Analyst Conference Summary


conference date: January 18, 2007 @ 2:00 PM PT
for quarter ending: December 31, 2006 (3rd quarter fiscal 2007)

Forward-looking statements

Overview: Not growing. Revenues down sequentially and flat compared to 2005 quarter. Guidance for weak March 2007 quarter.

Basic data:

Revenues of $450.7 million were down 3.5% sequentially and were about unchanged from year-earlier. This was near the midpoint of previous guidance.

Net income decreased 6% sequentially to $87.5 million. Earnings were $0.26 per share, up from $0.23 the year-earlier quarter. Includes stock-based compensation expense of $21 million.

Cash and equivalents ended at $1.8 billion, up $19 million sequentially.

50.5% gross margin, lower than guidance due to increase inventory reserve.

Operating income was $82.2 million, down 12% sequentially.


March quarter is typically one of stong revenue growth, but because defense business will decline over 10% sequentially:

March quarter 2007 revenues are expected to be flat to down 5% sequentially. Gross margins 61%. Operating expense 1% up. Tax rate 22%. Share count to decrease by 336 million shares. 125 inventory days. Amortization $2 million.

Conference Highlights:

Disappointing quarter consistent with other semiconductor companies exposed to telecommunications, especially wireless. But enterprise networking was healthy.

Expects to gain PLD market share this year. Has 70% of 90 nm FPGA global market and 100% of 65nm. Are one year ahead of competition.

Operating and net income includes a $2.5 million patent litigation settlement.

Interest income was $21 million, better than expected due to higher yields.

Free cash flow was $153 million. Capital expenditures $21 million. Repurchased 6 million shares for $150 million. Tax rate was 15%, lower than expected due to reinstated R&D tax credit.

Days sales outstanding decreased 6 days to 30 days.

Industrial and Other end markets increased 3% sequentially. Communications end market declined 7% sequentially. Mainstream and Base products declined, but New products increased 12% sequentially and represented 26% of sales. Spartan-3 and Virtex-4 family sales were strong.

Inventory including at distributors declined to 118 days from 126 prior quarter.

North America 40% of revenues; Europe 23%; Asia 25%; Japan 12%. All geographic areas decreased in revenues sequentially. Communications 44%, its lowest percentage in history. Industrial and Other 31% (includes Defense, which grew to 13% of revenue; Test and Measurements grew 11% sequentially); Consumer and Automotive 16%. Consumer revenues grew at double digit rates, but was offset by automotive declines. Data Processing 9%, also at historic lows.

90nm and 65nm processes now 24% of total sales.


Bottom in Q1? Did not call the bottom; does expect 2nd half of year to be better. Depends on communications market.

One-time defense orders? Going into Dec quarter knew $10 to $15 million in defense not it backlog. In roughly same position now.

Wireless? Up 24% in calendar 2006 over 2005, despite last 2 quarters being weak. Have not reached previous bottom in wireless.

Enterprise? Depends on Cisco.

Drivers for company? Older businesses like communications and storage have been declining. New business like consumer, test & measurement, computing and audio-video, are all seeing double-digit growth rates (20 to 50%). Impact of communications is getting smaller as it becomes small percent of revenue. Storage is down to 2% of revenue. Mergers are behind us, and they had a role in decline.

Mergers impact on guidance? Lucent-Alcatel merger approval means they should get back to normal soon, but probably not in March 2007 quarter.

Inventory guidance to higher? 125 up is driven by higher cost-of-sales in December quarter that skewed.

Wireless v. wireline? About 1/3 is wireless. May be a shift in enterprise v. metro.

Operating expense guidance? Did a good job in December quarter, will be challenging to repeat in March quarter. Introduction of new products is one reason.

Gross margin? Why not 62% long term goal? Long term goal is 61 to 63% pro-forma. Mix issues, including soft communications where margins are typically good.

New product revenues? Vertex 4 did extremely well in growth. Spartan 3 was flat, but in transition to Spartan 3e, which is growing rapidly. Mainstream, like Vertex 2 and older Spartan lines were down.

Revenues flat with margin down, why operating expenses not decreased? Had a strong first half, launched new products, wants to finish new products. Are looking at other means of reducing expenses over time.

Long term growth? For 2007 a couple of weak quarters but stronger second half and Vertex 5 will ramp. Will have more on next call.

Challenges on V4 FX 90nm has dragged them down somewhat.

Customer timeframe in communications for improvement? First half of last year, people overpurchased because of fear of shortages. Then their own demand declined. General belief is adjustment will complete in March quarter.

Stock from 40 to 25, cash from $700 million to above $1 billion. Why not double the dividend? Dividend increase is being considered by board.

Expense goals? Was more bullish on revenue when older goals were mentioned. Can't reach them without more revenue.

Share repurchases to continue? Being discussed, may know more in March.

Wireless caution color? Wireless industry was more bullish not long ago, not as many cell phones are selling as expected. China government dragging on 3g licenses. Also weakness in Asia and Japan. But expects growth in second half. Wi-Max is coming on line.

Enterprise wireline is really routers. New triple-play routers are rolling out so depends on how quickly service companies deploy the new technologies.

Defense business? Encryption success. Expects continued growth.

Japanese wireless market? No visibility.

DSP strength is really helping and is part of reason for confidence. Consumer market, which is a rapid growth group for them, has lower margins, so that affects gross margins.

Nanotechnology interconnects? Very interesting, but production is at least 10 years away.


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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers