Analyst Conference Summary

conference date: October 23, 2007 @ 2:00 PM Pacific Time
for quarter ending: September 29, 2007 (3rd quarter)

Forward-looking statements

Overview: Not a good quarter, a bit down from Q2 and still slumping from 2006. Guidance is grim too.

Basic data:

Revenues were $315.8 million, down 1% from $319.7 million in Q2 and down 7% from year-earlier $341.2 million.

Net income was $69.0 million, down 14% sequentially from $80.5 million and down 21% from $87.4 million year-earlier.

EPS (earnings per share) were $0.20, down 9% sequentially from $0.22 and down 17% from $0.24 year earlier.

Guidance:

For Q4 revenues are expected flat to down 4%. Gross margin 63% to 64%.

Conference Highlights:

Results were below guidance of 0 to 3% growth. Had weaker-than-anticipated second half of September. Shortfall was largely in communications segment (down 1% and tailing off in late September), but also some in industrial and test and measurement. Consumer was strong.

10.8 million shares of stock were repurchased at a cost of $255 million.

"The September quarter proved more challenging than anticipated. Sales to the communications and industrial markets were below expectations, although consumer market segment sales were up strongly. The resulting end market mix reduced gross margin this quarter. Reflecting continued cost control efforts across the company, operating expenses came in lower than forecast, more than offsetting the lower than planned gross margin."

On the bright side, Stratix III FPGA family introduction is going well.

Revenues from largest customers grew modestly, but broad base declined. New product revenues grew 13% sequentially and 52% from prior year.

FPGA revenue declined 1% sequentially, but Stratix II was up 4% and Cyclone II up 34%. CPLD revenue was up 1% sequentially led by 13% increase in Max II. Hardcopy declined by 7%.

Gross margin from 63.8%, down sequentially from 64.2% due to larger mix of consumer items. R&D costs rose due to 65nm product launch. SG&A declined by $2 million. Other income was $16 million. Tax rate was 14%.

Cash and equivalents ended at $1.2 billion, down $93 million due to share repurchases.

Book to bill was better than 1.

Investing strongly in new products and technologies.

Server revenue was up but storage down.

Negative announcements from communications manufacturers is one reason for negative guidance.

Expect Altera to grow 10 to 15% annually over the next 5 years. Expect PLDs to continue to replace ASICs for lower volume products.

45nm products should ship next year.

Q&A:

Larger customers v. broader base implications? Difficult to forecast when customers themselves don't know where they are headed. Large communication customers were down. Small customers are mostly in industrial sector, which should grow as PLDs replace ASICs and ASSPs.

What so far in Q4? Back half of September weakness was weak for any quarter. Industrial quarter expected flat to slightly down in Q4.

Ramp of Stratix II? Expect it to continue to grow with new product introductions.

Moore's law tends to price out ASICs. Programmability allows you to aggregate designs and get good cost structures. If communications industry continues to consolidate that does decrease the number of designs. Also some designs include analog technology that can't be included in a PLD.

Are you slowing down on process improvements? No, but we are dealing with the power issue. Our programmable power designs took a lot of investment and is not being matched by our competitors.

Geographic issues? Splits are not that meaningful because production lines can be moved around. Japan is flat this year, but it was good in past years and should be good in 2008.

Cash from operations? $116 million.

Military? It is not a big sector for us, but because they have low volumes our PLDs are perfect for new communications equipment, especially with power consumption issues. PLDs are mandated for encryption devices because of need to change algorithms to keep ahead of the enemy.

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