Analyst Conference Summary

conference date: January 22, 2015 @ 1:45 PM Pacific Time
for quarter ending: December 30, 2014 (Q4, fourth quarter 2014)

Forward-looking statements

Overview: Revenue down sequentially but at midpoint of guidance; up y/y.

Basic data (GAAP):

Revenue was $479.9 million, down 4% sequentially from $499.6 million but up 6% from $454.4 million in the year-earlier quarter.

Net income was $111.1 million, 6% sequentially from $118.0 million, but up 13% from $98.9 million year-earlier.

Diluted EPS (earnings per share) was $0.36, down 6% sequentially from $0.38 and up 16% from $0.31 year-earlier.

Guidance:

For Q1 2015 sales are expected to be flat to down 4% sequentially, with gross margin between 64.5% and 65.5%. Operating expenses between $188 million and $196 million. Tax rate back up to 13% to 14%.

By vertical market, Telecom and Wireless is expected flat; Industrial & military down; networking & computer up; and other down.

Conference Highlights:

"Our Arria 10 FPGAs, the first of our Generation 10 products, are proving to be competitively quite strong with good design-win momentum and record opportunities to pursue. We are entering the advanced stages of design for our high-end Stratix 10 FPGA, the industry's only 14 nanometer FinFET-based FPGA, with planned introduction later this year," said John Daane, CEO. Arria 10 is at 20 nm, and had over $1 million in revenue in Q4, while 28 nm product sales continued to grow.

Altera benefited from a low tax rate due to the catch-up for the reinstated R&D tax credit.

Altera had a design win with Audi's driver assistance system. An acceleration platform connected to IBM Power CPUs was also a win. An OpenCL design kit is also expected to aid gaining design wins.

Gross margin was weaker than expected due to the product mix.

Cost of sales was $168.2 million, leaving a gross margin of $311.7 million. Operating expenses of $190.8 million consisted of: R&D $107.3 million; selling, general and administrative $81.0 million; and amortization of $2.5 million. Leaving an operating margin of $120.9 million. Interest and other expense was $5.6 million. Income taxes $4.0 million. Other comprehensive income was $15.6 million, resulting in comprehensive income of $126.8 million.

Revenue by geography: Americas 15%; Asia 41%; EMEA 30%; Japan14 %.

Revenue by vertical market: Telecom and wireless 42%; industrial and military 22%; networking & computer 16%; other 20%. Wireless revenue was fairly stable.

New products contributed 59% of revenue; mainstream 18%; mature and other 23 %.

84% of revenue was for FPGAs, 8% for CPLDs and 8% for other products.

Cash, equivalents, and long-term investments ended at $4.5 billion. Long term debt was $1.5 billion. Cash flow from operations was $150.8 million. $9.8 million was used for capital expenditures. $152 million was used to repurchase shares.

A dividend of $0.18 per share to stockholders of record on February 10, 2015 will be paid on March 2. Altera has plenty of cash to continue to repurchase shares.

Sequential growth is expected to resume in Q2 2015 and continue in the second half. Gross margin should improve during 2015.

Believes the 14 nm FinFET products, when introduced, will have 25% more logic elements than competing products. Sees continued growth in FPGA coprocessors in datacenters as well as robotics and automotive systems.

Q&A:

Gross margin color? It was lower mainly due to growth in telecom and wireless, which has a lower margin. We had two greater than 10% customers in that area. We are no longer expecting a pause in wireless deployments in Q1, with non-China and 3G picking up the slack in China LTE, which means the mix issue will remain. But the higher margin military and industrial business has been trending lower than expected. Margins should improve later in the year.

Pricing strategies and margins? As you grow large customers, there tends to be some price concessions. Telecom and consumer are high-volume businesses. Margins have decreased over time as accounts have become more concentrated.

Competitors' clouds in communications markets statement? We have some visibility from our customers. Wireless will be stable, telecom should grow. There is nervousness from carriers saying they will reduce cap ex spending. But we are hearing that is not going to be in hardware, but in other areas. So we see a growth opportunity in telecom and networking in 2015. We expect military to grow this year. We should see very good growth in computer this year and FPGAs are entering the datacenter.

14 nm tape out timing? Originally we were going to tape out in Q1. We are running a couple of months late but should tape out before the end of the year. The change in architecture will be a big advantage for us to increase performance 2X. Using the true 14 nm available only from Intel, we will have a major advantage over both Xilinx and ASICs.

We have been beating the competition (Xilinx) in the wireless segment. We did not run an obsolescence program like they did. Other than that it is design specific.

We would expect LTE to pick up again in later 2015 as China Mobile returns to a new round of deployments. We are seeing stronger-than-expected 3G builds in developing countries and China.

In North America as more 4G is deployed there will be a greater need for wired backhaul, which should contribute to demand later in 2015.

We believe we can stay stable in market share in 28 nm, or even take share. We are also getting out of the gate very strongly in 20 nm, where we have design wins.

Automotive has been growing quickly, but off a small base. It has a 3 to 4 year delay between design and production, but then a design tends to stay stable for a very long time.

We would expect to grow earnings faster than revenue for the next few years because we completed a major investment cycle in new architectures to drive the next generation of devices.

Keep in mind wireless customers are still taking devices at 65 nm and 40 nm as well as the newer products. 28 nm is going to continue to ramp for the next several years, even though we are already introducing 20 nm and will soon have 14 nm.

We are doing a midrange family in 20 nm, with some extent into the high end range. This fixes our less-competitive family in 28 nm. We are seeing very broad acceptance of this product. For high-end products we will go to 14 nm. There are some pauses as some customers are waiting for Stratix 10.

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