Analyst Conference Summary

Altera Corporation

conference date: October 22, 2013 @ 1:45 PM Pacific Time
for quarter ending: September 27, 2013 (Q3, third quarter 2013)

Forward-looking statements

Overview: Good sequential growth, but revenue & profits down y/y.

Basic data (GAAP):

Revenue was $445.9 million, up 6% sequentially from $421.8 million, but down 10% from $495.0 million in the year-earlier quarter.

Net income was $119.4 million, up 18% sequentially from $101.5 million, but down 24% from $157.5 million year-earlier.

Diluted EPS (earnings per share) was $0.37, up 19% sequentially from $0.31, but down 24% from $0.49 year-earlier.


Q4 2013 -3% to +1% sequential revenue change. Gross margins 68.0% to 69.0%. R&D expense $110 to $111 million. SG&A $82 to $83 million.

By market segment: telecom flat, industrial flat, networking/computer up; other down.

In 2014 op ex growth should be minimal.

Conference Highlights:

Sequential revenue increase was in line with guidance. Each market segment was up sequentially.

Breakthroughs in FPGA density will come with test chips already in the Fabs using 14nm technology from Intel and production in 2014.

$33 million 28 nm revenue.

Compared to Q2, selected device revenue: Stratix V, up 30%; Stratix IV, up 3%; Aria II up 16%; Arria V up 108%; Cyclone IV up 13%; Cyclone V up 73 %; HardCopy IV down 25%; Enpirion up 100%.

Altera ended the quarter with a cash and investment balance of $3.82 billion. $5.3 million was spent on share repurchases.

The quarterly dividend will be $0.15, to shareholders of recodr on November 12, to be paid in December 2.

Cost of sales was $141.5 million, leaving a gross margin of $304.4 million. Operating expenses of $176.1 million consisted of: R&D $95.2 million; selling, general and administrative $78.9 million; and amortization of $1.8 million. Leaving an operating margin of $128.3 million. Interest and other expense was $0.3 million. Income taxes $8.6 million.

Revenue by geography: Americas 18%; Asia 39%; EMEA 28%; Japan 15%.

Revenue by vertical market: Telecom and wireless 41%; industrial and military 23%; networking & computer 19%; other 17%.

82% of revenue was for FPGAs, 9% for CPLDs and 9% for other products.

Business model over next few years: 67% to 70% gross margin. More on this model next month in New York.

Analyst day November 18 in New York City.


Traction in 40 nm wireless? LTE deployments in China will deploy a mix of technology between 60 nm and 28 nm. We expect new products to grow in Q4, including both 28 nm and 40 nm.

Visibility in China? The government is just now announcing the release of spectrum to the carriers. That drives the radio deployments. We have not heard from China Mobile of how many F vs. D band radios will be deployed, but our customers probably have a good idea.

China Mobile LTE ramp? In Q3 we saw base stations and radio up in the quarter, but microwave down. Should be flat to slightly up again in Q4. It is too early to call Q1. Same for China Telecom.

Wireline? Flat in Q3, expected flat to slightly down in Q4.

Revenue was below guidance midpoint, what was offset to LTE strength? Microwave in general has been weak this year. The other category was down more than we expected.

We expect more program transitions in Europe over time that will benefit Altera vs. our competitor (Xilinx). We are not sure about the meaning of their Q3 comments [analyst said was Ericsson, but Xilinx to not give a customer name]

Shift to industrial segment not helping margins? There are many mix issues going on. We are guiding slightly up for Q4, and next month will give margin guidance for next year. New product introductions put pressure on margins.

Wireless next year, if 3G drops while 4G expands? It is very difficult to predict wireless deployments. Spending in wireless seems low right now. China Mobile is just in a trial for LTE, they should go several rounds, so it should be multiyear LTE spend. Some developing countries will also spend. So we should be in a revenue trough, but it is hard to predict by quarter when spending might increase.

Our industrial business and military grew in Q3, but military will decline in Q4. We have seen no impact from sequestration or the government shutdown, but we are in a sluggish global macroeconomy.

Production constraints? Capacity is available, including for packaging.

Network, compute and storage market? What you are seeing is a new opportunity. The end market is stagnant, but we are getting more product placements in it. FPGAs are being used as co-processors to servers to accelerate algorithms.

Intel 14 nm pushout? It is a one-quarter delay for Intel. We were not scheduled for commercial production until Q4 2014, so we would expect the technology to be solid by then. Yields should be solid and cycle times should be robust. So no negative effect on us.

Our competition is ahead of us right now in 28 nm. We expect our high end to be about 55% of the market for 28 nm node. It takes longer to ramp the higher-end products; our competitor's launch has been at the low end.

What ends up getting deployed for a carrier is what has qualified at that point. There is not going to be a China LTE new qualification cycle any time soon. So there should be no node transitions anytime soon. So we are shipping a mix of 28 nm to 65 nm, but at some point 20 nm will be added.

Microwave as a % of wireless? It is the smallest of the three components, but significant enough that changes in it can change the overall direction of the wireless segment.

Small cell coverage will mostly be used for building coverage, but then go away in a few years.

We believe we can grow twice as fast as the industry as a whole, driven by wireless but including other segments, industrials in particular.

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Disclaimer: My analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. I cannot guarantee anything said by company representatives is true. I try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2013 William P. Meyers