Analyst Conference Summary

conference date: January 24, 2018 @ 2:00 PM Pacific Time
for quarter ending: December 30, 2017 (third fiscal quarter 2018, Q3)

Forward-looking statements

Overview: Solid quarter, obscured by a very large tax expense related to the new tax law.

Basic data (GAAP):

Revenue was $631 million, up 2% sequentially from $620 million and up 8% from $586 million in the year-earlier quarter.

Net income was $12 million, down 93% sequentially from $168 million, and down 92 % from $142 million year-earlier.

Diluted EPS (earnings per share) were $0.05, down 92% sequentially from $0.65, and down 90% from $0.52 year-earlier.

Guidance:

For the March Quarter (fiscal Q4), revenue expected between $635 and $665 million. Gross margin 69% to 71%. Operating expense up to about $285 million, including a one-time expense of about $30 million for the CEO change. Other income $3 million. Tax rate to drop to between 0% and 5%.

On track to exceed all fiscal 2018 guidance parameters.

Conference Highlights:

Moshe Gavrielov, Xilinx President and CEO, said "We delivered our ninth consecutive quarter of revenue growth with December quarter revenues establishing a new record for Xilinx and we achieved our operating margin target of 30% one quarter ahead of schedule. Revenues from Advanced Products continued to be strong, increasing 30% from the same quarter a year ago and comprising 56% of company sales . . .. In addition, our 16nm portfolio continued to gain market momentum as we have cumulatively shipped 43 unique products to 1,160 customers." Gross margin was higher than predicted.

This will be Moshe Gavrielov's final earnings call. He believes Xilinx has transitioned from its FPGA roots to providing a more all-encompassing programmable chip solution.

$0.67 EPS is taxes were normalized.

The dividend will be $0.35, for shareholders of record on February 7, 2018, and payable on February 22, 2018.

"Market leader Alibaba recently announced plans for two generations of FPGA as a Service (FaaS) F2 and F3 using Virtex® Ultrascale +™ FPGAs. Additionally, Amazon Web Services expanded their FaaS F1 deployment to multiple regions, including availability in its secured government cloud."

The first CCIX (Cache Coherent Interconnect for Accelerators) at 7 nm test chips should be available in 2018, in collaboration with ARM, Cadence and TSMC.

Chips for cryptocurrency drove some of the growth in Q4.

Revenues by end market:

Communications and Data Center 35% of total. Down 12% y/y.

Industrial, Aerospace & Defense 47%, or $297 million, a record, up 23% y/y.

Broadcast, consumer and automotive 18% of total. Up 24% y/y.

Revenue by product type:

56% Advanced products: UltraScale, Virtex-7, Kintex™-7, Artix™-7, UltraScale+ (these are at 28 nm, 20 nm, and 16 nm)

44% Core products. So all the older, standard products.

71.2% gross margin, up sequentially from 70.2%. 30% operating margin.

Cash, equivalents and long-term investment balance was $3.54 billion, down sequentially from $3.66 billion. $1.73 billion long-term debt. Operating cash flow was $185 million. Depreciation $11 million. Capital expenditures $7 million. $ million of stock was repurchased. Stock based compensation expense was $36.8 million. The dividend payment required $89.5 million.

Revenue by geography: North America 31%; Asia 41%; Europe 20%; Japan 8%.

Cost of revenues (GAAP) was $182.2 million, leaving gross profits of $449.0 million. Operating expense total was $259.3 million, consisting of: research and development $166.2 million; selling, general and administrative $92.8 million; and amortization $0.4 million. Leaving operating income of $189.7 million. Interest and other income was $5.5 million, and the income tax provision was $183.2 million.

The tax provision amounts to a 94% rate for the quarter. $0.67 EPS if taxes normalized. Taxes were paid on foreign cash and there were adjustments due to the new tax law.

Q&A:

Operating margin sustainability, next node, service model? Mix has a big impact. The growth recently was in segments where the margin helps. Of course we have also been working to reduce COGS and continue to invest in the company. We plan to stick with our traditional cadence for guidance; more details on analyst day.

Service model? That is a longer-term opportunity. It is not very material yet. It is part of the acceleration and data center opportunity.

Cryptocurrency size? We flagged it because in the past it had not been material. It is in the low tens of millions of revenue, and we expect a lot of volatility.

Tax reform, impact on R&D spend? There is not a first-order impact from tax reform on our operating model. It may affect capital allocation. We will maintain high profitability and cash flow. Its main benefit is freer use of cash on a global basis. We are modeling that as best we can. Will have more on analyst day.

GAAP annual cash rates? Lots of caveats, but believe forward tax rate should be between 10% and 15%.

Gross margin above 71%, that is high for you, how did the mix in the quarter contribute? Our products are leading because of innovation and execution. The different segments have different natural margins. Consumer is margin lean. Aero and defense have strong margins. In addition to the quarter shifts, we have been working on improving margins for a decade. We are in some very competitive markets that keep them under cost pressure, so we can't say we will keep growing margin.

Automotive revenue? It was up about 20% y/y, but that is an anomaly due to an easy compare. It is still 7% of overall sales.

Communications revenue, guidance? Wireless was up some. We are in almost all of the pre-5G prototyping. Wired slowed down some, but we expect it up in the March quarter. Wireless is expected flat until the 5G inflection point.

Cash, M&A, repatriation of offshore cash? After we pay the transition tax, which is mostly a book number, our cash is free to move around the world. We don't see a tax penalty for deploying outside the U.S.

M&A depends on our strategic objectives.

Industrial and related strength was a pleasant surprise this year, and the drivers seem to be sustainable. Automotive not as strong as we thought it would be, but still growing for us. Consumer has some possible upside including cryptocurrency. Wireless will bounce around flattish until 5G kicks in. Datacenter growth will be slow. Zynq is also strong across segments.

5G ramp timing? More in the 2020 time frame. RFSoC, however, is not just 5G.

Our chips for cryptocurrency competes with custom ASICs and GPUs. We are providing support to our customers. We first saw it as a very small business.

Lead times? We don't really have any lead time issues.

Inventory and receivable increases? Inventory tends to grow in anticipation of future revenue growth.

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