Lattice Semiconductor Corp (LSCC) Q1 2024 Earnings Call Transcript

Greetings, and welcome to the Lattice Semiconductor First Quarter 2024 Earnings Call. 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 will provide a financial and business review of the first quarter of 2024 and the business outlook for the second 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 second 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 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. Q1 '24 results were in line with expectations for revenue, margin and profitability. The Industrial and Automotive segment was down 25% sequentially as demand softened and end customers reduced their inventory levels. The Communications and Computing segment was down 7% sequentially in Q1. Within that segment, Computing was sequentially up on stronger demand for our products used in servers, which was offset by weaker demand in the Communications segment. We expect Q2 revenue to be down sequentially from Q1, primarily driven by softer end customer demand and continued inventory normalization. In particular, we're seeing incremental softness in the Communications segment related to weaker telecommunications infrastructure deployments. Looking forward to the second half of the year, based on our current view of anticipated near-term business conditions, we continue to expect revenue in the second half of 2024 to be higher than the first half. We believe the second half improvement will be driven by improving end market conditions as end customer inventory levels normalize as well as new Nexus and Avant product ramps. Turning now to our product portfolio. In our small FPGA portfolio, we now have 7 Nexus device families launched and 6 in production, with the seventh going into production in Q3. We recently shared with our customers the latest small FPGA product roadmap. This includes continued expansion of the number of Nexus device options coming to market over the coming quarters, which received a very positive reaction from our customers. In our mid-range FPGA portfolio, we now have 3 Avant device families in the hands of our customers. The first device family, Avant-E, achieved initial revenue at the end of 2023, and we expect revenue to ramp through the course of this year and into the coming years. The second and third device families, Avant-G and X, are expected to achieve initial revenue towards the end of this year and to ramp over the following years. 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. The strong competitive differentiation of Avant, which we demonstrated at our recent Developers Conference, combined with our software support continues to produce a healthy growing design opportunity pipeline. As we discussed on our previous earnings call, Lattice hardware and software solutions are increasingly being 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, Lattice devices are used in the control management and security of the AI computing system. Another example is in AI-enabled PCs, where Lattice hardware and software solutions are used to run the AI inference algorithm that provides features such as user presence and gaze detection. We recently shared that Lattice is designed into multiple new Dell Latitude systems, which we expect to benefit us in the second half of this year. In these types of AI applications, software is a key part of our strategy and how we enable customers in adopting our solutions. In summary, we're excited to be in the midst of the largest product portfolio expansion in our history, which is driving strong customer momentum. Despite near-term industry headwinds, the company is well positioned with a rapidly expanding product portfolio, and we remain focused on long-term value creation. I'll now turn the call over to our CFO, Sherri Luther.

Thank you, Jim. The first quarter turned out as expected with results in line with our prior outlook. We maintained strong profitability and cash generation and returned cash to shareholders through share buybacks. Let me now provide a summary of our results. First quarter revenue was $140.8 million, down 17.5% sequentially from the fourth quarter and down 24% year-over-year, primarily reflecting end market demand softness and end customer inventory rebalancing. Our Q1 non-GAAP gross margin declined 140 basis points to 69% compared to the prior quarter and 130 basis points compared to the year-ago quarter due to mix in our end market segment. Q1 non-GAAP operating expenses were $54.9 million compared to $55.5 million in the prior quarter and $54 million in the year-ago quarter. We continue to be disciplined in the management of SG&A expenses while ensuring that we invest in our product portfolio. Our Q1 non-GAAP operating margin decreased 780 basis points to 30% compared to the prior quarter and was down 1,100 basis points compared to the year-ago quarter. Q1 non-GAAP earnings per diluted share was $0.29 compared to $0.51 in the year-ago quarter. In Q1, we repurchased approximately 265,000 shares or $20 million worth of stock, making Q1 our 14th consecutive quarter of executing share buybacks. Over that period, we have repurchased approximately 5 million shares, thereby reducing our dilution by 3.6%. Let me now review our outlook for the second quarter. Revenue for the second quarter of 2024 is expected to be between $120 million and $140 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis due to less favorable mix from our end markets. Total operating expenses for the second quarter are expected to be between $54 million and $56 million on a non-GAAP basis, which is in line with Q1 at the midpoint. Overall, we believe we are well positioned for long-term growth. As we navigate the near-term cyclic softness in our end market, we remain focused on supporting the expansion of our product portfolio and continued execution. Operator, that concludes my formal comments. We can now open the call for questions.

Our first question comes from Melissa Weathers with Deutsche Bank.

I guess I have one bigger picture question and then a second one that's more related to the near-term cycle. On the bigger picture, you guys talked about some new Nexus product launches. I know you have 7 in the market now with 6 coming and maybe 1 more. Can you help us think about like how is this new-ish product family going to start flowing into revenues? And what kind of traction are you seeing with customers of those products?

Sure. Thanks, Melissa. Yes, we're actually really excited about this, which is why I wanted to mention it in the prepared remarks. And actually, the customer feedback that we've gotten on this is very positive. We recently shared our latest small FPGA roadmap with all of our customers, and that includes some of the near-term additions that we're adding to the roadmap as well as our long-term investment. In particular, we shared that we're going to significantly expand the number of device options on Nexus, and we added the other new products to the long term. This was really positively received by our customers. First of all, just because, to them, it just indicates a sustained focus from Lattice on continuing to invest in innovation in this small FPGA portion of the market, which is really important to our customers, so it's sustained investment that they can count on. But then also they've been able to see that Nexus is incredibly differentiated, has great power efficiency benefits, features, capabilities that I think demonstrate clear leadership in the industry. And so that, combined, just gives them confidence to continue to shift more business over time to Lattice. We believe we've gained significant share in this part of the market over the past years, and I think this just positions us to continue to grow and expand our presence in this part of the market over the long term. And then that, combined with in parallel, we continue to invest in Avant and the expansion of our Avant portfolio for mid-range devices. And when you take those two combined, our customers are just really excited about the continued expansion of our product portfolio and our investment in the long-term roadmap.

I guess on the more cyclical side, a couple of your peers have talked about 2Q, hopefully, marking the bottom for this FPGA cycle. And I think last quarter, you guys talked about channel inventory burn or just inventory burn in general, completing in this quarter. Is that still your expectation? And how should we think about, in the near term, Lattice resuming shipments to be closer to sell-through rates?

Yes. Certainly, our Q2 guidance factors that, and we know the first half of this year, what we saw in Q1, what we're expecting in Q2 is across our customer base, our customers are reducing their semiconductor inventory overall. They're drawing down those inventories. That includes Lattice, the inventory that our end customers are holding in terms of Lattice inventory. And they view this as bringing inventory levels back to normalized levels. And so we believe that effect certainly continues through the current quarter, Q2. And then into the second half of the year, we believe that, that drawdown of inventory starts to dissipate through the second half of the year. So it gradually dissipates. It's not that it turns off like a light switch, but that it dissipates over the second half of the year. And that's why in my prepared remarks, I mentioned that we believe the second half revenue will be stronger than the first half for the reason, number one, that we believe that, that drawdown of inventory, this effect, dissipates in the second half of the year; but then the second reason is Lattice-specific reason of we believe that the products, the Nexus and Avant products, will continue to ramp over the course of this year, and then that will be additive to our revenue in the second half of the year as well. As I mentioned, there's the 6 Nexus device family just went into production, so we'll benefit from that in the second half of this year. The seventh, we expect to go into production in Q3. And then the first device family of Avant is ramping this year. We saw initial revenue from Avant at the very end of last year. We expect that to ramp through the course of this year and into next year, with more benefit from that Avant-E series in the second half of this year. And so for all those reasons, we think the second half will be stronger than the first half.

Our next question comes from the line of Quinn Bolton with Needham & Company.

I just wanted to start with your comments, Jim, on the Communications side. I think it's probably no surprise to any of us that the Communications remains weak, but wondering if you had any signals that, that comms portion may be starting to reach a bottom, or any further comments you might be able to give us on when you think the comms infrastructure markets may stabilize. And I'm not sure that you'll give it, but I'll ask. Within comms and computing, can you give us a rough sense, is comms a bigger or smaller portion of that overall bucket, just to help try to size the exposure?

Yes, we have noticed some recent weakness in communications, particularly in telecom infrastructure. This has become more evident over the last couple of months as demand has weakened moving from the end of Q1 into Q2. The spending in telecom infrastructure related to 5G is closely linked to the capital expenditures of major telecom carriers. Once we see a rebound in telecom capital expenditures, that should boost telecom equipment spending, which will, in turn, positively impact us and improve demand for our devices utilized in telecom infrastructure. The decline we’re observing from Q1 to Q2 is largely due to this weakness in telecom. Regarding the comparison between communications and computing, compute has been performing relatively well. In Q1, we actually saw a sequential increase in compute from Q4. A significant part of compute includes servers, both general purpose and AI-optimized, which experienced a rise in demand from Q4 to Q1 while communications showed a decline. Looking ahead to Q2, we anticipate compute to increase sequentially again, whereas communications is likely to decline. Currently, compute represents a larger share of our segment due to the recent weakness in communications.

Got it. Perfect. And then just on the industrial side of the market, wondering if there are any specific trends to call out other than this idea that the inventory drawdown will dissipate in the second half of the year, which I imagine helps the industrial business get back to consumption levels, but are you seeing any specific trends in industrial segments that are worth calling out?

Yes. I would say in that segment, it is a bit mixed. If you look at some of the subsegments, some of the subsegments are showing steady, stable demand or even growing demand. For instance, in medical equipment has been quite stable. Aerospace and defense has been strong to up. And so it's a bit of a mix depending on that segment. And then the automotive portion, which is a smaller part of that segment for us, we've seen some sequential weakness there. But the net-net is, as we look towards the second half, we believe that, that inventory drawdown that's happening in the industrial and automotive segment, that that effect, that negative effect on our demand, that effect starts to dissipate in the second half just as customers reach their normal inventory levels.

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

Jim, I'm just going to bounce off of you a couple of questions that I've been getting from investors, and I think it would be helpful for you to maybe address or respond to them. I think the first one is not only yourselves but your two much larger FPGA competitors have been going through this inventory digestion, and it's very well-documented. And I wanted to sort of explore the relationship between that correction and what it's done to the market versus the new design wins that you guys have with the Avant. Do you feel like the timing of these new programs with Avant, because they're new wins and new products ramping, are relatively independent of the inventory situation in the industry? Or do you think that the inventory situation and the drawdown may change some of the timing of the Avant ramp one way or the other?

Thanks, Matt. Regarding the Avant ramp, we are still early in the process, so let me summarize our progress. So far, we have launched three Avant device families: the E, the G, and the X. We began generating revenue from the E at the very end of last year, and we anticipate its ramp-up to continue through this year and the next. The revenue contribution from Avant-E will be more significant in the second half of this year, as we are still ramping up. For the G and X, which we introduced at our Developers Conference last December, we expect to see some revenue before the end of this year, but the main benefits from these devices will likely be in 2025. Given that we are still in the early stages of the Avant ramp and currently going through inventory drawdowns, I don’t foresee these affecting the Avant ramp in the short term. Instead, the ramp will primarily depend on the pace of our customers' development and qualification cycles now that they have the devices. Regarding Nexus, that ramp could be influenced by fluctuations in end market demand since it is much further along in its ramp, with six device families currently in production. The earlier device families that we launched a couple of years ago may be impacted by those demand fluctuations. However, the Avant ramp appears to be insulated from end market effects this year.

I appreciate it. For my second question, I've received inquiries from investors regarding the server sockets and FPGA sockets available for nearly all server vendors. We're emerging from a correction in the server market, as you've mentioned. However, the questions focus on your team's confidence in maintaining the market share you've built over the past few years and the visibility you have into the next two or three server generations. Could you elaborate on that and discuss any changes in competitive dynamics for those sockets compared to the past?

Yes, servers have been a significant growth area for us over the past few years. We have successfully increased both our attach rate and our average selling prices. Our attach rates have improved as Lattice chips are now used in a higher percentage of servers, and in some cases, multiple chips are utilized in a single server. Currently, the average server uses more than one Lattice chip. With each new generation, we've aimed to enhance our offerings, both in hardware and software, introducing new features and capabilities that increase our average selling prices over time. The new generation of general-purpose servers, which started ramping up last year and is continuing this year, will see a substantial increase in content per server, with an approximate 50% increase in dollar value. As this generation enters full production, it will provide a favorable boost for us. Looking ahead to future generations, we are optimistic about our ability to further increase the dollar content per server due to the new functionalities and capabilities we plan to introduce. We will definitely share more details as new server generations develop, but we are confident in our ability to drive innovation and add more content to these server generations.

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

Jim, could you discuss the traction of Avant design and highlight where you are currently seeing the most engagement? It would also be helpful if you could provide some details regarding the numbers or scale of that traction. Additionally, if possible, could you compare how the performance has been during this stage of the ramp?

Sure. Thanks, David. We're very pleased with the growth in the overall Avant design win opportunity pipeline. Last year, we set an ambitious goal for our team regarding new Avant design wins, and they exceeded it, which makes us proud of their performance. This year, we've established another challenging goal, but we're encouraged by the momentum we're seeing. Avant is being adopted across various applications. We believe it will eventually be integrated into all our end markets, with significant opportunities emerging in industrial applications such as automation robotics and automotive ADAS systems, as well as in communications and data centers. An example in communications is that the Avant-X family offers higher connectivity speeds, which enables us to address data plane applications more effectively. Previously, with our Nexus small FPGA portfolio, our focus was mainly on control plane applications in communication systems, including data center communications and telecom. Now, with Avant, we can pursue data plane applications. We're excited about the ongoing expansion of the design win pipeline. We are currently in the revenue ramp-up phase with Avant-E being the first device family entering production, and we are also eager to bring the G and X families into revenue. We launched G, intended for general purpose, and X, which offers additional connectivity speed, and we anticipate that these will begin generating some revenue before the end of this year, contributing further to our revenue next year. Additionally, we have many more developments planned for the future, which we'll discuss in more detail at our developers conference in Q4, including our future plans for Avant and Nexus. Customer feedback and traction for Avant continue to be very positive.

Thanks so much for that color. And maybe secondly, just anything from a geographic standpoint that stood out to you, it seems like Europe was down considerably sequentially and year-over-year. But is there anything in particular you'd point to and maybe just what you're seeing in Asia, that's a better, worse or anything that you'd point to the positive or negative?

Sure. Thanks, David. In Q1, looking at the three regions, the Americas was close to our company's overall average in terms of the sequential revenue change from Q4 to Q1. North America mirrored our overall company performance. However, Europe was weaker than our overall revenue, primarily because of challenges in telecommunications. We have customers in that region who provide telecommunications infrastructure systems, and we experienced some weakness with them. Additionally, there was a decline with some large Industrial and Automotive customers in Europe, which contributed to the weaker performance in that region for Q1. Conversely, Asia outperformed our overall company average, mainly driven by server growth. A significant portion of our products for server applications are shipped to Asia, where servers are assembled, resulting in strong demand for servers there. Overall, our computing segment for comms and compute saw a sequential increase from Q4 to Q1, primarily due to this server demand.

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

First of all, Jim, referring back to a statement you made, I believe you mentioned around $50 of FPGA Lattice content per server. I wanted to know what that content number is for the next generation, including Sierra Forest, Granite Rapids, and Turin. Comparing for AI servers is challenging, but I'm curious about how you consider it on a GPU basis in terms of dollar content per GPU. What are your thoughts on that market, the metrics, and your content there?

Thank you, Chris. To clarify the first part of your question regarding server content growth in the current generation, I mentioned a 50% increase from the prior generation to the one that's currently ramping up. This current generation includes, for Intel CPUs, the Sapphire Rapids CPU, and for AMD, the Genoa CPU. On average, when we assess all of our shares with customers, we observe about a 50% growth in content. Regarding your second question, I will elaborate more on the content increases we anticipate for future generations as we approach those server ramps. We believe we can continue to enhance the dollar content per server in future generations as well, and we'll provide further details as we get closer. For the second part of your question regarding AI servers, generally, when comparing an AI server to a general-purpose server, our content levels are either equal or higher. AI servers can vary greatly in configuration: some are simpler and resemble general-purpose servers, while others are highly configured with many GPUs. In a basic setup, the content levels are similar to that of a general-purpose server. However, in more complex configurations, we typically see significantly more content. Overall, we view the AI-optimized server as a benefit for Lattice and have noted strong demand for our products used in AI-optimized servers. This demand was a key factor in the growth we experienced in our Computing segment from Q4 to Q1, specifically driven by the need for AI-optimized servers.

For my second question, I want to discuss some specific opportunities you have and the competition related to them. A previous question was about server security, and ASPEED seems to be making progress in that area. Google has also introduced their own internal solution. I’m curious if you have any thoughts on that. Additionally, companies like Synaptics are claiming they are gaining market share in human presence technology. Do you have any new opportunities or applications that have emerged recently and are starting to become significant revenue drivers that we should be aware of?

Thank you, Chris. Regarding your question about new opportunities, I mentioned in my prepared remarks that Lattice hardware and software is now utilized in Dell Latitude laptops. We're running AI algorithms on the Lattice chip using the video stream to enable features like human presence detection and gaze detection. We're really excited about our partnership with Dell and anticipate revenue benefits from this in the second half of the year. This is a relatively new announcement in the AI PC space. Additionally, we've had a partnership with Lenovo for several years, where Lattice chips and software can be found in Lenovo ThinkPads, for instance. We have established proof points demonstrating that Lattice technology can be effectively used for AI processing on our FPGA, primarily focusing on inference processing and enabling new AI usage models tied to presence and gaze detection. As for the first part of your question related to security or servers, Lattice chips are utilized in various aspects of server technology, including control management and security. I want to emphasize our confidence in our ability to expand our content value over upcoming generations. While there is competition in all of our markets, based on customer feedback, we believe we have a unique and differentiated solution in both hardware and software. We feel well-positioned to grow our presence and revenue in server applications over the coming generations.

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

Going back on Industrial and Automotive trends, if we assume kind of, say, $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 quarterly run rate? And is your commentary about second half recovery you're applying to Industrial, if that's the case, which geography you think is going to emerge first from that on the shipping dynamic?

Yes, thanks, Tristan. Regarding your first question, we believe that based on our Q2 guidance and the end customer consumption of Lattice content for their systems, we are currently under shipping relative to end customer demand in Q2. We think this was also the case in Q1, but we expect that this situation will start to improve in the second half of the year. It's a gradual improvement as customers restore their inventory levels, leading to a natural increase in demand that matches their actual consumption. We anticipate this trend throughout the year, though it may vary across different subsegments within industrial and automotive sectors and among individual customers, given our large customer base of over 10,000. Overall, we expect this inventory drawdown effect to lessen in the second half. On your second question about geographic recovery, we anticipate improvements across various regions, with North America and Europe in the industrial and automotive sectors likely to begin seeing increases first as the inventory adjustments take place.

Okay. And then for a follow-up, how is your distributor dollar inventory comparing with the prior quarter? Is it increasing? If so, by how much? Or is it declining? And then also if you could quantify this in weeks, inventory weeks, at distis on average?

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 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 levels 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 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.

Our next question comes from Ruben Roy with Stifel.

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 in development. Is that kind of what you're referring to? Or has something changed and you're accelerating the roadmap around Nexus?

Yes, something has changed. We have accelerated the roadmap on Nexus. We've expanded the range of device options, aiming to launch a broader portfolio faster than what we shared at the Developers Conference. We continue to see significant long-term growth potential in this segment, and we believe the company can keep growing here. Therefore, we wanted to introduce more device options to support our customers in the long run. Meanwhile, we are also pushing ahead with the Avant roadmap at full speed. I want to emphasize that this does not detract from the Avant roadmap, which remains very ambitious. We have found a way to enhance the Nexus roadmap while also aggressively pursuing the Avant roadmap with new device introductions.

Yes, that's what I thought you were saying, but I want to make sure about that. Regarding Avant, I just want to confirm my understanding of the design activity you're observing. Avant-E was released first and seems to be focused on specific processing and edge processing applications, while the other two, G and X, are intended for general purposes. Would you say that the design activity or customer engagements are leaning more towards general-purpose applications, or is that not the correct perspective?

I think we have strong engagements across all the different versions of Avant. Each one serves a slightly different purpose. G is the most broad and general purpose, E is optimized for edge applications, and X offers higher connectivity speeds, particularly for data plane applications. They all meet different needs. We're seeing good engagement with all of them. E is generating more revenue since it was the first one we introduced, which puts it ahead of G and X in terms of revenue generation and its ramp over time.

Our next question comes from the line of Doug Zhang with Bank of America.

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? 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?

The quick answer is no. We don't see the downturn affecting the software attach rate at all. Our software attach rate is now over 50%, which means that more than half the time when we secure new designs with customers, they are choosing to not only use Lattice silicon, but they are also using one of our software solution stacks. We have a wide portfolio of software solution stacks that we've introduced to the market. These stacks are specifically designed for common end-user use cases that multiple customers face. Their purpose is to help our customers innovate, quickly implement Lattice solutions, and bring products to market swiftly. They have been very popular with our customers, and we continue to witness high attach rates. We expect this rate to grow over time, which will certainly benefit us in the long run. It not only aids our customers in innovation but also fosters long-term loyalty to our solutions. Additionally, we see a positive impact on average selling prices with design wins that include software attachments. However, I wouldn't say that the software attach rate is affected in any way by the downturn.

Awesome. As a follow-up, given Intel's efforts to go public with Altera and their reallocation of resources into that business along with the launch of new products, how do you perceive the competitive landscape in the FPGA market? Are your customers showing any changes in their behavior? Any insights on that would be appreciated.

Yes. First of all, we always take our competition very seriously and have anticipated robust competition in every one of our markets and products since I joined Lattice. This philosophy has guided our product road maps for the past five years. That said, we're well positioned competitively. Our small FPGA portfolio, particularly Nexus, is highly differentiated with excellent performance per watt, great power efficiency, and compact size. I believe it's a strong product, and our customers would agree. Looking at our mid-range product line, Avant, including the E, G, and X versions, they are also highly differentiated. At our Developers Conference in December, we highlighted the distinct advantages of our mid-range products through competitive demonstrations. We feel confident about our position in the small FPGA market, having gained significant share in recent years, and we see potential for continued growth. While we're at the beginning of the Avant revenue ramp, we believe we can expand its reach significantly in the coming years. It's worth noting that Avant uses the same software as Nexus, leveraging the same development tools and software solutions. Additionally, 90% of Avant's target customers are already Lattice customers, viewing Avant as an extension of our existing product lineup. For all these reasons, we feel optimistic about the competitive landscape. We don’t take it lightly and always expect strong competition, but we are confident in our positioning today and in the future.

Our next question comes from the line of Srinivas Pajjuri with Raymond James.

I have a couple of questions. First, regarding one of your larger competitors, Xilinx, who seems to have ended their low-end product line, as indicated in a press release from January. You hold a strong position in this area, so I'm curious if you've noticed any impact on your business or an increase in design activity following their exit or potential exit from the market. Additionally, could you help us understand how significant this opportunity could be for you in the next couple of years?

Yes, thank you, Srini. The answer is yes, this is very beneficial for us. We view it positively that this particular competitor has discontinued several parts. One of the reasons we are increasing our focus in this segment is that we see a competitive opportunity and the potential to gain more market share over time against our main competitors. As a result, we are investing more and launching additional products, which we believe is viewed very positively by our customers. Small FPGAs are essential to all our customers' systems, and they recognize Lattice as a company committed to ongoing investment in innovation in this area. We consistently innovate with each new generation, expand our product offerings, introduce new software, and provide long-term assurance regarding the lifespan of our products that customers can depend on for their systems. For these reasons, we believe customers see Lattice as their preferred supplier for small FPGAs in the long term. We are also confident that this customer enthusiasm regarding our investment and innovation extends to the mid-range segment. Most of our customers primarily utilize both mid-range and small FPGAs. With Lattice, they have a supplier offering a continuously innovated mid-range and small FPGA portfolio, backed by a long-term strategy of investment in both hardware and software to meet their requirements. Therefore, we believe they see us as the preferred supplier in both mid-range and small FPGAs.

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 2 to 3 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 give us some pointers on how we should think about contribution this year and next year, even if it's rough numbers. I think that would be very helpful.

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.

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

Just a quick follow-up for Sherri. So Sherri, 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?

Thank you, Chris, for your question. From a tax standpoint, we released our valuation allowance in the fourth quarter. In our last earnings call, we discussed how to approach the effective tax rate for 2024, which we expect to be in the mid- to high single digits. For the first quarter, our effective tax rate was approximately 7.5%. The valuation allowance has been released to the extent of about $57 million in the fourth quarter. While we still have some valuation allowance on our books, you can find more details when our quarterly report is published, but this should provide you with additional insight on the tax rate.

As we have time for one last question, the line comes from Ruben Roy with Stifel.

It's Ruben Roy. I also have a quick follow-up for Sherri, which I forgot to ask. Sherri, 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, etc. 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.

Sure. Thanks, Ruben. We're pleased with the 69% gross margin in Q1, which aligns with the midpoint of our guidance. It came in as anticipated. When we provided our Q1 guidance, we mentioned that mix was a significant factor in the sequential decline. Looking ahead to Q2, while the midpoint revenue guide is lower, mix may still play a role. The gross margin range is 69% plus or minus 1%, and we have been focusing on our gross margin expansion strategy. We're now in our sixth year and have improved our gross margin by approximately 1,200 basis points to date, which remains a key focus for us. You can expect to see some quarterly fluctuations, but at our Investor Day in 2023, we projected a long-term gross margin in the low 70s, and this continues to be a priority for us.

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

Yes. Thank you, operator, and thanks again, everybody, for joining us on today's call. As we navigate some of these near-term headwinds, we absolutely remain focused on executing what is the biggest product portfolio expansion in the history of Lattice. We're very excited about that and so are our customers. And looking forward to sharing more details about that on our next call. Operator, that concludes today's call.

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