Analyst Conference Summary


conference date: October 16, 2014 @ 2:00 PM Pacific Time
for quarter ending: September 28, 2014 (second fiscal quarter 2015, Q2)

Forward-looking statements

Overview: About as expected, but guides to a better December quarter.

Basic data (GAAP):

Revenue was $604.3 million, down 1% sequentially from $612.6 million and up 1% from $598.9 million in the year-earlier quarter.

Net income was $171.5 million, down 1% sequentially from $173.6 million, and up 21% from $141.5 million year-earlier.

Diluted EPS (earnings per share) were $0.62, flat sequentially from $0.62, and up 27% from $0.49 year-earlier.


For December quarter (fiscal Q3) revenue expected between flat and up 4% sequentially. Gross margin near 69%. Operating expense around $230 million. $6 million net other expense. Tax rate about 13%. Expects wired and wireless communications to ramp, despite slower than expected LTE ramp in China.

Conference Highlights:

Revenue was in line with guidance, but EPS exceeded. A $2 million tax credit helped. All end markets performed as expected, including a pause in Chinese LTE activity.

28 nm sales were flat; 40 nm sales declined. Believes December quarter will display a strong recovery in 28 nm part sales. Base category (oldest product) sales increased significantly during the quarter due to aerospace & defense demand.

Sales to communications customers were down significantly, as expected, with two customers leading the decline. Wired and wireless were both down, but datacenter sales increased.

Entered a new collaboration with China Mobile for development of virtualized 5G wireless networks.

Revenues by end market: Communications and Data Center 41%; Industrial, Aerospace & Defense 41%; Broadcast, consumer and automotive 15%; Other 3%. Sequentially this represents a major shift from communications to industrial.

Revenue by product:

43% New products: UltraScale, Virtex-7, Kintex™-7, Artix™-7, Zynq™-7000, Virtex-6, Spartan-6
31% Mainstream products: Virtex-5, Spartan-3 and CoolRunner™-II
23% Base products: earlier Virtex, Spartan-II, Spartan, CoolRunner and XC9500
3% Support products: Configuration solutions, HardWire, Software & Support/Services

71.9% gross margin, up sequentially from 69.1%. 33.1% operating margin, sequentially from 33.7%.

Cash, equivalents and long-term investment balance was $3.55 billion. $1.0 billion long-term debt and $570 million current debt. Operating cash flow was $204 million. Depreciation $14 million. Capital expenditures $8 million. $200 million of stock was repurchased. Stock based compensation expense was $28.7 million. The dividend payment required $77 million.

Inventory rose to $262.7 million sequentially from $256.8 million. Expects inventories to be reduced by end of fiscal year.

Revenue by geography: North America 32%; Asia 37%; Europe 21%; Japan 10%. Sequentially this results from a shift from Asian to North American sales.

Cost of revenues (GAAP) was $169.6 million, leaving gross profits of $434.6 million. Operating expense total was $234.6 million, consisting of: research and development $138.3 million; selling, general and administrative $93.9 million; and amortization $2.4 million. Leaving operating income of $200.0 million. Interest and other expense was $5.7 million, and the income tax provision was $22.8 million.

The dividend of $0.29 will go to shareholders of record on November 5, payable on November 26, 2014. Continues to be committed to returning cash to shareholders.

"At the 20 nm node, independent customer feedback indicates we have an approximately one year lead over the competition." Believes will drive market share gains.


Help us to see how 4G base station ramp compares to 3G ramp? It is difficult to compare the two ramps; predictability is difficult because of shortages in the supply chain. The number of 4G base stations deployed should be greater than 3G. The pace has been different with 4G. There are many base station OEMs, but in average 4G has about 50% more revenue for us than 3G.

Our gross margin was driven up by all the sub-segments going up during the quarter. Aerospace and defense sales are specific-program related. We expect one more quarter of strong government spending, but then falling off again in the March quarter.

Any artificial boost from last-time buys in quarter? Industrial, medical, and aerospace have very long tails after design-in. So when these categories grow it is in older products, at higher margins. There are last time buys regularly in this segment. When aerospace drops, margins will drop too.

We have had customers say to us "We would take more FPGAs if we could get enough power amplifiers." China Mobile might want another 100,000 base stations this year, but we don't see how that would be possible. We don't believe we are losing any share, the shortage just determines the timing of LTE sales.

Are you aware of any conversions to High Silicon's communication devices by Huawei? None of the drop was caused by substitution by ASICs, High Silicon or anyone else.

We are trying to be a consistent increaser of dividends over time. The buy back is opportunistic. Given the hit we took in the stock market, we will continue, with $200 million remaining allocated.

What gives you the confidence you can have $600 million in 28 nm sales in the fiscal year? The target is driven by a host of markets. The design width breath is strong. Wireless in China is particularly lumpy. Wireless is not the only driver. We expect automotive to start accelerating, for instance.

We believe the growth of the TAM (total addressed market) by ASSP replacement is coming, if behind the curve we expected. Wire communications has been slow to move to 28 nm, but we expect to see that in 2015.

What is wired communications looking like going forward? We had seen a lot of product taken in the prior quarter, so they had some inventory, which was 40 nm. Now they are shifting to 28 nm, and we expect that to grow pretty significantly in coming quarters.

We do believe that the China Mobile part of the mix will increase thoughout the year, which will take down the margin some.

We have about half radio card, half baseband in our LTE mix, the power amplifier shortage is affecting both.

Is the share count guide just from the buyback? It is from chosing a price per share to compute our convertable note dilution, plus the buy back.

Size of aerospace and defense, and so size of drop in March quarter? Typically it has been about 15% of total revenue. In the September quarter it was higher. Despite brisk military activity in the world right now, we expect some decline in March.

How did inventory get so high? We needed to make sure we had adequate supply for the 28 nm peak, and there was a possibility of constraint at the foundry. Once there were other constraints at China Wireless, we started cutting our orders. We will be selling some of the higher-cost inventory, which will contribute to dropping margins to what we are predicting.

Yields are good with 20 nm, the quality from TSMC has been very good. It has been the smoothest introduction we have seen. We are pleased with where we are in 28 nm with defect levels, but have not reached the ultimate low yet.

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Disclaimer: My analyst call summaries may include both our condensations of statements made by company representatives and my own analysis. They are not covered by any warranty. I cannot guarantee anything said by company representatives is true. I 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 2014 William P. Meyers