-digit growth in Industrial, and we expect to get back to that as well. Our products are just a really good fit for industrial-type applications, examples in robotics and factory automation, and Avant helps that as well. In fact, some of the key Avant wins that we're tracking to ramp up in 2024 are with industrial accounts as well. So although there's some short-term cyclical normalization we have to go through, we feel very good about our position in the industrial market. Now the second part of your question, Nexus vs pre-Nexus. It's always good to see new products ramping, and we love both our Nexus and pre-Nexus devices. But as customers ramp up new products, you have less normalization of inventory to worry about with the new products that are ramping and older products that they stocked up perhaps in prior years. And this is why we love having new products that are very differentiated. They create new revenue streams. They ramp up and they allow our customers to differentiate even more. Yes, pre-Nexus is down more, but that's probably aligned with the rest of the industry and what we're doing, which is really trying to ship under true demand. But we are shipping Nexus. There's strong demand for Nexus and the normalization for these new products isn't the same as the older products.

Got it. Thank you very much, Esam. I’ll jump back in the queue.

Thank you. Our next question comes from the line of Melissa Weathers with Deutsche Bank. Please proceed with you question.

Hi, there. Thanks you for taking my question. You've talked a lot about industrial. I just want to double click on comms and compute and what you guys saw in the quarter. At least by my model, it seems like you may have upsided expectations from what you gave last quarter. So can you talk about where you believe we are in the cycle for both the comms and the compute end market?

Yes. So in comms and in compute, what we said was it was flat quarter-over-quarter, and it was primarily driven by strength in server as well as data center networking, but our 5G wireless was down as we had expected when we talked about that in our Q1 earnings call. And what we talked about from a server perspective, again, is our tax rate dollar content. We expect that to go up. And on the data center networking, this was something that we talked about at our last Investor Day that we introduced for the first time. And we are now being designed into switches and routers and data center networking. And although it's a smaller portion of the overall revenue still in constant computes an area that we see growth for both Nexus as well as Avant-type applications. But from a 5G wireless, I don't think we're unique that we're still seeing softness in 5G wireless. I think this is something that seems full. And until the price of deployments reduces, the cost of CapEx reduces, I don't think that anybody is anticipating a strong return in the 5G wireless end market.

Thank you. And I guess as we think about sell-in versus sell-through, how do we bridge the gap? Once the inventory gets cleared, like how sharp of a snapback can we expect? I know the FPGA market has seen differing trends throughout the cycles. But like -- is it the case where as soon as that inventory gets sold through, then things will snap back very hard? Or are you expecting more of a gradual recovery in both your industrial market and your constant computing end market?

Yes. Melissa, so the way that we're thinking about that is this inventory normalization has been occurring through the first half of the year, and it's going to continue into the second half than we expected to dissipate. And so it's really us under shipping so that undershipping demand so that this inventory consumption can occur and that will occur at the end customers. And then as it occurs there, it comes out the distributors consumption goes up with the distributors as well in terms of the resting the inventory that's in the channel. And so what we said is we expect that to continue into the second half, but we'll start to dissipate in the second half.

Perfect. Thank you.

Thank you. Our next question comes from the line of Quinn Bolton with Needham & Company. Please proceed with you question.

Hi. Esam, I guess I just wanted to come back. I think last quarter, you were pretty confident that revenue would increase in the second half over the first half as a result of the dissipation of the inventory normalization process and then the latter specific drivers for the six and seven Nexus family, the Avant family and the new Dell Latitude product ramp. I haven't heard you guys sort of make that statement yet on this call. And so I'm just wondering if you could give us your thoughts half-over-half? It certainly seems like you've said that many of those working pieces are still in place, but I'm just wondering, can you give us your sense? Do you still think second half revenue is up over first half revenue?

Yes. On today's call, we're really focusing on the Q3 guide based on the data we have to date. But as we talked about, we do see signs of improvements. We do know that we're undershipping demand. We do know that the normalization with our customers will continue through the year, but to a lesser extent in the second half versus the first half. But as we get into the Q3 earnings call, we'll provide more color for Q4 and what we see for the second half of the year.

Got it. And then the second question for me is just sort of on a competitive front. I wonder if you might give us an update back in January, what are your competitors end-of-life to almost 300 small FPGA parts with no replacements provided, and I think that left an opportunity for your sales and FAE team to come in and try to convert some of those designs over to Lattice. How successful have you been on converting some of those competitors' designs over to Lattice?

Yes. I mean every time a competitor doesn't favor for us like that, we capitalize on it. Our team has done a really good job, and it's helped that we've been building good customer momentum over the past few years with our product differentiation. They see our road map. They're participating in our road map. They're investing time with Lattice and that's been going well. When I talked also about the expansion of Nexus in the prepared remarks, if you recall, I said we're adding more device options for Nexus, those device options that we're adding is to give our customers more choices. And in some cases, that helps accelerate some of this end-of-life from our competitors as well. But our sales team does a really outstanding job. And I think we built a lot of credibility with our customers that we do capitalize every time somebody does end-of-life product line.

Thank you, Esam.

Operator? Operator, you there? Operator, are you still there? [indiscernible] we are still on the line, just waiting the operator to respond.

[indiscernible] seems to be experiencing some technical difficulty, so we will just stay on the line and wait.

Can you hear me?

Yes. We can.

Okay. I do apologize. I was going through some technical difficulties on my end here. Our next question comes from the line of Chris Rolland with Susquehanna International. Please proceed with you question.

Hey, guys. Thanks for the question. [Multiple Speakers] I was wondering if you guys were avoiding me or not. That would have been a [indiscernible]. No seriously. Just maybe a softball first. Are you guys seeing any new applications that you learned of from your customers that you think are kind of interesting or cool or needle moving, and perhaps one of these might be in the PC space with Lunar Lake or Strict Point these new things coming. I know you do human presence detection there, but any other kind of PC-driven applications or other applications that you learned of that you think could eventually be pretty big applications?

Yes. On the PC side, I think you're aware that we do a lot when it comes to adding artificial intelligence, person detection, gate detection on client devices, but we're also part of the ecosystem partners with the large PC OEMs, they enable AI PCs and you'll see even on their reference designs. They'll point to Lattice as well as an ecosystem partner. So we benefit from those deployments as well. The other needle-moving thing that I'll talk about, that I'm excited about is when we talked about AI in the prepared remarks, the NVIDIA, Lattice solution for AI. And we talked about this. We introduced the concept at our last developers forum in December. And the problem statement is that, a lot of companies want to have high-performance AI on the Edge that they can afford the latency to go into a data center. And if you look at all the sensor deployments that are out there in the world, over 1 billion sensors, there's no easy way to get those sensors to work with compute platform. And so NVIDIA and Lattice partnered on a solution that we introduced last December on how we can aggregate that sensor data, preprocess it and actually with some specific solutions around how do we do -- how we make that compatible within NVIDIA [indiscernible], we've actually started to ship boards to customers now and customers are starting to deploy those systems. So that's exciting for me as well to see us bring that type of a solution to the industry. But those are, again, two examples, one referring to PCs that you talked about and another one.

That's fantastic. Thank you, Esam. And then maybe for Sherri, I didn't totally understand the channel inventory comments. You guys have previously said that inventory was back to pre-pandemic levels. So I guess I missed the nuance there. Are you saying those levels are just too high or customers have now expressed a preference to drag below? I missed the nuance there. And then perhaps we can put some numbers around some of the stuff like if you could give us channel inventory numbers like either dollars or days? And then maybe this would also help us understand, from a dollar perspective, how much you're shipping below true demand? Or if you guys have perhaps a normalized quarterly number in mind if you were shipping normally? And I think just quantitatively, if you guys were to provide any of those numbers, I think it would paint the picture very well.

Yes. So what I was saying earlier was that the range that our distributor inventory, that is inventory in the channel, the range that, that currently is, is at pre-pandemic levels, but it is at the higher end of that range. And so that's the similar commentary that we have provided last quarter as well. So it's within the range that [Multiple Speakers]

And what's that range?

We have not communicated what that range is, but what we -- the range that we consider normal for our business is at pre-pandemic levels. And so because it's at the higher end of what we consider to be sort of normal range, if you will, that is why we are undershipping demand so that, that inventory consumption can occur over time. And I mean, the other color I can give you on that is that, if you go back to during COVID, we had communicated multiple quarters in a row that our distributor inventory in the channel was at very low levels. And that we knew it would need to be replenished and that it would be replenished over time. So contrast that with where we are now, where it's a little bit toward the higher end of the range. And so that's why we want to undership demand so that inventory normalization can occur -- continue to occur over the second half, we will start to dissipate so that inventory digestion can occur.

Okay. And could we get a sense on how much you're shipping below true demand? Or if this wasn't occurring, what your normalized revenues would be?

Yes. So there's two ways we know we're shipping under true demand. One is the customer conversations that I talked about where we talk with them on a regular basis. We ask the question, how are you doing? Is it getting normalized? That's number one. And number two is, if you look at what the distributor ship out the door versus what we ship to the distributors, we know that they ship more to their customers than what we ship to them, which is what Sherri alluding to that, the dollars of inventory in that channel, by definition, that would be decreasing. But we're at healthy nominal levels, but we are on the high side of that is what she was referring to, but we're not concerned with the level of inventory we have in the channels.

Okay. Thanks.

Thank you. Our next question comes from the line of Tristan Gerra Darren with Baird. Please proceed with you question.

Hi, good afternoon. Looking at industrial and automotive, and I know you've mentioned you're undershipping and demand. If I annualize the $58 million you reported for Q2 for that segment, you're basically 50% above pre covered level, which was in 2019. So that's inferring about a 9% CAGR. We know that the whole industry, at least on the industrial side, has been around 3%. So you've been gaining share. You've probably benefited from some pricing. So the question is, what is the kind of CAGR that you're looking at in industrial for the next several years? And how much contribution you got the past few years from pricing and share gain? And what I'm trying to get at is, even if we assume that Q2 is kind of a bottom, are we going to see those revenues eventually rebounding double digit because you're under shipping? Or is it kind of the new normal from which you're getting back to a normal growth rate? But any CAGR number would be -- growth will be useful to kind of tie this up with the 9% inferred since 2019.

Yes. And industrial has been a really good segment for us, and you alluded to that, Tristian, the growth that we've had in the past. And what's driven that growth is our differentiated products that are just really suited well for this segment, the power, the form factor, what we can do in adding more intelligence to systems the customers are just adopting it. And we have been growing at a higher rate than the market overall as we alluded to as well. When you look at all those fundamentals and you combine that with the customer intimacy that's getting stronger and stronger, we're still targeting a good healthy double-digit growth within that end market. That segment is a good portion of the Lattice revenue. We gave a financial target at our last Investor Day that we expect the company to grow over the next three to four years between 15% to 20% [indiscernible] revenue layers on top of our small FPGA revenue, and we're still committed to that target. Our product portfolio is as strong as it ever has been. We're introducing more products. We just introduced more devices last quarter at our Developer Conference. You'll get more announcements of new products that are being announced. These are very differentiated products defined by our customers as well. So we feel good about our position in industrial markets and that we can continue with double-digit growth within that segment.

Okay. That's useful. And then I know you've said Avant is on track, but given the excess inventories, and it's not necessarily just at the [indiscernible], but also at your actual industrial end customer. Could that mean that Avant could ramp a little bit lower -- at a lower rate than you would expect a few quarters ago just because you need to get a new product refreshes and you've got -- they've got to kind of flush all their products first? Or are you getting any indication of that at this point?

Yes, there's really no indication that the inventory normalization is going to affect the ramp of av. Avant is still early in the cycle. Customers are adopting it. They're ramping up with their products. And again, if you recall, to a prior question, I kind of give a data point that new products have ramped in the first half of 2024 versus the first half of 2023. And so I mean, I'm very intimate with the field and the marketing team with Avant. We don't see -- there's no -- let me put it this way, there's no inventory normalization problem with our Avant pipeline. And customers want to get those new products that they're designing with Avant to the market as fast as they can. They want to get their products out, and they want to get their revenues going, they want to show differentiated products as well.

Great. Thank you very much.

Thank you, Tristan.

Thank you. And our next question comes from the line of Srini Pajjuri with Raymond James. Please proceed with you question.

Thank you. A couple of short-term questions. Esam, you talked about bookings stabilizing a bit and also backlog being a little better than Q2 as we look out to Q3. Just curious, is this primarily the inventory normalization that you talked about? Or do you think the new products are driving this improvement in backlog? Or you also talked about the server cycle being strong as well. So if you could just give us some color as to what you think is driving the improvement in backlog?

Yes, it's a combination of multiple factors. Clearly, the new product ramps as orders come in that sells from a booking perspective. Our design wins. I did also give a data point that we had record design activity in the last two quarters. The team has been doing a really good job on getting customers to design Lattice into the sockets that are opportunities for us. That drives also additional bookings as those products ramp. Part of it is normalization as well. So I think it's multiple factors that, when combined, we again at the second half of Q2 saw an uptick in the bookings, which is a good sign for us.

Okay. Got it. And then just to follow up on the other bucket, the compute bucket. I'm guessing the server and compute is now much bigger than the comms. If you could maybe help quantify how big compute is of that bucket? And then also talk about maybe where we are in that cycle? I know you're seeing a 50% content increase with the current generation of servers. If you can maybe talk about where we are? And then as we look out to the next few quarters, you have new platforms ramping. And just curious if we should expect a similar type of content increase as we go from Sapphire to Granite and then from Genoa to Turing? Thank you.

Yes. I want to point out that there's always going to be some fluctuations quarter-to-quarter. But if you look at our server revenue overall, it tends to go up. And the reason why is, again, the higher tax rate, the higher ASPs that several customers are adopting. And we also broke it out in the past. You heard me talk about this. There is a general purpose servers, but there's also the AI-specific servers. And in the AI-specific servers, what we've said in the past, and it holds true is that the attach rate is equal or higher than general-prepose servers. In fact, if I look at the next generation and ad servers that are being deployed, we see a good increase of the tax rate there as well as in the general purpose servers as well. We have really good visibility over the next architecture for both AI specific as well as general purpose. And the Lattice team, with our customers, are doing a really good job in innovating and bringing more value to this market. So although we haven't quantified the dollar increase for the next generation, the current generation has a 50% increase to the prior generation. We'd expect an increase in dollar as well, we just have not quantified it, and we'll do that as they'll start to ramp into production. But we do see a higher tax rate, and we do see the adoption of FPGAs with a higher ASP.

Got it. Thanks, Esam.

Thank you, Srini.

Thank you. And we have reached the end of the question-and-answer session. I'll now turn the call back over to management for closing remarks.

All right. Thank you, operator, and thank you, everyone, for joining us on today's call. While the industry continues to go through a period of inventory normalization, we're starting to see signs of improvement. We continue to execute on our ongoing product portfolio expansion and remain well positioned for long-term growth. Operator, that concludes today's call.