Analyst Conference Summary

conference date: January 21, 2014 @ 2:00 PM Pacific Time
for quarter ending: December 28, 2013 (third fiscal quarter 2014, Q3)

Forward-looking statements

Overview: Seasonal sequential revenue drop, but outstanding net income and EPS.

Basic data (GAAP):

Revenue was $586.8 million, down 2% sequentially from $598.9 million, but up 15% from $509.8 million in the year-earlier quarter.

Net income was $175.9 million, up 24% sequentially from $141.5 million, and up 70% from $103.6 million in the year-earlier quarter.

Diluted EPS (earnings per share) were $0.61, up 24% sequentially from $0.49, and up 60% from $0.38 year-earlier.

Guidance:

For the March 2014 quarter sales expected up 2% to 6% sequentially [$598 to $622 million]. Gross margin near 68%. Operating expense about $226 million. Other expense $7 million. Tax rate 13%.

Conference Highlights:

Revenue was at low end of guidance, but 28 nm product sales increased to $100 million in the quarter driven by Kintex-7, with Zynq-7000 products also strong. Market share was gained in the quarter. Mainstream and base market segments declined sequentially.

A cash dividend of $0.25 per share will be payable on February 27 to stockholders of record on February 6, 2014.

GAAP net income included a $19 million or $0.06 per share reversal of a patent litigation reserve.

69% gross margin.

Revenues by end market: Communications and Data Center 44%, ; Industrial, Aerospace & Defense 37%; Broadcast, consumer and automotive 16%; Other 3%.

LTE sales to China were strong. Believes this will continue in March quarter. Believes the quarter will break records in the wireless segment.

Revenue by product:

38% New products: Virtex-7, Kintex™-7, Artix™-7, Zynq™-7000, Virtex-6, Spartan-6
33% Mainstream products: Virtex-5, Spartan-3 and CoolRunner™-II
26% Base products: earlier Virtex, Spartan-II, Spartan, CoolRunner and XC9500
3% Support products: Configuration solutions, HardWire, Software & Support/Services

The first (by anyone) 20 nm PLD UltraScale product shipped in November 2013. Vertex UltraScale 20 nm taped out in December.

Cash, equivalents and long-term investment balance was $3.7 billion. Convertible debenture liability was $1.3 billion. Operating cash flow was $216 million. Depreciation $14 million. Capital expenditures $11 million. $97 million of stock was repurchased.

Stock based compensation expense was $24 million. Dividend payment required $67 million.

Cost of revenues (GAAP) was $181 million, leaving gross profits of $406 million. Operating expense total was $203 million, consisting of: research and development $128 million; selling, general and administrative $92 million; amortization $3 million. Leaving operating income of $203 million. Interest and other expense was $5 million, and the income tax provision was $22 million.

Backlog at end of quarter was up slightly sequentially.

Believes will continue to win share from ASICs and the PLD competition.

Q&A:

Expecting wireless record, is it a peak? LTE? This is far from where we think the peak will be. The last peak was the 3G rollout in China. We are participating in 4G rollout outside China, with Europe beginning to kick in. We expect to go well above our historic peak in wireless. We were disappointed because wired was down. All China OEMs are coming to us to discuss the long-term supply situation.

68% gross margin as wireless remains growth driver? We are not ready to forecast margins beyond March quarter. But our margins are good at 28 nm. The reason for the dip is the cost of acceleration of shipments, not the overall margins at 28 nm.

Altera competition at next node? We are very confident we will maintain and expand our leadership. More details will be released in February.

Growth is not just about Kintex, it is also end markets. We do have a pricing discount due to the high volumes. The mix and margin should work itself out over time.

There is an emerging need for higher performance products at cost points. The low-end products won't have the performance. The expansion is replacing ASSP's and ASICs, not cannibalizing PLDs.

Consumer end market weakness? It has trends as high-end electronics come to market, like next-generation ultra-high-def televisions. These trends tend to last for a year or so, but when they go to higher volume they usually trans to ASICs.

Business outside of communications? We see modest growth in the other markets. Wireless is the major growth area. Our growth delta this year is mainly from 28 nm products.

10% customers? None. We rarely have that.

Mid-tier communications? Overall economy and IT spend were not what we would like. We are doing better with new designs than legacy designs.

Base stations versus radio cards? Radio cards will lead volume, we are seeing a lot of orders. We are getting base band orders, and also some backhaul. Radio is likely to lead for the next few quarters.

20 nm is shipping for revenue today, but only for prototypes. We are already getting design wins. Significant revenue is out a year. It has been 3 years since we first taped out 28 nm, and we just reached $100 million for a quarter, so you can see the lag.

Zynq opportunity size? It is still under $10 million. It is a new concept, so the design-in cycle is longer than for other products. In a year or so the numbers will be higher, mainly in wireless with some automotive.

4G deployment in America is not complete. Really only Korea has completed 4G deployment. So there is plenty of ramping over time for 4G products. India is likely to stop 3G deployment and commence with 4G later this year. FPGAs are becoming more essential to these devices and form a larger part of the bill of materials.

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