Analyst Conference Summary

conference date: July 22, 2014 @ 2:00 PM Pacific Time
for quarter ending: June 28, 2014 (first fiscal quarter 2015, Q1)

Forward-looking statements

Overview: Great EPS at $0.62 GAAP. Guidance weak.

Basic data (GAAP):

Revenue was $612.6 million, down 1% sequentially from $617.8 million and up 6% from $579.0 million in the year-earlier quarter.

Net income was $173.6 million, up 11% sequentially from $156.0 million, and up 10.5% from $157.0 million year-earlier.

Diluted EPS (earnings per share) were $0.62, up 17% sequentially from $0.53, and up 11% from $0.56 year-earlier.

Guidance:

September quarter (fiscal Q2) revenue expected flat to down 4% from Q1. Gross margin near 70%. Operating expenses around $236 million including $2.5 million amortization of acquisition-related intangibles. Net other expense of $7 million. 282 million fully-diluted shares. Tax rate 13%.

Believes wireless will be down again in Q2, then increase again in Q3. Defense is expected up in fiscal Q2.

Full fiscal year 2015 revenue is now expected to be up 5% y/y. 68% to 70% gross margin, with lowered operating expenses y/y. $530 million R&D expense; $380 SG&A. 13% tax rate.

Conference Highlights:

Revenue sequential decline resulted from weak defense and wireless markets, particularly the China LTE base station market. Cost reductions led the rise in EPS.

LTE shipments outside of China remained healthy. China LTE sales were weak due to inventory rebalancing. Space and defense market is expected to pick up later in the year.

Revenues by end market: Communications and Data Center 50%; Industrial, Aerospace & Defense 31%; Broadcast, consumer and automotive 16%; Other 3%.

First Virtex Ultrascale FPGA product 20 nm shipped. Believes 28 nm node will be the most successful in Xilinx history, but already see costs from 20 nm tape outs.

Revenue by product:

45% New products: UltraScale, Virtex-7, Kintex™-7, Artix™-7, Zynq™-7000, Virtex-6, Spartan-6
34% Mainstream products: Virtex-5, Spartan-3 and CoolRunner™-II
18% Base products: earlier Virtex, Spartan-II, Spartan, CoolRunner and XC9500
3% Support products: Configuration solutions, HardWire, Software & Support/Services

69.1% gross margin, improved on reduced expenses. 33.7% operating margin, also up.

Cash, equivalents and long-term investment balance was $3.6 billion, down $53 million in the quarter. $1.0 billion long-term debt and $568 million current debt. Operating cash flow was $130 million. Depreciation $13 million. Capital expenditures $9 million. $101 million of stock was repurchased. Stock based compensation expense was $22 million. The dividend payment required $77 million.

Inventory rose to $256.8 million sequentially from $234 million. Expects inventories to remain at elevated levels

Revenue by geography: North America 26%; Asia 43%; Europe 21%; Japan 10%.

Cost of revenues (GAAP) was $189.2 million, leaving gross profits of $423.4 million. Operating expense total was $216.9 million, consisting of: research and development $122.0 million; selling, general and administrative $92.5 million; amortization $2.4 million. Leaving operating income of $206.5 million. Interest and other expense was $6.2 million, and the income tax provision was $26.7 million.

The dividend of $0.29 for the quarter will be payable on August 27 to stockholders of record on August 6, 2014.

Q&A:

China LTE, is it a supply issue or demand issue? We had a huge shipment to them in the March quarter, we believe the June quarter was a supply side, inventory issue. For the September quarter it will be more of a delay in demand before buildout resumes.

Lead times? They were trying to get supply chains solidified, and in some cases took the parts available.

Percent build so far in China Mobile? Believe 300,000 base stations have been built. The next phase has been pushed out into calendar 2014, so just up to 400,000 or 450,000 this year. Our guidance is based on talking to the manufacturers and carriers. We expect a rebound as inventory drives up, then more as China Mobile starts its Phase 3.

Market share for 28nm? Our share grew in the fiscal year ending in March to about 70%. We are predicting in the high 60's in the current quarter, depending on what the competition does. We expect further sales acceleration in the December and March quarters. The flat spot has been driven by the weakness in China wireless for Kintex. Vertex grew "quite nicely" in the quarter. So the traction in 28 nm is quite good, excluding the slump in China LTE sales.

Gross margin will be dependent on mix, but should be in 68% to 70% range.

We will not be slowing down 16 nm or 20 nm programs in order to reduce cost. We want to get the technologies out as fast as possible.

The expectation is that the LTE deployment in China will be a three year event, with some up and down cycles within it. We expect the deployment to continue well beyond calendar 2015. We believe the inventory is because they are waiting for other components to complete the kits for the base stations. We don't know if there is an inventory of undeployed base stations.

The main driver of improved gross margin was mix, as the LTE wireless units don't have as good of margins as some other specific markets.

FinFET update? We are on track with our foundry for FinFET. Some of their customers will be ahead of us in using it. We do not believe we will see any delays from TSMC. They are doing 16 nm FinFET, then we will use the next phase which is 16 nm FinFET Plus. Tape out should be in the March quarter of 2015.

We can't really say what a normalized run rate would be in China. We expect December and March to be larger than the June quarter.

Revenues missing midpoint of guidance 2 quarters in a row, why are you having problems with guidance? We have missed, and it was due to China LTE and also aerospace and defense. The Defense Department budget changes have made forecasts difficult. It does not appear to be a broad-based end market issue.

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