Analyst Conference Summary

conference date: January 23, 2014 @ 1:45 PM Pacific Time
for quarter ending: December 31, 2013 (Q4, fourth quarter 2013)

Forward-looking statements

Overview: Decent quarter.

Basic data (GAAP):

Revenue was $454.4 million, up 2% sequentially from $445.9 million, and up 3% from $439.4 million in the year-earlier quarter.

Net income was $98.9 million, down 17% sequentially from $119.4 million, and down 18% from $120.8 million year-earlier.

Diluted EPS (earnings per share) was $0.31, down 16% sequentially from $0.37 and down 18% from $0.38 year-earlier.

Guidance:

Demand pause in Q1 resulting in revenue down 2% to 6%. Gross margin down 30 basis points sequentially on mix. Gross margin should improve the rest of the year. 30% sequentially increase in 28 nm revenue. Wireless up sharply on China LTE.

Conference Highlights:

Newer products drove growth, led by 28 nm FPGAs. Plans to sample 20 nm FPGAs in Q1 2014. Did a little better than expected based on some subsegments doing better than expected.

28 nm revenue was $44 million, up 33% sequentially. New products grew 10% sequentially.

Compared to Q3, selected device revenue: Stratix V, up 36% sequentially; Stratix IV, up 4%; Aria II flat; Arria V up 5%; Cyclone IV up 17%; Cyclone V up 89%; HardCopy IV 23%; Enpirion down 8%.

Altera ended the quarter with a cash and investment balance of $, sequentially from $3.82 billion.

Cost of sales was $144.0 million, leaving a gross margin of $310.3 million. Operating expenses of $193.2 million consisted of: R&D $106.6 million; selling, general and administrative $84.7 million; and amortization of $1.9 million. Leaving an operating margin of $117.2 million. Interest and other expense was $4.9 million. Income taxes $14.9 million.

Revenue by geography: Americas 19%; Asia 41%; EMEA 24%; Japan 16%.

Revenue by vertical market: Telecom and wireless 40%; industrial and military 22%; networking & computer 19%; other 19%.

Wireless was flat sequentially helped by LTE in China, while industrial grew. Telecom (wired) was down significantly. Computer & broadcast were up sharply, driving outperformance compared to guidance. Continues to replace ASICs in existing markets. Automotive, industrial, and military each grew in 2013.

83% of revenue was for FPGAs, 9% for CPLDs and 8% for other products.

Book to bill ratio was 1.0.

Cash, equivalents, and long-term investments ended at $4.57 billion. $140.8 million was used to repurchase stock.

The cash dividend will again be $0.15 per share.

Believes can become the market leader with its next generation products. Aria X will sample in Q1 at 20 nm. 14 nm Stratix family design on schedule; believes will capture the high end of the FPGA market with this. Believes having 20 nm design software available is an edge over the competition.

Plan is to grow revenue faster than expenses, so earnings will grow faster than revenue.

Q&A:

Baseband vs. radio shipments in China for LTE? We have seen China Telecom orders from some vendors. We are shipping for base stations and radio for China Mobile, which increased its targeted number of stations. We believe the deployment will take several years. The U.S. still has a couple of years to reach full deployment.

EMEA shipments down? It was broad based.

China deployments 40 nm or 28 nm? It is a collection of process nodes. We did not do a low-end product in 40 nm, so we are still shipping high-end 40 nm product. Radios tend to shift faster to next-generation products. Baseband tends to stay in a technology several years before transitioning. For us it is a combination of 65, 40 and 28 nanometer. Overall we are number 1 in China. We had a 10% customer from China; we will be number one in radio, backhaul, and baseband this year.

28 nm share still around 30%? As revenue ramps we expect to hit 50%. The high end ramps more slowly than the midrange, due to design and debug time requirements. Our competition has done very well in radios. We would expect we will catch up in 28 nm revenue this year.

Share buybacks and share count in 2014? We did a 5 year and 10 year bond, not a convertible. We could not do repurchases while we did the bond. Over time we will by back in a linear fashion, with some opportunism within a quarter.

We have had superior products in the high end, which is more than 50% of the market, while our competitor (XLNX) has been stronger in the midrange and low end.

Your march revenue outlook is below consensus, is demand weakness a one-quarter phenomena? We can't give guidance beyond Q1. Other and computer are expected to be down. But wireless is growing sharply. So far our book-to-bill is good.

In computer and storage we are well ahead of the competition.

Growth in other areas than wireless in 2014 will be outside of China. There is no reason industrial growth should slow down. We have military and space programs should ramp this year.

Believes TD-LTE deployment in China will be greater than the TD-CDMA rollout. Higher frequencies require more radio units.

Typically it would take about 1 and 1/2 years for a new node to hit 5% of revenue, and the 3rd year (after first samples) is the big ramp year.

Broadcast was up strongly in Q4, but expected down in Q1. Consumer is seasonal, so also stronger in Q4 than expected in Q1.

The reason we are only doing midrange chips in 20 nm is the power consumption is just too high with the planar process used. Many applications are in devices without fans or cooling. Power is a very significant issue. High-density at 20 nm meant high power consumption, which is not usable for the targeted applications. Fin-Fet works well for the high end, so we will move to 14 nm Fin-Fet. We expect the competition to go to 16 nm FinFet, but we will have much higher density. As a result we expect to capture the vast majority of the high-end market at 14 nm.

A lot of the early revenue we have for 20 nm is from companies that build their own servers for server farms. When the major server manufacturers adopt the chips, it will became less volatile. Certain things, like search and picture compression, can be done faster with FPGA than with standard CPUs.

We have not announced 14 nm products yet.

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