Lattice Semiconductor Corp (LSCC) Q2 2022 Earnings Call Transcript

Greetings. Welcome to the Lattice Semiconductor Second 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. Please note this conference is being recorded. I will now turn the conference over to your host, Rick Muscha, you may begin.

Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Lattice's President and CEO; and Sherri Luther, Lattice's CFO, who will provide a financial and business review of the second quarter of 2022 and the business outlook for the third quarter of 2022. If you have not obtained a copy of our earnings press release, it can be found on our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the third quarter of 2022. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. We will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at latticesemi.com. Let me now turn the call over to Jim Anderson, our CEO.

Thank you, Rick, and thank you everyone for joining us on our call today. We delivered strong results in Q2, with record quarterly revenue, which grew 28% year-over-year, and non-GAAP net income growth of 68% year-over-year. Growth continues to be led by our largest end markets of communications and computing, and industrial and automotive. Our growth in these strategic markets is fueled by growing demand for our rapidly expanding product portfolio and continued strong customer momentum. Let me touch on a few additional highlights from Q2. In addition to the strong revenue growth, we expanded non-GAAP gross margin by 700 basis points year-over-year to a record 69.1%. We achieved record non-GAAP operating profit of 38.1%, which was an increase of 900 basis points year-over-year. And we further expanded our product portfolio with the launches of our MachXO5-NX device and our Lattice 5G ORAN solution stack. Let me now provide an overview of our business by end market. In the communications and computing market, revenue increased 13% sequentially and 35% on a year-over-year basis. We're on track to deliver our fourth consecutive year of double-digit growth for this segment. In data center, our dollars of content per server continues to increase due to our growing attach rate, which is now well over 1x and increasing ASPs. In client computing, where we have a large greenfield growth opportunity, new customer systems began production in Q2, including the new platforms that were announced with Lenovo and LG over the past quarter. Lastly, in 5G infrastructure, we're benefiting from ongoing global deployments with strong revenue growth, both sequentially and year-over-year. Turning now to the industrial and automotive market. Revenue increased 7% sequentially and was up 30% on a year-over-year basis. Revenue growth was driven by new customer platforms, where Lattice has either displaced competitors or brought new functionality and capabilities to the system. Lattice's market-leading power efficiency, in combination with the software content that we provide, has been a key driver for customers adopting Lattice products. We continue to be very excited about the growing customer opportunities for Lattice products in the industrial and automotive segment. Turning now to consumer. Revenue declined 17% sequentially and was down 1% year-over-year, reflecting macroeconomic softness in the consumer electronics end market. Because consumer represents less than 10% of our overall revenue, the consumer demand softness was more than offset by growth in our other core strategic markets. I'll now provide some product roadmap highlights. We introduced MachXO5-NX, the fifth device family built on the Lattice Nexus platform. This device family enhances system monitoring and control in multiple applications, across our strategic markets, with class-leading power efficiency and reliability. Overall, we continue to be pleased with the broad adoption of our Nexus platform across all our market segments. We're also pleased with the revenue ramp of our Nexus products, which we expect to continue to ramp over multiple years. In addition, to the continued portfolio expansion of Nexus, we're excited this year to be further expanding our product portfolio with the launch of our Lattice Avant platform. Avant will have 5x the capacity of Nexus, which will double our addressable market and will allow us to address mid-range FPGA applications. Customer engagement and momentum are very healthy and continue to grow. We believe Avant will create an important new revenue stream for Lattice when it ramps into production. Execution remains on track for launch in the second half of this year. And as we previously mentioned, we expect to hold a public launch event for our bond customers and partners in Q4 of this year. Turning now to our software strategy. As we've discussed over the past few years, we've been increasing investment in our software portfolio. These investments are focused on making it easy for our customers to adopt Lattice products and get to market quickly. During the quarter, we launched the Lattice 5G ORAN solution stack, which is the fifth software solution stack in our portfolio of software solutions. The 5G ORAN solution stack provides customers with the ability to secure data and accelerate network functions. Over half of our new silicon design wins are now enabled by at least one of our five software solution stacks, which increases the value that we're delivering to our customers and the long-term stickiness of our products. In summary, we believe Lattice is well positioned in the right strategic growth markets, with a rapidly expanding product portfolio and accelerating customer momentum. We're pleased with our first half results, and we expect to have a strong second half as well. I'll now turn the call over to our CFO, Sherri Luther.

Thank you, Jim. We are pleased with our strong financial results in Q2, as we continued to deliver double-digit revenue growth, significant gross margin expansion, and record profitability. We generated strong free cash flow while investing in our long-term product roadmap. We also returned cash to our shareholders through share buybacks. Let me now provide a summary of our results. Second quarter revenue was a record $161.4 million, up 7% sequentially from the first quarter and up 28% year-over-year. Revenue grew double digits year-over-year in our communications and computing and industrial and automotive market segments, with strong sequential growth as well. Revenue from our consumer market segment was down sequentially and year-over-year reflecting macroeconomic weakness in the consumer electronics market. Our non-GAAP gross margin increased 140 basis points to a record 69.1% in Q2 compared to the prior quarter and was up 700 basis points compared to the year-ago quarter. Both the sequential and year-over-year increases in gross margin continued to be driven by strong execution of our gross margin expansion strategy, which we began to execute in early 2019. Non-GAAP operating expenses were $49.9 million compared to $47.2 million in the prior quarter and $41.5 million in the year-ago quarter. Both R&D and SG&A expenses increased sequentially as we continue to invest in the long-term growth of our business; however, both declined sequentially as a percentage of revenue. Our non-GAAP operating margin increased 180 basis points to a record 38.1% in Q2 compared to the prior quarter and was up 900 basis points compared to the year-ago quarter. We continue to benefit from the gross margin expansion strategy that we began executing at the beginning of 2019. Q2 non-GAAP earnings per diluted share was $0.42 compared to $0.25 in the year-ago quarter, which represents a 68% year-over-year growth. Driving strong cash flow generation continues to be a key focus area for the company and through the first half of 2022, we have driven a 31% year-over-year increase in operating cash flow. We ended the quarter with $118 million in cash after repurchasing approximately 735,000 shares or $35 million of stock under our existing buyback program. Q2 was our seventh consecutive quarter of executing share buybacks. Let me now review our outlook for the third quarter. Revenue for the third quarter of 2022 is expected to be between $161 million and $171 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis. Total operating expenses for the third quarter are expected to be between $50 million and $52 million on a non-GAAP basis. In closing, we are pleased with our strong first half results and expect a strong second half of the year. We remain focused on driving sustained revenue growth and profit expansion through the strength and differentiation of our leadership product roadmap.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Hans Mosesmann with Rosenblatt. Please proceed with your question. Hans, are you there?

Sorry about that. I was muted. But congratulations to Jim and the team for great execution. What you've done over the past several years is just very impressive. Besides execution to the strategy in terms of gross margins, in terms of new products and the software stacks, what is driving this strength in the midst of a pretty tough environment?

Yeah. Thanks for the question. We were quite pleased with the growth that we saw in first half of this year overall, but in Q2 as well. And both from a market standpoint and from a product standpoint, growth has really been driven by our big strategic market segments which are communications and computing, and industrial and automotive. If you look at Q2 in communications and computing, we grew 35% year-over-year. We're really pleased with that growth, with continued expansion in, for instance, servers, for the data center, where we continue to see expansion of our attach rate, now well over 1x ASPs, nice growth in 5G wireless infrastructure as well in Q2. And client computing continues to remain a large greenfield growth opportunity for us in that market, also really pleased with the results in industrial and automotive. We had quite a strong Q1 in industrial and automotive but followed that in Q2 with 30% year-over-year growth. We continue to see good strong growth in new design wins in things like industrial automation, robotics, automotive electronics. We're either displacing competitors or we're bringing some new capabilities to customers. So, quite pleased with growth in that market. We did see some softness in our smallest market which is consumer electronics. We saw a little bit of end-market softness there. But consumer represents in Q2 about 8% of our revenue. So 90% of our revenue is in those other growth strategic segments that I talked about. And then, from a product perspective, we're pleased with the Nexus ramp. We have a lot of new product cycles that are happening right now. Nexus we launched our fifth new Nexus device in Q2, we now have four of the five are in production, our fifth device which we just launched that will enter production next year. So we have a layering effect of new products as they ramp into revenue. And Nexus we expect to continue to ramp over the course of multiple years, so good growth in both from a market standpoint but also from a product standpoint. We are certainly cognizant of the macroeconomic climate and we're cautious around some of the recessionary pressures that exist out there, certainly monitoring demand signals very closely. But we're very bullish on the latter specific growth drivers that we have whether that's the market growth drivers I just talked about or the new product cycle. So again, pleased with first half results. And we are looking forward to a strong second half as well.

Hey Jim, I understand all that and that's great execution. However, could it be that much of the momentum is coming from capturing market share from traditional small FPGA players or from non-traditional competitors like microcontrollers?

Yeah. I think it's a combination of both those. We certainly are gaining share versus our traditional FPGA competitors. We can definitely see that we're taking share there in the small FPGA space. But we are also converting microcontroller sockets over to FPGAs as well. So it's really a combination of those two, as well as there are cases where we're bringing just brand-new functionality and capability that hasn't existed in platforms before. For instance in the Lenovo platform that we had announced earlier this year, that's completely new functionality that didn't really exist in that platform before. So, it's really a combination of all those factors. I think it's interesting, when I look at the growth that's been driving for instance in the first half of this year and you look at well what is the source of that growth. The vast majority of that growth is driven by new revenue streams that we've created just within the last say 12 to 18 months. So that means new platforms at existing customers, so expanding our footprint of existing customers or bringing on new customers to the Lattice family. So we're quite pleased with the freshness of that revenue growth in terms of we're at the beginning of new revenue growth cycles that should last for multiple years.

Great. Very helpful. Congrats.

Our next question now comes from the line of Mark Lipacis with Jefferies. Please proceed with your question.

Hi, thank you for taking my question. I have a question for Sherri and then one for Jim. Sherri, regarding the gross margins, you mentioned the programs driving the expansion. As you look ahead to next quarter, while you're expecting higher revenues, you're predicting flat gross margins. Could you clarify what factors are influencing this? Also, considering you have a long-term operating target for gross margins, after consistently achieving that target for several quarters, do you consider reevaluating it? And I have a follow-up question for Jim as well. Thank you.

Thank you for the question, Mark. We are very pleased with our gross margin results for Q2, which stand at 69.1%. This marks another record for us, showing a 140-basis point improvement sequentially and a 700-basis point increase year-over-year. As a reminder, we have been implementing our gross margin expansion strategy for four years, which we outlined in 2019. Key elements contributing to this growth include our pricing optimization and the higher gross margins from our new products. Since the end of 2018, we have achieved an increase in gross margin of nearly 1200 basis points, and we are very satisfied with this progress. Expanding our gross margin remains a priority for the company. Regarding our gross margin target, we will continue to maintain our focus on gross margins, which we have been doing for four years, to enhance the company's profitability.

Fair enough. I have a follow-up for Jim. You mentioned earlier that you're aware of the macro pressures that don't seem to be affecting your business. It appears that many semiconductor companies are discussing concerns about the market, yet they still report strong results, with only a few exceptions. I'm curious, Jim, do you think this is the most anticipated downturn that hasn’t occurred yet in your career in the semiconductor industry? Does it influence how you manage risk in your business, particularly regarding operations? If I look back over the last six quarters, you've generally met or exceeded your guidance, whereas in previous years, you were more in line with the middle. This suggests there may be a more cautious approach, perhaps in response to potential macro pressures. I would appreciate your thoughts on this. Thank you.

Yes, certainly. Thank you, Mark. When we assess the macro economy and consider potential inflationary and recessionary pressures, particularly as we approach next year, we want to remain aware of this overall climate while planning for the business's future. We are being cautious about how these factors might influence our performance. Therefore, we are closely monitoring demand signals, even more so than usual. Despite this cautious approach, we feel optimistic about the specific growth drivers unique to Lattice. This includes areas such as market-specific growth opportunities, an expansion in server attach rates and average selling prices, and growth in new sectors like PCs, as well as the significant advancements in industrial automation, robotics, and automotive electronics. There is considerable opportunity across various markets. Additionally, we are entering new product cycles; for instance, we are at the start of the Nexus ramp, currently in its second full year of revenue, and we expect several years of growth from the Nexus product line. We are also set to launch Avant in the second half of this year, which will introduce a new revenue stream for the company. In summary, while we remain cautious about the macro environment, we are very positive about the specific growth drivers we have in front of us.

Very helpful. Thank you, Jim.

The next question comes from the line of Alessandra Vecchi with William Blair. Please proceed with your question.

I echo the congratulations on the strong results in the tough environment. Jim, if we can maybe delve a little bit deeper into some of the greenfield opportunities, and what's been driving the content gains there? I mean, you mentioned PC, which you've been talking about for the last few quarters, and had some really nice announcements this quarter with LG as well as two sockets in Lenovo. And then, similarly with automotive, if you could just talk a little bit again about if the gains are against the microcontrollers, how we should be thinking about ramps into the back half and next year? And then also, how we should be thinking about those greenfield opportunities as a percentage of revenue on total as we look out a couple of years going forward?

Thank you, Ales. You mentioned both the automotive and PC sectors, so I'll address both. Starting with automotive, we see automotive electronics as a significant long-term growth opportunity for the company. The average electronic content in vehicles is expected to increase, and we are actively involved in that trend. Our products are well-suited for automotive applications because of their flexibility, software capabilities, and power efficiency. There are various applications, such as advanced driver-assistance systems and infotainment systems, where our products are being integrated. We have a strong pipeline of design wins and our automotive revenue is increasing, with particularly strong growth in the second quarter. We are optimistic about long-term growth in this area. Although automotive electronics currently represents a small part of our revenue, we anticipate it will become a major growth contributor in the future. In the PC market, our revenue is also small at present. However, the overall PC market is quite large. There are numerous new capabilities and features we can introduce to PCs that significantly enhance the user experience. We have recently announced several systems in collaboration with Lenovo, including the ThinkPad system, and a Chromebook system, along with a new system with LG. This represents a significant potential for growth in the PC sector. We expect these products to grow and contribute not only to the second half of this year but also to continue their growth in the coming years.

That's really helpful. While not wanting to focus too much on gross margin, if I exclude the pure gross margin royalty revenue from the last couple of quarters, the underlying gross margin has been incredibly strong, as we previously mentioned. How should we consider the structural gross margin a few years down the line? You're nearing the gross margin levels of Xilinx before they were acquired by AMD, which appears to be a reachable target. Additionally, even if we enter a downturn, considering your ongoing growth factors, it seems that your gross margin should stay relatively strong, even at these high levels. Would you say that’s a fair assessment?

We believe our gross margin is resilient, based on the underlying factors and our outlook. As Sherri mentioned earlier, we initiated our gross margin expansion strategy in early 2019, and we are currently in our fourth year of implementing this strategy, which includes pricing optimization, product cost improvements, and business mix enhancements. We're pleased with the progress we've made over the years, and Sherri shares that sentiment. This remains a key focus for us as we move forward, and we see continued opportunities for improving gross margin. One area mentioned by Sherri is the ramping of new products, which are intended to enhance the overall company margin. We anticipate this will benefit the company in the future, whether through Nexus or Avant. Additionally, we've observed a strong attachment rate of our software solutions to our new hardware design wins over the past 6 to 12 months. Most design wins for Lattice Silicon in the last year have included some form of software integration from our five software solution stacks. Typically, when we pair software with our silicon and make a solution sale, we achieve higher average selling prices. Thus, we see further opportunities ahead and confidence in sustaining our gross margin.

That was extremely helpful. Thank you so much. I’ll jump back into queue.

Thanks, Alex.

Our next question comes from the line of Matt Ramsey with Cowen. Please proceed with your question.

Yes. Thank you very much. Good afternoon. Jim, I think it's I don't know kind of consensus that one of the areas in digital semis where we see still see a pretty wide supply/demand gap is in FPGAs. Obviously with some of the things happening in the PC market and the smartphone market some of those supply-demand gaps in other parts of the industry are starting to close a bit. I wonder if you might give a few comments just on the FPGA market in general and how you feel supply is relative to demand out there? And has that gap started to shrink at all in your markets? Or is still pretty consistently wide? Thanks.

Thanks, Matt. You know, I can mostly just comment on our business. What I would say is that I feel like we've done a good job of supporting our customers. Certainly, the supply chain, the overall semiconductor supply chain remains tight. I think it will continue to remain tight through the end of this year into next year. But we are seeing some signs of improvement. We have recently over the last quarter or two seen some incremental supply from our suppliers, incremental capacity beyond what they have committed to us for this year. So we see that as a positive sign for the second half of this year and into next year. We do feel like relative to some of our competitors, we've done a good job supporting our customers. Our customers recognize that, and I think that's helped accelerate in some cases transitions from our competitors towards Lattice. That has been helpful. It's not that we're immune to the supply chain crisis at all. Certainly, we're affected by the same supply chain tightness. But overall we've done a good job navigating that and supporting our customers overall. But we do see some good signs of improvement over the last couple of quarters and we expect supply to continue to improve into next year.

Thanks. Thanks for that, Jim. Just as a follow-up question for Sherri. Maybe you could talk to us a little bit about OpEx growth. I know I have conversations with some of your peer companies about inflationary costs on wages. Obviously, as Jim just mentioned in his comments, the supply chain remains tight and you guys aren't immune. So just investments you're making hiring wages just how should we think about OpEx, sort of, trending or just kind of staying within the band that you're in as a percentage of revenue? Thanks.

Yes, thanks, Matt. Our operating expenses increased by 20% year-over-year, primarily driven by our investment in research and development, which grew by 24% year-over-year. We are committed to our product roadmap for the long-term growth of our company, and this investment focus has been consistent. We've announced several product launches, including our fifth device and our 5G ORAN solution stack in Q2, with Avant expected in the second half, as Jim mentioned. Continuing to invest in our product roadmap remains our top priority. Regarding inflation, separating its impact can be challenging, but we are actively hiring, especially in R&D, to ensure we focus on developing the right products. We are also seeing an increase in spending within SG&A, particularly for customer support and demand generation, which is crucial. Overall, we are committed to investing in the company.

Thank you very much, you both. Congrats on the results.

Thank you.

Thanks again, Matt.

Our next question comes from the line of Chris Rolland with SIG. Please proceed with your question.

Hey, everyone. I want to join in on the congratulations. My question is one that I hear from investors often: can you tell us what percentage of sales comes from legacy products? Additionally, what percentage of sales is derived from products launched during your management? Do you have any rough estimates of the current split?

Yes. Thanks for the question, Chris. So we don't break out product line specific revenue, but what we can say is we kind of think about it as Nexus products and pre-Nexus products. Both categories have continued to grow. You would expect Nexus products to continue to ramp and grow, those products are new. As we've mentioned, we've launched five products, four of the five are in production, and our fifth device, which we just launched, will enter production next year. You can expect us to continue to introduce additional Nexus products moving forward. And those products will ramp over the course of multiple years. But even the pre-Nexus products, we've seen very good growth in the pre-Nexus products, new design wins, new applications that those are getting designed into. We believe that our software solution stacks in particular have been helpful in getting our pre-Nexus products designed into new applications that we may not have been able to support in the past. We're seeing growth in both of those areas. We want both pre-Nexus and Nexus products to continue to grow. Moving a little further out as we launch Avant in the second half of this year and bring that into production in future quarters, that will add an additional revenue stream that's completely additive to the company, because it's in a different part of the FPGA market that we don't address today; it addresses mid-range FPGA applications. We feel good about the growth of all of those categories moving forward.

Great. Thank you, Jim. And then either Jim or Sherri, looking out, maybe next quarter or even beyond, I don't know if you could force rank the segments for us in terms of growth or just some broad strokes between the three segments, but even breaking it down into comms versus compute or something like that? And I guess also, do we get a bounce back in consumer? Or do you think those trends continue as well?

Yes. Thanks, Chris. I'll give a little bit of color on Q3. Looking at the midpoint of our guidance for Q3 relative to Q2, we're guiding sequentially up in Q3. We expect growth in communications and computing and industrial and automotive. On consumer, we expect consumer to be roughly flat from Q2 to Q3. We are a little bit more cautious about that segment, given the kind of broader consumer electronics softness that the industry has seen. But we expect again sequential growth in our large strategic market segments of comms and compute and industrial auto.

Perfect. Thanks, and congrats again guys.

Our next question comes from the line of Tristan Gerra with Baird. Please proceed with your question.

Hi. Good afternoon. My first question is about backlog and pricing. So you've mentioned your expectation for the market to remain tight through the end of this year and part of next year. How far is your backlog extending currently? And how does that compare earlier this year? And also, are you able to still provide the same type of price optimization over the next, let's say a couple of quarters as what you've done in the past as we start seeing lead times coming down a bit for some products? And generally, we're seeing pricing stable overall in semis, but not rising every quarter like we saw last year. So, any commentary you may have on not so much your new products, which you mentioned are basically going to be ASP accretive. But on your existing product, what's your ability to continue on the path of higher pricing?

Thank you, Tristan. Regarding your question about our backlog compared to earlier this year, I can say that our backlog has remained relatively stable. We have been addressing the backlog, and at the same time, our new bookings have been strong, so we continue to see healthy levels of bookings. I would characterize the situation as stable backlog with healthy booking levels. In terms of pricing, as we look ahead to the next few quarters, I want to remind you that we began our pricing optimization strategy back in 2019, and we are now in the fourth year of this process. We have developed a solid understanding and system for our pricing optimization. Beyond the introduction of new products, there are ongoing opportunities to improve pricing in our business regardless of overall market conditions. We believe there are areas where we can enhance pricing. A key part of this is ensuring our products are priced appropriately according to the value they provide to customers and their respective markets. Tying back to a previous comment, even with existing products, we have been able to incorporate software solutions. Rather than just selling a hardware device, we offer a complete solution that includes software, whether that be our sensAI or the latest 5G ORAN solution stack, among other software offerings. This strategy adds more value for our customers, which often results in a higher average selling price for us. By providing more value through our software, we believe we can continue to optimize our average selling prices, and this approach also enhances the loyalty of our customers going forward. Our focus on software is an important element of the value we aim to provide to our customers in the future.

That's great. And then my second question, which I guess is related to what you just mentioned. If you could talk about product stickiness, you've been for example now really successful in servers for quite some time with your worth of trust chip. And I know there is competition out there with MCU or ASIC solutions, but looks like you continue to gain some traction. Is that a function of performance? And also, do you expect your ramp in PC to be sticky for more than just a couple of years? As such you're not concerned about those design wins eventually reverting to a non-FPGA socket?

I appreciate your question regarding servers and PCs. Starting with servers, we are very happy with the growth we have achieved in server solutions for both hyperscale and traditional enterprise data centers over the past year. This success comes from increasing our attach rates, meaning we are finding more opportunities to integrate Lattice devices into server systems. Currently, our attach rate exceeds 1x, indicating that most servers are being shipped with more than one Lattice silicon component. We see ongoing potential for further integration of our capabilities into servers in the future. Each new generation has allowed us to enhance functionality, which has supported improvements in our average selling prices over time. The combination of increasing attach rates and higher ASPs has resulted in solid growth in our content revenue per server, and we aim to continue this trend. We believe our position is strong because we not only provide hardware but also layers of associated software. Similarly, for PCs, we're also offering not just the chip but a complete solution that includes supporting software, as seen in our recent collaboration with Lenovo. The versatility that our FPGAs offer is highly valuable to a range of customers, including those in servers, PCs, industrial applications, and automotive sectors. The ability of FPGAs to easily accommodate new features and system capabilities through reprogramming, without the need for extensive hardware redesigns, provides significant advantages. This benefit enhances both time-to-market and strategic flexibility. For many of our customers, the adaptability and power efficiency of our FPGAs are key factors in their initial design decisions and their continued integration into systems over multiple generations.

Great. that's very useful. Thanks so much for taking the time on that question.

Thanks, Tristan.

Our last question comes from the line of David Williams with Benchmark. Please proceed with your question.

Hi, good afternoon, and congratulations on the success and wins. My first question is about the Lenovo design win. It appears to be shifting from what we previously thought was primarily the enterprise segment to Chromebooks and the lower tier segment. I'm curious about your perspective on this and what opportunities you foresee in the next two to three years.

Yes. Thanks, David. We did see initial adoption of our designs in more of the enterprise class systems like the Lenovo ThinkPad. We also announced, as you said, the Lenovo Chromebook. We really see opportunity for our devices to be used in all sorts of PCs, whether those are enterprise or more consumer-oriented PCs. Again, for us, it's a large greenfield growth opportunity roughly 300 million systems a year for PCs, and we believe that the capabilities and features that and really the end-user experience that we're able to bring to the PC is certainly relevant in the enterprise context, but also relevant in the consumer context as well. There's many features that we can bring that are important to a consumer. There's a tremendous usage model that we bring, where we can say, help save a significant amount of battery power. That's helpful to both enterprise users, as well as consumers. We really see the whole PC segment as potential TAM over time. Whether it's a Chromebook system or a ThinkPad system, we're happy to add content to those systems and to ramp those over time. We see it as just a good long-term greenfield growth area.

Thanks for the color. And then just kind of thinking about the data center, you've talked about the server attach rate strong. Just curious, if you're seeing anything specific within the data center in terms of demand, or any changes in maybe customer behavior there?

Yes, thank you, David. In the data center, we continue to experience strong demand from our data center server customers. It's important to note that our growth is primarily driven by the increase in content dollars seen in each new generation rather than just growth in the end market itself. The increase in our attach rates and average selling prices has been a significant factor in our growth. We are seeing robust demand from our server customers. Additionally, I want to highlight that our solutions are CPU agnostic, which is crucial for our customers. They appreciate that Lattice's hardware and software solutions work with various CPU types, whether they come from Intel, AMD, or ARM. We support all CPU flavors and are currently in production across both ARM and x86 processors. If there is any shift in market share among CPU vendors, we are well-positioned to handle it as we cater to our customers across different CPU types and platforms.

Thank you.

And our last question comes from the line of Richard Shannon with Craig-Hallum. Please proceed with your question.

Hi, Jim and Sherri. Thanks for taking my question. I guess, I got just two of them. First one, Jim you mentioned half of your current hardware designs have software attached to them. Obviously, they're going to roll out over a couple of years after the win here, but it kind of helps us think about the contribution of software to your overall revenue stream, which haven't really quantified in the past. Maybe you can help us with that today. On that topic, of these designs, where you have software attached, how do we think about the amount of content added the software has to it? Anyway, you can quantify or arrange it? I mean, is this just 5% of that hardware or 25% or somewhere in the middle just kind of my personal guess is? But any way you can characterize that for us?

Thank you, Richard. We haven't provided a specific number because it varies greatly depending on the application. We're noticing that when software is included, there tends to be a higher average selling price. This increase can vary significantly based on the type of applications. In some cases, the value added by the software is quite substantial, resulting in a significant increase in the average selling price, while in others, it may be lower. However, overall, we are definitely observing an increase in average selling price with software attached. As these new design wins begin to generate revenue over the next few years, they will contribute positively to our results, especially those associated with software attachment and higher average selling prices. In terms of revenue growth, most of the new revenue is driven by software attachment, which typically leads to higher average selling prices moving forward.

Okay. Fair enough. My second question was following up on an earlier one around Nexus, and the contribution there, and haven't given us any way to think about the contribution from Nexus versus pre-Nexus, but is there a point in time, or a percentage of revenues above which you'll start disclosing that? I think I agree it would be very helpful to people to think about. I'm assuming it's a fairly low percentage today, but is there a point where you'd commit to providing that sort of a number so we can start to do those splits?

Yes. We'll look to potentially sharing that in the future. Just as a reminder, Nexus is still early in its ramp, right? We are in just the second year of the full year of revenues. Sine our 2022 will be the second year of a full year of revenue from Nexus. We expect the Nexus product lines to ramp over multiple years and to continue to grow as a percentage of revenue over multiple years. Breaking that out separately may be something that we do in the future; we'll take that into consideration.

Okay. Perfect. That’d be great. And that's all the questions. Thank you.

Thanks, Richard.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to CEO, Jim Anderson for closing remarks.

All right, operator, and thanks everybody for joining us on the call today. Overall, I'm quite pleased with the execution that we saw from the company in the first half of this year. I'm very pleased with the strong financial results that we delivered in the first half, and we do expect the company to have a strong second half of the year as well. Of course, we'll always look forward to giving you further updates on our next earnings call. So, operator, thank you and that concludes today's call.

And again, this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.