Q3 2022 Lattice Semiconductor Corp Earnings Call
[music].
Greetings and welcome to lattice semiconductor third quarter 2022 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Rick Boucher Senior director of Investor Relations. Thank you you may begin.
Thank you operator, and good afternoon, everyone with me today are Jim Anderson, <unk>, President and CEO and Sherri Luther <unk> CFO .
We will provide a financial and business review of the third quarter of 2022, and the business outlook for the fourth quarter of 2022.
You have not obtained a copy of our earnings press release. It can be found at our company website in the Investor Relations section that is semi dot com.
We'd 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 the company files with the SEC, including our 10-K, 10, Qs and eight Ks destock.
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 2022.
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 can be found on the Investor Relations section of our website at ladder semi dot com.
Let me now turn the call over to Jim Anderson, our CEO .
Thank you Rick and thank you everyone for joining us on our call today.
We delivered strong results in Q3 with record quarterly revenue, which grew 31% year over year and non-GAAP net income growth of 68% year over year.
Very pleased with the growth in our current product portfolio and we're excited about the launch of our newest FPGA platform lattice upon on December half, a bond would double our addressable market and create new greenfield revenue opportunities for lattice.
Let me touch on a few Q3 highlights.
In addition to the strong revenue growth, we expanded non-GAAP gross margin by 590 basis points year over year to a record 69, 5%.
We achieved record non-GAAP operating profit of 39.7%, which was an increase of 930 basis points year over year, and we continue to expand our roadmap with the introduction of an automotive version of our <unk> pro attacks.
Let me now provide an overview of our business by end market.
In the communications and computing market revenue was roughly flat sequentially and up 26% on a year over year basis.
We remain on track to deliver our fourth consecutive year of double digit growth for this segment.
The three key long term growth drivers in this segment continue to be content expansion in Datacenters servers, new Greenfield client computing design wins and growth in <unk> wireless infrastructure.
Turning now to the industrial and automotive market revenue increased 15% sequentially and was up 45% on a year over year basis. We.
We expect this to be our third consecutive year of double digit revenue growth in this segment we.
We continue to see this market as a strong long term growth opportunity for lattice as we address growing applications in industrial automation and robotics as well as automotive Adas and infotainment systems.
Turning now to consumer revenue declined 11% sequentially and was down 13% year over year, reflecting macroeconomic softness in the consumer electronics end market.
Given that consumer represents only 6% of our total revenue in Q3, the revenue decline in consumer which more than offset by growth in our other segments.
I'll now provide some product roadmap highlights I'm pleased that in our most recent quarter, we launched an automotive version of our <unk> Pro annex family with market, leading power efficiency performance in small form factor.
This new product based on our Nexus platform adds to our solutions that are optimized for the automotive market, which we continue to see as a long term revenue driver for the company.
In addition to our leadership position with access we're looking forward to further expanding our product portfolio with the launch of our latest bond platform.
It will double our addressable market and will create new greenfield revenue opportunities for allowed US we're excited to share more details at the upcoming upon launch about.
Turning now to our software strategy, we've been increasing investment in our software portfolio over the past few years. These investments are focused on making it easy for our customers to adopt flattish products and get to market quickly.
As we mentioned on our last earnings calls over half of our new Silicon design wins are now enabled by at least one about five software solution stacks.
And we will also leverage the same software that our customers are using today on our current products.
In summary, while we recognize there are macroeconomic headwinds and we continue to watch demand signals very carefully we're pleased with our continued progress and the growth of our existing product portfolio, including the continued ramp of our Nexus platform.
In addition, we're excited about the launch of our new bond platform and the continued expansion of our product portfolio I'll now turn the call over to our CFO Sherri Luther.
Thank you Dan we are pleased with our strong financial results in Q3 with record profitability driven by double digit revenue growth and continued gross margin expansion.
We remain focused on free cash flow continue to invest in our product roadmap and return capital to our shareholders through share buybacks.
I'll provide a summary of our results.
Third quarter revenue was a record $172 5 million up 7% sequentially from the second quarter and up 31% year over year.
Revenue grew double digits year over year, and our key strategic market segments of industrial and automotive and communications and computing more than offsetting macroeconomic weakness in consumer.
Our non-GAAP gross margin increased 40 basis points to a record 69, 5% in Q3 compared to the prior quarter and was up 590 basis points compared to the year ago quarter.
The sequential year over year increases in gross margin continued to be driven by strong execution of our gross margin expansion strategy, which we started in early 2019.
non-GAAP operating expenses were $51 3 million compared to $49 9 million in the prior quarter and $43 8 million in the year ago quarter.
Both R&D and SG&A expenses increased sequentially as we continue to make investments in our product portfolio and demand creation.
Our non-GAAP operating margin increased 160 basis points to a record 39, 7% in Q3 compared to the prior quarter and was up 930 basis points compared to the year ago quarter.
We continue the balanced operating margin expansion with investments that will drive the long term growth of our business.
Q3, non-GAAP earnings per diluted share with 48 cents compared to <unk> 28 in the year ago quarter, which represents 71% year over year crowds.
We are pleased with the strong cash flow generation, which continues to be a priority for us.
In Q3, we drove a 41% year over year increase in operating cash flow.
We returned $40 million of capital to our shareholders.
Purchasing approximately 685000 shares making Q3, our eighth consecutive quarter of executing share buybacks. Additionally in August our board of directors extended the share buyback program with a new $150 million authorization that goes through the end of 2023.
Let me now review our outlook for the fourth quarter.
Revenue for the fourth quarter of 2022 is expected to be between 170 million and $180 million.
Gross margin is expected to be 69, 5% plus or minus 1% on a non-GAAP basis.
Total operating expenses for the fourth quarter are expected to be between 51 million and $53 million on a non-GAAP basis.
In closing we are pleased with our strong results and progress and remain focused on driving further revenue growth and profit expansion.
Operator, we can now open the call for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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First question comes from the line of Ruben Roy with Stifel. Please proceed with your question.
Thank you hi, Jim and Sheri Congrats on another solid quarter.
I wanted to start Jim and see if we could talk a little bit about the puts and takes around the two core segments Communications and then automotive and industrial just sort of any detail around the quarterly performance in Q3, and then how youre thinking about.
Those two segments relative to the guidance for Q4. Thank you.
Yes. Thanks for the question appreciate it so first of all.
Pleased with the progress in both of those segments in Q3.
If we start with comms <unk> compute.
6% growth year over year.
Excuse me flat sequentially, but great growth year over year.
We continue to say really good progress in our three main growth factors, there, which are content expansion in servers.
<unk> wireless infrastructure enterprise networking as well as client computing growth and so yes really happy with the performance there as we look forward into Q4, I would expect comms <unk> compute to be flat sequentially up and then in industrial and automotive that that segment in particular, we were.
We're very very happy with the progress there.
15% sequential growth in Q3, and 45% on a year over year basis.
The growth drivers in that segment, our industrial automation and robotics as well as we had really strong performance in the automotive segment as well.
Yeah in that segment, both the industrial and automotive lattice products or just a great fit for that market. The combination of the power efficiency. The small size the flexibility and adaptability as just a great advantage for our customers and we've seen very strong design win growth.
That segment.
Healthy design win.
Pipeline and then going into Q4, we would expect that segment to be flat to sequentially up as well and in fact, if you combine those two segments comms and computing and industrial and auto that now represents about 90% of our revenue and comms and computing. This we're expecting this year to be our fourth.
Consecutive year of double digit revenue growth in industrial and auto this will be or we expect it to be our third consecutive year of double digit growth and we do expect those segments to be the long term growth drivers for the company over the coming years as well.
Great. Thanks, a lot for that detail, Jim as a follow up.
Wondering if we can spend a few minutes on nexus. So we're three years into Nexus here I'm getting ready for the <unk> launch next month and you recently released earlier this year. The fifth family of next I was just wondering if you can give us a little bit of color around what customer feedback has been.
You know one of the attributes that you guys talked about with Nexus at launch was the fact that FD Soi brought a number of inherent.
Attributes that are that are.
Customers were.
We're excited about you know things like inherent low soft error rates lower power et cetera, any any detail on how you're feeling about the nexus launch.
Three years in and and maybe if you can give us a little bit of a preview are you talking about greenfield revenue opportunities for avant are the end market is going to look similar would you say or any any preview on those some of those greenfield revenue opportunities would be great.
Yeah. Thanks, I always happy to talk about our product portfolio expansion, we're really really happy about that let me start with Nexus.
Really pleased with the continued progress on Nexus you asked about customer feedback customer feedback is very very good our competitive position on Nexus is very strong.
The power efficiency is up to four times better than our competition great performance really good size physical size advantage versus our competitors. So we continued to see really strong customer engagement and momentum there we've launched five different device families based on.
Nexus to date and of those five four in production and ramping and then fifth the.
The most recent family that we introduced that fifth family will go into production in the first half of next year. So we have kind of a layering effect of of each new family entry production and beginning to ramp.
Revenue and you should expect more devices on the Nexus roadmap to come as well and I think the combination of Nexus on top of our existing <unk> portfolio. I believe we have the strongest product portfolio in the company's history, and we will turn 40 years old as a company next year, but we have a great.
Product lineup and really pleased with continued ramp of Nexus and then of course it goes without saying we're super excited about avant avant will launch this quarter, we have the public launch events scheduled for December 5th really excited to share more details about our bond at that launch event.
But avant will double our addressable market it will move the company into an.
In adjacent part of the FPGA market, it's completely additive to our existing products and so as a bond interest production in future quarters that will create a brand new revenue stream for the company that's additive to our existing revenue streams today.
Customer engagement really really good impact of his customers that pushed us to invest in a bond back when we started a couple of years ago and yes happy to share more details at the December 5th launch event.
Looking forward to it thanks, Jim for all the detail.
Yes. Thank you.
Yeah.
Our next question comes from the line of Christopher Roland with Susquehanna. Please proceed with your question.
Thanks for the question guys. This one for Sherry Sherry regarding gross margin I guess, there were some puts and takes in September some beneficial stuff including mix.
And it looks like it's carried over into December .
But I was wondering if maybe you could kind of double click for us on gross margin, what we're seeing there and whether this is sustainable or or even do you think you can build into 2023. Thanks.
Yeah.
Thank you Chris.
So we're really pleased with our gross margin our results for Q3. Another record 69, 5% 40 basis point improvement sequentially 590 basis points improvement year over year as.
As I mentioned in our prepared remarks.
Been executing on our gross margin expansion strategy since 2019.
So we're now in our fourth year.
And as a result of that over that period of time, we've driven 280 basis points of improvement in gross margin. Since we started this strategy.
And then when you look back in terms of the elements of that are the drivers that that gross margin expansion. Its been multiple factors pricing optimization has been one new products have added value to gross margin.
<unk> has also been a contributor.
As well as the product cost efficiencies over time has also been a contributor so we've been able to execute on the strategy and and you know as we've talked before some of those initiatives have been effective in the near term and some of that out more longer term.
It's really the way that we the way that we think about things in terms of how we how we do business and when you look at our guide.
It's a range right at 69, 5% plus or minus 1%, it's a range and so we continue to focus on on the gross margin expansion just the way that we do business.
Great. Thanks Sherry.
And maybe one for you Jim.
I guess as we think about supply overall inventories you built inventories in the September we've seen some weakness from some other guys out there in the market I was wondering if this is.
Freed up some supply for you and whether you want some extra supply on top of that inventory or if you could explain why you were building inventories as well and then lastly, as theres a little bit of slack in the supply chain are you seeing some of those pricing pressures or are you even seeing some.
Opportunities for better pricing moving forward.
Yeah. Thanks, Chris So first of all on supply we are seeing supply improve in <unk> across the supply chain in general and certainly the lattice supply.
Surely something that we flagged on prior earnings calls, we did expect to see some income had an incremental supply capacity in our supply chain in the in the second half of this year and actually going into next year as well and so we have seen the realization of that additional supply here in the second half and we do expect supply to continue.
To improve into next year as well should we view that as very positive.
Did we did intentionally growing inventory from Q2 to Q3.
And that was really to support new product ramps. So as we ramp as we were mentioning we were talking earlier about the nexus product ramp as we ramp Nexus and the multiple versions of that but even as we ramp new design wins on pre Nexus products as well we wanted to make sure that we have the inventory in place to support those new product or new.
When ramps and for US our product life cycles are very long and so the risk of obsolescence around inventory is relatively low for us and so it just makes sense to us to make sure we position the right level of inventory.
We are well positioned for design win growth and then I think the last part of your question was around pricing pressure.
We have seen a pretty good durability in our pricing I think sherri touched on pricing optimization as part of overall gross margin expansion.
As part of our gross margin expansion strategy that we started executing at the beginning of 2019 and although it may seem like a long time ago, but.
We had a pricing optimization strategy at the beginning of 2019 that we've continued to execute on now in our fourth year plus of executing on that.
And we've seen very good durability in our pricing and I would anticipate that continuing.
Thanks, guys congrats.
Our next question comes from the line of Matt Ramsey with Cowen. Please proceed with your question.
Right.
Yeah, good afternoon, and happy Halloween.
Yeah, and I guess the first question I had was I guess it was no surprise seeing the results that are maybe a little bit of weakness in consumer.
The part of the computing business that touches P. CS maybe a little bit weaker, but then some some big upside in the auto industrial segment. So I guess the first question on that is.
You got did you pull in supply to service some some more demand on that segment and in auto industrial where I'm just trying to make sure. We didn't we didn't pull some stuff in there. It seems like the organic business trends remain pretty strong, but that was a big up quarter in that segment and I just kind of wanted to check on sustainability there as we look forward.
Yes, it was really demand driven we've seen stronger than expected demand in industrial and auto than actually we had anticipated at the beginning of the quarter.
If you recall from.
<unk> earnings calls that we did even a year prior or we were talking about.
<unk> seen an increasing level of design win conversions from competitor design wins to us over the last couple of years and those are now have started entering production over the last few quarters and are ramping into production and some of those design wins have ramp faster frankly than we had anticipated.
And so it's really a reflection of.
The really good demand that we're seeing in that segment.
As I've mentioned in the past.
<unk> products are just a great fit for our customers in this space and as we look forward over the long term.
We continue to see this segment is a really good source of long term growth for the company as well the customer relationships over the last two years to three years. In this segment have only only strengthened and then you did that you asked about consumer at the very beginning of your question I just wanted to touch on that too that is certainly a place that we've seen weakness in the most.
Recent quarter in Q3, and we had some weakness and softness in Q2 as well. So we see that is certainly driven by macroeconomic overall weakness in the consumer electronics sector. So that certainly has been a weak spot in our business but.
But definitely in industrial and automotive that's been an area of good strength that we've seen.
Thanks, Tim for that I appreciate it I'm just kind of following up the.
The question that I've gotten in the last hour or so since the results came out.
Was just to ask you about.
Sustainability right I mean, you guys have booked a pretty big trend here, you've seen what's going to be going on around you guys in the different end markets with the inflation.
Other competitors and companies in the ecosystem I'm talking about.
Certainly weakness in consumer about that extending into certain pockets of enterprise, maybe some a little bit of concern on industrial there's just.
A wall of worry out there, which is totally understandable, but.
Raising with good results from your company that I. The question I got and I don't know how to ask it five different ways, but the big the Nexus of the question is just your visibility on the order book have you seen anything it toward the end of the the order book that that's moved up or down and just thoughts about visibility from here because the results are really strong.
And in a really choppy outlook and I'm really choppy macro.
Yes, Thanks, Matt.
I'd say first of all we only guide the current quarter Q4 and so.
On the guidance if you take the midpoint of our guidance.
Expecting revenue <unk> revenue to be up slightly sequentially.
But I think if you step back and look more broadly where certainly the company is certainly not immune to any macroeconomic softness or.
Demand downturn, so we might see broadly across the market certainly consumer electronics has been weaker I think the industry is now experiencing a softer charter environment around servers for entry for instance in data center, especially in the enterprise segment. So we're certainly not immune to that.
That said.
I think we are going through some new product cycles that are beneficial to the company. The combination of the nexus ramp even or pre nexus products are doing well and then I think within specific segments.
There there are particular places where the you know the company has done well in terms of securing.
Design wins in demand particular places for instance, just one example in servers.
If you look at servers over the past year.
Our growth is really primarily been driven by content expansion not actually by the end market, but really by the expansion of the dollars of content per server and that's been driven by a.
Higher attach rates, so a greater number of lattice chips being used in servers over time also higher asps on our chips as customers select devices with additional content with additional software and hardware content and that higher asps and higher attach rates of combined to give us really good.
<unk> growth over multiple years in the server space and we continue to see opportunities for new content expansion. In servers is just one example, so we talked earlier about industrial and auto and some of the places that we see there for continued continued growth so.
Certainly cognizant of the macroeconomic pressures and the company is certainly isn't immune.
To the broader market trends, but I think there are some lattice specific growth areas that we're pretty excited about.
Thank you for that Jim remote remarkable results and look forward to seeing you guys at the avant launch.
Thanks, Matt.
Okay.
Our next question comes from the line of Alessandra Vecchi with William Blair. Please proceed with your question.
I Echo the congratulations on the remarkable results in this environment.
Jim if I can just follow up on one comment you made.
You alluded to new design wins ramping on pre Nexus products I think some investors kind of forget that the pre nexus products or are still strong and progressing there is it is it getting a second life from someone.
Some of the software attach rates or is this really just that long life product.
Yes, Thanks, Alex actually a great question, we really appreciate it.
Yes, I will take any opportunity I can to talk about the <unk> products as well.
Because we do see.
We haven't seen strong growth in excess products and actually you're spot on on your question software. The software layers that we've been adding have really helped reinvigorate some of our pre Nexus products you know our software strategy, which we really kicked off in earnest about four years ago was really about investing.
And software to make it very easy for our customers to adopt our products and get to market quickly, but also to give them software that would allow our devices to be used in maybe new applications that they hadn't been used in the past and that applies to not just our new products and excess nexus, but it applies to our pre nexus products too.
And so yes, I do believe that the software that we've built over the past years has helped reinvigorate some of those products just as one example in particular, we've invested in application software solution stacks. We now have five different solution stacks that we have brought to market.
Got it.
And I think those solution stacks hub have certainly helped extend the life and reinvigorate the design win pipeline around some of those <unk> products.
Awesome, that's really helpful. And then just an extension of that question as well as mats.
Some competitors are not competitors, but some other semi companies in the last week has definitely pointed to weakening industrial granted the industrial portion that's closer to consumer.
Whereas things like factory automation and robotics and vision.
It still sounds quite strong can you kind of split for us or at least give some color on how much of the business or how much of the industrial you think turns more towards that consumer centric side versus how we normally think about that as being leveraged it to the value add portion of industrial.
Yeah. Thanks, Alex It is certainly our industrial revenue base is certainly much more weighted towards what I would call deep industrial REIT industrial robotics automation.
And definitely less weighted towards the more consumer centric industrial and again, we we as a company, we're certainly not immune to any general broad market trends.
But as we've talked about I.
I think well over a year ago.
We did say that we were starting to see a real strengthening and growth in our design wins in industrial and automotive over the last couple of years part of that particularly to your.
Your prior question I think part of that was related to new software that we were bringing that was making it easier for customers to design our products into switch to our devices more quickly to design out a competitor in favor of our devices.
We've accumulated those design wins over the past years now youre starting to see those trans transfer into into revenue growth and we're quite we're quite pleased with that we do continue to see industrial and automotive as a long term growth area for the company.
Great. Thank you with that I'll jump back into queue.
Thanks, Alex.
Our next question comes from the line of Christian Guerra with Robert W. Baird. Please proceed with your question.
Hi, good afternoon, just as a sort of up to a prior question any sense or qualitative commentary you could give us in terms of the mix of Nexus sits at the center. If you took a lot of the year we are.
Cannot seem to had its way there or is it still early innings any any commentary there.
Yes, Thanks Christian to give you a sense of kind of where we're at in the in the ramp I would still I would characterize the stage that we're at is still relatively early.
And that's because.
We're only in our second full year of production of Nexus based devices, and we're still bringing out new Nexus devices.
Even yet to enter production rate as I mentioned earlier, we've launched five device families for are in production and ramping that fifth device family, which we launched earlier this year that will enter production.
First half of next year and so we're still building multiple nexus devices that are entering production and you should expect additional nexus devices, which we have on our roadmap to be launched in future quarters.
So we would expect nexus to continue to ramp and become a greater percentage of revenue over time really over at least the next few years.
Great. Thanks for the color and then.
Into next year, if you could talk about you know what percentage of your orders are non <unk> suitable to white now and would you expect that trend to continue in 'twenty three I mean have you see.
A lot of your end markets right now are still very they revising it relative to peers, but just wanted to get some color as to how you.
Positioning a product in terms of.
Customers thinking of.
We carry as you know doing push outs.
How's the cancer policies.
Yeah, there hasn't been any change in our policies.
Cancellations are rescheduling you asked about <unk> in particular.
I will say that our philosophy or approach on NCR is that's something that we only use in.
More specific circumstances as.
There would have to be a specific reason why we would ask a customer for <unk> with its not something that we would broadly broadly do and the reason is is because we wouldn't want to.
To force a customer to take a product or volume that they really don't need because that would only that would only delay the issue over time.
Where we use N CNR.
In the case, where.
Let's say I'll give one example, let's say.
Customer orders are an unusually large quantity of a particular part that maybe is lower volume for us where we don't have a lot of other customers that use that part and in that case. If we were going to go off and build that volume for that customer we would ask for an NCR order because it would it would exceed the norm.
<unk> volume for that part with other customers that might be a situation, where we asked for an <unk> order.
Just to give you a sense of.
Where we use that but its more in specific circumstances in instances and then I would say with respect to <unk>.
Look at our backlog for the current quarter Q4, very healthy level of backlog.
For the current quarter.
We're not seeing any unusual cancellations or rescheduling with respect to that about in backlog for the current quarter. So I think we're at a healthy level for this quarter.
Great very good thank you.
Thanks Christian.
Our next question comes from the line of Mark <unk> with Jefferies. Please proceed with your question.
Hi, great. Thanks for taking my question.
I had two first on avant.
Jim can you tell us can you give us a sense like how do you think avant ramps relative to how Nexus ramped is is it is it something that you would expect to ramp faster than nexus or slower or is there is there are there idiosyncrasies with one or the other that you know that we should expect it should be better or worse.
And maybe just talk about how you think.
Production revenues ramp because I think it's interesting because I think you had the launch of Nexus in late 2019. So here. We are three years later with a late 2022 launch of our bonds. So.
So it just I think it'd be interesting just to compare and contrast, if you couldn't I believe.
I believe of the previous question I don't know if I heard the answer are you are you. Just are you kind of are you able to help us out like how big is nexus as a percentage of your revenues are we talking to single digits.
<unk> is there any help you could give us on that just so we can benchmark.
And then I had a follow up thanks.
Okay. Thanks, Mark so on the first part of your question around the bond so the and the ramp expectations. So the way we're modeling it internally in terms of timing is we're using the excess timing as kind of the model for what we would expect for a bond to as well so when we launch.
Nexus and when we brought the first device to market. We saw revenue start in the kind of 12 to 18 months later and so we're using that as the same we're expecting the same kind of time to initial revenue with a bond to as well so with the launch this quarter we would.
<unk> revenue from Avant to started 12 to 18 months from now so maybe a little bit of revenue at the end of 2023 from a bond with a more material contribution into 2024 and beyond so that's kind of how we're thinking about the timing of the revenue ramp now a couple of maybe just a couple of them.
To note.
That are beneficial to the avant ramp is first of all the software that upon tool use.
Is basically the same software that customers will leverage from their use of Nexus and pre nexus devices. So the same development environment. The same software stacks that I was talking about earlier those are leverage a bolt on to our bond. So that's certainly beneficial and helpful to our customers.
And then secondly, if you look at the customer overlap.
The target customers for a bond.
Over 90% of the target customers for avant are already customers of lattice. Today. So these are really existing customers that we're expanding the product line with overtime. So show from those aspects, we feel really well positioned to drive revenue growth of a bond, but we're using nexus.
Says as the modeling.
Baseline for <unk>.
Fair enough and then for Sherri this.
The inventories.
It did grow is this is this a new level that we should think about for <unk>.
Inventories do you when do you want to keep a higher level of inventories on the balance sheet relative to the past.
Yeah, I think thanks, Mike for the question so.
Feel good about the level of inventory that we have right now it's really to support our growing business I think Jim talked a little bit earlier about the increase in.
To support the growth of our business, whether it be in design wins for our customers as well as product ramps and we talked about the nexus stuff where devices that are ramping currently.
That's very important to make sure that we've got inventory to support those ramps.
But there are other other.
Inventory levels can fluctuate depending on what's happening in the business so that can always happen.
But the other thing to note about our products and that's really cool is that our products have very long life cycles, and so the risk of obsolescence is really low.
And so we feel like that.
The inventory that we have is certainly.
Certainly, it's not perishable and has a very long life and so that that's really good as well.
Other thing is that I'll, just highlight is that our our cash generation further.
The quarter was 41% year over year, so very strong cash generation.
Our free cash flow was 35% are our cash generation as a percentage of revenue for the quarter alone. It was about 40% and so really really strong cash results there and so that's something that we'll continue to focus on as we manage the business.
Very helpful. Thank you.
Mhm.
As a reminder, its star one to ask a question. Our next question comes from the line of Hans most of the men with Rosenblatt Securities. Please proceed with your question.
Thank you congratulations guys.
Great execution.
A lot of that.
Inventory question.
What are the expectations for inventories in the channel are you seeing any evidence of customers, bringing down some inventories could that be impacting your business to some degree maybe offsetting a little bit of the momentum from the new designs.
Yeah. Thanks, John So in terms of channel inventory we.
We have very good visibility on the inventory that sits with our distributors most of our revenue shifts through distribution and so we have good visibility there.
You look at where we ended Q3 on distributor inventory relative to historic normals.
It's really quite on the lean lean side, and so we will need to replenish distributor inventory over the coming quarters as it makes sense because it is on the lean side.
And then in terms of end customer inventory, we do have over 9000 customers. So difficult to have perfect visibility on an end customer inventory and we do but we do know with our strategic customers. We work closely with them to make sure they're getting the right supply from us.
Without either building unnecessary inventory or or being unnecessary lean in terms of inventories. So we work closely with our strategic customers and so we have relatively good visibility there, but doing again in distribution I would say we're on the lean side.
Okay. That's helpful.
Then one more question.
Based on the designs that you guys are working on.
Do you envision platforms using pre Nexus in Nexus in advance on the same platform on the same board.
That's possible.
But I think more likely is the usage model like let's say that we have a particular customer that's got many different types of systems and maybe today, they use nexus or pre nexus devices on say a portion of their systems, let's say a third of their systems.
The bond to allow us to do is address a higher percentage of their systems and their applications. So it allow us to move on to to new systems that or applications and new systems that we haven't been able to service in the past so think about it more as an expansion and share of wallet or coverage.
Product coverage at the at the account.
Okay. Thank you.
Thanks Hans.
Our next question comes from the line of David Williams with Benchmark. Please proceed with your question.
Hey, good afternoon. Thanks for letting me ask the question and congrats on the execution here guys.
Solid.
I guess curious if I could start with you and we've kind of talked about the gross margins, but just kind of we kind of think about a buck is it launches should we expect maybe some early pressure on the ramp at that improves over time or do you is there enough uplift maybe that that will offsetting the initial ramp and maybe any of the yielding she's may see there.
Yeah. So thanks, David for the question so.
Our our evolve all of our new products are behind included is designed to be growth.
And so that's that's one of the elements of our gross margin expansion strategy new products, adding value. So that's the way you can think about that.
And David David I think shared in the past too that just a little bit more color is on asps.
That avanti asps relative to today's product portfolio, our existing product portfolio, we expect our bond asps to be 10 to 20 times higher than todays asps.
Yeah.
Great Thanks for that Jim.
And Jim I guess now that you've got auto and industrial about 50% of revenue. How do you think that mix will trend over time is there is there an ideal mix that you think maybe it gives you the best.
All worlds or would you think that auto and industrial remains kind of.
Half the revenue overtime.
Yes, if I take you back to actually 2019, the first investor day that Cherry Ni.
Did what we said in 2019 is.
You should really expect industrial and automotive and comms and computing to be the growth engines of the company and we reiterated that two years later in 2021, and that's kind of exactly what you've seen over the last four years both of those two segments growing very well.
In one particular year, one segment may grow a little faster than the other segment, but overall quite pleased with the growth of those segments and they now account for about 90% of our revenues. We're pleased with that mix. We believe those those four markets in those two segments.
All have long term secular growth trends underneath those markets and then we also believe that lattice is particularly well positioned.
To continue to grow our content grow our revenue in those markets, especially not just with the existing products with with but with the addition of a bond since we launched that this quarter and expand that product line and in the coming quarters.
Okay.
Yeah.
Our next question comes from the line of Richard Shannon with Craig Hallum. Please proceed with your question.
Alright, thanks, and Jim or Sheri for taking my questions. I guess, my first one kind of revisiting the topic of of our software and the benefit it's giving you maybe if you can quantify or characterize the the revenue benefit here or pricing dynamics that you think about it per application and to the degree to which is beneficial to nexus.
Pre Nexus and also by end markets any characterization would be great. Please.
Yes, Thanks Richard.
First of all in terms of revenue or pricing benefit.
When we look at say the last 12 months. So design wins. These are silicon design wins, one of the things that we track is what is the software attach so when we win a silicon design win with our customers what software are they using along with that piece of silicon.
As we sell that as a overall solution and while we can see is that over 50% of our design wins now have our software attach specifically, meaning they are using the customer is using one of the five software solution stacks that we brought to market and so we view that as very.
Positive because that first of all that just helps them get to market.
<unk> that helps us and bring more value to our customers and then we also believe that that helps make our solution much more sticky over time as well and then the other thing that we can measure is we measure the ASP or the price that that design win is one at and what we've seen from that data.
Is that the design wins that include our software attach generally have a higher ASP.
Then the design wins that don't have software attach and so we know that that our customer is is.
Is valuing that software because we can measure it with a higher price that we get when we have our software attach and then on the last part of your question around just sort of where we've seen the attach software we're seeing it in both pre nexus and Nexus devices.
So I don't I don't think Theres, a dramatic difference between the attach that were seeing in either pre to excess or in excess and then across the markets.
We're certainly seen really good software attach in things like computing.
In industrial automation robotics.
Automotive electronics, so I would say it's across quite a number of our markets and it depends a little bit on the particular software stack.
One of the.
The <unk> software stack some are actually more targeted two particular markets for instance, one of the software stacks.
Specifically for industrial automation.
Another software stack is specifically around computer vision, which would be more applicable in a computing context or an industrial context for instance, and so it can depend on the particular stack, but I would say, we're seeing good adoption across the markets.
A great a great feedback there Jim My second question is.
Okay.
I apologize I've got some.
Halloween Busyness going on you if you could take me out of the queue I'll jump back in later sorry.
As Richard was getting Eric are treated.
Our next question comes from the line is a follow up question from Christopher Roland. Please proceed with your question.
Hey, guys.
Just really quickly on the compute side of things.
Are you guys getting a benefit from Sapphire rapids and or channel.
Hum on the server side and then on the client side.
Are you continuing to see a ramp in that mirror metrics portfolio that you guys have as well.
Yes, Thanks, Chris on the first part, yes, we are expecting dollars of content per server or the amount of value that we're bringing for server to continue to expand in on those platforms you listed.
We are anticipating a higher level of content on those platforms and we expect those to be beneficial to us and again just reiterating my point from earlier in the call that it's really content expansion. That's been the primary driver of our growth in the server segment over the past over the past years and so we do anticipate.
<unk> growth in the future and then on client in mirror metrics.
We certainly are focused on continuing to expand the footprint to mirror metrics across client computing, but I'll note that we also.
I believe that there is opportunity to bring that same technology to other markets as well for instance, in the industrial and automotive space and so that is something that we're working on in parallel is not just expanding the footprint and client, but finding new applications for the software.
In industrial and automotive as well.
Alright, thanks, guys.
Thanks, Chris.
Our next question is a follow up question from the line of Richard Shannon with Craig Hallum. Please proceed with your question.
Alright, sorry about that guys nine year olds, they really get excited about Halloween. So I hope that this won't happen again.
My follow on question is in a in an earlier response.
Our response to a question I think you'd talked to Jim about share gains and I I'm forgetting the context of it but I think it was maybe in reference to a newer nexus platforms and and the reason for the outsized industrial growth here recently, maybe if you can add some color to that to the degree to which that is related to newer nexus products and gaining share against competitors, who don't seem to be as focused on.
Your focus areas that'd be great. Please.
Yes, Thanks, Richard certainly understand the Halloween.
Halloween excitement.
<unk> two but.
Yes, what I would say is that going back to the comments around industrial is.
We've seen a very good growth in that design win pipeline I think this would cause this would apply to automotive electronics as well.
And we've seen a nice design win growth over the past couple of years.
And that that is certainly an excess products, but also our <unk> products I think Alex asked a question earlier in the call around software and the ability of software to rejuvenate older products and so I think some of the software that we brought to market has helped.
Drive some of the design win growth on some of the <unk> products as well and so yes, some of those share gains or where we've seen design outs of competitors in favor of lattice devices I would say that crosses both nexus and pre Nexus certainly aided by our software portfolio.
Perfect. Thanks, Jim.
There are no further questions I'd like to hand, the call back over to Mr. Anderson for closing remarks.
Thank you operator, and thanks for everybody for joining us on today's call.
Pleased with our continued execution and strong results and really excited about the opportunities for lattice. We're certainly cognizant of the macroeconomic headwinds that are out there, but excited about the lattice specific growth drivers that we see ahead of US and then of course very much looking forward to sharing more details.
A bond at the launch event that will host on December 5th.
Operator that concludes today's call.
Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.