Lattice Semiconductor (LSCC) Q3 2019 Earnings Call Transcript

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Lattice Semiconductor (LSCC -10.75%)
Q3 2019 Earnings Call
Oct 29, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. I'd like to welcome everyone to the Lattice Semiconductor third-quarter fiscal year 2019 earnings release conference call. Later, we will conduct a question-and-answer session.

[Operator instructions] A replay will be available approximately two hours after the call today. The replay dial in number is 404-537-3406. The conference ID number is 9191529. The replay will also be accessible on Lattice website at latticesemi.com.

I'd now like to turn the call over to Rick Muscha. Please go ahead.

Rick Muscha -- Senior Director of Investor Relations

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 third quarter of 2019 and the business outlook for the fourth quarter of 2019. 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'd 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 the actual results may differ materially. I refer you to the documents 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 fourth quarter of 2019. 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. Some financial information presented by us during the call will be provided on both the GAAP and a non-GAAP basis. By disclosing a certain non -GAAP information, management intends to provide investors with additional information to prevent further analysis of the company's performance and underlying trends.

Management uses non-GAAP measures to better assess operating performance and to establish operational goals. For historical periods we provide the reconciliations of these Non-GAAP financial measures to GAAP financial measure 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.

Jim Anderson -- President and Chief Executive Officer

Thank you Rick and thank you everyone for joining us on our call today. I'm pleased with the strong results we delivered in Q3 of 2019 as we achieved a new 10-year high in non-GAAP operating margin for the company. Highlights for the third quarter of 2019 included revenue growth in line with our expectations, gross margin expansion of 240 basis points year over year and 80 basis points sequentially to 59.8% on a non-GAAP basis, non-GAAP operating profit for the company was 25% of revenue a new 10 year high and non-GAAP EPS increased 55% on a year-over-year basis. Let me now provide an overview of our business by end market.

In the communications and computing market revenue increased 5% sequentially in Q3 as we continue to experience strong sequential growth and year over year in this segment. In computing our revenue in servers for enterprise and cloud data centers increased sequentially with growth driven by both our higher attach rate and DSP versus the prior sequentially with growth driven by both our higher attach rate and ASP versus the prior generation. We remain focused on increasing our content in next generation servers by adding security functionality with our new MachXO3D product family. In the communications market, we're benefiting from increased 5G infrastructure deployments.

Our 5G revenue increased sequentially in Q3 as we continue to expect 5G revenues to grow moving forward as the 5G wireless infrastructure build out progresses. Turning now to the industrial and automotive market, revenue declined 4.5% sequentially in Q3 as we experienced some demand softness toward the end of the quarter related to the macroeconomic climate and continued trade tensions. Despite some near-term softness, we believe this segment will remain a long-term growth factor for us given the breadth of applications that we serve. Long-term growth drivers include the proliferation of robotics and industrial automation and the steady increase in electronic content in autos.

Turning now to the consumer market, revenue declined 4.5% sequentially in Q3. This reflects continued demand softness related to macroeconomic conditions. We remain focused on serving the higher margin areas of the consumer market where our solutions are enabling customers to differentiate their products. As an example, we are seeing strong adoption of our AI technology in Prosumer applications for development of next generation human presence and gesture detection.

I'll now provide an update on our product roadmap execution, first is sensAI. Our award-winning low power AI solutions stack. Last week we released an update that further extends our innovation in ultra-low power AI. This new version introduces enhanced support capabilities enabling faster inference performance and lower latency including enhancements to reference designs for key phrase detection and human facial recognition.

Moving to MachXO3D, our new secure control FPGA, we recently received the National Institute of Standards and Technologies Cryptographic Program certification. This security standard is extremely important for our enterprise customers and makes our solution even more compelling. We're pleased with the accelerated and broad customer traction we're seeing with this product on next generation server platforms. We also launched and sampled our new cross-link plus product in Q3.

Developers are using this product to enhance their users experience by adding multiple image sensors or displaced to embedded vision systems. We're very pleased to sample our customers ahead of schedule. And as a result we expect to generate initial revenue for this product in Q4 of this year. Finally, at our Investor Day this past May, we committed to sampling our next generation FPGA platform in early 2020.

I'm very pleased to say that we are executing ahead of schedule and we now expect to sample customers before the end of the year. This new product platform based on FDSOI technology has been architected from the grounds up for low power operation, which enables a significant power reduction for our customers across many different applications. We're looking forward to sharing more details about this innovative next generation platform at a special product launch event planned for this December. In summary, we're pleased with our strong financial results in Q3.

However, we're even more excited about the solid execution of our product roadmap, specifically the accelerated product rollouts of both CrossLink Plus and our next generation FPGA platform. This execution fidelity is a direct result of the key strategic portfolio management and resource deployment decisions we made in late 2018. Those actions drove a sharp focus across the company on delivering high ROI products and accelerating the cadence and time to market for our new product roadmap. We remain focused on executing our business strategy and product roadmap for sustained long term revenue and profitability growth.

I'll now turn the call over to our CFO, Sherri Luther.

Sherri Luther -- Chief Financial Officer

Thank you, Jim. We are pleased to deliver revenue growth, gross margin expansion, record profitability and a further delevering of our balance sheet. We are making substantial progress on our commitment from our Investor Day as we move closer toward our target model. Let me now provide a summary of our results.

We achieved third-quarter revenue of $103.5 million up 1.1% sequentially from the second quarter. Product revenue growth in communication and computing helped to offset a sequential decline in industrial and automotive as well as consumer. Our key long-term growth drivers remain intact. Gross margin on a GAAP basis was 59.4% compared to 58.7% in the second quarter and up from 57.5% in the year-ago third quarter.

Our non-GAAP gross margin expanded to 59.8% from 59% in the prior quarter and from 57.4% in the year-ago third quarter, this was due primarily to product cost reduction, pricing optimization and higher IP revenue. We have now delivered three consecutive quarters of gross margin expansion while we have made meaningful progress and continue to execute we still have a lot of opportunity ahead of us for further improvement, as we work toward achieving our long-term target model. Q3 GAAP operating expenses were $44.8 million compared to $45.6 million in the second quarter. On a non-GAAP basis operating expenses were $35.9 million compared to $35.5 million in the second quarter.

As a percentage of revenue operating expenses were flat at 34.7% in Q3 from the prior quarter. R&D increase to 17.8% of revenue while SG&A decreased to 16.9% of revenue. The mix of opex continues to gradually shift toward our target model of R&D at 20% of revenue, and SG&A at 15% of revenue. Our GAAP EPS for the third quarter was up 67% sequentially and increased 100% from the year-ago third quarter.

On a non-GAAP basis EPS for the third quarter was up sequentially 6% per basic share and 13% per diluted share, and increased 55% from the year-ago third quarter. Accelerating cash flow generation remains a priority for the company. Year-to-date, we have generated approximately $85 million in cash flow from operations, which is four times the cash generated over the same period in 2018 underscoring our focus on cash generation. We ended Q3 with the cash balance of $97.4 million compared to $122.6 million at the end of Q2.

At our Investor Day, we detailed our plan to actively de-liver the balance sheet. Year-to-date we have made $107 million in total debt payments, including $33.4 million in Q3. As a result, our non-GAAP debt leverage ratio as defined in the credit agreement is now below 1.5. To put this in perspective, we have improved our leverage ratio from 3.5 a year ago.

Additionally, the Q3 discretionary debt payment allowed us to reduce the interest rate by another 25 basis points for a total reduction of 300 basis points in 2019. Let me now review our outlook for the fourth quarter. Revenue for the fourth quarter of 2019 is expected to be between $97 million and $103 million. Gross margin is expected to be 59.5% plus or minus 1% on a non-GAAP basis.

Total operating expenses for the fourth quarter are expected to be between $35.5 million and $36.5 million on a non-GAAP basis. As we look forward our priorities and focus are unchanged. We remain committed to expanding our profitability, increasing our cash flow generation, and delevering our balance sheet to build additional value for Lattice and our shareholders. Operator, we can now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] We have a question from Tristan Gerra from Baird. Your line is now open.

Tristan Gerra -- Robert W. Baird -- Analyst

Hi, good afternoon. Given your increasing exposure in data center and also ongoing changes in mix, how should we look at typical seasonality going forward by quarter and including for Q1 in terms of the sequential changes in revenue?

Jim Anderson -- President and Chief Executive Officer

Yeah. Thanks, Tristan. You know in general our business over the last year in particular you know you've seen a shift in the makeup of our revenue toward you know a higher percentage of comps and compute and industrial and automotive versus for instance consumer segment and so our revenue has shifted to those segments and I would say that's made our business a little bit less susceptible to seasonality. There is still some seasonality in our business with respect to specifically consumer right.

Normally we would expect you know for instance consumer to be down from say Q4 to Q1, but it's really consumer that's the only segment that exhibit significant seasonality now.

Tristan Gerra -- Robert W. Baird -- Analyst

OK, great. And then as a follow up your direct sales increased nicely sequentially, was there a particular end market that was the driver of that increase.

Jim Anderson -- President and Chief Executive Officer

Tristan, could you repeat the -- which sales were you asking about, could you repeat it once again.

Tristan Gerra -- Robert W. Baird -- Analyst

Yeah, so, the non-distribution revenue, the direct sales which increased sequentially, was there a particular catalyst for that increase sequentially?

Jim Anderson -- President and Chief Executive Officer

No. That can vary from quarter-to-quarter distribution versus direct. So, I don't think there was any particular catalyst for that. But in that we view that as within the normal sort of variance that we can see from quarter to quarter.

Tristan Gerra -- Robert W. Baird -- Analyst

OK, great. Thank you.

Operator

Your next question comes from the line of Matt Ramsay from Cowen. Your line is now open.

Matt Ramsay -- Cowen and Company -- Analyst

Thank you very much. Good afternoon. Jim, I wanted to ask a question and you called it out in your script about some of the AI applications, facial recognition and a whole bunch of others that you listed that some of your low power FPGAs are enabling, and I wondered if you might expand upon that a little bit, what are the customers that are driving that, how I guess deep are the engagements, and might they continue to expand on your new generation FPGA platform as you guys roll it out? Thanks.

Jim Anderson -- President and Chief Executive Officer

Yes. Thanks for the question, Matt. So first of all a lot of that's related to our sensAI software stack. So our sensAI software stack is a software stack that we introduced first about a year ago.

We made refinements over the course of this year introducing new versions that have improved the performance and features and capability. And what that software stack really allows our customers to do is to make it very easy to use our FPGA products in AI applications, particularly at the edge of the network. And in particular for inference processing at the edge where you want to make basic decision making in edge computing applications. And we've seen really good adoption of that and quite a bit of customer traction and interest, and it's across the number of different segments.

We've certainly seen you know consumer-related applications for that, you know whether it's facial detection or key phrase recognition, you know we can also analyze an audio or a video signal and pick out different patterns and the audio or video. So not just consumer applications, but also we've seen applications in the industrial segment for as well for instance analyzing production lines as in the manufacturing line and detecting manufacturing excursions for instance and things like that. So we're quite pleased with the progress that we're making with sensAI in AI in general and yeah it's been broad based across the number of different applications.

Matt Ramsay -- Cowen and Company -- Analyst

Got it, thank you for that. As my follow up Sherri, the whole team laid out some pretty ambitious gross margin targets at the Analyst Day, six odd months ago and it looks like you're coming in even better than those, those expectations and you mentioned in the script that you had a number of different levers to continue working on margins as you go forward maybe you might expand on those and sort of remind us of what your long-term ambitions are on the gross margin line? Thank you.

Jim Anderson -- President and Chief Executive Officer

Yes sure, Matt. Yeah so as we outlined in our Investor Day we talked about some of the levers of gross margin expansion related to pricing optimization and product cost reductions. And so the improvement that we have seen to date Q3-over-Q3 the 240 basis points you can see it's really delivering on those levers that we mentioned on our Analyst Day and the long-term target that we laid out on our Analyst Day of over 62% in the year three and four out there is really looking at those levers including mix. And so the way we laid it out there in terms of the pricing optimization we said -- roughly a 500 basis point increase from 2018 to get to our target model gross margin and we laid that out in terms of the about 200 basis points improvement and pricing optimization another 200 in product cost reductions and then another 100 in mix and so that's kind of the way to think about the progress that we're making.

You know moving forward with the 240 basis improvements that we've been to so far and really the levers that we're looking at continuing to pull on, to achieve our target model.

Matt Ramsay -- Cowen and Company -- Analyst

Thanks very much.

Jim Anderson -- President and Chief Executive Officer

Sure. Operator did you want to bring our next caller in.

Operator

Yes. Our next question comes from the line of Christopher Rolland from Susquehanna. Your line is now open.

Chris Rolland -- Susquehanna International Group -- Analyst

Thanks for the question. Yeah. Maybe you guys can talk about your outlook for next quarter by end market you know how you see those trending and then I know it's early but some people had given thoughts on Q1 expectations versus typical seasonality just given the difficult macro out there. I wonder if you guys had any thoughts there as well.

Thanks.

Jim Anderson -- President and Chief Executive Officer

Yeah. Thanks, Chris. So first on the Q4 guidance if you take a look at the midpoint of our guidance from a year-over-year perspective it's up from a sequential perspective, it's down sequentially. If I speak about you know kind of what are the key drivers that we see sequentially a couple things driving the expectation for a sequential decline, one would be we're expecting our IP revenue to decline sequentially.

We had a little bit higher than normal IP revenue in Q3 and we expect in Q4 for IP revenue to decline back to what is kind of considered by us to be the normal run rate. So that's maybe a $1 million to $2 million sequential decline and then the other factor I would say is in the industrial automotive segment toward the end of Q3 we did see a little softening in demand at the end of Q3 related to I think the macroeconomic conditions and continued conservatism around trade negotiations and the dynamic nature trade negotiations and we are expecting some of that softness to continue into Q4. So, those are kind of the main factors for the sequential movement from Q3 to Q4.And then you know probably early -- too early for us to give you know any thoughts on Q1 and specific, but I will say you know if we go back to our Investor Day in May where we see over the long term growth coming from for the company is in those two main sectors of ours. First of all in comms and compute and then secondly in industrial and automotive.

We really see those two sectors as the long-term growth drivers for the company.

Chris Rolland -- Susquehanna International Group -- Analyst

Great. Well, I guess a great gross margin guidance, particularly given that IP declined sequentially there as well. As a second question maybe you can just talk about FD-SOI, you know how do you see this affecting top line, is it a revenue accelerator for you guys, and is it really about taking share here -- or these new kind of greenfield opportunities that the FPGAs haven't been able to address before. How are you thinking about that FD-SOI opportunity?

Jim Anderson -- President and Chief Executive Officer

Yeah. Thanks. So, first the FD-SOI is the technology that our new FPGA platform is based on, right. So, that platform it's not just about FD-SOI, it's about a new architecture that we're bringing to market with new features, new capabilities, and then that's built on top of the FD-SOI semiconductor technology.

And you know what FD-SOI brings is at a transistor level a much more power efficient transistor level and so for instance you know roughly 50% lower power than for instance regular bulk CMOS technology and on top of that then we add our own low-power architecture and other features and capabilities. So, we're really excited about the next generation platform. As I mentioned in the prepared remarks low power architecture and other features capabilities. So, we're really excited about the next generation platform.

As I mentioned in the prepared remarks, we're actually executing a bit ahead of schedule. If you remember back in May of at our Investor Day, we talked about first samples for this platform being in the first half of 2020. We're now expecting to provide first samples to our customers before the end of the year. Quite pleased with the engineering teams execution on this and we're excited to get this in the hands of customers.

We're also expecting to have a special launch event in December to roll out the new products. And so, we'll talk more about it at that time. But in terms of you know the business impact or revenue impact from that product, we would expect that to begin to generate revenue for us in probably the second half of next year. That would be a typical time period from the samples to the very first initial levels of revenue.

And so, that's when we would expect to see the business benefit. And then of course in the following years, we expect it to be a bigger revenue benefit.

Operator

[Operator instructions] Your question comes from the line of Richard Shannon from Craig-Hallum. Your line is now open.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK. Guys, thanks for taking my questions. I apologize I got on a little bit late so I may have missed some of the prepared remarks. But let me ask a question on the comms segment.

Looks like it was up a few percentage points. I think you made some comments about 5G benefiting Maybe if you could kind of replay those comments and maybe unpack whether the comms business would have been up sequentially without 5G?

Jim Anderson -- President and Chief Executive Officer

Yeah. Thanks, Richard. So in comms and compute we saw you know, a good sequential growth and also in that segment, a very, very good year-over-year growth, I think around 27% year-over-year growth in that segment, but in terms of sequential growth we saw growth in both the compute and communications parts of that segment, you know a couple of the growth drivers are 5G, you mentioned that, so we saw sequential growth from Q2 to Q3 and 5G. But we also saw a nice growth in our server revenue from Q2 to Q3, as we continue to you know benefit from our higher attach rate and higher ASPs that we have in the current server platform generation versus the prior generation.

So, yeah the segment has been -- you know a good growth factor for us over the last couple of years, and certainly in the most recent quarter.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK. And maybe a follow up on the -- just looking at the comps part of that segment again is the business outside of 5G? Is that growing, obviously we have some trade tensions with a very large OEM out there sanctioned by the US government, maybe if you can kind of help us understand the dynamics in the third quarter? And whether you have any worries about that going forward?

Jim Anderson -- President and Chief Executive Officer

Yes, from a sequential standpoint Q2 to Q3, I think it was relatively stable across those two quarters, and you know look -- moving forward the main driver for that segment will certainly be 5G wireless infrastructure deployments over the coming years. I mean 2019 is really just the beginning of the 5G wireless infrastructure build-out. It's really only happened in a couple of countries, a couple of geographies, you know, moving into next year, and the following years, we'll start to see greater build-outs in North America and eventually in Europe too. And so we think that you know on the 5G wireless infrastructure and our very healthy position in that will be a nice long-term growth factor for us.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK, great. My last question, I'll jump out of the line, specifically in the automotive space here has seen some difficult numbers coming out of the some of the major automakers worldwide, particularly in Europe, and I know historically Lattice had a pretty good exposure in here, maybe if you could help us understand the degree to which you've seen an impact from a units perspective and maybe offsetting as how much we've been gaining share to offset that?

Jim Anderson -- President and Chief Executive Officer

Yes. In the industrial automotive segment, automotive is still a relatively small part of our revenue in that segment. And yeah, certainly you know we are, we have a number of different customers there, and so we're subject to any you know macroeconomic slowdown that affects automotive, but we do believe automotive electronics is a good long-term growth engine for us. We're seeing a very healthy design win funnel in automotive electronics, obviously there's increasing electronics in automotive moving forward, and we're seeing as I said a very healthy design win funnel with customers.

And so we think this will be a nice growth propellant for us for a number of years to come.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK. Appreciate all the thoughts. That's all the questions for me. Thank you.

Operator

[Operator instructions] Your next question comes from the line of Charlie Anderson from Dougherty. Your line is now open.

Charlie Anderson -- Dougherty and Company -- Analyst

Yes. Thanks for taking my questions. I'll start with kind of a two-parter on margins. I wonder as FDSOI starts to layer in the back half of next year as you mentioned, what is the impact in gross margins, if you could speak to that.

And then also on the opex side, we sort of flattened out here a little bit, I think SG&A on an absolute dollar standpoint sort of flattened out. I know you guys want to get to a 15% at some point, so that more of a revenue growth that gets you there, is there still some opportunities to trim on the SG&A side, and then I've got a follow-up.

Jim Anderson -- President and Chief Executive Officer

Thanks, Charlie. So, on the FDSOI or next gen FPGA platform we are planning that program or that set of products that will be based on that platform to be margin benefit to us. We're trained to build into that, the design of those products and in the marketing and the position of those products, a margin tailwind for us as those products, as those products ramp I would say in the second half of next year we expect to see some initial revenue but I think we the actual impact to our margin will be pretty muted in the first year just because the level of revenue would be pretty small in the first year. But moving toward the outer years as a program or as that generation of products contribute to higher amount of revenue or would have more of an impact positive impact or margin.

And on the second question on the opex and SG&A again in terms of the absolute dollars it was roughly flat Q2 to Q3 but we are not done in SG&A yet we still are looking at areas to continue to try to drive SG&A into that 15% target and we still expect that to be a combination of absolute dollar declines as well as, just better, better scale as revenue ramps as well. So I would say we're still looking at additional -- absolute dollar declines in the SG&A bucket.

Charlie Anderson -- Dougherty and Company -- Analyst

Great, and then there was some commentary in the script about the -- and I think there was a press release during the quarter about the NIFT standard and how secure these source of content gain for you. So wondered if you any guys could speak to the ramifications of that standard and some of the content opportunities that are out there. You know end markets want to adopt the security? Thanks.

Jim Anderson -- President and Chief Executive Officer

Thanks, Charlie. Yes, that's on our market of 3D product and that one we launched in Q2 and that product is an FPGA that we've added specific security technology to and it allows that product to provide a platform route of trust and sensAI allows that product to ensure that the hardware or firmware in a system has not been tampered with, whether it's tampered with in production or in transit or when it's been deployed. And so, we're really excited about that product. We've seen very good traction with for instance server OEMs for next generation server platforms.

The reason that that particular standard is important. The NIST standard is that's basically a good stamp of approval that this meets the right security requirements. And so, it's an important -- it's an important stamp for our customers to know that we meet those security requirements and you know again we're very pleased with the customer progress and beyond the server customers we see this product as potentially applicable in a number of different markets to basically provide security in all sorts of endpoint devices whether there should be client computing platforms or other end point devices in the network.

Operator

[Operator instructions] Your next question comes from the line of David Duley from Steelhead. Your line is now open.

David Duley -- Steelhead Securities -- Analyst

Thank you very much. I was wondering it seems like your new product introductions have been accelerated versus previous conference calls on your Analyst Day. I'm just wondering with the acceleration of new products does that mean that you'll achieve higher levels that will hit your accelerated levels of revenue growth sooner than you had before. And could you just remind us what the long term revenue growth goal is?

Jim Anderson -- President and Chief Executive Officer

Yes. Let me start with the last part of your question Dave and that's at our Analyst Day in May earlier this year what we provided is that over this year and next year our revenue growth would be expected to be kind of in the mid-single digits in terms of year-over-year percentage. And then in the three year to four year timeframe we would accelerate our revenue growth into the low double digits is what we expected. And, yeah, certainly to the extent that we can accelerate the product roadmap or get things to market quicker in the hands of our customers quicker that certainly helps -- it helps to solidify our long term growth objectives.

And I would say you know yes a little bit about the products and why they were accelerated. If you recall at the end of last year and we've talked about this previously we did a pretty extensive portfolio optimization where we looked at every single product and project that the R&D team is working on and really justified that each project according to you know it's RPI and strategic value and we pruned out a lot of projects that we believed were low ROI or just didn't have the right value for the company.What we did then is we took that the resources that we saved out of pruning out some of those projects and we doubled down on the high ROI projects and really focused the R&D team on driving the higher ROI programs to market quicker to increase the cadence of our roadmap and to increase the time to market. And so a couple of the programs that I mentioned that have you a -- had some scheduled acceleration. I really view that as a direct result of that portfolio optimization and in R&D focusing that we did last year and so our cross-link plus product which launched in Q3 that sampled a little earlier to customers and expected we're actually expecting to generate initial revenue from that product this quarter.

And then I mentioned our next generation FPGA platform as well, originally we got samples early next year now samples before the end of the year. So, yeah, I'm pleased with the progress on the product roadmap, and the R&D team has done a good job to execute to the schedules and actually pull in a bit.

David Duley -- Steelhead Securities -- Analyst

OK. Next question is, as far as your server business goes in the cloud with the cloud computing guys, you've talked about increasing content there with the next generation platforms that are being rolled out. Could you just help us understand where are we on the next generation of server platforms being rolled out by the big customers whoever they might be the intels of the world I guess. And you know what we should expect going forward from this segment with that progression of the customers adopting the new platform?

Jim Anderson -- President and Chief Executive Officer

Sure. In the current generation that's really ramping today, sometimes it's called by its code name the prior generation, and their current generation that started ramping you know last year has been ramping this year. One of the reasons that's a big growth opportunity for us or has been a good growth performer for us is that versus the prior generation of servers, we increased both our attach rate and our ASPs. So our attach rate roughly tripled from prior generation to this generation and our ASP went up as well.

And so that helped drive a significant amount of growth for us, that's for instance part of the reason that our comps in compute sector this quarter in Q3 was you know up 27% year over year. Now if we look forward to the future generations of the server, which haven't started ramping yet, what we are focused on there is of course maintaining our high attach rate, but also continuing to bring more value to the customers and higher ASP along with that value as well. So, we're trying to bring more content, more value to the server customers, and then Mark XL 3 product that I mentioned earlier is part of that. That product brings new security functionality.

We're working with the server customers to get that designed in the future server generations to again bring more value and continue to drive growth in that segment over the long period.

David Duley -- Steelhead Securities -- Analyst

And just as a follow on about what you just talked about, did your server unit volumes grow this quarter or was it more of an ASP increase, and then just as a final clarification could you just talk about any revenue into China and are you recognizing revenue that you sell to Huawei.

Jim Anderson -- President and Chief Executive Officer

Yeah. So, in the first uniting ASP on the sequential increase from Q2 to Q3, it was a combination of both and both unit and ASP relative to certainly the prior generation. And then in terms of China Huawei revenue specifically, so we are shipping to Huawei, we are shipping only those products that we deemed compliant with export restrictions and so near the end of Q2 of this year we did a very extensive legal analysis of which products are compliant with export restrictions using both internal counsel as well as leveraging multiple external legal firms as well. So, we did very extensive analysis and we're shipping those products that we've deemed compliant at this point.

David Duley -- Steelhead Securities -- Analyst

Thank you.

Operator

There are no further questions at this time. I would like to turn the call back to Lattice, CEO Mr. Jim Anderson for closing comments.

Jim Anderson -- President and Chief Executive Officer

All right. Thank you, operator and thanks everybody for joining us on our call today. So in summary we achieved a new 10-year high in our non-GAAP operating profit as a percentage of revenue, on the product side our solid execution has enabling us to launch and sample CrossLink Plus ahead of plan, and to pull in sampling of our next generation FPGA platform which is based on FD-SOI technology. And overall we remain focused on executing to our business strategy and our product roadmap.

We appreciate your support and look forward to updating you on our progress moving forward. Operator that concludes today's call.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Rick Muscha -- Senior Director of Investor Relations

Jim Anderson -- President and Chief Executive Officer

Sherri Luther -- Chief Financial Officer

Tristan Gerra -- Robert W. Baird -- Analyst

Matt Ramsay -- Cowen and Company -- Analyst

Chris Rolland -- Susquehanna International Group -- Analyst

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Charlie Anderson -- Dougherty and Company -- Analyst

David Duley -- Steelhead Securities -- Analyst

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