Analyst Conference Summary

conference date: January 21, 2015 @ 2:00 PM Pacific Time
for quarter ending: December 27, 2014 (third fiscal quarter 2015, Q3)

Forward-looking statements

Overview: Mediocre quarter due to weakness in broadcast and communications end markets.

Basic data (GAAP):

Revenue was $593.5 million, down 2% sequentially from $604.3 million and up 1% from $586.8 million in the year-earlier quarter.

Net income was $168.5 million, down 2% sequentially from $171.5 million, and down 4% from $175.9 million year-earlier.

Diluted EPS (earnings per share) were $0.62, flat sequentially from $0.62, and up 2% from $0.61 year-earlier.

Guidance:

March (fiscal Q4 2015) quarter sales are expected to be down another 2% to 6% sequentially. Gross margin 68% to 69%. Operating expenses $227 million. Other net expense $7 million. Tax rate 13%. Diluted share count 270 million.

The backlog going into the quarter was less than normal, and there will be a negative impact from the timing of aerospace and defense programs. Wired and wireless communications are expected to be flat sequentially. Broadcast and automotive are expected to be up. 20 nm product should be strong.

Conference Highlights:

CEO Moshe Gavrielov was disappointed by the quarter. He expects fiscal 2016 to be a low-growth environment overall, with uncertainty in global wireless spending. However, cash flow is expected to remain strong.

EPS was solid in the quarter despite the less than expected revenue from broadcast and communications. Sales to communications market declined 3% sequentially, with flat wired sales and a decline in wireless sales. China wireless increase in line with expectations, but wireless was weaker than expected in other regions.

Strong defense sales offset declines in industrial, scientific and medical sales. Automotive sales were better than expected, with new driver assistance programs beginning to ramp.

December was the weak month of the quarter.

There was a $0.02 EPS benefit from the reinstatement of the R&D tax credit.

28 nm product line went back into growth, with a 20% sequential increase and up over 50% y/y. The increase was over a broad set of applications.

Kintex UltraScale 20 nm FPGAs moved into volume production, leading the industry. Believes has a one-year lead over the competition in 20 nm. 16 nm products are in the pipeline.

To address the datacenter and other markets the SDAccel development environment was introduced to give developers a CPU/GPU like environment that includes support for OpenCL parallel processing.

Revenues by end market: Communications and Data Center 41%; Industrial, Aerospace & Defense 43%; Broadcast, consumer and automotive 14%; Other 2%. 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
29% Mainstream products: Virtex-5, Spartan-3 and CoolRunner™-II
25% Base products: earlier Virtex, Spartan-II, Spartan, CoolRunner and XC9500
3% Support products: Configuration solutions, HardWire, Software & Support/Services

69.7% gross margin, down sequentially from 71.9%. 32.0% operating margin, down sequentially from 33.1%.

Cash, equivalents and long-term investment balance was $3.6 billion. $1.0 billion long-term debt and $573 million current debt. Operating cash flow was $291 million (up sequentially from $204 and y/y from $216). Depreciation $14 million. Capital expenditures $6 million. $175 million of stock was repurchased. Stock based compensation expense was $29.1 million. The dividend payment required $76.2 million.

Revenue by geography: North America 34%; Asia 39%; Europe 17%; Japan 10%. Sequentially this results from a shift from European to North American sales.

Cost of revenues (GAAP) was $179.6 million, leaving gross profits of $413.9 million. Operating expense total was 223.9$ million, consisting of: research and development $133.5 million; selling, general and administrative $88.1 million; and amortization $2.4 million. Leaving operating income of $190.0 million. Interest and other expense was $4.0 million, and the income tax provision was $17.5 million.

The dividend of $0.29 will go to shareholders of record on February 4, 2015, payable on February 25. Continues to be committed to returning cash to shareholders.

Q&A:

Slow growth in fiscal 2016 statement? Right now growth is driven by 28 nm products. The outlook for communications, aerospace and defense does not look strong.

Is this a permanent reset to the earlier projections of growth at 2x the industry rate? We do see a slow down. We will have more to say in March. We are not making a long-term statement, just for fiscal 2016. A lot of it is specific defense programs.

Effect of Russian sanctions on aerospace and defense? None. We do have high-performance compute and communications sales that have been affected by the sanctions against Russia.

We believe there may be some negative impact on sales due to the increasing U.S. dollar.

China base station business, constraints? There are still some power ap shortages. The two changes we are seeing is that Phase 3 rollout pace is slower than expected and the FD licenses. We expected FD shipments to begin in the March quarter, but the licenses have not been given out yet.

Wireless has had short term weakness in North America, as capital is diverted from AT&T and Verizon, as well as Sprint's LTE roll out. We are not modeling Europe or India taking significant product yet.

How to think about gross margins now? We guided for Q4. We had been running the company at 68% to 70%, we don't want to give out a lower number at this time. It is a reasonable range for now.

We are making good traction on the FinFET 16 nm program with TSMC, but we are now looking at May for the tape out timeframe. The delay was from design issues at Xilinx. It typically takes 2 to 3 years for a new process technology to reach a high volume of sales.

28 nm is a broad and deep product family. It addresses all the markets we are in. Families are moving into significant growth, Virtex, Zynq, and Artix. We expect continued significant growth ahead. In 40 nm and 45 nm products, market share has been up and down over the past year. Industrial and automotive are growth areas for us, and they are still mainly at 40 nm. In wireless there is a transition to newer products too.

Televisions continue to represent an opportunity for us.

Does it still make sense to chase Moore's law, given the effect on operating expense? End market growth has not been sustained, has flattened at about $2.4 billion per year. We believe being at the leading edge allows us to capture more market share. We see more ASICs going away in the future, as well as ASSP products shifting to FPGAs, if we make the investment in software and process technology. Automotive market is an example.

Wired has been frustrating for us. We have predicted growth for years, then not seen it. We will talk more about this in March. We believe wired will continue to see a move to FPGAs. We do need to expand the population of designers we address.

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