Lattice's Q3 2025: Contradictions Emerge on Inventory Normalization, Growth Outlook, and AI Market Projections

Date of Call: None provided

Financials Results

• Revenue: $133.3M, up 7.6% Q/Q and 4.9% YOY
• EPS: $0.28 per share (non-GAAP), up 17% YOY and Q/Q
• Gross Margin: 69.5% (non-GAAP), +20 bps Q/Q and +50 bps YOY
• Operating Margin: 29% (non-GAAP operating margin), expanded 150 bps to 29%

Guidance:

• Q4 revenue expected $138M–$148M (midpoint = $143M, ~22% YOY)
• Non-GAAP gross margin expected 69.5% ±1%
• Non-GAAP operating expenses $54.5M–$56.5M
• Non-GAAP tax rate 3%–5%
• Non-GAAP EPS expected $0.30–$0.34
• Expect channel inventory normalization by year-end (supporting 2026 growth)

Business Commentary:

• Revenue Growth and Market Trends:
• Lattice Semiconductor reported revenue of $133.3 million for Q3 2025, marking a 7.6% increase over Q2 and 4.9% growth year-on-year.

• This growth was driven by strong performance in the communications and computing segment, particularly in wired data center infrastructure and AI-optimized servers, as well as improving conditions in the industrial and automotive sectors, which are expected to normalize by year-end.

• Communications and Computing Segment Growth:

• Revenue in the communications and computing segment grew 8% sequentially and 21% year-on-year, reaching a record level.

• This growth was primarily driven by demand in wired data center infrastructure, including network interface cards, switches, routers, and security appliances, as well as increasing use cases in both general-purpose and AI-optimized servers.

• Inventory Normalization and Operational Improvements:

• Lattice Semiconductor is on track to normalize channel inventory by year-end, with comms and compute inventory already normalized.

• This effort is part of their strategy to position the company for renewed growth in 2026 and align with increasing investments in AI and data center infrastructure.

• Leadership in FPGAs and Market Expansion:

• The company's FPGA products, particularly the Nexus platform, are seeing strong adoption in data center applications due to their small form factor, low power consumption, and high reliability.
• This leadership position is supported by post-quantum cryptography (PQC) adoption, driven by NIST requirements for secure systems.

Sentiment Analysis:

Overall Tone: Positive

• CEO: "more confident than ever" and cited record sequential growth ($133.3M, up 7.6% Q/Q). CFO: "strongest booking patterns we have seen in at least six quarters" and raised 2026 confidence; Q4 guidance implies 22% YOY revenue growth at midpoint.

Q&A:

• Question from Kevin Garrigan (Jefferies): Is the increased confidence in 2026 contingent on normalization of industrial and auto channel inventory in Q4, or can strong comms and compute growth offset any potential industrial/auto softness?
  Response: Comms & compute acceleration is the primary driver — server and communications are growing materially faster than CapEx and should drive 2026; industrial/auto inventory normalization by year-end is a supportive upside.

• Question from David Williams (Benchmark Company): What changed over the last 90 days to increase your confidence in demand and outlook?
  Response: Customer activity and bookings accelerated after the Open Compute Summit and improved hyperscaler demand visibility, producing stronger orders booked into H1 2026.

• Question from Tristan Gerra (Robert W. Baird): Should we expect re-acceleration in comms & compute in Q4, and when might gross margin pick up; why is Nexus gaining momentum now?
  Response: Nexus ramp is accelerating — multiple new Nexus SKUs introduced in 2025 and more coming in 2026, which will drive ongoing revenue growth.

• Question from Gary Mobley (Loop Capital): How much are you under-shipping in industrial & auto embedded in Q4 guide, and are there supply/lead-time issues for comms & compute?
  Response: They are under-shipping roughly $15M–$20M per quarter to normalize channel inventory, expect normalization by year-end; comms/compute lead times have extended but supply is being managed with suppliers and customers.

• Question from Christopher Rolland (Susquehanna International Group): You said comms & compute could be ~60% of revenue next year; what are the assumed growth rates for comms/compute versus industrial & auto in 2026?
  Response: Comms & compute expected to drive the bulk of growth (roughly 20%–40%), while industrial & auto is assumed to return to modest growth (mid-single digits to ~15%).

• Question from Ruben Roy (Stifel): Clarify AI usage assumptions and mix between compute/comms and industrial/auto.
  Response: AI usage expected to rise from high teens in 2025 to mid-20s in 2026, with roughly a 60% share in comms & compute and 40% in industrial/auto; focus is on low-power near-sensor (<1W) AI in industrial/auto.

• Question from Joshua Buchalter (TD Cowen): What assumptions underlie the 20%–40% comms & compute growth range and the industrial/auto outlook for 2026?
  Response: Guidance assumes industrial/auto returning to normal demand cycles (mid-single digit growth); comms/compute growth is backed by rising industry CapEx plus Lattice share and attach-rate gains — detailed app-level breakout not provided on the call.

• Question from Chris Myers (Rosenblatt Securities, on for Kevin Cassidy): What is your current view on the automotive market and the dollar content difference between traditional and AI servers?
  Response: Automotive is a small part of revenue with strength mainly in China; AI servers have higher Lattice dollar content than traditional servers due to segregated architectures and companion roles.

Contradiction Point 1

Inventory Normalization and Supply Chain Challenges

It involves the company's ability to manage inventory levels and supply chain challenges, which directly impact revenue and customer satisfaction.

How much are you under shipping in industrial and automotive, and are you facing shortages or extended lead times in comms and compute? - Gary Mobley (Loop Capital)

2025Q3: We're under shipping about $15-$20M per quarter. - Ford Tamer(CEO)

Can you discuss the inventory situation in Industrial and Automotive? - Christopher Adam Jackson Rolland (Susquehanna International Group)

2025Q2: Our inventory in Comms and Compute is normalized. Industrial and Automotive is on track to be normalized by mid-year. We continue to ship over revenue from channel inventory. - Ford Tamer(CEO)

Contradiction Point 2

Confidence in Growth Outlook and Macroeconomic Conditions

It reflects differing levels of confidence in the company's growth outlook and how macroeconomic conditions may influence this outlook.

Is your confidence in the 2026 outlook contingent on Q4 normalization of industrial and auto channel inventory, or can strong comms and compute growth offset potential macro industrial and automotive softness? - Kevin Garrigan (Jefferies)

2025Q3: Our comms and compute business revenue growth continues to accelerate, with comms and compute expected to become over 60% of total revenue in 2026. - Ford Tamer(CEO)

Ford, how is Lattice positioned as AI infrastructure spending grows? Can you benefit from hyperscale spending trends? - Ruben Roy (Stifel)

2025Q2: We are confident in exceeding our 2025 guidance for non-server business, driven by new products. - Fouad G. Tamer(CEO, President & Director)

Contradiction Point 3

Impact of New Products on Revenue Growth

It highlights differing expectations regarding the contribution of new products to revenue growth, which is crucial for assessing the company's growth strategy.

What has changed in the past 90 days that affected your confidence in the outlook, and what is driving the increased confidence? - David Williams (The Benchmark Company)

2025Q3: We are on track to exceed our forecast of high teens in 2025 from new products and expect mid-20s percent of new product revenue next year. - Ford Tamer(CEO)

Could you provide an update on your confidence in Lattice's business model and the opportunities you see? - Melissa Weathers (Deutsche Bank)

2025Q2: We are on track to exceed our forecast of high teens in 2025 from new products and expect mid-20s percent of new product revenue next year. - Fouad G. Tamer(CEO, President & Director)

Contradiction Point 4

AI and Server Market Growth

It involves differing projections for the growth of AI and server markets, which are critical for understanding the company's strategic positioning and revenue potential.

How much are you under-shipping in industrial and automotive, and are you experiencing shortages or extended lead times in comms and compute? - Gary Mobley (Loop Capital)

2025Q3: The server market is expected to grow mid-teens this year, with AI mix continuing to grow, becoming the majority by the end of 2025. - Ford Tamer(CEO)

Can you discuss future penetration and content resilience amid macro challenges? - David Williams (Benchmark Company)

2025Q1: Our server growth rate of 46% year-over-year was better than we had modeled, driven by cloud and AI workloads. We have 36% server content growth year-over-year. - Ford Tamer(CEO)

Contradiction Point 5

Inventory Management and Growth Expectations

It involves differing views on the management of inventory levels and their impact on growth expectations, which are crucial for understanding the company's operational efficiency and financial outlook.

Will growth in communication and computing re-accelerate in Q4? - Tristan Gerra (Robert W. Baird)

2025Q3: We are managing inventory, with specific programs to reduce it. It may take longer than expected to reach target levels due to market uncertainty. - Lorenzo Flores(CFO)

Has your 2025 revenue outlook changed due to macroeconomic caution? Can you explain the decline in the comms and computing segment? - Melissa Weathers (Deutsche Bank)

2025Q1: We see no change in 2025 outlook. We remain steadfast due to improving demand signals, including increased consumption and higher book-to-bill ratio. - Ford Tamer(CEO)