Greetings, and welcome to Lattice Semiconductor's Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rick Muscha, Lattice Semiconductor's Vice President of Investor Relations. You may begin.

Thank you, operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice's CEO; and Lorenzo Flores, Lattice's CFO. We will provide a financial and business review of the second quarter of 2025 and the business outlook for the third quarter of 2025. If you have not obtained a copy of our earnings press release, it can be found 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 and the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 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 2025. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. We will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to 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 our CEO, Ford Tamer.

Thank you, Rick, and thank you, everyone, for joining us on our call today. Let me begin by saying that Q2 was a solid quarter for Lattice with results in line with expectations. We continue to execute our long-term strategy, leverage our competitive position and expand our growth opportunities. We continue to see the adoption of Lattice products increasing across our core markets, demonstrated by our record level of design wins and expanded opportunities with our partners. At a high level, we delivered Q2 revenue of $124 million, up 3% over Q1 and flat with the year-ago period. Our non-GAAP gross margin remained strong at 69.3%, and our adjusted EBITDA expanded to 34.1%. We achieved these impressive results in an uncertain market, underscoring our continued discipline, execution and strength of our differentiated product portfolio. We exited Q2 with increased optimism about the market environment versus Q1. Our confidence is based on several factors. Communications and Compute demand remains strong with normalized inventory and continued growth expected through the second half and beyond. Industrial and Automotive continues to perform as expected. We believe we've passed the bottom with channel inventory levels decreasing as we continue to recognize revenue under channel point-of-sales outflows. We remain on track to be at normalized inventory levels by year-end, as we previously indicated. We expect the companion chip opportunity will become an increasingly significant growth driver for us. We are seeing impactful growth opportunities from major design wins alongside AI accelerators in cloud data centers, wired communications, industrial robotics, ADAS, infotainment and far-edge AI applications. In customer meetings throughout Q2, we're energized to see how Lattice is increasingly enabling innovations for our customer strategic applications. Of particular note was the recent successful Asia Tech Summit, where we were able to engage with over 100 customers and showcase our leadership in low-power programmable innovation alongside key partners. We reinforced how Lattice FPGAs are complementary to ASICs and MCUs with a clear focus on Lattice's sweet spot in small to midrange FPGAs. At that same conference, we highlighted our expanded role as a companion chip in AI and other advanced use cases, supporting functions such as bridging, sensor fusion and board management. In far-edge AI, our solutions are optimized for applications requiring less than 1 TOPS, tera operations per second and under 1 watt of power, making them ideal for industrial and automotive deployments. We are also increasingly convinced of our value propositions in emerging areas like humanoids, industrial robotics, vision systems and security. With respect to end markets in the second quarter of 2025, Communications and Computing grew 20% sequentially, which was Lattice's highest sequential growth for the segment in 5 years and grew 26% on a year-over-year basis. Both subsegments were up double digits, both sequentially and year-over-year. The growth in Computing is driven by our expanding footprint in both general purpose and AI-optimized servers. And the growth in Communications is primarily driven by related strength in data center infrastructure, including network interface cards, switches, routers and security appliances. In line with the macro market, our Industrial and Automotive segment declined sequentially as we continue to shift under true demand to normalize channel inventory. As I previously stated, we are confident we're past the bottom, and we remain on track for channel inventory to be back to normal by end of this year. This is consistent with what we previously said. Please note that while Automotive is slower to recover, it continues to be the much smaller portion of this segment. And with additional share gains in multiple applications, including smart factory, robotics, medical and aerospace and defense, we expect Industrial will again be a strong growth driver for Lattice in 2026. Finally, total revenue for our new products continues to grow at a strong rate, and we're on track to exceed our 2025 goal that we've discussed on prior earnings calls. We are encouraged by this momentum, which reflects both the strength of our products and our deep customer relationships. Turning to Q3 guidance. We now expect $133 million in revenue at the midpoint or 7.2% sequential growth, the largest we've achieved in 3 years. We also expect a continued improvement in channel inventory, strong gross margin with a 69.5% midpoint and EPS of $0.28 at the midpoint, which is above current expectations. This shows the strength and leverage of our financial model where normalized revenue delivers higher benefits to the bottom line. To summarize, we delivered another strong quarter in Q2 with broad-based growth across key financial metrics and record design wins. We executed well, stayed laser-focused on innovation and deepened our customer engagements. The Lattice team is energized and committed to delivering on our long-term strategy. Our Q3 guidance reflects our expectation for strong growth in both revenue and profitability. As you can see, for the past 4 quarters, we told you what we're going to do, and we did what we said we would. And we are confident we can continue to do more of the same in the future. Let me now turn the call over to Lorenzo for a detailed review of our Q2 results. Lorenzo?

Thank you, Ford, and good afternoon, everyone. We will begin with a brief overview of our second quarter 2025 financial performance, followed by our third quarter outlook. We are pleased to report that Lattice has delivered on expectations. Revenue, gross margin, operating profit and earnings per share were all in line with our outlook for the quarter. In Q2 2025, revenue increased 3% to $124 million. This was flat compared to the year ago period. Our gross margin expanded by 30 basis points quarter-on-quarter and year-on-year to 69.3% on a non-GAAP basis. This performance continues to reflect the durability of our business model with continued growth in higher-margin new products and markets and anticipated share gain at strategic customers. Non-GAAP operating expense was slightly up to $51.8 million, roughly 1% sequential growth, but 4% lower on a year-over-year basis. We continue to invest in growth opportunities in a disciplined manner. Our non-GAAP operating margin expanded 150 basis points to 27.5%, and our EBITDA margin increased 70 basis points to 34.1%. We delivered non-GAAP EPS of $0.24, which was at the midpoint of our guidance and up from $0.22 in Q1 and $0.23 in the year ago period. GAAP net cash flow from operating activities for the second quarter of 2025 increased to $38.5 million, up from $31.9 million in Q1. GAAP operating cash flow margin of 31.1% was up from 26.5% in Q1. Free cash flow in Q2 was $31.3 million with a 25.2% free cash flow margin, up from $23.3 million and 19.4%, respectively, in Q1. This is a focus area for us, and we expect the trend of increased free cash flow margin to continue. We are expanding our cash flow while selectively investing in CapEx in support of R&D and operational improvement projects. Channel inventory continues to decline. Channel inventory for Comms and Compute is already at normalized levels. And for Industrial and Automotive, we are tracking to plan. Now let me turn to capital allocation. Our balance sheet remains strong. We are debt-free and have ready access to capital if we need it. We are well-positioned to navigate macro uncertainties and invest for future growth. Given our balance sheet strength and our business model, returning capital to shareholders remains a key component of our capital allocation strategy. During the quarter, we repurchased approximately $46 million of common stock under our existing buyback program. Through the first half of 2025, we've repurchased $71 million of common stock, which equates to 100% of our operating cash flow. Now to guidance. For Q3 2025, we expect revenue to grow into the range of $128 million to $138 million, with gross margin expected to be 69.5%, plus or minus 1% on a non-GAAP basis. Non-GAAP operating expenses are expected to be between $52 million and $54 million. The income tax rate for Q3 is expected to be between 5% and 6% on a non-GAAP basis. Non-GAAP EPS is expected to grow into the range of $0.26 to $0.30 per share. These expectations are based on our current thinking around the macro and geopolitical environment, including tariffs. In closing, we remain focused on executing our strategy, and we are confident that we are well positioned for revenue growth near and long term. We are driving shareholder value by prioritizing investments in our product road map, revenue generation and customer support.

That concludes our formal remarks. We can now open the call for questions.

Nice to see the progress into the second half of the year, guys. Ford, I want to start with maybe a high-level question and drill in a little bit on your comments around the companion chip opportunity and some of the comments you made on data center infrastructure within the context of what's going on with hyperscale spend over the last week and a half, we've gotten increasing CapEx yet again, and it seems like that trend is going to continue into next year. So I guess when we take a step back and think about your positioning, would you say that as you speak to customers and think about some of these opportunities, certainly on the companion chip side, that Lattice is in a position to benefit as we think about exiting 2025 and into '26 as the AI infrastructure spend continues to grow? That's the first question.

Thank you, Ruben. Yes, we absolutely believe that our Comms and Compute segment grew 20% quarter-over-quarter and 26% year-on-year. And within that segment, the Server was the star of the show with the Server segment growing year-on-year 85%, Q2 '25 over Q2 '24 and more than doubling the first half of '25 over the first half of '24. So as you could see, we've got some very strong growth in the Server segment, fueling the strength in the Comms and Compute, and we expect that to continue in the second half '25 and '26. And if I were to drill down into a bit more detail, there are four factors driving the growth. Number one, the overall CapEx increase was post-earnings expectation for the major cloud clients to be over 50% year-on-year, whereas it was like 38% pre-earnings. The second one, our attach rate continues to grow into server. The third one, our average selling price, ASP for various products continue to grow. And the last one, we continue to gain share in AI server versus traditional server. We're growing both actually, but our AI server attach rate is growing fast. So these four factors are contributing to the growth of our Server and hence, the growth of our Comms and Compute.

As a follow-up, how are the discussions progressing regarding new products compared to core products at Lattice? Additionally, could we involve Lorenzo in this discussion to consider the mix for next year and potential gross margin impacts as we anticipate new products entering the data center segment? That's all I had.

Thanks, Ruben. I’ll address the first part of your question and then hand it over to Lorenzo for insights on the gross margin impact. Regarding new products, we are on track to surpass our forecast of high teens in 2025. We expect to reach or exceed mid-20s percent of new product revenue in 2026. This suggests that we are aiming for approximately 70% year-on-year growth in new product revenue between 2024 and 2025. Now, I'll turn it over to Lorenzo to talk about the gross margin impact.

Right. So Ruben, what I got from your question is you want some near-term color, but really a view longer term on gross margin. Is that right?

Yes, that's right, Lorenzo and also thinking through as industrial inventories normalize, just sort of how to think about margin going into 2026, that would be helpful.

No, that's great. So we obviously saw gross margin improvement this quarter. And without going into all the detail, this is something that starts with the value we provide to our customers and the products. And as you can tell from the growth that Ford illustrated in his comments around what's going on in the server market, clearly, there's strong demand for what we have. So we are seeing that the overall balance of business that we have is supportive of the gross margins we have this quarter. And as you know, from our guide, we see an improvement into next quarter. We think that the fundamental dynamic for the longer term is supportive of these gross margin levels, though we are not giving any specific guidance about 2026 just yet. But what you said is really important. If you look at where we are today with the strength of the relative strength of the Comms and Compute business and knowing that we have a coming rebound in the industrial and auto, we're very comfortable where our gross margins are. And we look to continue to drive expansion, but we're not providing specific guidance just yet. I think the key to what you said about the Industrial and Auto is right now, one thing Ford didn't hit is we're undershipping true demand in Industrial and Auto. And so we think as we go through the rest of the year, we'll start to see some significant growth there. And as you indicated, find that supportive to gross margins.

The next question is from Melissa Weathers of Deutsche Bank.

I guess for my first one, I'll also keep it pretty high level. This one is for Lorenzo. You've now been in the seat for a few months now and gotten to know the business a lot more closely. So can you just give us an update on how you're thinking about the business? What is your confidence in the business model that's been established at Lattice? And what opportunities do you see for the company going forward?

I'll try not to take up the rest of our time answering the question. I knew coming in, looking at it from the outside, that the characteristic strength of the FPGA business model was well represented at Lattice. Again, high-value product, a broad base of customers demanding that product in a broad base of sectors. So you have a lot of comfort on the durability of the top line. As you can see this past quarter, the revenue from Industrial and Auto was down, but more than offset by the fact that we have a very strong presence in the emerging Comms and Compute applications that Ford talked about. So great durability on the revenue line. And as Ruben's question indicated, as Industrial starts to manifest itself in our revenue, we should see acceleration of growth. And all this is supportive of the strong gross margins that we have. But very importantly to me, as I've become familiar with Lattice, is the structure underneath the operational focus on driving profitability and our focus across the management team and through the organization on improving it. Lots of activities on price and cost at the gross margin level. But if you look just, for example, at this year, this time, our OpEx for a very similar amount of revenue than last Q2, we're lower by a couple of million. This is based on actions the team has taken to drive profitability. And what that sets us up for is near term, we're seeing expansion of all our profitability metrics. Operating income, EBITDA is up over 34%, as I said. But if you look just quarter-on-quarter, our revenue is up 3.2%, and our operating income is up 8%. So this is what we're trying to set the table for as we go forward and recapture the revenue growth across the board of the business and accelerate our profitability growth into the end of this year and through next year. So I hope that answers your question.

Yes, definitely. And we're definitely happy to have you on board. I guess for my second question and maybe a less friendly question, but I think last quarter, you guys had indicated in 2026 that you should get back to your 15% to 20% revenue growth target. It seems like things are tracking as you planned, if not maybe a little bit better on the Comms and Compute side. So is 15% to 20% still a viable target for how you guys are thinking about 2026 revenues?

Yes, absolutely. We have indicated the strength in Comms and Compute, but we also are undershipping through demand in the Industrial and Automotive, which is allowing us to continue to bring the channel inventory down and our own inventory down. So we're still very positive on that segment going back to growth in 2026. And there's a range of new applications driving it. Like for example, just in robotics, we're very excited about all the applications that were being designed in, a range of new application in robotics, for example, all the way from electronics, EV production, logistics, warehouse automation, agriculture, industrial automation, aerospace, grocery logistics, smart city, oil and gas, and last but not least, the category we're most excited about humanoids. So you could see that we're just on this one area in industrial and automotive are pretty excited about the growth prospect and believe 2026 will be a strong year, and we're past the bottom in that segment.

The next question is from Christopher Rolland of Susquehanna International Group.

We have been looking into some XPU racks at what may be your largest hyperscale customer, and the XPU-FPGA attachment seemed quite significant, indicating a huge opportunity. My first question is, were you surprised by this? Secondly, could other hyperscalers potentially match this engagement? Lastly, how should we consider this largest XPU customer in relation to the GPU opportunity and other XPU hyperscale prospects? How can we evaluate this, and what excites you the most?

Yes, thank you, Chris. We're performing quite well across all hyperscalers due to our low power, compact size, and cost-effective solutions. When dealing with a significant number of FPGAs, it's essential to ensure that power, size, and cost meet expectations, and we excel in all these areas. This advantage is helping us lead in the server market. Additionally, we're processor agnostic, allowing for versatility. The complexity of the board is on the rise, leading to an increase in the number of FPGAs per rack. Factors like security and post-quantum cryptography are driving greater attachment rates and higher average selling prices. We're also witnessing more servers equipped with additional cards because of AI systems. Generally, configurations for a hyperscaler rack vary from 40 to 60 servers, while we can accommodate anywhere from 70 to 130 FPGAs per rack based on the setup. We're observing this trend consistently across different platforms, including XPU and GPU, all of which are contributing to enhanced content, strong attachment rates, high average selling prices, and robust revenue growth for us. Does this address your question, Chris?

Yes, that was some great insight, Ford. As a follow-up on distributor inventory, I noticed that it increased to about 91% of the total. This indicates a high sell-in rate, but you mentioned that sell-through was even higher because you're reducing inventory. Could you provide a rough estimate of how much inventory has been reduced? It seems that a significant portion was in I&A. How much I&A inventory is remaining? Are you on track to normalize this, especially in I&A, by the end of the year?

Yes. No, thank you for the question. Our inventory in Comms and Compute, as we discussed, has already been normalized. And as you are alluding to, our inventory in Industrial and Automotive or I&A is on track to be normalized by midyear. We're making very good progress month-to-month, quarter-on-quarter. And we're not breaking out the exact number, but we continue to substantially ship over the revenue. So the point-of-sale outflows from our channel inventory from a channel partner is definitely continue to be higher than revenue and will continue to be so until the end of the year, at which point we should be normalized in industrial automation and give us really strong growth and strong tailwinds actually into 2026, given that inventory will be normalized.

The next question is from Blayne Curtis of Jefferies.

Ezra Weener on for Blayne. I guess first one would be, we've seen pretty mixed commentary from the rest of your peers in terms of Industrial and Auto. And you're talking a lot about growth next year and normalization at the end of this year. Can you just talk about what you're seeing from, I guess, a regional basis and maybe break up Industrial and Auto into what gives you that confidence on timing?

Yes, we were more cautious in our last earnings call, but now we are feeling more optimistic. This is a shift compared to some of our peers. What gives us confidence are several factors. Firstly, our outflows from channel inventory are consistently higher than our revenue, and demand remains extremely strong. We have record high levels of starting backlog for both Q3 and Q4, and we are beginning to see this trend for Q1 as well. Our billings and backlog, including starting backlog, are very robust, resulting in the highest book-to-bill ratio we've had in a couple of years. Additionally, our inventory levels, both in the channel and our own stock, continue to decline, and we've achieved record design wins across all segments. This includes not just compute, but also strong performance in industrial and automotive sectors, as well as our new products. Our new product pipeline has nearly doubled over the past year, with significant successes in hyperscalers, robotics, and industrial automation. While automotive represents the smallest segment for us at less than 10% of that category and less than 5% of our overall revenue, we are actually seeing strength in automotive, particularly driven by demand in China and some areas of Europe. Thus, while some peers may be discussing weaknesses in automotive, it is not a significant factor for our revenue growth.

The next question is from David Williams of Benchmark Company.

I guess maybe first, you've touched on the ASP trends. And just kind of curious, is that a dynamic of where you're just seeing some pricing power come back in? Or are you seeing just a mix shift in terms of your new products, more Avant or the higher-end products versus maybe some of your prior platforms?

Yes. We're definitely experiencing a mix shift, not only to products like Nexus Avant, but also within our MachXO family going from XO2 to XO3 to XO4 to XO5. So I think we're continuing to provide products that are being driven by things like security, things like post-quantum cryptography, by a higher number of interfaces. So that ASP is definitely benefiting from what I just mentioned.

Can you provide some detail on Avant's contribution and how its growth compares to the newer Nexus products?

Yes. The short term will focus on Nexus, including 2026, while Avant will play a larger role in 2026 and 2027. The small FPGA is driving short-term and medium-term revenue into 2026, and Avant will significantly contribute as we move into the latter half of 2026 and into 2027.

Our next question comes from Gary Mobley of Loop Capital.

At that $133 million revenue guide for Q3, approximately how much are you undershipping as you draw down the continued excess inventory in Industrial and Automotive? And then I guess, conversely, is there any sort of constraint on Communications and Compute as perhaps your inventory might be running too lean or you might have extended lead times?

I will address the question about undershipping, Gary. I can't provide a specific number because that involves estimation. However, when we give forecasts in the future, we will take past channel performance into account. We anticipate a similar situation in our Q3 forecast as we observed in Q2, and we expect this trend to continue until the end of the year when we aim to normalize across the channel. Now, I’ll pass it over to Ford for the second part of your question. We are currently seeing some activity in the Comms and Compute business during this quarter.

Yes. No, as Lorenzo said, Comms and Compute continues to be strong, and our goal is to be a good supplier to our customers and do the best we can to meet supply. Obviously, it gets challenging with some of the upsides, but...

I appreciate that detail. Lorenzo, I understand this wasn't your target as it was set back in 2023, but the long-term goal is to keep OpEx around 30% of revenue. I recognize that the recent restructuring may not be entirely under your control. To achieve that OpEx goal, revenue needs to grow by 35% from the current levels. Is the current strategy to remain patient and wait for revenue to recover, or do you think there are still further adjustments needed for OpEx?

I appreciate the opportunity to share my thoughts, Gary. I believe that aiming for a long-term target isn't unfavorable. I see our operational expenditure investments as crucial for future growth, which is fundamental to the FPGA industry. As you mentioned, we took significant steps last year to reduce our operational expenses. We're continuously refining our operational structures to maximize efficiency, and we recently reassessed our investment focus to ensure we're directing funds towards the right areas. I firmly believe that the long-term goal is appropriate, but I'm not in a position to specify when we expect to achieve it. Considering the revenue growth you've mentioned, I see it as achievable.

The next question is from Quinn Bolton of Needham & Company.

I wonder if you have started to see point of sale in the Auto and Industrial segment beginning to increase, or if it has remained relatively stable while you are just undershipping more of that steady level.

In short, Quinn, POS is increasing.

Excellent. And then...

So that speaking was right.

Yes. No, that's great. I just wanted to clarify. Ford, I'm going to ask you what may be a tough question, but what Nick said we're going to get Section 232 within about the next week or so. How are you guys preparing for Section 232? Do you have sort of a sense where you think those tariffs may land? And how do you handle that uncertainty?

Number one, our understanding is the country-specific tariffs supersede 232. So we get a fair amount of our supply from Japan, South Korea and Malaysia. And so those are already in place. So no change on that front. Number two, a lot of our channel partners bring inventory from Mexico into a free trade zone and ship from there out of the U.S. So the percent that is coming to the U.S. is a small percent of our business. And at this point, we haven't seen any direct impact from tariffs, and we'll wait and see, but some of these factors are going to mitigate any potential 232 impact.

Yes. I would like to build on what Ford mentioned. The direct impact on our business does not appear to be significant in terms of altering our cost structures, thanks to the orientation of our supply chains and customer flows. However, like everyone else, we are mindful of larger macro-level effects on overall demand. Currently, as indicated in our guidance, we observe strength in our end markets. For example, with hyperscaler capital expenditures, we anticipate that the indirect effects of tariffs will be minimized for us. We have a robust supply chain setup that allows us to be flexible in response to these changes, and we have been collaborating with our customers in recent months to help them optimize their supply chains as this issue has emerged.

The next question is from Duksan Jang of Bank of America.

On Comms and Compute, Ford, I know you mentioned a lot of growth drivers, some of which are secular and some of which are more specific to Lattice. Is there any way to sort of force rank those four contributions that you mentioned, so say, the market growing versus your wins or your attach rate versus content, that would be very helpful.

So you'd like us to rank the four factors that are the overall CapEx increase that the cloud hyperscalers have indicated on the earnings call being 1, our attach rates being 2, the ASP being 3 and our attach and AI servers being 4. And these are all related and intertwined. So the number 5, I forgot to mention, is the record design wins we're having with hyperscalers. And so that is a strong #5, if you wish. And number 6, I think as I think about the sort of ecosystem that we use to sell into that market, we sell, if you wish, to four different constituents. One is the ODMs that are building for the hyperscaler and OEMs; two, we sell directly with AI accelerators; three, we sell directly with some of the related wired communication type of providers; and number four, the server OEMs directly as well. And so we've got these four constituents also going strong. So that's, I'm not sure there's a scientific way to break this. We have all the data, but I'm not sure we could take it offline and come back to you, but quite a few factors that are helping us grow the Comms and Compute.

Yes. Understood. And then the second question on Industrial and Auto. So I know you mentioned the strong recovery outlook. But then the channel has been elevated for quite some time, and you said you've been undershipping demand for a time as well. So do you anticipate once the inventory actually normalizes, do you expect the market to go back to shipping in line with the demand? Or do you expect it to be a little bit more conservative?

I would expect it would be in line with demand. And as our design wins take hold or new design wins take hold and these products in these sectors ramp, we should have quite strong growth.

The next question is from Joshua Buchalter of TD Cowen.

Maybe following up on Quinn's earlier question about the geopolitical backdrop. Maybe it's a good thing it hasn't come up, but any changes you've observed in your customers' order patterns, specifically in China over the last 90 days, given all the volatility? I think in the Q, it said China was up like 11% sequentially. So it doesn't seem like anything egregious, but we would just be curious to hear your thoughts on the geopolitical backdrop from the tariff angle.

Yes, we have not observed any changes, and we continue to monitor the situation closely. We are cautious and want to ensure we accurately understand true demand. However, it's important to consider our projected growth and Ford's previous comments regarding bookings. The question you’re raising is whether we anticipate a pull-in followed by a drop-off, and our data does not indicate that.

I appreciate the information you provided. Regarding new product growth, you mentioned it would be 70% this year. Given the positive trends in Comms and Computing this quarter, should we expect new products to align more closely with those areas, particularly with faster design cycles in that market? Additionally, could you share any insights on sequential growth expectations by end market based on your guidance?

We believe that the Industrial and Auto sectors will begin to outperform as we approach the end of this year and move into next year. Therefore, we expect to see growth in both end markets, including Comms, Compute, Industrial, and Auto. We anticipate continued growth in both areas as we move into the next year.

Our next question comes from Kevin Garrigan of Rosenblatt Securities.

On the strong results. Ford, you had mentioned several Edge AI growth areas that will benefit the company. Looking at the market in your business, can you just give us a sense of what applications you see developing more in the near term that you'll benefit from? And what is more on the longer tailwind?

Yes, for sure. So on Edge AI, we're on track to achieve high teens of revenue coming from AI in '25 and expect this to grow to mid-20% of revenue in '26. So that's positive and aligned with what we had indicated in the past. And the way we break it up by end segments, we see about 60% of this AI-related revenue coming from Compute and Comms and about 40% of this AI revenue coming from the industrial, automotive and consumer type markets. By application, we see about 55% of these applications where we are a companion chip to sort of AI accelerators and GPUs and switches, et cetera. And we see about 45% that are application where we're either on the data pass or are running edge AI into our chip for tiny AI models. So that should give you a color of that AI revenue.

Yes. Okay. That's perfect. And then you delivered another record quarter for design wins. Ford, you're coming up on your 1 year at the company. So what are you seeing at Lattice that helps with capturing design wins versus the rest of the market?

Our strong focus on small and midrange FPGAs is driving growth in that segment of the market. We're clarifying our role as a companion chip for AI accelerator networking chips and NIC cards, in contrast to our competitors who target larger FPGAs that compete with some of our customers. We position ourselves as a pure-play FPGA, with a focus on small to midrange applications. When using AI on our chip, we achieve under 1 tera OPS and consume less than 1 watt. This targeted approach is defined as far-edge AI or near-sensor AI, unlike our competitors who aim for what they call near-edge AI, which competes with our customers. We see ourselves as a companion chip for image processor AI, capable of integrating input from various sensors, such as image sensors, radar, LiDAR, and infrared cameras. Our FPGA can handle data from multiple sensors, which allows us to preprocess the information and enhance the performance of near-edge AI inference chips. In this supportive role, we provide value to our customers as they invest heavily in AI accelerators. Our low power consumption, compact size, and cost-effective solutions positioned near the sensors enable these accelerators to operate more efficiently. Our customers refer to this as contextual intelligence, which aligns with the specific sensor's needs and assists the main AI chip.

Our last question today comes from Christopher Rolland of Susquehanna International Group.

I guess, first of all, I just want to know Ford what you meant by the country tariffs superseding the Section 232. So I guess that means you don't think there will be any additional semiconductor tariffs on top of country specific, but just wanted you to elaborate there. And then also, if you guys had any more color on Q4 or '26 based on the positive bookings backlog commentary, that would be great as well.

Sure. So on the first question, our understanding is if you look at tariffs, for example, from Japan or South Korea, where we procure wafers or Malaysia, we procure assembly and test stuff, is that those, let's say, 15% in the case of Japan and South Korea would supersede a 232 if 232 were to be higher. So let's say a 232 comes in at 20%, our understanding is that the Japan 15% or South Korea 15% would supersede that 20% and stay valid. So that's number one. Number two, on the question on Q4 and 2026, as I said, we see strong backlog actually into Q4 now and starting into Q1 of next year. So this is way above where we have been and probably some of the best bookings and backlog for the past 3 years.

Excellent. And then Ford, maybe just a high-level technical discussion as to where you see opportunities. When we think about scale-up AI, particularly networking, just because that was your background, are there any opportunities for things like scale up or retimers or DSP or SerDes or I/O chips or anything like that? Or are these FPGAs, including Avant too small for some of these functions? I'm just wondering if there could be expanded opportunities just in your heritage of networking.

Today, we are becoming more confident in our role as the companion chip for various components, including XPU, GPU, AI accelerators, switches, NIC cards, retimers, board management controllers, and NIC storage. All these chips contribute to AI infrastructure, and our position as a companion chip complements these AI accelerators. Currently, we are benefiting from a unique position as a crucial support player in these deployments, and our role as a companion chip is set to grow due to the increasing complexity in AI systems. There is significant pressure to lower system design costs and accelerate time to market. Many of these functions are more effectively handled by FPGAs, particularly smaller to mid-range options that can fit well within systems where multiple FPGAs are used per rack. We are pleased with our current role and believe it presents a substantial opportunity for us.

End of Q&A: That concludes our question-and-answer session. I would like to turn the floor back over to Rick Muscha for closing comments.

Yes. Thanks, everyone, for joining us today. For a copy of our earnings release, please visit us on our Investor Relations website. We'll be attending the following conferences this quarter: the Jefferies Semi, IT Hardware and Communications Tech Conference in Chicago on August 26, the Evercore Semiconductor, IT Hardware and Networking Conference also in Chicago on August 27; and the Benchmark Annual Tech, Media & Telecom Conference in New York on September 3. This completes our call. Thank you again very much for your participation.

You may now disconnect your lines at this time. Have a wonderful day.