Advanced Micro Devices, Inc. (AMD) Q4 2010 Earnings Report, Transcript and Summary

Good afternoon. My name is Tiffany and I will be your conference operator. I would now like to welcome everyone to the Xilinx fourth quarter fiscal year 2010 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Please limit your questions to one to ensure that management has adequate time to speak to everyone. I would now like to turn today’s call over to Maria Quillard. Thank you, Ms. Quillard. You may begin your conference.

Thank you and good afternoon. With me are Moshe Gavrielov, CEO; and Jon Olson, CFO. We will provide a financial and business review of the March quarter then we’ll open the call for questions. Let me remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This conference call is open to all and is being webcast live. It can be accessed from our Investor Relations website. Now let me turn the call over to Jon Olson.

Thank you, Maria. During today's commentary, I will review our March quarter and fiscal 2010 business results. I will conclude my remarks by providing guidance for the June quarter. For the second consecutive quarter, Xilinx achieved record sales. In addition, gross and operating margins increased to their highest level in nearly six years. These results speak not only to the increased customer acceptance of Xilinx PLD solutions but also to our increased focus on expense management and return on investment. After bottoming in the June quarter of this most recent fiscal year, sales increased in each of the remaining fiscal quarters. Fiscal 2010 sales were $1.8 billion, flat with the prior year. Gross and operating margin improved in each consecutive quarter of the fiscal year. SG&A expense declined by 5% for the year, due to restructuring efforts as well as continued cost improvement efforts. R&D expense for the year increased by 4%, primarily due to increased expenses associated with the roll-out of 40-nanometer products. From an end market perspective, wireless, defense and automotive sales increased during the fiscal year while all other end markets declined. Turning to the March quarter, which was a 13-week quarter; sales were $520 million, a sequential increase of 3% and a year-over-year increase of 34%. Gross margin of 64.9% was up from 62.1% in the same quarter of the prior year. Operating margin of 29.5% was up from 19.8% in the same quarter of the prior year. Operating expenses were $187 million, including approximately $3 million in restructuring charges. In addition, operating expenses for the quarter were impacted by the resolution of a litigation matter and increases in variable spending driven by revenue and profit improvement. New product sales increased 13% sequentially, while mainstream products decreased 4% sequentially and base products remained flat. European sales were particularly strong during the March quarter, increasing 25% sequentially. Most of the incremental sales growth was related to wired and wireless communications, but sales from nearly all other end market categories in Europe increased. Asia-Pacific sales increased 1% sequentially to 35% of total sales, with gains from communications and storage, slightly offsetting declines from consumer. North American sales decreased 5% sequentially to 33% of sales, with sales from communication and industrial and other decreasing sequentially, but partially offset by strong audio/video broadcast sales. Lastly, sales from Japan declined 4% sequentially, primarily related to declines from wired communications and consumer applications. Overall, communication sales increased 7% sequentially, driven by increases in wireless sales. Wireline sales were essentially flat for the quarter after a very strong December quarter. Industrial sales decreased 4% sequentially, as an anticipated decline in defense sales more than offset increases in industrial, scientific and medical and test and measurement applications. Consumer and automotive sales increased 5% sequentially, driven by strength in automotive and audio/video broadcast applications. Sales from pure consumer applications declined as expected. And lastly, sales from data processing increased by 7% sequentially, as increases in storage more than offset decreases in computing and data processing. Net income during the quarter was $149 million, or $0.54 per diluted share including $3 million or approximately $0.01 per diluted share in restructuring charges. Included in the Q4 net income is a tax benefit of $23 million or $0.08 per diluted share, primarily related to the impact of our recent favorable ruling in the Ninth Circuit that dealt with the treatment of stock option expense. Operating cash flow for the March quarter was $104 million before $11 million in CapEx. We paid $44 million in cash dividends and spent $125 million on share repurchases during the quarter. During the fiscal year, Xilinx generated over $550 million in operating cash flow. The tax rate in the March quarter was 8%, lower than expected, due to the previously mentioned decrease in tax expense. Let me now comment on the balance sheet. Cash and investments decreased $24 million during the quarter to approximately $2 billion. We have approximately $690 million in convertible debt and our net cash position is approximately $1.3 billion. Days sales outstanding increased one day in the March quarter to 45 days. Combined inventory days in the March quarter were 79, down from 85 days in the prior quarter and lower than we had anticipated due to foundry supply constraints impacting a number of our products. Moshe will elaborate on this in a minute. In the June quarter, we expect inventory days to be approximately flat. Let me now turn to a discussion of guidance for the June quarter of fiscal year '11. Our backlog heading into the quarter is up. We are expecting to see continued strength from Virtex-5 as well as strong growth from our new Virtex-6 and Spartan-6 families. From an end market perspective, we are expecting sales from communications to be up, driven by strength in wireline and wireless communications. Industrial and other is expected to increase, driven by defense and test and measurement. Consumer and automotive is expected to be up slightly as increased consumer sales offset decreased automotive sales and flat audio video broadcast sales. Lastly, data processing is expected to decline driven primarily by storage. As a result, we are expecting total sales to be up 9, 5 to 9% sequentially in the June quarter. With sales from Japan declining and sales from all other geographies flat to increasing. The midpoint of our sales guidance is predicated on a turns rate of approximately 50%. This is down from 56% in the March quarter but appropriately conservative given our higher backlog and extended lead times. Gross margin is expected to be 65% plus or minus a point. The slightly wider range in gross margin is related to the variability around yields of our 40, 45 nanometer product family which will ramp sharply in the coming quarters. Operating expenses in the June quarter are expected to be approximately $182 million. Other income and expense is expected to be a net expense of approximately $2 million. The share count is expected to be 276 million shares, and the tax rate for fiscal 2011 is expected to be approximately 21%. Let me now turn the call over to Moshe.

Thank you, Jon and good afternoon to you all. Across the semiconductor industry, the customer demand side of the business has been very healthy. For Xilinx, we are delighted to have delivered our second consecutive record revenue quarter. In addition, with our 5 to 9% growth in revenue guidance for the June 2010 quarter, we are expecting better than normal seasonality. As demand strengthens our customers are giving us increased visibility by placing bookings and driving down our trends requirements for the quarter. As Jon mentioned, our backlog is up significantly. We are predicting lower turns in the 50% range for the June ending quarter. Furthermore, as we discussed last quarter, many of our secondary markets have yet to reach the levels of our prior revenue peak during the June 2008 quarter. Currently, four of our 10 secondary markets, wired, industrial, testing measurement and computing are still below their peak revenue. This improved end market outlook is encouraging as the new 65, 40 and 45 nanometers yield is poised to grow significantly. Encouraging growth rate is a testament the programmable imperative that is occurring all around us. Increasingly, advanced technology node Programmable Logic platform are replacing ASIC and some selective ASSP solutions. I encounter this trend frequently whenever I meet with our very broad based customers. While the demand side has been very strong, supply side of semiconductor business has been constrained, primarily by foundry capacity. Xilinx is not impervious to these trends this past quarter. Our top line results were at the high end of our guidance. However, our forecasted demand particularly for some of our Virtex families coupled with very tight foundry capacity constrained our sales from growing further this past quarter. By and large, we're serving our customer needs and delivering to our commitment. Our lead times have stretched out but generally are 10 weeks or less with some Virtex-5 parts extending beyond this range. As we enter the June quarter, our ability to deliver continues to challenge us given the healthy demand. We currently expect to see overall lead time improvement in the September quarter. Even though we couldn't ship all the Virtex-5 devices we had on order, this family grew double digits sequentially, establishing yet another new record. In the June quarter, we are expecting Virtex-5 to increase yet again, building upon the success of our Virtex-5 family are the Virtex-6 and Spartan-6 families. Both of these families have achieved full qualification and are now shipping in volume production. In the June quarter, several of our 3G wireless customers will take significant deliveries of our Virtex-6 devices. They've been designing with Virtex-6 and expect to have their end products shipping volume in the coming quarters. As a result, we expect to see sales from this product family increase significantly. With respect to our 28-nanometer product, we expect to be sampling silicon by the end of our fiscal year. We'll be disclosing more details about our unified 28-nanometer sector and specific products in the months to come. Yesterday, we unveiled our revolutionary ARM-based extensible processing architecture that combines an ARM Cortex A9 processor with integrated 28-nanometer, low power, high performance programmable logic. This new programmable platform will deliver unrivaled levels of performance, flexibility, integration to developers of a high – of a wide variety of embedded systems. It is a key element of our company's overall growth strategy as articulated at our analyst meeting in February. Target markets include automotive driver assistance, intelligent video surveillance, industrial automation, aerospace and defense and next generation wireless. By employing familiar embedded software environment and its vast ecosystem, we can leverage open standards and extend the reach of embedded systems, providing significant incremental growth opportunities for Xilinx in the future. Summary, fiscal 2010 was a great year with a number of key accomplishments. I'm pleased by what we have been able to achieve through steadfast execution to our plan. During this period, Virtex-5 became the industry's most successful product offering in terms of quarterly sales. We began production of the next generation of Virtex-6 and Spartan-6 families and have improved our profitability significantly through a number of proactive cost reduction and efficiency programs. As we enter fiscal 2011, we plan to continue to focus on operating efficiencies for overall execution. Additionally, we have an exceptional new product pipeline that I expect to drive continued growth and market expansion. Now, let me turn the call back to the operator to open it up for the Q&A session.

(Operator instructions) Your first question comes from the line of Tim Luke with Barclays Capital. Tim Luke – Barclays Capital: Thank you very much. Moshe, with respect to the capacity constraint, could you clarify again which products were affected by this, is it just the Virtex-5? And do you have any framework for us in terms of the degree of impact there or what sort of range you might have seen of further upside, if you hadn't been constrained? And can you give us some sort of milestones in terms of when that was most affecting you and when it's likely to affect you less? Obviously you're guiding for some slower sequential growth, notwithstanding the constraint and I think you said that it would be done by the September quarter, but could you just give some clarification with respect to that? Thank you.

Let me take that one, Tim. So generally it's been Virtex-5, although there has been some tightness also in our Virtex-4 family as well. So, even at 90-nanometer technologies, we've had some tightness with the foundries, and as you know, they juggle their tools around to do different things and maximize output. But they're just generally at the most advanced technologies seem to be the tightest. But it has been largely Virtex-5 related products. Now, the degree of the impact from this last quarter, we haven't really specifically put a dollar amount on it. It's in the neighborhood of a couple of percentage points, so it's 2 percentage points, in the neighborhood of 10, $11 million. It's in that range and we do anticipate that this tightness continuing throughout this quarter and it's quite possible we would leave the quarter even with a greater level of delinquency than that. It kind of depends on the mix. When you're really tight and you sucked up the lion's share of your safety stock which we have in certain devices on Virtex-5 it is actually really dependent on what orders come in and what device so-to-speak. So we do expect that by the time we get into the September quarter, we're going to get some relief and hopefully that will not have delinquencies. But again, it's too early to tell because it really is dependent on how strong demand is overall throughout the summer. Tim Luke – Barclays Capital: So, is this something that you're seeing at both of your foundry partners or primarily at one rather than the other?

Well, I mean, we do build product at two foundries and that's actually been one of the advantages of our two foundry strategy. We have been able to get a little more out of one versus the other, but quite frankly they're both very tight. Tim Luke – Barclays Capital: Thank you very much.

Your next question comes from the line of Adam Benjamin with Jefferies. Adam Benjamin – Jefferies: Thanks, guys. Can you just talk a little bit about gross margin and kind of what is affecting the gross margin, kind of going forward here and how we should think about the puts and takes there?

Yes, sure, Adam. Yes. Gross margin, we're actually been very pleased with the improvement of gross margin throughout the year and all our efforts getting up to the 65% level or 64.9 this quarter and then forecasting 65 for the next quarter. And I would anticipate us to be in that 65% range for a few quarters, again, plus or minus the point. And it really is because generally the new technologies are a drag on our margins, but we've been able to increase yields, lower costs in other areas to offset that as we go through this period of ramping yields on 40 and 45-nanometers. So I'm actually feeling pretty good that we can keep things stabilized at what was the high end of our range is now the midpoint of our new forecasted range for a business model for the company. And kind of, work through these yield improvements and then as we get to the end of the year and the next year hopefully they'll tail up some more. So I think we've done a really nice job. If you go back on our history and look at 90-nanometer and 130, you'd see a pretty marked drop in gross margin for us when we introduce new technologies, and we're doing a much better job with our own design and yields, and work with our foundry partners to not make that impact our margins so predominantly. Adam Benjamin – Jefferies: Got you. And then on your commentary regarding lead times out at 10 weeks and stretching but then you expect them by the September quarter. I think you indicated to come in. I'm just curious if you can give some more color as to what that expectation is based on as to why you think they would come in by that point?

Yeah. Sure. First off, we believe we're getting more capacity, more capacity allocated to us as we work through this quarter for out into the – I mean, wafers out into the September quarter. So, we're getting more wafers out, number one. And, second off we are working through a lot of yield improvements which give you more die per wafer therefore we think we're going to end up with more absolute die as a result. Our inventory dollars we're not worried about inventory dollars, the inventory dollars have been flat, we would like to actually have this go up. Days have been coming down some and we think they will stabilize in the 70s – in the mid to high 70s which is lower than we would like to run the company at. So, even if we were able to add some dollars we are still well behind on broadly filling our safety stock. So, it's not like we're over soaking things in my mind. Adam Benjamin – Jefferies: So it's not a reflection of your expectation for orders, it's more purely just capacity?

Yes. It really is, it's purely capacity. We do believe that there is strength throughout the June quarter and into the summer particularly in all the wireless business that we see, so we are planning on really a strong June from the wireless area. Particularly because of the China, beginning of the China ramp so that's quite significant for us. So we do think orders have stayed strong for a while but after – as we go into September, it becomes less clear what's going to happen. Adam Benjamin – Jefferies: Got you. Thanks a lot for the color.

Your next question comes from the line of Glen Yeung from Citi. Glen Yeung – Citi: Thanks. Jon, maybe just to follow-up on that last one. When you say you're getting more wafer allocation. Are you suggesting that you’re getting more wafer allocation relative to your competitors or – not your competitors but your other people who are acquiring those wafers or that net wafer supply is going up?

For us, it's net wafer supply is going up. I can't really speak to how our foundries are allocating among their customers. But I think that more wafer capacity starts to come online towards the end the second half of the calendar year. And that's where we're getting – able to get commitments for relief on some of our issues that we have are short-term right now. Glen Yeung – Citi: Can I assume there is no meaningful change in wafer pricing that you see and maybe the same question with respect to you to your customers any meaningful change in pricing?

Yes. On the pricing front, we're not seeing any substantial increases in wafer across the board, but quite frankly, we're not seeing the decreases that we have planned on in our long-term road maps and have typically been able to negotiate. So it's fairly clear the foundries are trying to bolster prices to some degree but we're not getting increases. Glen Yeung – Citi: And do you pass the lack of decrease through to your customers as well?

Typically not. And the reason Glen, is that, first off, a lot of our revenue is done by our top 10, top 15, top 20 customers and they generally have volume price agreements that are negotiated anywhere from quarterly to annually. And so a fair amount of our pricing is locked in and so you don't typically have opportunities to pass those on until the renegotiation time and of course, we'll do everything we can at that point to make sure we can maintain our margins. And the second point is business is generally quoted far enough in advance, more broadly that it is difficult to come in after the fact, after you've made a quote and raise it. So as new quotes are coming along, we certainly are mindful of what's going on in the environment and doing our best to hold prices up. But in terms of a radical change that you’d see in the P&L, just because we're trying to pass on, quote a surcharge, all our airlines [ph] becomes immediate that doesn't happen in our business model. Glen Yeung – Citi: And just one quick one. Obviously, falling short of your own shipment potential in the quarter, should we assume then that customers are not able to build inventory or do you really see some customers explicitly trying to build inventory of your parts?

This is a question I know, because every semiconductor company has been asked, are people building inventory in excess of their needs and what's your profile and etcetera. And quite frankly, from the Xilinx perspective, our growth has come from new products, which generally means new designs, etcetera. We've done a lot of work with our customers to try to understand whether they're really selling through and – or whether they're buffering inventory. And by and large, the response is coming, they're not buffering inventory and sell-through is good. However, we do know of certain customers, even large customers that we believe are buffering some inventory and are ordering farther in advance and they don't seem – as we've had some difficulty with lead times, they don't seem to be complaining broadly that theirs lines down or whatever. So even though we can't find the data and anybody admitting to us that inventory is being built maybe in excess of their needs, it sure feels like some of what's going on is that. But on the other hand, we're selling a lot of new products and we're pretty confidence those are being sold through. Glen Yeung – Citi: Thank you very much.

Your next question comes from the line of Uche Orji with UBS. Uche Orji – UBS: Thank you very much. Let me just ask you about your proposed ramp for new products as the yields improve. What kind of impact should that have on margins as we go into the second half of the year, are you going to be able to maintain your target range of 64 to 66% range?

Yeah Uche, I really think we're going to be able to maintain in that range of 65 for a few quarters, despite some of the drag that's going on and then hopefully improve after that. And there's a lot of different things that go on in margin relative to product mix and it's not just all about short-term cost changes, based on yields, etcetera. But what we see as a very rapidly improving yield environment on 40, 45-nanometer right now as we start building a lot of product, we think that we can maintain that range, 64 to 66 or 65ish kind of a number while we're going through this yield ramp and then we'll see what happens as get to the end of the year. Uche Orji – UBS: Sure. Just one more question. On the relative impact of your being constrained, obviously outgrew [ph] you this quarter and also within the guide they seem to be outgrowing you. How much of – granted, you both have different seasonality (inaudible) but one can't help but notice that it looks like you're losing market share. How much of this do you think you can regain once you start to see capacity ease? And then just how confident you are, I mean, if one looks at UMC's CapEx spend at the high end SoC [ph] TSMC, is it fair to just conclude that it's inevitable you're going to lose market share?

So let me get the first part of that question. So while we are constrained, we don't think we're losing any customers or designs as a result of these short-term constraints. So I don't think that this situation that we have on these selected products has any bearing in the pure, does somebody get more share, win share or lose share. So of I don't think that really has anything. If we had a prolonged situation that might cause customers to redesign but it's pretty costly to redesign when you are in these very sticky, complex SoC situations. And by and large, there is a lot of other semiconductor companies scrambling to make to provide product to some of our same customers. And I don't believe we're on the top of the constraint list quite frankly for most of our large customers. And then with respect to the foundry differences and CapEx expanding and capacity as to any sort of market share shift one way or the other, I don't think that has any bearing on the situation at all. I think if you look at the seasonality, it's typical that Altera has outgrown us in the front end of the year and then we outgrow in the back end of the year. So I don't see any huge share shifts going on this year. Uche Orji – UBS: Great. Just one last question for Moshe. I mean, Moshe, you are kind of design into com equipment and this market tends to be traditionally mix or power PC and how do you plan to kind of drive acceptance of this? I mean, what are the relative merits of this strategy you've adopted? Thank you.

, : So, having very tightly integrated applicable ARM Core, probably the easiest decision to make for this family. And we have tremendous expectations and it wasn't product announcement, it was more of an architecture announcement we made. But as we come up with the product announcement I think you'll see that this provides unparalleled capabilities for huge range of applications and this is one of those products that absolutely will enable us to accelerate the programmable imperative. And in particular replace ASSP. I've gone on the record on that and I know you guys will continue to needle me on that particular point. We have data which shows that that is happening and it's happening in spades now. Uche Orji – UBS: Thank you very much.

Your next question comes from the line of John Pitzer with Credit Suisse. John Pitzer – Credit Suisse: Yeah, guys. Thanks for taking the question. Jon, I want to make sure I understand on the supply constraints. You said about 10 to 11 million in revenue in the March quarter. And you could expect to see a like amount in the June quarter. Is that – did I read that right?

Yeah. John, I think it will be that much and maybe even a little more. John Pitzer – Credit Suisse: And so help me understand. As we move into September, do we think about sort of a phantom backlog of 25 million to catch up as your supply starts to come on or how does that business then migrate into the back half of the year?

Yeah. So, since we're not really forecasting what the overall profile in September is. September, the September quarter has typically been a slower quarter for us as generally particularly wireline but generally communications, customers are off a lot in the summer and Europe is paused and whatever. So, I want to be hesitant to say that gee, we're going to roll over 15, 20 or some amount and that's going to be additive to some run rate. I don't really want you – I don’t want you to walk away with that statement. But, I do think what I'm trying to indicate is this 10 to maybe $15 million we left this quarter we could have shipped. It's going to be that much and a little bit more than that potentially. It could just be that much. I doubt that we'll be fully caught up. John Pitzer – Credit Suisse: And then I guess, Jon. I apologize if you had mentioned this but as you look at the profile of revenue growth in the June quarter by end market, any big differences that you see out there?

The biggest is going to be wireless. So we had a very strong wireless business this last quarter driven primarily out of our European customers, you could see that in our European revenue split. And then as we move into June, it's the wireless business we think is even going to increase more and that's going to be driven both out of the European customer base that's serving the world as well as the China 3G phase IV business which is starting to ramp and those customers are starting to take product in a big way basically this quarter. John Pitzer – Credit Suisse: And then my last question, guys. I know the design cycle is relatively long but Altera did put up some outsized gross margins in their quarter. Just kind of curious if that gives you a pricing umbrella to get a little bit better pricing and or an opportunity to go out there and try to gain some share.

Yes. So we did. We certainly have, we did talk about this a little bit earlier. And it's really hard to have short-term pricing in fact to show up on the P&L immediately. But we're aware of the environment and our supply chain and what's going on there and while, we don't want to lose business out there. We certainly are going to do everything we can to get the most value out of our products and if that means raising some prices then we'll do that. John Pitzer – Credit Suisse: Perfect. Thanks, guys. Appreciate it.

Your next question comes from the line of James Schneider with Goldman Sachs. James Schneider – Goldman Sachs: Good afternoon. Thanks for taking my question. I guess you as well as many of your peers have talked about increased visibility going into the back half of the year or customers placing longer dated backlog on you. First of all, I just want to confirm that that's indeed what you're seeing. And then in the context of that what are you seeing from your Asian comps customers into the back half of the year of the calendar year. Do you think that's going to continue to see the strength you're expecting in Q2 or might that tail off a little bit?

Yeah, sure, Jim. The backlog situation, we're definitely seeing products being booked out farther, so out farther within the current quarter and also more into the following quarter. And I think that's really more of a function of lead time increases on selected parts than anything else. Our overall backlog going into the quarter was up 20% over the backlog going into the previous quarter, so quite substantially. But a lot of that was our leading product families as the constraints are becoming clearer to people and they're ordering out to make sure they get supply. So I don’t – I view this as kind of a fleeting thing that when lead times start to move back in, that the backlog will return to normal patterns for us by and large. If the second question was around our Asia communications customers and the second half of the calendar year. I really don't have much visibility on that. I know that they're going – they certainly are telling us they're going to ramp very strong this summer relative to phase four business. But beyond that, we have pretty limited visibility as to whether this is going to continue or not. James Schneider – Goldman Sachs: That's very helpful. Thanks. And if I could just do a follow-up on the OpEx. What should we expect in terms of the profile of spending throughout the fiscal year? And specifically, if you just exclude the effects of variable SG&A related to higher sales or lower sales?

It's pretty hard to do the latter because it is part of what we're doing. I mean we forecasted 182 for OpEx for next quarter and I think you can see that as reasonable number for the next several quarter going forward. There would be some – there could be some adjustments relative to – if we have sharper spikes in revenue up or down or profitability up or down that deals with those variable expenses but I think if you're trying to draw some sort of a line for us, pretty flat this year. James Schneider – Goldman Sachs: So no big spikes due to tape-outs in the R&D line?

No, there is a little – there is a beginning of the tape-outs for the next generation in the back half of our fiscal year, more likely the fourth quarter of fiscal year and there's some leftovers going on right now in this quarter and then in the next two quarters there are a few other things going on to help offset that. That's why it ends up being relatively flat. James Schneider – Goldman Sachs: Great. Thanks very much.

Your next question comes from the line of Shawn Webster with Macquarie. Shawn Webster – Macquarie: Yeah, thank you. In terms of – Jon, I think you mentioned that there were some customers you weren't sure out there that may have built extra inventory maybe just stepping back a bit if you can assess by end market, are there certain end markets that you feel like they're sufficiently supplied or their inventories are normal versus others which are leaner than normal?

I don't think I can draw any specifics around that at all. It's really different by different end market, whether certain sub-segments within those end markets are really well-populated or not, with inventory. So, I would say we know – I know of a communications customer or two that sounds like they're buffering inventory. I see some industrial customers that are doing that. So, you know, it's really kind of spread around. Shawn Webster – Macquarie: Okay. And then in terms of the tightness that you experienced, when – maybe not it's not exactly, but when did you start seeing the tightness or unexpected tightness in your products over the course of the March quarter end, could you share with us what your mix of 40-nanometer is or was in the March quarter?

So we're not segregating out individual technologies within our new products to talk about that. But the tightness, we've been tight probably for four or five months but because demand has been slow growth for Virtex-5, which is where the primary issues are, that's where we're experiencing the tightness. It got to be a bigger issue for us because the ordering patterns were so strong for V-5. Shawn Webster – Macquarie: Okay. Thank you very much.

Your next question comes from the line of Tristan Gerra with Robert Baird. Tristan Gerra – Robert Baird: Hi. Good afternoon. Is your reason for automotive to decline in the June quarter based on difficult comparison or is there anything else happening in that end market?

I'm sorry, Tristan, I didn't get which end market you are asking about. Could you repeat that? Tristan Gerra – Robert Baird: In automotive, I think you mentioned that you expected some decline in the June quarter.

Yes. So, automotive has been really strong in the last couple of quarters, the last three quarters, actually, and some of that was the snapback from just the auto industry going up, but then, as things picked up it kept getting progressively stronger. Some of that is just a more healthy auto industry but some of that is also us taking more share within the automobile, inside the car from alternative sources. Again, this is a great example of ASSPs being supplanted by PLDs and some of the designs that we've been talking about over the last year or so are now starting to kick in and we're starting to see the beginning of more penetration in addition to more just autos being sold. Tristan Gerra – Robert Baird: Okay.

Now the decline aspect is mostly just a little bit of a leveling off and a slight decline, not a significant decline. Tristan Gerra – Robert Baird: Okay. And then your gross margin is currently at about a five-year high and you said that you have confidence you're going to hold to those levels in the second half of the calendar year. But at the same time, as pricing comes down we should also expect consumer mix to pick up in the second half. You are also going to ramp at the 40-nanometer chip, if you know. Are yield improvements the only reason to offset those factors and giving you the confidence that your gross margin can hold?

Well, certainly the yield improvements as we go through the next couple of quarters have pretty sharp yield improvement that does help. But also as we get into the back half of the year, in addition to consumer growing, aerospace and defense also typically grows for us. And that's a good offset. So, the end market mix, we’re not necessarily believing that's going to have a huge impact on us. The headwinds on next quarter quite frankly are the fact that we have a lot of V-6 that we're starting to ramp up and it's being sold into wireless, which is one of our – of all of our end markets, maybe the most challenging on pricing and margin, but at the same time we have a number of cost reduction efforts that have been kicking in and helping give us an offset. So, the forecast is 65 plus or minus a point, so it could be down a point, could be up a point, it's really dependent on how all the factors I just talked about turn out. Tristan Gerra – Robert Baird: Great, thank you.

Your next question comes from the line of Christopher Danely with JPMorgan. Christopher Danely – JP Morgan: Thanks, guys. I guess just a little bit of history on lead time issue. I think I remember last year somewhere towards like mid late year we first started talking about delivery issues and lead time problems. So, is this an extension of that same issue? Was it different? Is it different products or is just that same problem just lasting until now?

Totally different. Chris, this is Moshe. It's totally different. Last year if you remember and it's sort of amazing when you think back the semiconductor industry was dead and being buried at the end of Q1 and as a result all of the foundries were shutting down. All of the infrastructure for the foundry business was shutting down and then it turned snapped back in the most amazing way and there was some major issues as the foundries had been closed to reopen them and to bring capacity back online. And, we got impacted by that. I believe it was the second quarter or the second calendar quarter in a big way. A lot of other players got impacted by that actually later in the year. What is happening now is just incredibly robust environment where the foundries are operating at their peak capacity and they're scrambling to bring up additional capacity in particular in advanced process nodes. So, I wouldn't say it's the same. For us, it hit us for one quarter, June quarter of 2009 and once it snapped back and the capacity came online. As Jon pointed out we've now going into we are in our second quarter and we're going to the third quarter of challenges in terms of expanding capacity. But it's a different problem. And it's predominantly at the most advanced process nodes but not restricted to them. Christopher Danely – JP Morgan: And this time around, have there been any yield issues or is it purely been demand that's been much better than you expected and the wafer supply has not ramped as much as you expected?

It's the latter for sure.

Yes. Certainly 65-nanometer, we're continuing to focus on improving yields there because the leverage for us is so significant both for parts and units and margin there. And the other 40-nanometer process while we are the lead customer for UMC on that process, we are on our road map for yields in that product family generation. So, we aren't, we've not deviated from our road map.

Great. And then last question. Now, that we're sitting on tons of cash provided the government doesn't come and take it away from you. In terms of usage of cash between paying debt down, buying back stock, increasing dividend. Can you maybe discuss that a little bit?

Yeah. Sure. Our net cash is at $1.3 billion which is higher than we – than our target; we would like to be below $1 billion. Buying the debt back at the current price is not a good MPV situation for us at all because of some of the tax advantages we get out of that that particular instrument that we did. So, we did raise our dividend in this past year a couple of quarters ago. We're continued to buy back shares in this last quarter $125 million worth. So, we are committed to both increasing dividends on a go-forward basis and taking any other cash above our targets, cash targets and doing buy – share repurchase with that. Christopher Danely – JPMorgan: Great. Thanks.

Your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. Mahesh Sanganeria – RBC Capital Markets: Thanks for taking the question. I need some help in understanding the wireless revenues. And if you can put it in context of the wireless CapEx. Last year, your wireless revenues grew I'd say close to 30% and you're running at record level and looks like if you stay on this course you can grow about the same amount where as we hear on the headline numbers the CapEx – wireless CapEx going to be flattish. Can you help in reconciling, is it your content increasing or what's – how should we take the headline CapEx number and think of your wireless revenues?

From my perspective, Mahesh, it is true that maybe there is a reduction, but primarily on the news protocols and the upgrading of the equipment to the – for example, 3G in China that continues at a very fast rate and they're doing it in phases and this phase – this coming phase, fourth round is a very significant one. And we're seeing it in China. We're seeing an upgrade in North America and potentially Western Europe to 4G over time and they're still waiting for the Indian portion to pan out. But it's continuing to grow and the wireless continues to do well and best we can tell it's going to continue to be a driver going forward. It is possible that it could have been even better or it could be even better if they increase CapEx. But we don't see a slowdown on these new deployments. We really see that happening. If you look at what is – everything that we're aware of as this insatiable demand for bandwidth, all of the new widgets that everyone is using now are data and video-driven and there's just huge demands and basically the networks, the data communication networks are having great problems and they have to be upgraded. And you've seen cases, very public cases where some of the big carriers have actually stopped selling devices because their network can't handle the bandwidth. That's not a viable business for them to continue to stay in that model. So, I'm quite bullish on wireless and it's possible that it could be even greater, but we see it continuing at a very positive level. Mahesh Sanganeria – RBC Capital Markets: Okay. Thank you. And one more quick one on that 10 million and 15 million probably you will lose. So what happens to the customer, which didn't get your part, is it that they just are not able to ship those parts or are they going to get it late? Where does that requirement go away? I mean, because you're saying that you might not get back – get it back in September, necessarily. How do we reconcile that missed revenues?

I couldn't call that missed revenues. I think you misconstrued what Jon said. Some of the customers are building inventory. If we had additional product we could help them short-term. If not, these products are typically sole sourced. So, as long as they continue to build and sell their equipment. And keep in mind that we're in an infrastructure play as opposed to consumer play, so the upgrades do happen, then we do get that business. And it will hopefully build up and that's why we're scrambling to get it to those customers as soon as we can.

Any specific customer that doesn't get their parts in week, in the last week or the second to last week of the quarter will get it two weeks later, and it's a series of events that create these delinquencies over time. It isn't like the same customer won't get everything that they want at the end of this quarter and at the end of next quarter. It's not necessarily – doesn't work that way. We have so many customers and such a broad focus and we are responding with getting more parts out to meet the customers' orders. So it could be different part packages for different customers that could be short at the end of one quarter versus another quarter. Mahesh Sanganeria – RBC Capital Markets: Okay. All right. I get it. Thank you.

Your next question comes from the line of Srini Pajjuri with CLSA. Srini Pajjuri – CLSA: Jon, a couple of clarifications. On OpEx I was hoping that it would come down in the second half of the year. Just wondering if you're planning to spend on any additional tape-outs or if this is mostly revenue related?

So, the back half of the year is strictly our fourth quarter of our fiscal year is definitely impacted by 28-nanometer tape-outs, so the ramp for the next generation begins. So that's what – that’s one of the things that's impacting it. But we do – we're holding the line on our resourcing level, and with that putting out more products including the follow-on announcement that will come from our ARM relationships. So we are I think doing a good job of not growing R&D dollars, while being able to address additional markets in addition to the traditional PLD segment. Srini Pajjuri – CLSA: Okay. And then on the defense business, Jon, you said it's down sequentially which is somewhat different from what some of your peers are reporting. Just wondering, I'm talking about the industrial business. I’m wondering if the defense decline explains all of the weakness in industrial or if the segment is somewhat also supply-constrained.

Now the defense – no, it's not supply. Generally, that’s not supply constrained. Defense decline does explain the drop in our industrial and other category. The other sub-segments were flat to up. So, it really is just the defense and there is a seasonal pattern to defense that we've had pretty pronounced over the last five years as we've grown our defense business substantially. And it’s typified by a weaker March and June and stronger September and December, which September quarters and December quarters bracket the beginning of the government’s fiscal year where the purchasing – lots of the purchasing activities tend to happen. Srini Pajjuri – CLSA: Thank you, Jon.

Your next question comes from the line of David Wong with Wells Fargo Securities. David Wong – Wells Fargo Securities: The ramp in 40-nanometer, the 45-nanometer products, do they open up any particular new segments or new product types for you that you're selling into?

We definitely do because as they bring down the power, as they bring down the price, they enable us to address a whole host of new markets and actually to replace ASICs and ASSPs in a more aggressive way so it does broaden and deepen our reach into the applications we can address. Even in some of our traditional markets, for example, if you look at military or communications infrastructure. When you move into the 40 and 45 node, we can compete with ASICs and ASSPs in a more aggressive manner. So, it's both new applications but also deepening inside the existing traditional applications we have. David Wong – Wells Fargo Securities: Can you point to any new types of systems you haven't been in before? Can you give us any specific examples?

Well. You can look at examples in the high end of the consumer world where we're seeing the next generation of a lot of the displays. You know, that is something where I think we will expand our reach and it continues, we had some in past generations but it I believe becomes a lot more attractive when you have something like our 45-nanometer, Spartan-6 product and if you, that's sort of at the most cost sensitive side of our business. If you go at the high end of our business actually in the military space, you can address a whole host of new applications where they're actually significant volumes of these products and those in the past were not accessible to us and in the distant past used to be served just by ASIC. So, it really raises the water line for across the board in terms of applications we can service. David Wong – Wells Fargo Securities: Okay. Thanks.

Your next question comes from the line of Apurva Patel. Apurva Patel – Ticonderoga Securities: Hi. In terms of your ARM-based architecture, unified architecture. Do you believe you need to have additional software capabilities?

Well. Software is a lot of things. So when you look at the implementation software which is necessary in order to design the FPGA in of itself, you do need additional capabilities because you now have a very applicable high performance ARM core and you want to make that accessible to the customer and so that requires an expansion which is targeted at the embedded hardware that we have. When you go beyond that then there are layers of software which get closer and closer to the target applications. Those by and large are not provided by us, they are available through the extensive ARM ecosystem which is unparalleled in terms of the support it has for a broad set of applications. So, yes. There are demands but they are serviced in some cases by us in other cases by the ecosystem and of course ARM does provide quite a bit of that too. Apurva Patel – Ticonderoga Securities: And in terms of comms business you referred that wireless again is driven by bandwidth and wireless side but when did the pull come in on the wireless side?

When did the what? Apurva Patel – Ticonderoga Securities: On the wireless side.

Well. So the wired side, a lot of wired side is related to network infrastructure associated with Internet and that particular part of the bandwidth pipe. So that strength has been happening particularly as IT departments and companies are starting to buy more equipment. So we're obviously very active in routers and in data switches and things like that. So, that business has come back very sharply for us over the last couple of quarters and we think that's going to continue. Apurva Patel – Ticonderoga Securities: Thank you.

Operator, one last question, please?

Your final question comes from the line of Hans Mosesmann with Raymond James. Sabi – Raymond James: This is Sabi [ph] on behalf of Hans. Thanks for taking my question. I was just kind of hoping if – could you give a little bit more color on kind of within the new products and main stream, how the groups perform in 1Q and kind of how you – fourth quarter and how you expect it to perform throughout the year?

Yeah. So our new products are generally based on when the product was introduced into the market and they tend to be obviously then as a result our highest technology. So 40, 45-nanometer products, 65-nanometer products and then the very tail end of 90-nanometer and we every two years or so we realign those obviously as the generations move forward. We anticipate the new products to continue to grow throughout the fiscal year in the way things look right now, quite strongly and then sequential quarter growth every quarter throughout the year. The mainstream and base products are by definition then are older and oldest generation and they tend to have a different kind of profile. So the base being the oldest of them generally declines quarter-after-quarter-after-quarter. And the mainstream declines a little less quarter-after-quarter and that's depending on how older designs, the long tail FPLD designs what the pattern is for replacements out in the market or not. So if you were drawing a set of lines, you'd say new products, very positive slope and up to the right, mainstream, generally a gentle slope down to the left. And then base products, a more sharp decline down to the right – sorry, both down to the right. Sabi – Raymond James: All right. And then just a quick follow-up on that, just on kind of the examples that you give on the automotive where you're seeing kind of bigger market share take from the ASSPs, any other examples that you can give, more recent?

There are lots of them. There's a whole host of industrial applications where the – there used to be some traditional ASSP solutions which – and now they're at the end of the life and there's no roadmap for them, so we're actually seeing a lot of those devices in military, even another example, where that device it could have been a dedicated microcontroller is now being implemented inside in FPGA. So this is pervasive. It's not limited to automotive. Automotive may be one interesting application, but this does happen across the board pretty broadly and it's driven by the fact that at new process nodes it becomes prohibitively expensive to design and ASSP. So – and so of these ASSPs were designed at 130-nanometers, for example, and the companies that design them can't afford to take them forward to new aggressive nodes and the customers are stuck and you can implement those 130 and even 90-nanometer ASSPs sometimes quite cost effectively in advanced state-of-the-art FPGAs and that is what is happening on a broad basis.

Motor control and industrial would be one, solid state storage device controllers, there is examples of where people have typically used ASSPs in order to perform those functions. Now, needing custom algorithms to improve energy consumption and motor control, for example, et cetera, are using FPGAs for that, not ASSPs. Sabi – Raymond James: All right. Thanks, guys.

Okay. Well, thank you all for joining us today. We have a playback of this call beginning at 5 PM Pacific, 8 PM Eastern. For a copy of our earnings release, please visit our IR website. Our next earnings release date for the first quarter of fiscal 2011 will be Wednesday, July 21st, after the market closes. This quarter we'll be presenting at the JPMorgan Technology Conference in Boston, and the UBS Tech Conference in New York City. This completes our call. Thank you very much for your participation.

This concludes today's conference call. You may now disconnect.