Lattice Semiconductor Corp (LSCC) Q4 2023 Earnings Call Transcript

Greetings, and welcome to the Lattice Semiconductor Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Muscha, Vice President of Investor Relations. Thank you. 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. We'll provide a financial and business review of the fourth quarter of 2023 and the business outlook for the first quarter of 2024. If you have not obtained a copy of our earnings press release, it can be found at our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the first quarter of 2024. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum, such as a press release or publicly announced conference call. We 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. 2023 was another strong year for Lattice as we expanded our product portfolio and delivered record financial results. Annual revenue grew by 12%, marking the third consecutive year of double-digit growth. Full year non-GAAP gross margin increased 130 basis points to a record 70.4%, and we delivered 15% year-over-year growth in non-GAAP EPS. We also continued our rapid product portfolio expansion with the launch of multiple new hardware and software solutions, including two new device families based on our new Avant mid-range FPGA platform. While I'm pleased with the full year revenue growth for 2023, our progress in Q4 of 2023 was impacted by the cyclic correction affecting the broader semiconductor industry. In the industrial and automotive market, although revenue grew 11% year-over-year in Q4, revenue declined 9% sequentially as demand softened across this end market as customers reduced their inventory levels. In the communications and computing market, revenue declined by 14% sequentially in Q4 as growth in data center computing was offset by weakness in wired and wireless telecommunications, driven by lower wireless infrastructure deployments. Looking forward, we expect Q1 '24 revenue to be sequentially down from Q4 '23, driven by softer end customer demand across our end markets as end customers rebound to their inventory levels. At this point, we expect revenue in the second half of 2024 to be higher than the first half of '24, driven by improving end market conditions as end customer inventory levels normalize as well as new Lattice Nexus and Avant product ramps. Turning now to our product portfolio. In our small FPGA portfolio, we now have seven Nexus device families launched with five in production and ramping with customers and two families entering production later this year. We are very pleased with the strong revenue growth of Nexus in 2023 as it was a major contributor to the overall company growth. We also achieved a record level of design wins with Nexus in 2023, and our Nexus pipeline of opportunities continues to grow. Nexus revenue and design win growth in '23 was primarily due to a combination of displacing competitor devices as well as the adoption of Nexus in new greenfield applications. Turning to our mid-range FPGA portfolio. At the Lattice Developers Conference in December, we launched two new device families based on our new Avant platform. We now have three Avant device families in the hands of our customers with the first device family, the Avant-E, generating initial revenue at the end of 2023 as planned. Avant's initial revenue was driven by numerous applications such as communication gateways, industrial engine controls, LiDAR applications, and more. We expect the Avant-E series to ramp throughout the course of this year with a more significant contribution in the second half of this year and continued growth in the following years. We expect initial revenue from the newly launched Avant-G and X Series before the end of this year. Our three Avant device families provide a market-leading lineup of solutions for customers in the mid-range FPGA market. As a reminder, 90% of the target customers for Avant are already customers of Lattice today, and Avant leverages the same software that customers use today on Nexus. Given the competitive differentiation and use of adoption of Avant, the overall pipeline of Avant design opportunities continues to grow and significantly exceeds the pipeline of Nexus at the same relative point of time. We also refreshed four of our key software solution stacks. We continue to see strong software adoption at an attach rate of over 50%. We continue to expand the capabilities and performance of our software portfolio to enhance the customer design experience and to make it easy for them to adopt Lattice products and get to market quickly. Our most widely adopted solution stack to date has been our SensAI stack, which supports a variety of AI applications. One of the frequent questions we've gotten from investors over the past months has been around the overall Lattice AI-related opportunity. So I'd like to provide some additional color on that topic. Lattice hardware and software solutions can be used in a wide variety of AI-related applications. For example, in AI optimized servers in the data center where the system is running generative AI workloads, for example, Lattice devices are used in the control, management, and security of the AI computing system. Another example is in AI-enabled PCs, where Lattice solutions are used to run the AI inference algorithm that provides features such as user presence and gaze detection in PC systems like the Lenovo ThinkPad. A third example is AI-enabled automotive ADAS systems, where Lattice solutions are used to aggregate and pre-process essential data that is used for AI processing. We recently announced that Lattice solutions are being used in the ADAS systems of several crossover SUVs. There are many other examples as well. When we look across all the AI applications across our end markets, we estimate that wireless revenue in 2023 included about $100 million of AI-related revenue. We expect our AI-related revenue to more than double over the next few years based on the growing pipeline of AI-related design wins. In summary, I'm pleased with the strong progress in 2023 as we achieved record revenue and gross margin and continued to execute on the biggest product expansion in our company's history. While the industry moves through a temporary correction cycle and we experience some short-term cyclic headwinds in our end markets, we continue to be well-positioned for growth over the mid and long-term. We have the strongest product portfolio in our history and we continue to rapidly expand our product lines and accelerate our customer momentum. I'll now turn the call over to our CFO, Sherri Luther.

Thank you, Jim. We are pleased with our full-year 2023 results. We drove double-digit revenue growth for the third consecutive year, continued gross margin expansion, and strong profitability. We generated a record level of cash from operations, expanded free cash flow margin, increased the cash return to shareholders through share buybacks, and completely paid down our outstanding debt balance. Let me now provide a summary of our results. Fourth quarter revenue was $170.6 million, down 11% sequentially from the third quarter and down 3% year-over-year as end market demand softened and end customers reduced their inventory. Full-year 2023 revenue was $737.2 million, up 12% from 2022. Revenue growth for the full-year 2023 was driven by double-digit revenue growth in our industrial and automotive end market, representing the fourth consecutive year of double-digit growth in this end market. Our Q4 non-GAAP gross margin declined 20 basis points to 70.4% compared to the prior quarter due to mix and was up 40 basis points compared to the year-ago quarter. Our non-GAAP gross margin for the full-year 2023 was 70.4%, up 130 basis points from 2022. Q4 non-GAAP operating expenses were $55.5 million compared to $58.2 million in the prior quarter and $52.5 million in the year-ago quarter. The sequential decline in operating expenses was driven by the timing of certain R&D programs as well as the prudent and disciplined management of our SG&A expenses. Non-GAAP operating expenses for the full-year 2023 increased to $225.7 million from $201 million, primarily driven by increased investment in our long-term product roadmap as well as in customer support. Our Q4 non-GAAP operating margin decreased 240 basis points to 37.8% compared to the prior quarter and was down 230 basis points compared to the year-ago quarter. Our non-GAAP operating margin for the full-year 2023 was a record 39.8%, up 120 basis points from 2022. We continue to balance operating margin growth with a disciplined approach to investing in the long-term growth of the company. Q4 non-GAAP earnings per diluted share was $0.45 compared to $0.49 in the year-ago quarter. Non-GAAP diluted earnings per share for the full-year 2023 was $2.01 compared to $1.75 for the full-year 2022. This represents 15% year-over-year growth. I would now like to provide an update related to our taxes. In Q4, due to our consistent and continued profitability, we released our valuation allowance totaling $57 million, which had a GAAP EPS impact of $0.41. This is reflected as a tax benefit in our GAAP income statement. As a result of the release of the valuation allowance, we are expecting our 2024 effective tax rate to be in the range of the mid- to high-single digits. Demonstrating our continued focus on cash flow, we generated a record $270 million in cash from operations in 2023. This represents an increase of 13% compared to the cash generated from operations in 2022. Free cash flow margin increased to a record 34% in 2023. In Q4, we repurchased approximately 900,000 shares or $50 million of stock, making Q4 our thirteenth consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 4.8 million shares, thereby reducing dilution by 3.4%. Our Board recently approved a $250 million share authorization. We will prioritize investing in the organic growth of our business, but intend to continue returning capital to our shareholders through share repurchases. Let me now review our outlook for the first quarter. Due to the cyclic correction and demand headwinds that we are seeing across all of our end markets, revenue for the first quarter of 2024 is expected to sequentially decline to between $130 million and $150 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis due to lower absorption as well as a less favorable mix from our end markets. Total operating expenses for the first quarter are expected to be between $54 million and $56 million on a non-GAAP basis, which is roughly in line with Q4 '23 at the midpoint. We are taking a cautious and prudent approach to near-term OpEx while still enabling the long-term growth and expansion of our product portfolio. Overall, I'm very pleased with the continued financial progress we made in 2023 across many key metrics. As we enter 2024, we are experiencing near-term cyclic softness in our end markets, including customers rebalancing their inventory levels. However, we continue to believe we are well-positioned for long-term growth.

Our first question comes from Quinn Bolton with Needham.

I guess, Jim, as you look out at 2024, I'm sure visibility is pretty low. But two questions. You've guided to 140th midpoint for the March quarter. Do you have any sense based on backlog, current order patterns, whether you would expect June to be sort of flattish, up or down? And then you expressed confidence that the revenue in the second half of the year would be better than the first half. What's that based on? Is that just your best guess as to when inventory is digested? Is it based on design win traction, the ramp of Avant? What gives you confidence in that second half being better than the first half?

Thank you, Quinn. To address your first question regarding Q2, we anticipate that it will be similar to Q1. In the past, Q2 has typically outperformed Q1, so there's a possibility that it may exceed Q1 slightly. However, we currently view Q2 as roughly aligned with Q1. The challenges we faced in Q1 are expected to carry over into the second quarter. Looking to the second half of the year, we expect it to be stronger than the first half for two main reasons. First, there is the process of inventory digestion and rebalancing among our end customers that began in the first quarter and we expect it to continue into the second quarter. We anticipate this issue will lessen as we move through the rest of the year, particularly in the second half. The second factor contributing to our expectation is the rollout of new products. We have several new products launching this year, and they will have a greater impact in the second half than in the first. For example, with Nexus, we have introduced seven device families, five of which are already in production, with two more set to begin production this year—one in Q2 and the other in Q3. We expect these to positively affect our revenue in the second half. Additionally, we achieved our first revenue from the Avant platform at the end of last year and expect it to ramp up through this year and next, contributing more significantly in the latter half. Thus, the combination of decreasing inventory challenges and the introduction of new products from Lattice supports our outlook for a stronger second half.

I have a follow-up question. You have maintained tight inventory levels for distributors, so I assume most of the inventory digestion is occurring at the end customer level. Where do you stand with the distributor channel? Is it still fairly lean? Do you see an opportunity to restock the distributors in the second half, or will you continue to keep distributor inventory tight due to the uncertain environment?

Thanks, Quinn. The inventory digestion I was referring to is about the end customer inventory digestion and rebalancing. If we examine the inventory in the distributor channel, I would say that as of the end of 2023, it has returned to levels that are very much similar to what we saw before the pandemic, essentially back to normal. Our aim is to maintain those normal pre-pandemic inventory levels.

Our next question comes from the line of Hans Mosesmann with Rosenblatt Securities.

Jim, thanks for the color on the AI part of the business. I get that question asked a lot. Can you give us some puts and takes on how to look at this opportunity going forward? I suspect that the $100 million last year was driven by the accelerated server-type products, maybe ADAS. But what about the industrial markets and as things go to more inference-related workloads there and so on?

Thank you, Hans. Before I discuss our future plans, I'd like to provide some background about our journey so far. You may recall that during our 2019 Investor Day, which was the first for our new management team, we identified AI workloads and Lattice's potential in AI as a significant growth opportunity. We began making organic investments back then to help our customers implement Lattice devices in AI applications. One of our early solutions was SensAI, focused on inference at the network's edge, followed by another solution, mVision, aimed at computer vision processing. Both were designed to facilitate the integration of Lattice products into AI applications. We have also made inorganic investments, such as our acquisition of a small software company, Mirametrix, over two years ago, which specialized in computer vision and AI processing technology at the edge. They contributed an existing revenue stream, and since then, we have concentrated on enhancing revenue synergy between their software and Lattice devices. Looking ahead, we see various applications for continued growth, including AI-optimized servers in data centers. We have a strong position in managing and securing these servers, generally achieving a higher dollar content per AI-optimized server compared to traditional servers. Another area is AI-enabled PCs, where Lattice devices are currently used for AI tasks in products like Lenovo ThinkPad. Additionally, I mentioned ADAS, but there are numerous industrial applications, including robotics and automation, where computer vision technology plays a crucial role. We see tremendous potential to leverage our previous acquisition of computer vision software technology with Lattice devices to enhance our position and growth in these markets. Overall, we expect AI-related revenue across all applications to approximately double in the coming years.

Our next question comes from the line of Matt Ramsey with TD Cowen.

I appreciate the preview you provided, Jim, regarding the June quarter as it stands now. It seems we'll be maintaining these revenue levels for a while as customer inventory gets sold and processed. Could you give us an estimate of the sell-through revenue levels for the first and second quarters that reflect actual demand for the product? With the current quarterly revenue at $140 million, how much inventory are you moving with your customers? I'm interested in understanding what a steady state of end consumption for Lattice's business looks like at this time.

Thanks, Matt. It's a challenging question because we have good visibility on the inventory with our distributors, but with over 10,000 end customers, we don't have complete visibility on their inventory levels. Therefore, it's difficult to gauge that accurately. However, at the $140 million midpoint of our guidance, we believe that figure is below the natural consumption rate of our end customers, reflecting the inventory that they are using up. We don't have precise numbers on that, but we do believe we are shipping below natural consumption levels, and we expect that to continue into the second quarter. The inventory effects dampening demand in the first half of the year are anticipated to subside in the second half, allowing for more normal consumption levels from our customers.

Just a couple of quick things and follow-up, I guess, to that question. One, the first one is, if you look at the first quarter, if you kind of exclude the under-shipment relative to inventory burn, do you feel like the end markets are back to some level of normal seasonality? Or are they sort of end consumption well below where you would think normal seasonal behaviors are for your business? And I guess the second follow-up is for Sherri, the distributor percentage of revenue was a bit different than it's been in the past. Is this a strategic change? Or is this just the sort of how much inventory or how much sell-in happened direct versus distributor was kind of dictated by who was burning through inventory at what rate? I'm just trying to think if there's anything strategic changing there as to your distributor strategy or not?

Matt, on the first part of your question on the Q4 to Q1 decline that we're forecasting. Yes, definitely part of that is normal seasonality. Typically, Q1 is a seasonally lower quarter. But the forecast that we're giving for Q1 is beyond normal seasonality. And that beyond normal seasonality is really two factors. It's the inventory digestion and rebalancing that I was talking about, as well as our customers are seeing lower demand from their business as well. So they're seeing lower demand, and they're also drawing down inventory at the same time. So that Q1 is a combination of those three things: normal seasonality, lower customer demand, and then drawing down their inventory levels as well.

Yes. Regarding the second part of your question about the distributor percentage compared to the direct percentage of revenue, when you look at the full year 2023 in comparison to 2022, the numbers are quite similar. There isn't much difference between the two years. On a quarterly basis, you can expect some fluctuations in that revenue percentage, but I wouldn't interpret that in any significant way. It falls within the typical range we've historically observed, even when looking back to 2022.

Our next question comes from the line of Melissa Weathers with Deutsche Bank.

So for my first question, I wanted to touch base on your communications and compute segment, specifically on the compute side. I think we're hearing some mixed signals on overall demand for non-AI servers in 2024. Some people are talking about March being down seasonally. So, I know you guys have higher content in the next-generation servers this year. So how should we think about the level of growth that we should be looking for in 2024? What would the second half look like in computing for you guys?

Thank you, Melissa. We don’t typically offer detailed guidance, but I can share some insights that may be useful. In the fourth quarter, we experienced a slight decline in our communications and computing segment, although computing showed a sequential increase from the third to the fourth quarter. The decline was primarily due to communications. Looking ahead to 2024, one advantage we anticipate is the introduction of a new generation of servers that has significantly higher content per server—about 50% more than the previous generation. This means that even if unit sales remain flat year-over-year, we expect growth in the data center server segment due to this increased content. As the new server generation represents a larger share of our total shipments this year, we foresee positive impacts throughout the year.

I guess for my follow-up, I wanted to follow up on your Developers Conference that you had in December. Can you talk either anecdotally or qualitatively about that event and the kind of customer engagement that it brought on? What was the interest levels? And did it drive enthusiasm towards the line? Just any takeaways from that event that you guys want to share?

Thanks, Melissa. Actually, thanks for asking. We were really excited about the Developers Conference. That was actually Lattice's first developers conference we had ever done. And I was really pleased with the results. We had over 5,000 registrations. We had 35 different sessions. We had 40 different technology demonstrations. Those were not just Lattice demonstrations, but demonstrations from a lot of our partners. We had great keynotes from our customers and partners like BMW, Meta, and NVIDIA as well. Actually, the best part of the conference from my perspective was not just the partner and the customer activity that it generated, but we also launched the two newest device families based on our Avant platform for mid-range FPGAs. So that was Avant-G and the X. And so we exited last year with three different Avant device families in the hands of customers, the E, the G, and the X, and generated initial revenue from Avant before the end of last year as well. And so what's really exciting about that is that's the beginning of the Avant revenue ramp. And as you might recall, Avant doubles our addressable market. It creates an entirely new revenue stream for the company. It's additive to the existing revenue streams. It doesn't cannibalize the existing small FPGA revenue streams in any way. And so that was one of the best parts of the Developers conference, is the launching of G and X versions of Avant, which we believe will start to generate revenue before the end of this year. And there was certainly a lot of customer excitement and activity around that. But yes, overall, we viewed the event as a tremendous success and we expect to do another Developers Conference later this year.

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

Looking at your gross margin guidance, 69% is the first sequential decline since Q4 '19. Obviously, still a very healthy level. What is driving the decline? Is it more mix related? But it shouldn't be because communication, as I would recall, tends to be lower margin, and industrial seems to be still fairly resilient. So is there some other component mix that I'm not seeing that is impacting gross margin? And how much of this could be pricing related?

Thanks, Tristan, for the question. From a gross margin perspective, I’d like to highlight a couple of points. For 2023, our full year gross margin reached 70.4%, marking another record year for us, and we are very pleased with those results. In Q4, we experienced a sequential decline driven partly by mix, leading to a 20 basis point decrease. Specifically regarding your question about the 69% midpoint, this decline can be attributed largely to mix and a bit from lower absorption. The mix here refers to our industrial and automotive segments, which typically yield the highest gross margins. Therefore, any softness in those areas clearly impacts our gross margin. We noticed softness in industrial, automotive, and communications, especially in Q1, though this was offset somewhat by strength in the compute sector. Industrial and automotive generally provide higher gross margins, which is why we see the sequential decline in mix affecting Q1. Additionally, as part of our gross margin strategy, we are approaching our sixth year of expansion, during which we have increased our gross margin by nearly 1,400 basis points. Gross margin remains a focal point for us, and we will continue to work towards our long-term target model introduced last year, which aims for levels in the low 70s.

Tristan, I think you also asked about pricing at the end of your question. Maybe I'll take that piece of your question. I would describe our pricing as quite durable. As Sherri mentioned, we've had a gross margin improvement strategy in place since 2019. Part of that has been pricing optimization. And over those last five years of pricing optimization, through multiple different types of market conditions, our pricing has remained quite durable. In fact, our ASPs have continued to go up each year. As we've introduced a wider range of products and especially products with more capability, more capacity, more software content. And as more of our product mix goes towards those higher capacity, high capability devices, that has naturally pulled up our ASPs over time. And we expect that trend to continue, especially when you think about now we're at the beginning of the Avant revenue ramp and with Avant ASPs being 10x to 20x higher than the Nexus and pre-Nexus ASPs as Avant mixes into the revenue base, we would expect ASPs to continue to grow over the coming years.

And then for my follow-up, I wanted to go back to the revenue breakdown. I would have expected industrial revenue to roll over. It did a little bit, but still at a run rate that's well higher than a year ago and its communication that came down a lot. So the question is, is industrial the last leg to come down, and we haven't really seen that yet? And if you could remind us the percentage of communication as a percent of industry of communication and computing? And then also in computing, you've showed some seasonality in Q1 of last year sequentially. So how much of computing is actually driven by data center densification where more GPUs equate to more security chips versus the weakness in server units which also will have an impact? So if you could help us put all of this together, but also what should we expect with industrial? I know you gave us a hand for Q2 and the second half of this year, but wanted to understand better the moving pieces within the top line.

Thank you, Tristan. I believe that was at least three different questions, so I will do my best to address each one. Regarding the first question about industrial and automotive, we did observe a sequential decline from Q3 to Q4, approximately 9%. We anticipate a larger decline from Q4 to Q1. This decline has occurred later than the decreases we initially observed in the communications and computing sectors, where we began to see a downturn in the first half of last year. For industrial and automotive, the impact became noticeable toward the end of Q3 last year and into Q4, and we expect those markets to be down from Q4 to Q1. This is part of why Sherri mentioned that the changes in the mix of industrial and automotive—our highest margin segment—are declining more than the other segments, negatively affecting our gross margins. As for your second question regarding communications versus compute, we do not separate those figures, but qualitatively, compute is the larger part of that segment. Compute has grown significantly in recent years and represents the bigger component. For the third part about computing, if we set aside unit comparisons, the new generation of servers has higher content. We expect to see growth due to the increased levels of content on this new generation as it becomes a larger share of server shipments. However, any changes in overall server unit shipments in the end market will also impact us, but we will benefit from the higher dollar content per server. I hope this clarifies your third question as well.

Our next question comes from the line of Christopher Rolland with SIG.

I'm a bit surprised actually that you guys didn't mention your win in a high-profile VR/AR headset. And I'd love to know, if possible, what the OEM might be using that for, they appear to be using an iCE40 versus Nexus. Was this purely a price decision? Or was there anything else that went into that? And then is this a beachhead for headway into more of their products or even outside of that OEM? Do you guys get more excited about consumer again after this win?

Thanks, Chris. That particular customer is a very long and very good customer of Lattice’s, but that customer is also very sensitive about us discussing anything related to them. So I won't discuss that particular topic.

Just how about consumer in general? Does this get you more excited about consumer?

Yes, there are numerous applications for Lattice devices in various AI-enabled and sensor-driven consumer products. In the consumer sector, we are witnessing an increasing integration of computer vision and sensory technology, along with a rise in AI processing capabilities. Lattice is well-positioned in these applications for several reasons. Firstly, our devices are highly power-efficient, which is crucial for nearly all these products, whether they rely on batteries or are plugged in. Secondly, these consumer devices tend to see frequent updates or changes, often on a yearly basis or even more frequently, as new features are introduced. Our FPGAs provide a robust solution for rapidly implementing and adapting new features. Lastly, the software we have developed for other applications, including the SensAI software stack for creating inference algorithms and our computer vision software, is also applicable in the consumer space. This enables our customers to quickly bring their products to market and incorporate Lattice solutions. While we are enthusiastic about our role in the consumer segment, we still believe that our largest long-term growth opportunities lie within the industrial, automotive, communications, and computing sectors. Nonetheless, we continue to engage in the consumer market where we can deliver distinct value to our customers.

Great. And perhaps the second question. How do you think about your revenues versus Altera, Xilinx, Microsemi? Do you believe you can outgrow them, particularly because you have a new product rolling on? And about that new product, do you think that could be a 10% revenue adder for you this year? And in terms of overall top line is 15% to 20%, which is your long-term growth target, is that still reasonable considering the setback?

Thank you, Chris. Regarding Avant, we believe we can continue to capture market share in both small and mid-range FPGA sectors. We've gained share in the small FPGA market over recent years, and we're just starting to see revenue from the mid-range FPGA market, which represents new opportunities for us. This goes beyond our previous offerings, providing additional revenue potential. We’re optimistic about growing Avant revenue and expanding our presence in this segment. Notably, 90% of Avant's target customers are already Lattice clients, and they are familiar with the software needed to program Avant devices since they currently use it for Nexus devices. This familiarity means they can easily integrate our new product line into their existing portfolios. We are confident about our prospects in the mid-range area. Regarding our long-term growth targets, we remain dedicated to the objectives discussed at our last Investor Day, which we believe are appropriate for our company’s future. Over the past four years, since our management transition, we've seen an average annual growth rate in the mid-teens, around 16%, purely from the small FPGA segment. This illustrates our track record of consistent revenue growth in that market segment, and we still see opportunities for further growth given the size of the market and our total addressable market. Additionally, growth in the mid-range sector will complement our efforts, effectively doubling our addressable market and enhancing our growth prospects. Therefore, we are committed to achieving the goals we set during our last Investor Day.

Will we ever get an update like a number for Avant? And if so, when do you think we might get that number?

Yes, it's possible in the future for Avant to become a larger part of our revenue. At some point, we will provide more details on this. Keep in mind, we are just at the beginning stages of the Avant ramp. We had some Avant revenue before the end of last year, which was on schedule and slightly ahead of our projections. As Avant continues to ramp up this year and into next year, becoming a more significant part of our revenue, we may share more information about its quantity at some time.

Our next question comes from the line of Blake Friedman with Bank of America.

I wanted to circle back to Avant as well. I believe at your Analyst Day, you've mentioned that with an objective of Avant generating about 15% to 20% of total company revenue in three to four years. And I know you're not quantifying anything today. But I guess, is that still the long-term objective to have Avant contribute that much to the model long-term?

Yes. That's truly our objective, Blake, yes.

Thank you for outlining some of the drivers for the second half of the year that could lead to a revenue increase. What makes you confident that, despite your customers still managing their inventory, the inventory situation will be clearer by the end of the June quarter, allowing the second half catalysts to contribute to growth? Any additional details would be appreciated.

Yes. This is based on the customer forecasts we have, the backlog from our customers for the second half of the year, and what they have shared about their own plans to reduce inventory levels along with our internal analysis. As I mentioned, we believe that the inventory rebalancing and digestion is certainly a factor in the first half, but it should ease throughout the rest of the year. This leads us to think that the second half will be stronger. Another influence is the product ramps we discussed earlier in the call. However, business conditions can change, and macroeconomic factors may also shift. This is what we are observing now and what we expect moving forward. We aim to provide qualitative insights on how we foresee the year developing, but this is naturally subject to change based on macroeconomic conditions or changes in end-market business dynamics.

Our next question comes from the line of David Williams with Benchmark.

First, I wanted to see if maybe there was anything geographically that you noticed this quarter in terms of Avant weakness or softness among the different categories or segments? And maybe just kind of how you're feeling about that heading into the first quarter?

Thank you, David. From a geographical perspective, we've noticed some recent softness particularly in the industrial auto segment, which has been the most affected recently. The weakness we observed towards the end of Q3 last year was mainly in Asia, especially in China. In Q4 of last year, this trend extended beyond Asia into Europe, where we experienced declines in European industrials and communication customers. In contrast, North America held steady through the end of last year, with a sequential increase in revenue from Q3 to Q4. However, as we move into the current quarter, Q1, we anticipate further declines in Asia and Europe. We also expect a drop in the Americas, as we're beginning to see lower demand from some of our North America-based industrial and automotive clients.

And then maybe just on the automotive side. If we think about where your Avant platform can play. How do you think about that total addressable market in automotive specifically over the next few years? And maybe talk about any of the design interaction or early stage design activity you're seeing around auto for Avant.

Thanks, David. So first of all, we believe that auto electronics represents a great growth area for the company over the long term. We believe we're underexposed to that area. That's one of the fastest areas of growth that we've seen over the past years for Lattice solutions, even ahead of Avant. And we believe Avant is really well positioned in automotive electronics. We believe we'll see adoption of Avant in ADAS, infotainment systems, and a wide variety of applications. We'll be able to talk more about that as we move through the Avant ramp, but we certainly see many applications in the automotive electronics space. And I think we highlighted some of those potential usages at the most recent Developers Conference in December. So I would say stay tuned, expect to hear more about Avant in the automotive segment.

Our next question will come from Srini Pajjuri with Raymond James. Please go ahead with your question.

A couple of questions. First one on your distributor inventory. I think you said it's back to pre-pandemic levels. Obviously, the SAM, I'm guessing, is bigger than pre-pandemic time periods. And then on top of that, you have many new products that are ramping. So I'm just curious as to when you think you'll start to kind of increase the distributor inventory as we go through the next few quarters?

Yes. Thanks for the question. And just to clarify, when I say back to pre-pandemic levels, I mean, on a relative basis, for instance, a weeks of inventory perspective. So that accounts for the growth in the business that we've seen since pre-pandemic. So yes, on a relative basis, it's back to the same levels as we were pre-pandemic. And our goal moving forward then is to keep inventory levels at our distributors stable, right? Ultimately, what we're trying to do is if we've got a healthy level and a normal level of inventory at our distributors, what we're trying to do is match the sales into our distributors with the sales that our distributors are selling out to our end customers. That's our goal on a quarter-to-quarter basis.

And then, Jim, on the Avant new product ramp, given the environment. On one hand, I think a lot of excitement about AI, et cetera. But on the other hand, the macro, especially in industrial is not that great. So I'm just curious if that's having any impact, either positive or negative on the design activity itself, given what's going on out there?

Yes, it's a good question, and we really haven't seen it have an impact on the design win activity. Just a couple of qualitative data points is. Last year, in totality for the company, we had a record level of design wins last year and significant growth in our design win opportunity pipeline from '22 to '23. And that was across all products, Nexus, pre-Nexus, and Avant. Now I had actually last year, given the team a pretty aggressive goal on Avant design wins. And the team actually exceeded their design win goal for last year on Avant, which I was quite pleased with. And I want to take the opportunity to thank the Lattice teams for their great work on driving the Avant design win goals last year. And I would say, overall, the other thing that we look at with Avant is just how it is tracking relative to Nexus at the same relative point in time. If I look at the total Lattice or the total Avant design opportunity pipeline for Avant at the end of last year relative to the same or compared to the same relative point in time for Nexus, it significantly exceeds the Nexus opportunity pipeline, which, again, we just view as another really positive indicator of the future health of Avant. And the main governor of the rate and pace of the growth of Avant in this ramping phase is really the customers' own timelines in terms of their ability to, once we put the product in the hands of the customers, their ability to design that into the system, to do their qualifications, to do their system-level software, and get to market. And clearly, we provide software to make that as easy as possible for our customers. But actually, the customer rate in pace is the primary gate to that Avant ramp.

Thank you. There are no further questions at this time. And I'd like to turn the floor back over to CEO, Jim Anderson, for closing comments.

Yes. Thank you, operator, and thanks again for everyone for joining us on today's call. I’m very pleased with our strong results in 2023. And I actually want to take the opportunity to thank the Lattice team for the great execution in 2023. And as we look forward into 2024 and beyond, clearly, we're navigating some near-term macro headwinds, but we continue to be very well positioned for long-term growth with the strongest product portfolio we've ever had in the company's history in a rapidly expanding product portfolio as well. Operator, that concludes today's call.

Thank you. You may now disconnect your lines at this time. Thank you for your participation. Goodbye.