Lattice Semiconductor LSCC Q2 2025 Earnings Call

0:00 and welcome to the Lattis Semiconductors second quarter 2025 earnings call. At this time, all participants are in a listenonly mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rick Musher, Lattis Semiconductors vice president of investor relations. You may begin. Thank you, operator, and good afternoon, everyone. With me today are Ford Tamer, Lattis's CEO, and Lorenzo Flores,

0:47 Lattis' CFO. We'll provide a financial and business review of the second quarter of 2025 and the business outlook for the third quarter of 2025. 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 lattis semi.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 of the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10Ks, 10 Q's, and 8Ks. These documents contain and identify important risk factors that could cause the actual results to differ

1:32 materially from those containing our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the third quarter of 2025. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. We will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. for historical periods. We provided reconciliations of these non-GAAP financial measures to GAP financial measures that can be found on the investor relations section of our website atlissemi.com.

2:19 Let me now turn the call over to our CEO board tamer. Thank you, Rick, and thank you everyone for joining us on our call today. Let me begin by saying that Q2 was a solid quarter for Lattis with results in line with expectations. We continue to execute our long-term strategy, leverage our competitive position, and expand our growth opportunities. We continue to see the adoption for Lattis products increasing across our core markets, demonstrated by our record level of design wins and expanded opportunities with our partners. At a high level, we delivered Q2 revenue

3:05 of $124 million, up 3% over Q1 and flat with a year ago period. Our non-GAAP gross margin remained strong at 69.3% and our adjusted IBITA expanded to 34.1%. We achieved these impressive results in an uncertain market, underscoring our continued discipline, execution, and strengths of our differentiated product portfolio. We exited Q2 with increased optimism about the market environment versus Q1. Our confidence is based on several

3:51 factors. Communications and compute demand remains strong with normalized inventory and continued growth expected through the second half and beyond. Industrial and automotive continues to perform as expected. We believe we've passed the bottom with channel inventory levels decreasing as we continue to recognize revenue under channel point of sales outflows. We remain on track to be at normalized inventory level by year end. As we previously indicated, we expect the companionship opportunity

4:39 will become an increasingly significant growth driver for us. We are seeing impactful growth opportunities from major design wings alongside AI accelerators and cloud data centers, wired communications, industrial robotics, ADAS, infotainment, and far edge AI applications. In customer meetings throughout Q2, we're energized to see how Latis is increasingly enabling innovations for our customer strategic applications. Of particular note was the recent successful Asia Tech Summit where we're

5:25 able to engage with over 100 customers and showcase our leadership in low power program innovation alongside key partners. We reinforced how Lattis FPGAAS are complimentary to AS6 and MCUs with a clear focus on LDS's sweet spot in small to mid-range FPGAAS. At that same conference, we highlighted our expanded draw as a companionship in AI and other advanced use cases supporting functions such as bridging, sensor fusion, and board management. In Far Edge AI, our solutions are optimized for applications requiring

6:13 less than one tops their operations per second and under one watt of power, making them ideal for industrial and automotive deployments. We are also increasingly convinced of our value propositions in emerging areas like humanoids, industrial robotics, vision systems, and security. With respect to end markets, in the second quarter of 2025, communications and computing grew 20% sequentially, which was Latis's highest sequential growth for the segment in 5 years. and grew 26% on a year-over-year basis.

6:59 Both subsegments were up double digits both sequentially and year-over-year. The growth in computing is driven by our expanded footprint in both general purpose and AI optimized servers. And the growth in communications is primarily driven by related strengths in data center infrastructure including network interface cars, switches, routers, and security appliances. In line with the macro market, our industrial and automotive segment decline sequentially as we continue to ship under true demand to normalize channel inventory. As I previously stated, we are confident

7:48 we're past the bottom and we remain on track for China inventory to be back to normal by end of this year. This is consistent with what we previously said. Please note that while automotive is slower to recover, it continues to be the much smaller portion of this segment. And with additional share gains in multiple applications, including smart factory, robotics, medical, and aerospace and defense, we expect industrial will again be a strong growth driver for Lattis in 2026. Finally, total revenue for our new products continues to grow at a strong rate and we're on track to exceed our

8:34 2025 goal that we've discussed on prior earning calls. We are encouraged by this momentum which reflects both the strength of our products and our deep customer relationships. Turning to Q3 guidance, we now expect $133 million in revenue at the midpoint or 7.2% sequential growth, the largest we've achieved in 3 years. We also expect a continued improvement in sharing inventory, strong gross margin with a 69.5% midpoint and EPS of 28 cents at the midpoint which is above current expectations. This shows the strength and leverage of

9:22 our financial model where normalized revenue delivers higher benefits to the bottom line. To summarize, we delivered another strong quarter in Q2 with broad-based growth across key financial metrics and record design wins. We executed well, stayed laser focused on innovation, and deepened our customer engagements. The Latis team is energized and committed to delivering on our long-term strategy. Our Q3 guidance reflect our expectation for strong growth in both revenue and profitability. As you can see, for the past four quarters, we told you what we're going

10:10 to do, and we did what we said we would, and we are confident we can continue to do more of the same in the future. Let me now turn the call over to Lorenzo for a detailed review of our Q2 results. Lorenzo. Thank you Ford and good afternoon everyone. We will begin with a brief overview of our second quarter 2025 financial performance followed by our third quarter outlook. We are pleased to report that Lattis has delivered on expectations. Revenue, gross margin, operating profit and earnings per share were all in line with our outlook for the quarter. In Q2 2025, revenue increased 3% to $124 million. This was flat compared to the year ago

10:59 period. Our gross margin expanded by 30 basis points quarteron quarter and yearon-year to 69.3% on a non-GAAP basis. This performance continues to reflect the durability of our business model with continued growth in higher margin new products and markets and anticipated share gain as strategic customers. Non-GAAP operating expense was slightly up to 51.8 million, roughly 1% sequential growth, but 4% lower on a year-over-year basis. We continue to invest in growth opportunities in a disciplined manner. Our non-GAAP operating margin expanded 150 basis points to 27.5% and our EVID margin increased 70 basis

11:47 points to 34.1%. We delivered non-GAAP EPS of 24 cents which was at the midpoint of our guidance and up from 22 cents in Q1 and 23 cents in the year ago period. GAP net cash flow from operating activities for the second quarter of 2025 increased to $ 38.5 million, up from 31.9 million in Q1. Gap operating cash flow margin of 31.1% was up from 26.5% in Q1. Free cash flow in Q2 was 31.3 million with a 25.2% 2% free cash flow margin up from 23.3 million and 19.4%

12:33 respectively in Q1. This is a focus area for us and we expect the trend of increased free cash flow margin to continue. We are expanding our cash flow while selectively investing in capex in support of R&D and operational improvement projects. Channel inventory continues to decline. Channel inventory for cons and compute is already at normalized levels and for industrial and automotive we are tracking to plan. Now let me turn to capital allocation. Our balance sheet remains strong. We are debtree and have ready access to capital if we need it. We are well positioned to navigate macro uncertainties and invest for future growth. Given our balance sheet strength and our

13:18 business model, returning capital to shareholders remains a key component of our capital allocation strategy. During the quarter, we repurchased approximately $46 million of common stock under our existing buyback program. Through the first half of 2025, we've repurchased $71 million of common stock, which equates to 100% of our operating cash flow. Now to guidance for Q3 2025, we expect revenue to grow into the range of 128 million to 138 million with gross margin expected to be 69.5% plus or minus 1% on a non-GAAP basis.

14:04 Non-GAAP operating expenses are expected to be between 52 million and $54 million. The income tax rate for Q3 is expected to be between 5% and 6% on a non-GAAP basis. Non-GAAP EPS is expected to grow into the range of 26 to 30 cents per share. These expectations are based on our current thinking around the macro and geopolitical environment including tariffs. In closing, we remain focused on executing our strategy and we are confident that we are well positioned for revenue growth near and long term. We are driving shareholder value by prioritizing investments in our product roadmap, revenue generation, and

14:51 customer support. Operator, that concludes our formal remarks. We can now open the call for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today comes from Ruben Roy of Stifel. Please proceed with your question. Yes. Hi, thanks for letting me ask a question. Um, and nice to see the uh progress into the second half of the

15:37 year, guys. Uh, Ford, I wanted to start with maybe a highle uh question and drill in a little bit on your comments around the companionship opportunity and some of the comments you made on data center infrastructure. Um, within the context of what's going on with hypers scale spend over the last week and a half. um you know we've gotten increase in capex yet again and it seems like you know that uh trend is going to continue into uh next year. So I guess if we take a step back and think about your positioning, uh would you say that you know as you speak to customers and and think about some of these opportunities certainly on the companionship side that Lattis is in a position to benefit uh you know as we think about exiting 2025 and into 26 you know as the AI

16:23 infrastructure spend continues to grow. That's the first question. Thank you. Thank you Ruben. Uh yes, we absolutely uh believe that our um coms and compute segment uh grew 20% quarter over-arter and 26% yearonear and within that segment the server was the star of the show uh with server segment growing year 85% Q225 over Q224 and more than doubling first half of 25 over first half 24. So as you can see we've got some very strong growth in the server segment fueling the strengths uh in the coms and compute and we expect that to

17:10 continue in the second half 25 and 26 and if I were to uh drill down uh into a bit more detail there are four factors driving that growth number one the overall capex increase was post earning u expectation for the major cloud guys to be over 50% yearon-year whereas it was like 38% pre- earnings. The second one, our attach rate continues to grow into server. The third one, our average selling price uh ASP for various products continue to grow. And the last one, we continue to gain share in AI server uh versus traditional uh server. We're growing both actually, but our AI server attach rate is growing fast. So these four factors are contributing to the growth of our server and hence the

17:56 growth of our coms and compute. Thanks for that detail for it. And I guess as a followup, how are the conversations going relative to, you know, sort of new products versus, you know, sort of, I hate to use the word legacy, but core products at Lattis? And if we could bring Lorenzo into that discussion and think about, you know, mix uh, you know, into next year, you know, potential margin, gross margin impacts as we think about new products kind of flowing into that data center segment. That's all I had. Thank you. Thanks Ruben. Let me address the first half of the question and then turn over to Lorenzo to address the uh gross margin u impact. So uh the first part of that question is we are on track to continue to exceed our forecast of high

18:44 teens in 2025 from new products and uh we're on track to get to uh or exceed mid20s uh percent of new product revenue next year in 2026. uh just uh we also on track this would imply we're on track to to have about a 70% growth yearon year between 24 to 25 in new products revenue and then let me turn to Lorenzo to discuss gross margin impact right so Ruben what I got from your question is you want some near near-term color but really a view longer longer term on gross margin is that right yeah that's right Lorenzo and and you know also thinking through as industrial inventories normalize just you know sort

19:29 of how to think about you know marginal no that's that that's great so you know we obviously saw gross margin improvement this quarter and without going into all the detail right you know this is something at uh starts with the value we provide to our customers in the products and as you can tell from the growth that Ford illustrated in uh his comments around what's going on in the server market. You know, clearly there's strong demand for for what we have. So, you know, we are seeing that the overall balance of business that we have is supportive of the gross margins we have this quarter and as as you know from our guide, we see uh an improvement into next quarter. Uh we think that the fundamental dynamic

20:17 uh for the longer term is supportive of of of these gross margin levels. So we are not you know giving any specific guidance about 2026 just yet but what you said is really important. Uh if you look at where we are today with the the strength of the the relative strength of the comps and compute business and knowing that we have uh a coming uh rebound in the industrial and auto um we you know we very comfortable where where our gross margins are and you know we look to you know to continue to drive expansion but we're we're not providing specific guidance just yet. I think the um key to uh what you said about the

21:03 industrial auto is you right now uh one thing Ford didn't uh hit is we're under shipping true demand in industrial auto and so we think as we as we go through the rest of the year we'll start to see some significant growth there and as as as you indicated find that supportive to gross margins. Very helpful. Thanks guys. The next question is from Melissa Weathers of Deutsche Bank. Please proceed with your question. Hi there. Thank you. Um I guess for my first one, I'll also keep it pretty high level. Um this one's for Lorenzo. You've now been in the seat for a few months now um and gotten to know the business a lot uh a lot more closely. So can you just give us an update on how you're thinking about the business? What is

21:49 your confidence in the business model that's been established at Lattis? And what opportunities do you see uh for the company going forward? Right. Well, I'll I'll try not to burn the rest of our time in answering the question. I you know, I knew coming in looking at it from the outside that uh the you know, the the characteristic strength of the FPGA business model was was well represented at Lattis. Again, uh high value product uh you know a broad base of customers uh demanding that product and a and a broad base of sectors. So you have a a lot of comfort on the uh durability of the top line as you can see this past quarter. The you know

22:34 revenue from industrial and auto was down but more than offset by the fact that we have a very strong pro uh presence in the emerging uh coms and compute uh applications that Ford talked about. to you know great durability on the revenue line and as as as Ruben's question indicated as industrial starts to manifest itself in our revenue we should see acceleration of growth and all this is supportive of the of a the strong gross margins that we have but very importantly to me is as I've become familiar with with lattice is the is the um structure underneath the operational focus focus on driving profitability

23:20 and our focus across the management team and through the organization on improving it. Uh you know lots of activities on on uh price and cost at the gross margin level but if you look just for example at this year this time uh our opex for very similar amount of revenue than last Q2 uh we're lower by a couple of million. This is based on actions the team's taken to drive profitability. And what that sets us up for is near-term we're seeing expansion of of all our profitability metrics. Um operating income ibida is up to over 34% as I said. But if you look just quarter on quarter, our

24:08 revenue is up 3.2%. And our operating income is up 8%. So this is what we're trying to set the table for as we go forward and recapture the revenue growth uh across the board the business um and accelerate uh our profitability growth in into the end of this year and through next year. So uh I hope that answers your question. Yeah, definitely. And we're definitely happy to have you on board. Um, I guess for my second question and maybe a less friendly question, but um, I think last quarter you guys had indicated in 2026 that you should get back to your 15 to 20% revenue growth target. Um, it seems like things are tracking as you planned, if not maybe a little bit better on the cons and compute side. So, is 15 to 20%

24:55 still a viable target for how you guys are thinking about 2026 revenues? Yes, absolutely. uh we are uh we've indicated the strengths in uh cars and compute but we also are under shipping through demand in the uh industrial automotive which uh is uh allowing us to continue to bring the ch inventory down and our own inventory down. So we're still very positive on that segment going back to growth in 2026 and there's a range of new applications driving it like for example just in robotics we're very excited about all the applications that were being designed in uh a range of new application robotics for example all the way from electronics EV production logistics warehouse automation agricultural industrial

25:42 automation aerospace grocery logistics smart city oil and gas and last but not least the category we're most excited about humanoids. So you could see that we're uh just on this one uh area in industrial and automotive are pretty excited about the growth prospect and and believe 2026 will be uh a strong year and we're past the bottom in that segment. Perfect. Thank you. The next question is from Christopher Roland of Susuana International Group. Please proceed with your question. Hey guys, uh thanks for the question. Um, so we've been examining some uh XPU racks at what I think is uh or maybe your largest uh hypers scale customer

26:31 and um and the XPU FPGA attached seemed uh pretty high seemed like a massive opportunity for you. Um so I guess my first question is could other first of all did this surprise you? Secondly, um could other hyperscalers and their engagements potentially rival this one? And then lastly, like how should we think about this largest XPU customer versus the GPU opportunity versus uh other XPU hypers scale opportunities like h how should we size this or what are you most excited about etc. Thank you. Yeah, thank you Chris. Um, we're doing

27:16 actually quite well across uh all the hyperscaler because of our uh low power, small size and cost effective solutions. Uh, if you have as many FPGAs as you're uh discussing, you do want the three attributes of power, size, and cost to be to be adequate. And we we're more than we're actually superior in in every aspect. And this is causing us to have a leadership in server. Um you know in addition we're also processor agnostic. So we're Switzerland from that point of view. Uh the complexity of the board is increasing. So you're seeing more uh of these uh PGAS per rack. Uh security and postquantum cryptography are are driving more attach. They're driving higher ASP

28:02 and you're seeing more servers uh having more cards uh because of this AI system. So um in general for a uh a hyperscaler rock architecture they range from 40 to 60 servers per rack and we could range anywhere from 70 to 130 FPGAs per rack depending on on the configuration. And so we're seeing this across the board. Um whether it's XPU or GPU or other AI accelerators, uh they're all driving that content and they're driving, uh you know, strong attach rate, uh strong ASP and and uh you know, strong revenue growth for us. Um did this address the question, Chris? Yeah. No, I I think that was some great

28:49 color forward. Um m maybe as a followup uh on uh dist inventory in particular I saw dist was up as a percentage of total uh to I think 91% but also so that means sell in was pretty high but you guys are uh also saying sell through was even higher as you guys are burning inventory. Um, I don't know if you're able to tell us uh or give us a rough idea of the difference. How much inventory was burned? Uh, it sounds like a lot of it was in INA, you know, how much of INA is left and are you guys definitely on track for um for for that to be normalized particularly in INA uh by the

29:34 end of the year? Yes. No, thank you for the question. Our uh inventory in comic compute as we discussed has already been normalized and as you are alluding to our uh inventory in industrial automotive or INA is on track to be normalized by midyear. We're making very good progress uh months uh months to months quarteron quarter and uh we're not breaking up the exact number but we continue to substantially ship um you know over the revenue. So, so the the point of sale outflows from our channel inventory from a channel partner is uh definitely continue to be higher than revenue and will continue to be so until uh end of the year at which point we should be normalized in industrial automation and

30:20 give us really strong growth and strong headwind uh strong tailwinds actually into uh 2026 given that inventory would be normalized. Super. Thanks for the next question is from Blaine Curtis of Jeff. Please proceed with your question. Hi Ezra Weiner on for Blaine. Thanks for taking my question. Uh I guess first one would be uh we've seen pretty mixed uh commentary from the rest of your peers in terms of industrial and auto and you're talking a lot about growth next year and normalization to the end of this year. Can you just talk about what you're seeing from I guess a regional basis and maybe break up industrial and auto into what gives you that confidence on timing?

31:07 Yeah, for sure. So, you know, we we were actually more cautious in Q in the last earnings call and now we're more optimistic on this one. So, it's a bit different uh and uh than rest of our peers that some of them were flipped. uh and I think that what gives us that confidence is we continue to a few few factor number one we continue to have outflows from our channel inventory be higher than revenue and uh we the demand is extremely strong right now uh we uh are starting uh with uh starting backlog that are record high level not only for Q3 but also for Q4 and we're starting to see that for Q1 so buildings and backlog including starting backlog is extremely wrong the book to build is the highest it's been for uh you know a couple of

31:54 years uh the um uh as we talked about inventory on both the channel inventory and our own inventory continue to go down and then record design wins so I think what's also giving us confidence is we got record design wins across all segments um not only compute but also very strong in industrial automotive and very strong across the new products so the new product funnel is almost doubled uh you know uh over the past 12 months with uh very strong winds in hyperscalers in uh in robotics and industrial automation. Um uh and in in that segment automotive is the smallest area. So this the automotive is less than 10% of that segment. So less than 5% of our overall revenue. So some of the other peers are probably talking

32:40 about weakness coming from automotive. uh we're actually seeing automotive being strong for us driven by China and somewhat in uh in the rest of Europe but but really uh it's not a big factor in our revenue because only less than uh less five less than 5% of revenue there. Got it. Uh actually that's it. Thank you. The next question is from David Williams of Benchmark Company. Please proceed with your question. Hey, good afternoon and uh certainly appreciate you letting me ask a question here. I guess maybe first uh you've touched on the ASP uh trends and just kind of curious is that is that a dynamic of where you're just seeing some pricing power come back in or are you seeing just a mix a mix shift uh in

33:27 terms of your your new products more avant or the higherend products versus maybe some of your prior platforms? Yeah, we we're definitely a mix shift uh not only to uh products like Nexus Navan, but also within our Mac XO family going from X02 to X03 to XO4 to X05. So I think we're continuing to uh provide products that are uh being driven uh by things like security, things like postquantum cryptography by higher number of interfaces. Uh so you know um that ASP is definitely uh benefiting from the the the what I just mentioned and and then maybe secondly uh just kind of thinking about Avant's contribution

34:13 and the way that that is ramping. Can you give any color there around uh on the new product side? How much of that growth is driven by Avant versus some of the the newer Nexus products? Yeah, so look I mean the short term is going to be a Nexus story. uh including 2026 and Avant becomes a bigger factor in 26 and to 27. So that's the the progression. Uh so I would I would say um the small uh and the the small FPGAM is really what's driving the the short-term and medium-term revenue into 26 and Avant becomes a much bigger contributor as we go in the second half 26 and really into 27. Thanks so much for the call. As a reminder, if you would like to ask

35:01 a question, please press star one on your telephone keypad. Our next question comes from Gary Mobley of Loop Capital. Please proceed with your question. Good afternoon everybody. Thanks for taking my question. um at that $133 million revenue guide for for Q3. Um approximately how much are you under shipping as you draw down the continued excess inventory and industrial automotive? And then I guess conversely is there any sort of constraint on communications and compute as perhaps your inventory might be running too lean or you might have extended lead times. So I I'll take the uh undershi question

35:46 Gary and and um sorry I'm not going to give you a specific amount because we're just we're not doing that in part because it requires some estimation but you know also um you know when we do provide a forecast in the future we we will incorporate what's happened in the channel. Uh but there are, you know, there's a similar amount uh in the in our Q3 forecast that we saw in Q2 and and we think that's going to be consistent until uh the about the end of the year when we should be normalized across the channel. We are seeing and I'll hand this over to Ford on the second part of your question. We are seeing you know turns in the coms and

36:32 compute business within the quarter right now. Yeah. Yeah. Know as as said comms and compute continues to be strong and and our goal is to be a good supplier to our customers um and uh and do the best we can to uh to meet supply. Obviously uh it get it gets challenging with some of the upsides but appreciate that color. Uh, Lorenzo, I know this wasn't your target as it was given back in 2023, but I think the long-term stated goal is to have opex somewhere in the range of 30% of of revenue. And I know that the recent restructuring, you know, perhaps isn't necessarily under your guard as well, but to to climb back to that opex goal

37:17 revenue has to increase from, you know, has to increase 35% from current levels, you know, is it is it the um is it the strategy now to just remain patient and wait for the top line to recover or do you feel like you've got some more opex right sizing to go? So, uh, I'm I'm glad you, uh, let me out in a way, Gary. I appreciate that. But I will say at the same time, uh, you know, if if I'm if I'm afraid to def if I'm free to define longer term, uh, I don't think it's, uh, a bad objective. I do, uh, uh, look at what we're doing in our opex investment as the driver of growth

38:03 of the future. And uh I think that that's just the inherent nature of the FPGA business. Um we have done as you indicated a significant action last year in order to get our opex run rate down. We continue to to tune our uh operation structures to to optimize what we're doing. we just have gone through an exercise in the in the middle of the year of refocusing where we're where we're investing and uh trying to invest in the right things. So, no, I don't think it's a bad objective uh or I shouldn't let me rephrase that. I think it's the right objective, but I am not yet uh at the point of telling you when we think that's going to happen. Uh you know,

38:49 given the revenue growth that that you alluded to, I do think it's feasible. Appreciate the color. Thank you. The next question is from Clayton Bolton of Needaman Company. Please proceed with your question. Hey guys, thanks for letting me ask the question. I guess uh Ford and Lorenzo, you've talked about under shipping demand in the industrial automation uh seg industrial segment. I'm wondering if you've actually started to see POSOS in that end market starting to increase or has POSOS been pretty flat and you guys are just under shipping more of a a stable POSOS level in in in short Gwen POS is increasing.

39:39 Excellent. Okay, great. So that's good news, right? Yeah. No, that's that's great. Um, thank you for that. I just wanted to to clarify. Um, Ford, I'm going to ask you what may be a tough question, but you know, Lutnik said we're going to get section 232 within about the next week or so. How are you guys preparing for section 232? Do you have sort of a sense where you think those terrorists may land and um, you know, how do you how do you handle that uncertainty? Uh number one, the our understanding is the uh country specific uh tariffs supersede 232. So we get a fair amount of our uh supply from Japan, South Korea and Malaysia and

40:26 so those are already in place. So no change on that front. Um number two, a lot of our uh channel partners bring uh um inventory from Mexico into a free trade zone and and ship from there out out the US. So the percent uh that is coming into US is a small percent of our business and at this point we haven't seen any direct impact uh from tariffs and we'll wait and see but some of these factor are going to mitigate uh any potential 232 uh impact. Yeah, let me just uh leverage what port said. Uh the um direct impact uh as we see it on our business doesn't seem to be significant in terms of changing ourruct cost

41:14 structures uh based on the way our our supply chains are oriented and the way our customer flows work. you know, however, we do, you know, as as everybody else, uh, we do look out for bigger macrolevel impacts on on the overall demand. Uh, but but right now as as as you see in in what we've guided, uh, we we see strength in in our end markets and and given what's driving that strength. If you look at for instance the hyperscaler capex uh you know we we're hoping that the direct the indirect impact of tariffs are are minimized on us but um we have a good supply chain structure uh in order to deal with this flexibly and we've been

42:00 working with our customers over the past you know several months as this has become an issue in order to help them optimize their supply chains as well. Got it. Thank you for that. The next question is from Duenjang of Bank of America. Please proceed with your question. Hi, thank you for squeezing me in. Um, on Compsson compute Ford, I know you mentioned a lot of growth drivers, some of which are secular and some of which are more specific to Lattis. Um is there any way to sort of force rank those four contributions that you mentioned? Um so say the market growing versus your wins

42:47 or your attach rate versus content that would be very helpful. So um you'd like us to rank uh the four se the four the four factors that are the overall capex increase that the cloud hyperscaler indicated on the earning score being one our attach rates being two the ASP being three and our attach and AI uh servers being four. Uh and these are all related and intertwined. So um you know um the number five I forgot to mention is the record design wins we're having with hyperscalers uh and um so that's uh that

43:34 that is a strong uh number five if you wish and number six I think as I think about the sort of ecosystem that we use to sell into that market um we um you know sell if you wish to to to four different constituents. One is the ODMs that that are building for the hyperscaler and OEMs. Two, we sell directly with the AI accelerators. Three, we sell directly with some of the related wired communication type of uh uh providers and number four, the server OEMs uh directly as well. And so we've got these four constituents also going strong. So Dan, I'm not sure there's a scientific way to to break this. We have all the

44:20 data but but I'm not sure it we we could we could take it offline and come back to you but but quite a few factors that are helping us grow uh the coms and compute. Mhm. Yeah. Understood. Um and then the second question on industrial and auto. So I I know you mentioned the strong recovery outlook. Um but then the channel's been elevated for quite some time and you said you've been under shipping demand for a time as well. So, do you anticipate once the inventory actually normalize um do you expect the market to go back to shipping in line with the demand or do you expect it to be a little bit more conservative? Now I would expect it would be in in

45:09 line with demand and as our design wins take hold or new design wins take hold and these products in these sectors ramp uh we we should have quite strong growth. Got it. Thank you. The next question is from Joshua Buckalter of TD Cowan. please proceed with your question. Hey guys, thank you for taking my question. Um maybe following up on Quinn's earlier about the geopolitical backdrop. Uh maybe it's a good thing it hasn't come up, but any changes you've observed in your customers order pattern specifically in uh in China over the last 90 days given all the volatility. I think in the queue it said China was up like 11% sequentially. So it doesn't seem like anything egregious, but we're

45:56 just be curious to hear your your thoughts on the geopolitical backdrop from the tariff angle. Thank you. Yeah, the the short answer is we we have not seen anything and we keep looking uh and you know we're very wary of that uh uh to make sure that we are you know we understand what's what is true demand. Um but one of the things that you should put into context of that question is is our growth that we're forecasting and Ford's earlier comments about where bookings are. Uh so we the phenomenon you're asking for is that we see a a pull in and then are expecting a drop off and and we just don't see that in our data.

46:41 Got it. Thank you Lorenzo. I appreciate the color there. Um and then as we think about the new product growth I think you know you said 70% this year. Um, given the upside you saw in comms and computing this quarter, I mean should we think about new products being more tied to comms and computing and faster design cycle times in that end market too. Um, and then you know I'll kind of squeeze in a second one from um, you know, any outlook you can give us on on sequential growth by end market in the guidance on that note. Thank you. So as we indicated, we do believe that industrial and auto will uh you know start outperforming uh as we get into u end of this year into into next year and so we should see

47:27 growth across both end markets both the coms and compute as well as industrial auto. Uh so we're we're not sort of uh we're not seeing one we're seeing both of them grow into next year. Thank you. Our next question is from Kevin Garrian of Rosenblat Securities. Please proceed with your question. Yeah. Hey, good afternoon all. Congrats on the the strong results. Ford, you had mentioned that several edge AI growth areas that will benefit the company. you know looking at the marketing your business can you just give us a sense of what applications you see developing more in the near term that you'll benefit from and what is more on the

48:13 longer tailed end yeah for sure so on edge AI uh it's um we're on track to uh achieve high gains of revenue coming from AI in 25 and expect to this to grow to uh mid 20% of revenue in 26 six. So that's uh positive and aligned with what we had indicated in the past. And the way we we break it up by uh end segments, we see about 60% of this um AI related revenue coming from compute and comms and about 40% of this uh AI revenue coming from the industrial automotive and consumer type markets.

48:59 by application uh we see um you know about you know 55% of these application where we are a companionship to sort of AI accelerators and GPUs and and switches etc and we see about 45% that uh are application where we're either on the data pass or are running uh edgi into our chip for like tiny AI models so that should give you a color of that AI revenue yep okay That's perfect. Um, and then you know, you delivered another record quarter for design wins. Ford, you're coming up on your your one year at the company. So, you know, what are you seeing at Lattis that helps with, you know, capturing design wins versus the rest of the market? I think what's helping us is a very

49:48 single-minded focus on small and mid-range FPGAs, which we believe is a sweet spot uh of growth in the FPGA market. And um we're actually clarifying our positioning to be a companionship to AI accelerator um networking chips um Nick cards etc versus our competitors trying to do this in the mid-range and high large FPGA in a way competing with some of our customers or their customers uh sort of AS6. So we are more of a pure play FPGA in a sense that we this small to mid-range is is is more of a companionship if we run AI on our chip. This is as I said less than one terops uh less than one watt. So very focused

50:35 uh type of approach uh versus and we call this far edge AI near sensor AI as opposed to the uh competitors uh uh larger competitors larger PGA trying to go after what they call near AI which in a way competes uh with our customers. So we see oursel as a companionship for example to um you know image image image processor AI where we uh can be fed output input from various sensor could be image sensor could be radar could be LAR could be infrared cameras and many of these could be you know 10 12 15 different sensor being fed into our FPGA where we pre-process the data and and sort of uh make that um near AGI

51:24 inferencing uh chip more effective. Uh and so um we are in that companion role we are adding value to our customers because they're spending a ton of money on these AI accelerators and we make those AI accelerators more efficient because of our low power uh small size um cost effective solution near the sensor. We our customer call this contextual intelligence. So, so that intelligence is uh is contextual to that sensor and and uh and helps that main AI AI chip. Yes, absolutely. I appreciate the color. Thanks, Ward. Our last question today comes from Christopher Roland of Susuana International Group. Please proceed with

52:10 your question. Hey guys, uh thanks for the followup. Um I guess first of all uh I I just want to know forward what you meant by the country tariff superseding the section uh 232. So um uh I I guess that means you don't think there will be any additional semiconductor um uh tariffs on top of country specific but just wanted uh you to elaborate there. Uh and then also if you guys uh had any more color on Q4 or 26 based on the positive bookings backlog uh commentary that would be great as well.

52:55 Sure. So on the first question our understanding is if you look at terrorists for example from Japan or South Korea where we procure wafers or Malaysia we procure assembly and test uh stuff. uh is that those let's say 15% in the case of Japan and South Korea would supersede a 232 if 232 were to be higher. So let's say a 232 comes in at 20% our understanding is that the Japan 15% or South Korea 15% would supersede that that uh 20% and and stay valid. Uh so so that's number one. On number two on the question on Q4 and 2026 as I said we see strong backlog actually into Q4 now and uh and starting into Q1 of next year. So this is uh way above uh where we have been uh in probably some of the

53:42 best uh bookings and backlog for the past three years. Excellent. And then Ford may maybe just a highlevel um technical uh discussion as to where you see opportunities um when we think about scale up AI particularly networking just because that was your background. Are there any opportunities for things like scale up or rettimers or DSP or uh or or certis or IO chips or anything like that or uh are these um FPGAAS including Avant uh too small for some of these functions? I'm just wondering if there could be

54:28 expanded opportunities just in your heritage of of networking. Yeah, look, today we are uh getting increasingly confident in our positioning of being the companionship to all of the above, right? So, not just somebody asked about XPU and GPU and AI accelerator and switches and nick cards and rettimer and even board management controller and you know uh Nick as storage uh we are actually being companionship to all of the above and and that's all of these chips are driving uh the AI infrastructure. AI infrastructure is not just the accelerator but also all of the chips that you're mentioning that are companionship to these accelerator and we're companionship to these companionship. So I think uh right now we're benefiting from being Switzerland

55:16 and being a support uh uh very important support role uh in all of these uh deployment and this companionship role is going to increase because there is a tremendous amount of uh complexity increase in these AI there is a tremendous amount of pressure to uh reduce system design cost to increase time to to increase the speed at which the system go to market and a lot of these functions are typically better done in FPGA and these are not these big large FPGA power hungry expensive these are the small to mid-range FPGAs that are going to fit in these systems when you talk about tens of FPGAs per rack so um we're we're happy with the role we have and and feel like this going to be

56:01 a very big opportunity for us thanks for and congrats on the improvements thank This concludes our question and answer session. I would like to turn the floor back over to Rick Mushe for closing comments. Yeah, thanks everyone for joining us today. For a copy of our earnings release, please visit us on our investor relations website. We'll be attending the following conferences this quarter. The Jeffre Semi IT hardware and communications tech conference in Chicago on August 26th, the Evercore Semiconductor IT Hardware and Networking Conference also in Chicago on August 27th. and the benchmark annual tech media telecom conference in New York on September 3rd. This completes our call. Thank you again very much for your participation. You may now disconnect your clear lines

56:51 at this time. Have a wonderful day.