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conference date: February 13, 2007 @ 2 PM Pacific Time
for quarter ending: December 29, 2006 (4th quarter)
Overview: Revenues down sequentially but up year-over-year.
Basic data:
Revenues were $317.4 million, down 7% sequentially but up 13% from Q4 2005.
Net income was $99.0 million, up 43% from Q4 2005
Earnings per share were $0.27, up 43% from Q4 2005.
Gross margin was 66.3%, down .4% from Q4 2005.
Cash and equivalents ended at $1.6 billion.
Guidance:
Q1 2007 revenues expected flat to down 4% sequentially. Gross margin 65-66%. R&D expense $60 to $65 million. SG&A expense near $75 million. $14.4 million stock-based compensation. $12 million capital expenditures. Orders to resales so far have been slightly positive.
2007 tax rate 13-15%.
Conference Highlights:
New Products segment had 155% growth (6% sequentially). FPGAs declined 8% sequentially, but up 13% year-over-year. CPLDs were down 4% sequentially, but up 7% year-over-year.
What happened in Q4 2006 was what we expected, but "with greater downward amplitude." Communications was notably weak; elsewhere conditions were sluggish. Customer inventory reduction affected FPGAs. Mainstream products declined 16% sequentially. Mature products declined 6%. Computer storage and servers were soft. Believes increased market share in CPLDs year-over-year.
Communications industry has become weaker with recent customer backlog pushouts. Expect segment to decrease sequentially. Expect industrial and consumer markets to be flatish. Japan is particularly weak.
Effective tax rate declined from 15% to 10% due to R&D tax credit.
Stratix III FPGA devices are in final development. HardCopy structured ASIC adoption continues to expand.
Cost of sales $107.0 million. R&D $58.3 million (includes $6.5 million stock-based expense). SG&A $74.0 million (includes $8.6 million stock-based expense). Total operating expense $132.3 million (down $12 million sequentially). Interest & other income $18.8 million.
Accounts receivable ended at $74.8 million; inventories $78.5 million. Accounts payable $230.5 million.
Revenue by region: North America 22%, Asia Pacific 31%, Europe 26%, Japan 21%.
Revenue by product category: New 24%, mainstream 32%, mature 44%.
Revenue by market segment: Communications 39%, Industrial 35%, consumer 15%, computer & storage 11%.
Revenue by type: FPGA 71%; CPLD 19%; other 10%.
Bought back 4.4 million shares at cost of $87 million. Already bought 4.7 million shares in Q1 2007.
2006 as a whole showed growth across all segments, with only consumer segment disappointing.
Q&A:
Longer term outlook? Expect to outgrow communications market. Expects consumer segment to be better in 2007 than in 2006. Recovery is dependent on end wireless companies. Expect strength out of 2G market. Don't expect mass 3G deployments in China this year. There has been a slowdown in some of the North American wireless purchases.
Risk of inventories being too lean? Wireless demand is slow, but think it is more of an inventory picture, so at some point expect a snapback. Visibility poor beyond one quarter.
R&D guidance? Will accelerate after Q1. Full year guidance is unchanged: will peak mid-year.
Full year 2007 double digit revenue growth? Don't provide long term revenue growth rates.
Industrial and consumer market macro driven? Q1 is typically seasonally down for consumer segment, sees it is flatish, which is positive. Industrial side is combo of Japan weakness and general inventory overhang. Nothing on a macro basis.
Non-wireless communications? Networking and wireline seen as flat this quarter.
SG&A? $300 million is full 2007 target. R&D $300 million as well. Both are GAAP numbers.
Cyclone revenue? II was up 28% sequentially. Cyclone I was down 4% sequentially.
Gross margins? Long term will be centered around 65%; no prediction on when that will be hit.
Pricing for share? Usually not worth doing, but pricing has been aggressive for design wins for sockets. Since sockets are not industry standard, once a socket is won there tends to be little price decrease during a product's lifetime.
We do still see design losses to ASICs, but we also pick up wins in many areas that were once dominated by ASICs.
FPGA growth outlook? Grew stronger historically than CPLDs. But now CPLDs are seeing stronger growth as they are included in high-volume equipment. New architecture has lowered costs and increased functionality. But FPGA growth will probably remain higher. CPLDs are able to be in faster design cycles than ASICs, which is important for consumer products with short lifetimes.
Consumer expectations? Flat pannel side was weak in 2006. Design wins lead to higher expectations for 2007.
2G v. 3G? We have about 2 times the content in 3G base station devices.
HardCopy was down sequentially because had been up 50% in Q3 because they had stocked up after shortages in Q2 due to substrate shortages.
Lead times? They are back to normal, 2 to 6 weaks, have been since September.
Programmable power feature competitiveness? In 65nm have about 1 billion transistors, but they leak and have high power consumption. Infrastructure equipment has fixed power envelopes, which would not have worked if they had just extrapolated 90nm technology. So power savings are a necessity. Exciting to sell it to our customer base. Don't think we are late behind the competition.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it's possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers