Tristan Gerra: Hi, good afternoon. Going back on the industrial automotive trends, if we assume kind of a $65 million for Q2 in that segment, which takes us slightly below the Q1 ‘22 run rate, how do we look at true end demand, if you have visibility on that relative to that kind of mid-60s, quarter year run rate, and is your commentary about second half recovery applying to industrial? If that’s the case, which geography you think is going to emerge first from that under shipping dynamic.
Jim Anderson: Yes, thanks Tristan. On the first part of your question, yes, we believe that at this point, for instance, if you take the guidance that we provided for Q2, if we look at the end customer and how much Lattice content that they’re consuming as they build their systems, we believe we’re under shipping right now in Q2 to the end customer demand. And that’s something that we believe happened to Q1 as well. But we also believe that effect starts to dissipate in the second half. And it’s a gradual dissipation over time. But as customers start to get their inventory levels back to normal, that drawdown of inventory dissipates in the second half. And then the demand that we start to see from the customers naturally goes up to their actual consumption level.
So that’s what we believe happens through the rest of this year. And it can be a little bit different by sub-segment within industrial, auto, as well as by individual customer. We have a lot of customers, over 10,000 customers, but in aggregate, we believe that dissipation or that industry drawdown, inventory drawdown effect dissipates in the second half. And the different customers are at different stages of where they’re at in that effect. And then on the second part of your question, on geographically, we would expect to probably see improvement, let’s see across the geographies, but I would expect to see North America and Europe, industrial, autos, probably start to pick up first as that inventory dissipation effect, or that inventory drawdown effect starts to dissipate.
Tristan Gerra: Okay, thank you. And then if I may follow up, how is your distributor dollar inventory comparing with the prior quarter? Is it increasing, or if so, by how much, or is it declining? And then also, if you could quantify this in weeks, inventory weeks at this season average.
Jim Anderson: Yes, thanks, Tristan. When we look at the distribution inventory, and we have pretty good visibility on that, it’s really back to the levels that we saw in pre-pandemic. So basically, approximately back to that same level. Pre-pandemic before the whole supply chain disruption started. So we view that as a good thing, that it’s back to those levels, because we think those others are the right levels to support our end customers make sure that there’s inventory in place in case demand does start to pick up quickly. If the market starts to stamp back quickly, we want to make sure we have inventory position to support them. And so I would characterize those inventory levels as really back to those pre-pandemic levels. And then the second part of your question, I think was on weeks of inventory, we don’t typically break that out for our distribution partners.
Operator: Our next question comes from the line of Ruben Roy with Stifel.
Ruben Roy: Thank you. Jim, my first question is a clarification, I think, just on the commentary around the new Nexus devices. At the analyst event last year, I think you talked about some new Nexus devices and development. Is that kind of what you’re referring to, or has something changed and you’re accelerating the roadmap around Nexus?
Jim Anderson: Yes, something’s changed. We have accelerated the roadmap on Nexus. Yes, we’ve added additional device options. Think about this as a wider portfolio that we’re going to bring out faster than even what we had back at the Developers Conference. We’ve just continued to look at the potential for long-term growth in this segment, and we believe there’s great potential for the company to continue to grow in this segment, and so we wanted to bring out even more device options to support our customers over the long term. That’s in parallel to us continuing to drive the Avant roadmap at full speed, right, that doesn’t detract in any way from the Avant roadmap. That’s also very aggressive, but we found the ability to enhance the Nexus roadmap in parallel to driving a very aggressive Avant roadmap of introductions of new devices.
Ruben Roy: Thanks, Jim. Yes, that’s what I thought you were saying, but I wanted to just make sure on that, so thank you for that. And then just as a follow-up on Avant, I just want to make sure I have this right in terms of sort of the design activity you’re seeing, Avant-E being out first. And I’m not sure if I have this right, but it seemed like it was more specific to certain processing and really edge processing applications, whereas the other two, G and X, are more general purpose. Would you say that the design activity or sort of the engagements with your customers are more skewed towards the general purpose, or is that not the right way to think about it?
Jim Anderson: I think, we’ve got good engagements across all of those different flavors of Avant. They all serve a slightly different purpose. G is, yes, the most broad general purpose family. E was more optimized for edge applications, and X has higher connectivity speeds, really optimized more for, for instance, data plane applications. So they all fit a little bit different need. We’re seeing good engagement across all of those. E is just further along in terms of generating revenue, because that, primarily because that was the first one that we introduced, and so we introduced that one first, and so it’s just ahead of the G and the X in terms of generating revenue and its revenue ramp over time.
Operator: Our next question comes from the line of [Duxanne Zhang] with Bank of America.
Unidentified Analyst : Hi, guys. And thanks for taking my question. One on software attach, it’s been a big push for you guys, obviously. Could you remind us where you are in that progress today? And if the downturn has any impact on that attach rate, and would you say, when we get out of the downturn in the second half, should we also expect that attach rate to accelerate going forward?
Jim Anderson: Thanks, Duxanne. And the quick answer is no, we don’t see the downturn affecting the software attach rate at all. And our software attach rate is now over 50%. That means over half the time when we win the new design with customers, customers are choosing to not just use a lot of silicon, but they’re over half the time they’re using one of our software solutions stacks as well. And we’ve got a pretty wide portfolio of software solution stacks now that we’ve rolled out to the market. And remember, these software solution stacks are really purpose-built solution stacks for specific end-user common end-use cases that are common across multiple customers. And the purpose of these is, number one, to help our customers innovate to help them design Lattice solutions in really quickly, but also to get the market quickly as well.
They’ve been really popular with our customers. We see very high attach rates. We expect that attach rate to grow over time. And that certainly benefits us over time. It not just helps our customers innovate, but it creates long-term stickiness with our customers for those solutions. And then there is a benefit over time to the ASPs that we see with design ones that include software attach as well. But I wouldn’t say the software attach is affected in any way by the downturn.
Unidentified Analyst : Awesome, and then as a follow up, just given your big, obviously Intel is trying to go public with Altera, they’ve been reallocating resources into that business, coming out with new products, et cetera. So how are you seeing competitive dynamics within the FPGA space? Are your customers seeing any changes in behavior? Any color around that would be helpful, thank you.
Jim Anderson: Yes, I would say that, first of all, we always take our competition very seriously, and we’ve always assumed, since the day I joined Lattice, we’ve always assumed there’ll be robust competition across every one of our markets and products. That’s the philosophy that we use to plan out our product roadmaps over the past five plus years. That said, I think we’re really well positioned competitively. I think if I look at our small FPGA portfolio. We talked about Nexus a few different times over the course of this call. Nexus is very, very differentiated, very good performance per watt. So it’s got great power, efficiency advantages, great features, great physical, small size. I think it’s a very strong product and our customers would say the same.
And then when I look at our new mid-range product line Avant, the E, the G, and the X versions there as well, I think that’s highly differentiated. And at our Developers Conference in December, I think we demonstrated the level of differentiation of our mid-range products. And we demonstrated those live in competitive demonstrations in December to show the competitive advantages of Avant. So we certainly feel like we’re very well positioned. And we believe in small FPGA, we’ve gained significant share over the past years and we see the opportunity to continue to grow and gain share in small FPGAs. And then in mid-range, we’re at the beginning of that Avant revenue ramp, but we believe that we can grow Avant significantly over the coming years.
And remember that Avant uses all the same software as Nexus, so it leverages the same development software, the same software solution stacks. And when we look at the target customers for Avant, 90% of the target customers for Avant are already customers of Lattice today. So these are customers that are just buying another product from a Lattice’s product portfolio. They view Avant as just an extension of the existing Lattice portfolio. So for all those reasons, we feel really good about the competitive environment. We never take that for granted. We always assume it’s going to be a robust competitive environment, but we do feel good about the positioning that we have today and over the coming years.
Operator: Our next question comes from the line of Srini Pajjuri with Raymond James.
Srini Pajjuri: Thank you. Hi, Jim. A couple of questions. First on the, one of your larger competitors, I guess, Xilinx end of life, the low end. And I think they put out a press release back in January. Obviously, you have a very strong position there. And given their exit or potential exit from this market, I mean, just curious if you’re seeing any impact on your business, any more interest in terms of the design activity. And also, if you could help us understand maybe, how big this opportunity could be potentially for you to kind of think about the next couple of years.
Jim Anderson: Yes, thanks, Srini. So the answer is yes, very beneficial. It was, we viewed that as very positive that particular competitor evolved the number of parts. Part of the reason we’re putting our foot on the gas in that segment is because we see competitive opportunity here, and we see the opportunity to continue to gain more share over time against both of our primary competitors. And so you see us basically doing the opposite, which is investing more, bringing out more products. And I think that’s viewed incredibly positive by our customers. Look, small FPGAs are a critical part of all of our customers’ systems. And I think with Lattice, they see a company that’s dedicated to sustained investment and innovation in this segment that continues to innovate on every new generation that’s expanding its product offerings, that’s adding new software, and that’s giving them long-term assurance on the lifetime of these products that they can rely on for the lifetime of their systems.
And for all those reasons, I think they see Lattice as the supplier of choice for small FPGAs over the long-term horizon. And that’s why we believe we’re well positioned to drive continued growth, expansion, and fair game in this segment. We also believe that that same customer excitement about our investment, our innovation, spills over into mid-range as well. If you look at those customers, those same customers, most of our customers mainly use mid-range and small FPGAs. That’s the primary usage of FPGAs. And with Lattice, they have a supplier that’s now got mid-range and small FPGA portfolio to offer them that’s continuously innovated and has a long-term strategy of dedicated investment in both hardware and software to meet their needs. And so I think they see us as the supplier of choice in both mid-range and small FPGAs.
Srini Pajjuri: Got it. That’s very helpful. And then on Avant, I think previously your expectation was that Avant would contribute about 10% to 15%, roughly speaking, of your revenue in the next two to three years. I get a lot of questions about how we should think about the revenue ramp, and obviously Avant-E seems to be contributing already. So maybe at some point or some, how we should think about contribution this year and next year, even if it’s rough numbers. I think that would be very helpful. Thanks.
Jim Anderson: Yes, thanks. We continue to be focused on the target that we provided in terms of Avant revenue over the long term that we provided at that last Investor Day. I think that’s the target that you’re referencing. We’re still very focused on that and driving towards that target. We’ve given some markers for this year just in terms of how to qualitatively think about Avant contributing this year. It’s more of a contribution in the second half of this year. And then, of course, we expect Avant to grow and contribute more next year and in the following years. I think as we get closer to the end of this year and into next year, we could provide maybe some more specifics on where we see Avant over time.
Operator: Our next question comes from the line of Christopher Roland with Susquehanna.
Christopher Rolland: Hey, guys. Just a quick follow-up for Sherrie. So Sherrie, tax rate has been stepping up. I believe that’s the extinguishment of some NOLs, but correct me, if I’m wrong. And where are we on NOLs and tax rate moving forward? Thanks.
Sherri Luther: Yes. Thanks, Chris, for your question. So from a tax perspective, actually, Q4 is when we released our valuation allowance. And so in our last quarter’s earnings call, we talked about how to think about the effective tax rate for 2024, which is in the mid to high single digits. And that’s how to think about that from an effective tax rate perspective. And for Q1, our effective tax rate was about 7.5%. So the VA has been released to the extent of about $57 million in Q4. We still have some VA on our books, but you can probably read in all that fun detail when our Q comes out. But that gives you a little bit more color on the tax rate.
Operator: As we have time for one last question, the line comes from Ruben Roy with Stifel.
Ruben Roy: Hey, Ruben Roy. I also have a quick follow-up for Sherrie, which I forgot to ask. Sherrie, revenue down quite a bit year-over-year, but the gross margins have held up. And just wondering if you can comment on that. Obviously, you guys have been doing a great job on pricing optimization, et cetera, but any comments on gross margin and, I guess, how to think about gross margin second half as you get some revenue recovery and maybe a little bit of a mix shift back towards Nexus and a little bit from the new Avant products would be helpful. Thank you.
Sherri Luther: Sorry, thanks, Ruben. So we’re really pleased with the 69% gross margin in Q1 that was in line with the midpoint of our guidance. So it came in as expected. And when we put out our guide for Q1, we talked about the fact that mix was really a driver on that sequential decline. Now as we look ahead to Q2, with 69% being at the midpoint again, even though the revenue guide at the midpoint is lower in Q2, MIX can still be a factor there, but the range of a gross margin is 60%, plus or minus one, it is a range. But having said that, I mean certainly we’ve been focusing on our gross margin expansion strategy. Now we’re in our sixth year. And to date, we’ve improved our gross margin right by about 1,200 basis points.
