Analyst Conference Summary

conference date: April 24, 2014 @ 1:45 PM Pacific Time
for quarter ending: March 28, 2014 (Q1, first quarter 2014)

Forward-looking statements

Overview: Nice growth, but lagging Xilinx.

Basic data (GAAP):

Revenue was $461.1 million, up 1.5 % sequentially from $454.4 million and up 12% from $410.5 million in the year-earlier quarter.

Net income was $116.5 million, up 18% sequentially from $98.9 million, but down 3% from $120.2 million year-earlier.

Diluted EPS (earnings per share) was 0.37, up 19% sequentially from $0.31 and flat from $0.37 year-earlier.

Guidance:

For Q2 2014 sequential revenue growth expected between 2% and 6%, from strength in wireless. 28nm revenue growth greater than 30%. 66.5% to 67.5% gross margin. R&D expense $104 to $106 million. SG&A $78 to $80 million. Other expense $4 million. Tax rate 12 to 13%. Industrial, Military and Automotive expected down; networking storage and computer up; other flat.

Conference Highlights:

Revenues exceeded expectations due to stronger than expected Chinese LTE deployments. The computer segment declined more than expected. 3G business in India and other developing countries has picked up.

28 nm revenue was in mid-$50 million range, up sequentially from $44 million. New products grew % sequentially.

Altera is now shipping Arria 10 FPGAs based on 20nm process technology. Continues to work towards products based on Intel's 14nm Tri-gate technology, with test chips already back. We are about 2 months behind the competition in silicon availability, but months ahead in software.

Lead times have lengthened.

Cost of sales was $151.9 million, leaving a gross margin of $309.2 million. Operating expenses of $174.6 million consisted of: R&D $97.6 million; selling, general and administrative $74.5 million; and amortization of $2.5 million. Leaving an operating margin of $134.6 million. Interest and other expense was $4.4 million. Income taxes $13.6 million.

Revenue by geography: Americas 15%; Asia 43%; EMEA 26%; Japan 16%.

Revenue by vertical market: Telecom and wireless 45%; industrial and military 22%; networking & computer 15%; other 18%.

New products contributed 49% of revenue; mainstream 23%; mature and other 28%.

83% of revenue was for FPGAs, 9% for CPLDs and 8% for other products.

Cash, equivalents, and long-term investments ended at $ billion. Cash flow from operations was $130.4 million. $162 million was used to repurchase stock.

The cash dividend will again be $0.15 per share, to be paid on June 2 to shareholders of record as of May 12.

Believes can become the market leader with its next generation products. 14 nm Stratix family design on schedule; believes will capture the high end of the FPGA market with this. Believes having 20 nm design software available is an edge over the competition.

Plan is to grow revenue faster than expenses, so earnings will grow faster than revenue.

Q&A:

Chine LTE ramp, Q3 expected flat? Confidence in our view is the backlog out to Q3. China Mobile in particular has an advantage in 4G. The FTD 4G licenses for China Telecom and Unicom are expected in Q4.

Lead times stretching, could that be double ordering? Certainly backlog can be cancelled, but we are the sole source for the sockets we have one. These are orders from major customers. Book to bill was over 1, which appears to be from a real increase in business. The lead time change did not occur until the last week of Q1.

3G versus 4G dynamics? 3G has already seen a downturn. China Mobile has already stopped procuring 3G. Nor is there 3G deployment in the U.S. or Europe. 3G has been strong in Russia and India, with Brazil likely to pick up. 4G is very early, with the U.S. and Europe ramping.

40nm products? Growth in industrial did help our mature market. We had growth in 28nm, while 40nm was flattish. The reason new products are not driving all the growth is that we are still shipping 65 nm wireless, on down to the new products.

Long term gross margin view? This year is unique in the wireless growth. We are not seeing broad-based growth. So range is still 67% to 70% for gross margin.

How much effect will India have in Q4? That is why Q4 is hard to call. China Mobile tends to do builds in 6 month to 9 month cycles. The others, including in the U.S., tend to do more sustained rates. We are already looking at over 500,000 base stations from China Mobile. They (Unicom and Telecom) don't want to do TD deployments, they want to wait for FTD.

How big was your largest customer in the quarter? 1 slightly over 10%.

Networking, computer and storage weakness? We had predicted computer would be down. Q1 is seasonally weak. Also softness from flash-based storage system vendors. We expect computer to pick up this quarter. Recall we had double-digit growth in Q2 and Q3 because of a few large datacenter customers that tend to do lumpy growth.

Are lead times concentrated in 28 nm wireless? Was more 40 nm and 65 nm wireless. This was not due to inventory, but to capacity restrictions at the foundry. It is a slight issue, not a major issue.

Milestones with Intel foundry? We have working test chips in 14nm. We have a working transceiver. Our plan is to tape out our first design in Q1 2015, shifted out a bit so we can make some architectural changes and increase the density. We believe at that point we will be alone at the high end, with nothing our competition can match. Customers already have design tools that work with these future chips. One customer already has switched a traditional function from an ASIC to FPGA.

How big is the emulation market? It is a couple of hundred million per node. It is still active in 28nm, but will switch over to 20nm and then to 14nm. We are just doing the midrange product in 20nm, but we are mostly skipping to 14nm.

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