Analyst Conference Summary

conference date: July 23, 2013 at 1:45 PM Pacific Time
for quarter ending: June 28, 2013 (second quarter 2013)

Forward-looking statements

Overview: Revenue was up sequentially but declined from year-earlier. GAAP earnings took a hit.

Basic data (GAAP):

Revenue was $421.8 million, up 3% sequentially from $410.5 million but down 9% from $464.8 million in the year-earlier quarter.

Net income was $101.5 million, down 16% sequentially from $120.2 million, and down 38% from $162.7 million in the year-earlier quarter.

Diluted EPS (earnings per share) was $0.31, down 16% sequentially from $0.37 and down 48% from $0.50 year-earlier.

Guidance:

Revenue expected up 5% to 9% sequentially, with gross margin near 68%. $99 to $101 million for R&D, $80 to $82 million for SG&A. Tax rate 12% to 13%.

Telecom & Wireless; Industrial; and Networking/storage/computer are all expected to increase revenue, with the other category flat. Expects strong sequential growth in new products.

Conference Highlights:

Backlog increased in the quarter. The next generation Arria FPGA devices on 20 nm TSMC process and Stratix on 14 nm Intel FinFET process were announced. Believes Intel deal offers a substantial competitve advantage for FPGAs. However, these devices won't be in full production until 2014.

Gross margin performance was below guidance due to mix issues, and this is likely to continue into Q3, but improve in Q4. Gross margin was 68%, operating margin 26.6%.

Believes near-term advantages of main competitor will be reversed in long-term due to the differing nature of addressable markets at the new product nodes.

Book to bill was above 1. Lead times have extended.

Acquired Enpirion in the quarter for power system-on-chip technology.

Compared to Q1, selected device revenue: Stratix V, down 22%; Stratix IV, up 11%; Aria II down 13%; Arria V up 113%; Cyclone V up 73%; HardCopy IV up 64%.

Sales by category, % of total revenue: New 41%; mainstream 28%; mature and other 31%.

By vertical market: Telecom and wireless 42%. Industrial 22%, Networking & computer 18%, Other 18%.

FPGAs represented 83% of revenue. CPLD was 9%. Other products were 8%.

A cash dividend of $0.15 is to be paid on September 3 to shareholders of record on August 12, 2013. Intends to continue to increase the dividend over time.

Altera ended the quarter with a cash and investment balance of $3.6 billion. $55 million was used to repurchase stock.

Q&A:

Confidence in guidance? We are confident based on bookings and turnover.

China Mobile? Won't know until they release final results of bidding to Altera's customers, but feels good about shipments in Q3 for wireless. China Telecom LTE deployment won't ramp until 2014.

Industrial market? Industrial and automotive were up in the quarter, similar to the analog industry, but military was down. Automotive was up 22% y/y, and is expected up again in Q3.

Older products showing better growth than FPGA in quarter? Mature products were up because industrial sector came back, and they use the older products more. But that is not what caused the margin decrease.

China Telecom is continuing to deploy 3G, and are talking about deploying FTD instead of LTE.

We don't know yet what the margin will be for Intel products, but we will be a full mode ahead of our competitor, so we don't expect a margin problem. We believe Intel's 14 nm is a good match to our high-end product, because it scales better than TSMC's process. We should have a power and density advantage over our competitor. We will do even better at Intel's future node.

Enpirion revenue was the main cause for the jump in other income.

Some of the margin drop was due to customer volume forecasting errors, which should revert to normal over time. Wireless radio has lower margins than base products, and margins vary by end markets, mainly due to differences in volume.

Getting back to 69% to 70% range next year? We have limited visibility, but it should go up from Q2; our desire is to have margin in the 69-70% range.

First test chip tape out for 14 nm is this quarter.

Wireline market? We saw networking and telecom up substantially in Q2, and expect them to do fine in Q3.

Minimal increase in op ex next year? In 2010 we were underinvested in R&D, so we amped it up, but now we are done. So no increase in R&D in 2014.

We have been able to increase ASPs and markets and revenues by incorporating ARM CPUs into our products, thus pulling that part from other vendors.

14 nm exclusivity? Intel says we are the only major FPGA manufacturer that will have access to their process. But they are working with a few startups. So major direct competitor cannot work with Intel for FPGAs.

New products suffered because computer market was down in the quarter. But we expect the computer market to be up in Q3, and has been a fast growing market for us.

We had one 10% customer (11%) in the quarter, a Chinese equipment maker.

We have a strong relation with TSMC and there have been no manufacturing issues.

Order linearity in quarter? They were very linear except that Japan was back-end loaded.

We already have 20 nm design wins for the midrange product. Most 40 nm and 28 nm product is likely to migrate to 20 nm over the next few years.

We don't see anyone catching up to Intel's 14 nm technology in the next 5 years.

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