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conference date: November 6, 2006
for quarter ending: September 30, 2006 (3rd quarter)
Overview: Solid quarter, but guides to slight decrease in Q4 revenues.
Basic data:
Revenues of $341.2 million were up 2% sequentially and 17% from Q3 2005.
GAAP net income was $87.4 million or $0.24 per share, up 14% over Q3 2005.
Cash and equivalents ended at $1.6 billion.
R&D expense $63.6 million. SG&A expense $80.8 million.
67.6% gross margins.
Guidance:
For Q4 2006 revenues are expected to decline 2 to 5%. Gross margins at 65 to 67%. At the same time R&D and SG&A expenses are expected to be reduced significantly to $61 and $76 million respectively. $16 million interest income. Inventories expected to be flat.
Conference Highlights:
No shares were repurchased during the quarter. New product sales were up 26% sequentially and 142% from Q3 2005. Cyclone II up 66%. Stratux II & IIgx up 9%, Max II up 25%, and HardCopy up 50%. Mainstream products grew 1% sequentially. Mature products declined 6% sequentially due to CPLD inventory reduction. Expects to gain CPLD market share this year.
65nm products to be introduced soon.
Telecom segment grew, which was a surprise. Consumer segment grew 11% due to set top boxes. Wireless was down and will continue down in Q4, primarily due to Japan. But expects wireless to resume growth in Q1 2007.
MAX(R) II CPLD family had notable design wins.
FPGA sales were up 5%. CPLDs were down sequentially, as anticipated, do to inventory reductions. Turns were in the low 50s.
SG&A expenses was up $4 million sequentially, partly due to stock option compensation review.
Accounts receivable declined sequentially. Pipeline inventory at 3.8 months.
Quarter to date (Q4) book to bill ratio is below one, same as Q3.
Q4 earnings will not be released until February 2007.
Believes some FPGA inventories will need to be worked off in Q4. Wireless weekness in Q3 to continue in Q4.
2007 R&D will increase due to rollout of 65nm products. SG&A for 2007 to decrease to $300 million, front half loaded, including $30 million option-based comensation. R&D also to be $300 million, with $25 million option-compensation based. Gross margins of 65% to 67%. 14-16% tax rate GAAP, 16% to 18% non-GAAP.
Q&A:
Inventory comfort? Staying within their desired range of 3 to 4 months on hand. Includes product at distributors, which is not counted as sold until distributors sell it.
Lead times? Back to normal. Most inventory kept in wafer form.
Computer and storage products? Had strong Q3 growth, but expect down in Q4 because of program transition. No visibility for Q1. But is a small segment for Altera.
Consumer segment? Consumer area was flat, with decoder boxes offsetting declining flat panel. Q4 is seasonally weak for consumer segment.
Gross margin color? Caused by planned cost reductions with a change in mix. Goal is to operate around 65%. Consumer market has lowest margins, Industrial the highest.
HardCopy? Strong ramp in communications, computer and storage. Expects continued strong growth. Expects to eventually be 10 to 15% of revenues.
Does not have much military business, competitor Xilinx does well there and it is a very high margin business. However, Altera has had some military design wins lately.
Typical seasonal March quarter? Not sure there is a clear seasonal pattern. Believes there will be growth in Q1, but can't say what that will be because business fluctuates in unexpected ways.
Operational problems earlier in 2006 were due to one-time problems in supply chain.
Total Cyclone sales (both old and new families) did grow in quarter.
Strategy on new nm products? Does not try to be first to make announcements, but has been able to be first to volume production with best products. In 65 nm will have dramatically lower power consumption than competition.
Improved tax rate? Due to regional mix; only 25% of revenue is now from North America.
Expects to continue to take market share from Xilinx. Has higher market share as you move to newer nm (65 v. 90 v. 120) processes.
Other Income growth? Because they have not been doing share repurchases, they have more cash and more interest on the cash.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it's possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2006 William P. Meyers