Advanced Micro Devices, Inc. (AMD) Q1 2009 Earnings Report, Transcript and Summary

Good afternoon. My name is Cara and I will be your conference Operator. I would like to welcome everyone to the Xilinx first quarter fiscal year 2009 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) I would now like to turn the call over to Maria Quillard.

Thank you and good afternoon everyone. With me are Moshe Gavrielov, CEO; and Jon Olson, CFO. We will provide a financial and business review of the June quarter then we will 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 that 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 Xilinx Investor Relations website. Now let me turn the call over to Jon Olson.

Thank you, Maria. During today’s commentary, I will review our business results for the June quarter. I will conclude my remarks by providing guidance for the September quarter. Revenues in the June quarter set a new record at $488.2 million, up 3% sequentially from the prior quarter and up 9% from the same quarter of the prior year. Gross margin of 63.8% was at the high-end of our guidance of 63 to 64%, due primarily to improved yield and manufacturing efficiencies. This is the third sequential quarter of gross margin improvement for Xilinx and a direct result of focused yield improvement and cost reduction efforts. Operating income of $107 million, including $19.5 million in restructuring charges, was down 9% sequentially and up 10% year-over-year. Combined R&D and SG&A expense were flat sequentially as guided and represented 37.6% of sales. We continue to make progress in controlling expenses. In the same period a year ago, combined R&D and SG&A expense accounted for 39.9% of sales. However, we still have some work to do to realize our target of 17% for both R&D and SG&A. Other income in the June quarter was $5.7 million, up slightly from the prior quarter and in line with our guidance. June quarter net income of $83.9 million or $0.30 per diluted share, and included the previous mentioned restructuring charge in addition to a pre-tax $4.6 million charge related to impairment losses on equity investments. Collectively, these charges represented $24.1 million or approximately $0.07 per diluted share. Operating cash flow for the June quarter was $158 million before $10 million in CapEx. We repurchased 5.9 million shares for $150 million during the quarter and paid $39 million in dividends. Lastly, the tax rate for the March quarter was 22%, slightly higher than the 21% guided due to the fact that we have proportionately more U.S. income. Our recent workforce reduction disproportionately impacted U.S.-based employees, lowering expense and increasing U.S. income. Let me now comment on the balance sheet. Cash and investments decreased $15 million during the quarter to $1.85 billion. Factoring in the $1 billion convertible, our net cash position is approximately $850 million. Days sales outstanding decreased 10 days in the June quarter to 38 days. Inventory dollars at Xilinx increased by $10 million sequentially in the June quarter representing 72 days. This is up from 68 days in the prior quarter and down from 79 days in the same quarter a year ago. Worldwide distributors held 21 days in the June quarter, which is down from 24 days in the prior quarter and down from 22 days held in the same quarter a year ago. Combined inventory days in the June quarter were 93, well within our target of 90 to 100 days. Let me now turn to guidance for the September quarter of fiscal 2009. As most of you are aware the September quarter is normally our seasonally weakest quarter. Over the past five years the September quarter average sales decline has approximated 2%. We enter the quarter with backlog that is slightly down sequentially. The first couple of weeks have been typical for a September quarter, which is normally backend loaded. We continue to remain cautious about the macroeconomic environment. However, we are optimistic about the traction we are receiving from the Virtex-5 FPGA family. We are expecting this family to achieve strong sales growth in the September quarter. As a result, we are forecasting the September quarter to be up 1% to down 3% sequentially. This will require a turns percentage in the high 50s. Based on backlog analysis and customer feedback, we are anticipating sales from Asia Pacific, North America and Japan to be flattish sequentially and sales from Europe to be down sequentially in the September quarter. From an end markets perspective, we expect communications and industrial and other to be flat to slightly down sequentially and consumer automotive and data processing to be up sequentially. Gross margin is expected to be approximately 63 to 64%. Combined operating expenses, including $1.4 million of amortization, are expected to be approximately $180 million. Included in the $180 million of combined operating spending is 1 to $2 million of previously announced restructuring charges. Other income, including the impact of interest expense, is expected to be approximately $5 million. The share count is expected to be approximately 277 million shares. The tax rate is expected to be 22%. I’d now like to turn the call over to Moshe for some further comment.

Thank you, Jon and good afternoon to you all. I’m very pleased with the June quarter results, which marked a new record for the company at $488 million, coming in at the high-end of our sales guidance. In a challenging economic environment, we were able to achieve a number of milestones including record sales from our industrial and other category, record sales from the Asia Pacific region, and the highest gross margin since the September quarter of fiscal 2005. I’ll now provide some color on the results of our vertical markets. Final tally, sales from Communications, Industrial and Other, and Data Processing all grew sequentially this quarter while Consumer and Automotive declined slightly. The Industrial and Other market was undoubtedly the highlight of the quarter. Sales reached record levels in the June quarter exceeding $160 million. Aerospace and Defense sales, which were seasonally week in the March quarter, increased 10% sequentially in the June quarter. Sales growth from this category was very broad based with 16 of our top 20 customers growing during the quarter. Sales from Industrial, Scientific and Medical Applications increased in high single digits sequentially. This category continues to demonstrate consistent growth, benefiting from secular trends including productivity and power saving initiatives, coupled with renewed spending on U.S. medical equipment. By sub-segment following Wired Communications, Aerospace and Defense is our second largest area with Industrial, Scientific and Medical as number three. Communications was up 3% sequentially representing 42% of sales. European Communications customers were particularly strong, delivering double-digit growth in the June quarter. Asian and Japanese Communication customers were also generally strong, both delivering single-digit sequential growth. North American Networking customers were healthy again this quarter, but Wireless customers declined sequentially. Our V-5 momentum and leadership is very encouraging, and we are expecting strong sales in the September quarter as several communications customers begin employing V-5 for initial production runs. In addition, global communications upgrades including 3G wireless, WiMAX are on the rise and Xilinx is well-positioned to capitalize on these trends. As we are heading into the summer quarter, we expect our European Communications business to be seasonally softer. Data Processing grew 3% due to growth from new storage applications. The Consumer and Automotive end market was down 2% sequentially; Automotive and Audio-video Broadcast sub-segments were flat, but Consumer declined sequentially, due primarily to two customers. We expect the September quarter to experience a seasonal pick up for the Consumer and Automotive end market. Product family split shows total Virtex revenues 57% of overall revenues increasing 7% sequentially, while we tend to highlight Virtex-5 momentum, our Virtex-4 family continues to do very well and grew double-digit sequentially. Virtex-4 is the industry’s largest high end FPGA family in terms of revenues. Spartan revenues grew 3% to 26% overall revenues and CPLDs were down sequentially comprising 8% of our overall revenue. It’s been six months since I joined Xilinx and I’m delighted with the rapid progress that’s been made to date. At our analyst meeting last month, I discussed a market dynamic I called the programmable imperative. Basically highlights the inexorable trend that end market requirements driving programmability to become increasingly important in the complex burgeoning digital world. In parallel the alternative solutions, i.e. ASICs and ASSPs are becoming by financial necessity, more and more focused on the highest volume applications, thereby increasing the sweet spot for programmable solutions. To capitalize on this trend we’ve taken some bold proactive measures at Xilinx. We recently completed a very broad reorganization into an efficient functional structure. The new organization is significantly simplified and more tightly integrated. This new organization is already benefiting from increased efficiencies, more effective go-to-market strategies and improved execution. Consequently, it enables us to more rapidly develop and deliver focused customer and market driven products thereby targeting higher growth, higher return applications. As part of the reorganization we already have reviewed our existing portfolio, pruned and optimized it to accelerate the highest ROI programs. Over time we’ll be expanding our portfolio of offerings beyond focusing on power, cost and IP to further focus on power and deliver both horizontal and vertical platforms. These new offerings will be market driven with an increased emphasis on early customer collaboration. In addition we’ve implemented performance-based compensation and bonus plans to tightly align the variable compensation of the entire employee base with performance-driven metrics. In summary, there is abundant and growing opportunity for programmable solutions and definitely a lot to deliver in order to facilitate and capture these opportunities within a disciplined financial framework. I look forward to continuing our ongoing dialogue on the Xilinx story, keeping you apprised of our progress. Jon and I, in conjunction with the entire employee base and management team focused on delivering improved results for all of our shareholders. Now let me turn the call back to the Operator to open it up for the Q&A session.

Your first question comes from the line of Tim Luke - Lehman Brothers.

Thanks so much. A couple of clarifications and a question; with respect to clarifications, if you could give us how the book-to-bill was in the quarter and any clarity, Jon, on how you have perceived the linearity through the quarter? And then just as a question, within Communications how you had perceived in terms of your guide the different segments of Wireline, Telecom, Networking and Wireless? Separately Jon, I was also wondering; you’ve got the gross margins marching upwards, although you have more new products and I believe generally your mature products have had the highest margins? Thanks.

From a bookings pattern as we went through the quarter and then going into next quarter, we are starting in a flat to slightly down position in the quarter coming up here, Tim, from a backlog perspective. But I wouldn’t call that anything but typical relative to this quarter because more typical as we have a stronger September turns business than we do July and August, particularly because of vacations, and in Europe in particular it’s really pretty slow in July and August. We don’t see anything different right now from that perspective. So from a book-to-bill perspective I don’t think there’s anything that’s out of line here. It’s really pretty close to 1. Our linearity throughout the quarter was pretty much as we anticipated. This was a pretty level quarter for us. April, May, June all being pretty even and we didn’t see anything in particular different about June than any other June. We might have had some stronger Communications business in the month of June. That’s probably the only outlying item that I can recall. Then you asked a question around our Communications information by segment. As Moshe was talking about, we did experience good progress in the Networking area and we saw some good early positive signs in Telecom and some of that goodness was offset in the Wireless business for us. Now part of the Wireless offset was really around prototyping not base station; rollouts of 3G or Next Generation etcetera, it was really around the prototyping business was the biggest individual decline and I think that was really set up by a strong prototyping dollar in our last previous quarter’s figures for the most part. Then the last question was around gross margin being up, but it was up and we still had strong growth in new products and decline in our older products. While it is true that our older products have higher margins, we’ve done a really nice job of sequentially improving margins every quarter on our new products. New products are primarily made up of 90- and 65-nanometer based products. The 90-nanometer is starting to get much more mature; 65 yields are ramping in a way that’s much faster than 90-nanometer as we have discussed over the last two years pretty consistently. We’re quite pleased where we are with the product margin and gross margins of our products.

Just as a follow up then, in terms of the calendar third quarter Communications guide you would expect all of those segments to be slightly lower sequentially or are there any that are slightly higher? And just as a general question, I think your rival Altera was suggesting last night that they will see more design wins on 40-nanometer in the second half than on 65-nanometer. Any commentary on just, how you perceive the competitive dynamics there at the leading edge and any flavor as to how big 65 is as a piece of the growing business currently?

From a third quarter perspective I don’t really have much color on forward-looking guidance by segment of Communications because I think we expect all the segments to be pretty much flat to down. I don’t think there’s going to be one of the three segments standing out one way or the other. And when you’re in this kind of a flat kind of environment there really isn’t a whole lot of variation. Relative to Altera’s comments, we have an extremely strong 65-nanometer portfolio with our Virtex-5 product line. We are expecting growth. We are expecting significant growth next quarter and the quarter after in our advanced products. As we said at the analyst meeting, we’ll be announcing our 40-, 45-nanometer portfolio by the end of our fiscal year. In the meantime we’ve got a lot of really strong products to sell versus any of the competitors at the high-end and that’s what we’re going to be doing.

Thanks so much.

Your next question comes from the line of James Schneider - Goldman Sachs.

First of all on the end market commentary, can you talk about what you are seeing in Industrial? And in particular if you exclude the Auto and Defense business and look at broad-based industrial and in particular smaller customers, what are you seeing there; any signs of changes, weakening perhaps due to the macro economy?

Jim, I think that if you take Industrial and you take out Aerospace and Defense that leaves you with the broad-based Industrial and Scientific and Medical. We are seeing strength in the Scientific and Medical area and broad-based Industrial, depends on the geography. If you talk about the broad-based macroeconomic trends, the only kink that I’m seeing right now is in North America. We have had some sequentially weaker channel business and some of that lands in the Industrial area and the broad-based Industrial area. But other than that, from a macroeconomics perspective we are really not seeing too much going on. And the broad-based Industrial and the Scientific and Medical both, we believe, will grow. If you remember at our three-year CAGR growth forecast from the analyst meeting, we talked about where we thought the company was going to grow over the next three years and the Industrial area was actually the leader in terms of percentage growth, double-digit growth in those areas. That wasn’t just all about Aerospace and Defense. It was just as much about the broad-based Industrial and Scientific and Medical for us. So we are doing quite well there.

Great. And then as a follow up, could you maybe talk a little bit about the shape of the OpEx profile that you expect through the remainder of the fiscal year? If you could throw out any kind of dollar target in terms of absolute dollars for the year that would be great.

In the analyst meeting I talked about lowering our OpEx two to three-points as a percentage of revenue exiting Q4 of this next year. I don’t know what other kind of color I am going to have. If you look at the number we gave you for next quarter which is $180 million and then it has the 1 to $2 million of restructuring charge, you can see that the actions we’ve taken both RIF and cost savings, as you can see that there’s some dollars coming out. We have some more cost reductions planned throughout the year, but we also have some add backs that we had talked about also in the analyst meeting. I wouldn’t see us going forward having a big swing and maybe flat to slightly down in that number as we go through the year.

Okay. So just to clarify, you wouldn’t expect another significant step down in Q3?

I would not expect another significant step down in Q3. We are going to work diligently through the rest of the year on our cost reduction opportunities, and as we said before there will be some add back of heads.

Okay. Thanks.

Your next question comes from John Lau - Jefferies & Co. John Lau - Jefferies & Co : Thank you very much. You commented on the communications end market. I wanted to follow-up on that. The competition saw some extremely strong pulls there and the overall results were very, very strong. It seems like your results have a different profile. I was wondering can you comment on any of the different dynamics there that we can be looking at?

Obviously, we saw the announcement and if you parse where that came from, it appears that in North America they had very strong Communications business. And from our perspective we saw strong Networking across the board in almost every geography. We had extremely strong business in Asia and in our large customer base and that was across both generally wired and wireless technologies. I think one of the overall differences could be between the two of us was our wireless business, and as we’ve talked about, ours declined sequentially and I think they had a different profile. I can only comment on what they said in their call relative to our business, and I think there’s just a different timing of some of the customers’ needs from us versus the customers’ needs from them. I think if you look at our patterns over the years, you’ve seen us be much stronger towards the end of our fiscal year and their pattern is a little bit different. Those are some of the differences that I’ve seen. John Lau - Jefferies & Co : As a follow-up to that, you indicated that not only was Communications strong for you, but Asia was strong. What are you factoring in with regards to your outlook on Q3 especially with some of the commentary about the Olympics or any slowdown over there? Have you factored that into some of your guidance?

We certainly assume the Olympics are going to happen. I don’t think we are going to do anything about that one way or the other. But we definitely have taken a look at our customer forecast across the board. We’ve heard about the view that there is going to be some softness in terms of the rollouts during the calendar third quarter and we’ve put in the appropriate amounts into our forecast with that in our thinking and in the right context. John Lau - Jefferies & Co : Great. Thank you very much.

Your next question comes from the line of Glen Yeung - Citi.

Thanks. I just have one question although it’s in twelve parts. First part is really thinking about how you think about the Comm end-markets relative to the macro? Where I’m really going is we’ve seen projects, obviously, in China and in Japan, you hear about projects in the U.S.; what’s your sense as to sustainability of those projects, or the risk to them given the macro environment we’re seeing?

We’ve been cautious. We’ve been thinking about the macro environment. We’ve been waiting for something bad to happen to us in our backlog and customers to back away, and we have not experienced anything significant in this area. Our large customers are all rolling ahead with their projects. We’ve been getting very strong design wins on our Virtex-5, which is usually indicative of next generation Communications in many ways, as well as the Aerospace and Defense, but that’s less impacted by macroeconomics in the short-term. All the signs that we see are that prototyping is happening and the projects are moving forward. So we can all get afraid about oil prices and everything else and maybe someday it will actually happen in a way that hurts us, but right now we are not getting any information that says different than full steam ahead in terms of the Communications segment.

Okay. And then you talked about V-5 showing significant strength, I think, you said in the third quarter. Can you just talk about what end market you see that strength coming from?

I think primarily that will be the Communications and Aerospace and Defense will be the two areas that that will be the strongest in for us.

Okay. And on the same vein, you also talk about Comm being strong exiting the June quarter. Maybe clarify what end market that was coming from?

I don’t know that I want to get that granular. We did say overall Networking was very strong for us, so I think that gives you a pretty good indication of where it came from.

Fair enough. Last question, Jon; thinking about calendar Q4, Altera was able to say that they felt like that Q4 would be above seasonal based on what they are seeing today. I wonder as you look into your calendar Q4 if you get the sense that above seasonal is a reasonable expectation?

I think it’s too early for us to tell whether it’s really going to be above seasonal or not. We feel pretty good about the growth in the fourth quarter. Our historic patterns indicate that that’s typically a pretty good quarter for us, although there are a couple of outlier data points for us. The strength typically been some in Communications, but a great deal in the Industrial and Other category, specifically Aerospace and Defense as the budget patterns of the government give them new money and that’s a usually a pretty big quarter, and most of those customers are saying good things to us, but until they actually get the money you never know for sure.

All right. Thanks a lot.

Your next question comes from the line of Christopher Danely - JPMorgan.

Moshe, in the beginning spiel, you mentioned horizontal and vertical platforms in terms of the different products we could see. Are you going to change your product portfolio? Are you going to have new products? Are you going to subtract some products? Are you going to start doing modules? Can you just expand upon that statement, please?

At relatively high levels, if you examine what has happened in the FPGA world over the past ten years, primarily, in the past it was used for glue-gobbling, and there’s been a huge transition. Today, due to a variety of elements in a larger and larger number of applications FPGAs are now an important and central part of the system. That’s driven by what you can achieve with an FPGA today, and it’s also being driven by the economics which are very difficult for justifying ASICs and even standard products for everything except the highest end applications. Now, as you look at that general transition, the complexity of the product is significantly growing, and the complexity has numerous aspects to it. So, whereas in the past things were driven primarily just by having the highest performance and the largest capacity as you branch into more and more applications then there are other elements that are important. The IP portfolio has become quickly important, and then, integrating all of these things together becomes important. So, what you will see from Xilinx is a very strong focus on all of these aspects; performance, cost, capacity and power is becoming increasingly important. Then the IP and the existence of a platform which enables a broader solution are becoming more important, and we break those platforms into two kinds. There’s the more horizontal oriented that service numerous applications, and the vertical ones, which are more specific to certain markets. What you’ll see from us − and we’ve made huge strides, we just need to hone our strategy and to implement and deliver − is a much more focused element in terms of providing these platforms and they will be driven by where we believe there is the highest return. It will also enable us to scale in terms of addressing our customers. One of the blessings we have is the thousands and thousands and thousands of customers having a platform based solution, actually, will enable us to address them efficiently, and it will reduce the onus of design that they need to bear, and it’ll reduce the support costs that we have. This is becoming a multi-parametered solution, and it’s indicative of an industry which is transitioning from providing a peripheral solution to being the center part of our customers’ applications.

Okay. Thanks.

Your next question comes from the line of John Dryden - Charter Equity.

Thanks for taking my question. Jon, can you walk through the accelerated cash receipts in the quarter? Should we look for this to continue or was there a dynamic late in the period that allowed to you bring in the accounts receivable?

The issue is really around if you look at the calendarization of when revenue came in the last quarter versus this quarter. In March there was a lot of business in at the end of the quarter; April and May being more linear than January and February. More of the shipments to our distributors who still are our primary conduit to the customer came in a way that the timing of when the billings went out, more cash came in. So that was point one. Point two is, as we got to the end of the quarter, the primary distributor Avnet’s year-end was at the end of this last quarter and they, I think, were also taking fewer shipments leaning out their inventory during that time period. Their shipments, they took more front-end loaded as well, would be my estimation. The net answer to your question is, no, this is not a repeatable item every quarter. It was really the confluence of two things going on at the same time and that drove our days sales outstanding to being actually lower than what I would think the typical average range is which would more be in the 40s.

Thanks for taking my question.

Your next question comes from the line of David Wu - Global Crown Capital.

I have a question and clarification. The clarification is on the last quarter your Asia Pacific was 32% of revenue. I assume that China is a big chunk of that 32%. Am I correct? The other one I have is about your gross margin. Both you and your competitor have very excellent gross margins on 90- and 65-nanometer and I was wondering, given how careful the guys in Taiwan have been expanding their capacity, can that good cost reduction or yield improvement continue at the 40- to 45-nanometer node?

To answer your first question, yes, China is a very significant part of our Asia Pacific business. We don’t really quote the precise percentage but it is a very significant portion so you can assume that to be true. And then relative to overall foundry capacity, pricing, et cetera, that certainly is a current question and always an interesting one to understand. To me the yield improvement is not necessarily correlated to what the wafer pricing situation might be going forward. I think it’s in everyone’s interest to have the yield be as best as it possibly can, and we work very closely with our partners to work on yield improvements. I think going forward yield improvement programs are going to be extremely important and at the cost of a 40-, 45-nanometer wafer due to the investment to develop the technology, I think it’s going to be increasingly important for us to keep on the path that we’ve been on and so we are going to try very hard to do that. Relative to the overall capacity out there in the foundry, we work very closely with our foundry partners to make sure that there are enough wafers available for us through long-range forecasts and long-range pricing discussions with them and our experience over the last couple of years, that’s certainly been quite good with both of our primary foundries in that area and we continue to work that issue to make sure that we get all the wafers that we need. But we look at the same charts everybody else does and we certainly talk to them and understand as we go through our due diligence on foundries to understand who is going to be making the investments that allow us to stay on the leading edge of the nodes as we typically are for our industry.

Thank you.

Your next question comes from the line of David Wong - Wachovia.

Thank you very much. Am I right in assuming that Virtex-5 sells primarily into communications applications, and if so roughly what percentage of Comms is Virtex-5 at the moment?

That isn’t a good assumption, David. Virtex-5 is sold into the Comms market and it is a very important market, but Virtex-5 is also extremely important to the Industrial and Other category and in the surveillance area, for example, there are quite a few applications that it’s used in and, no, we don’t break out our Virtex-5 content within Communications.

Great. Thanks.

Your next question comes from the line of Uche Orji - UBS.

Just a follow up on David’s question. So how much percentage of sales was Virtex-5, please?

No, we are not providing that information. We were pleased with where we are in Virtex-5 in the life of its product lifecycle. We did have double-digit unit growth this quarter and some ASP decline as prototyping moved off to more mainstream kinds of activities.

Okay. And just very quickly on the next-gen network and deployment in Japan. What kind of growth should we expect in the back half of 2008?

I don’t think we have any forecast on that level of specificity for NGN quite frankly, Uche.

Any kind of metrics you can give us in terms of where they are in terms of deployment just for us to gauge the level of enthusiasm that you feel about this in the near future? You don’t have to give me a number; just anything qualitative that helps me understand how this will be a driver in the second half.

I don’t have that information right now. I don’t have anything. I have to see if we published anything out there. But I don’t have the data in front of me. I would answer the question as best as I can if I had the data but I don’t have the data in front of me.

All right. Thanks.

Your next question comes from the line of Srini Pajjuri - Merrill Lynch.

Thank you, Jon. Just a follow up to your OpEx question. You just announced a 7% restructuring and if I look at your guidance for $180 million it’s only slightly below the $185 million you did in Q4. Where you are spending this incremental savings that you are achieving from the restructuring?

One of the things that occurred in the July quarter because we’re talking about our forecast going forward, is our annual salary planning and focal process of the company. So you are seeing some impact and offset from the benefit that you’ve calculated there from the RIF. As I said before, we are going to continue to work on cost reduction activities that will help over the rest of the year help offset that impact and get us into this 2 to 3% improvement of OpEx as a percent of revenue by the time we exit the year.

Is it very much a function of higher sales, Jon, or do you see any opportunities or do you see absolute numbers going forward?

We do think our sales in the second half of the year will increase even though if you look at our comparative numbers from last year, this quarter was, year-over-year, 9% ahead. And if you look at our guidance, we will be somewhere in that same neighborhood. Year-over-year, we’re looking pretty good. And we do believe that there will be growth in the second half of the year and it will be seasonal for us. We do believe there will be some revenue growth. But we also are going to follow-up on the spending actions that we’ve talked about and we should get some benefit from that as well.

If I compare your target model versus Altera’s, they are talking about 15% on the SG&A line and you are saying 17%. I’m just wondering if there is any structural difference between you and them that you need to have 17% in SG&A. Thank you.

I can’t comment on their model and how they are structured. I don’t have much visibility into that. The way we think about SG&A, the sales and marketing effort, we want to make sure that there’s the appropriate level of technical resource to be able to work with our customers in order to develop the platforms and solutions that are important to them from a sales support perspective. I think we’ve demonstrated that that kind of support in the field has helped lead us with our technology to a higher sales pattern than any of our competitors. So we believe that is a source of strength in the company. At the same time, we are very understanding of transactional based part of SG&A and we need to improve systems, reduce costs broadly across the company and those are some of the things that I talked about in the analyst meeting that we are working on. Since we are from a position where we are much closer to 19% going to 17%, I’d like to get to us 17% before I start thinking about 15%. You’ll have to ask Altera about their structure and what they are doing.

Your next question comes from the line of Sumit Dhanda - Banc of America Securities.

I had a question for Moshe or Jon; one of the things you talked about is your design wins at 65-nanometers, 90% of the design wins. And then clearly, you were earlier than Altera at 90-nanometers too. I’m a little curious as to why Communications, which is a segment where I would think you would see these leading design wins ramp into volume first, is a segment where you actually lag your competition, at least in recent quarters.

It’s 42% of our business. Keeping it in that general range it has been growing and has been stable at that level; has been driven undoubtedly by Virtex-4 and Virtex-5 and the wins there are the ones which are keeping it at that level, as we are expanding and diversifying into other areas. I think that is what is driving it and it’s a good and highly profitable business for us servicing those key customers in that area with our leading technology. What we have seen which has provided a little bit of downward pressure on that business is there has been a lot of consolidation in that area and as that consolidation has happened and a lot of those key customers have merged and reviewed their product portfolios and that has generated some pressure, there are less players in that market but the ones that are still around, best we can tell are using our 65- and 90-nanometer with vengeance.

If I could just follow-up on that. I’m not sure I quite understand because that end-market dynamic is witnessed by both you and your competition. Your customer base isn’t dramatically different from what I know. What I’m not able to reconcile easily is your commentary on how well your design wins are doing; the Virtex-5 family was released in mid 2006 and the fact that in reality your Comm business has been stagnant, and Altera has had a couple of squishy quarters here and there, but in aggregate their growth has been much better. Maybe there’s an easy explanation for this. I’m not able to find it.

The 65-nanometer, at this point, the designs are transitioning from prototyping into volume production. So typically when you look at when we see the sweet spots in terms of revenues, it’s at a minimum three years and more typically four years after the product introduction. You are just seeing the beginning on Virtex-5. Definitely Virtex-4 is at that point now and actually has been growing rapidly recently. Virtex-5 is ahead of us in terms of its huge contribution to growth. I think you are only seeing half of the story; you are seeing the half which is driven by Virtex-4. You are yet to see what will be driven by Virtex-5 in terms of revenue expansion.

Is it fair to say then that they are doing better at 90-nanometers within the Comm segment?

I really don’t have access to their numbers and I also make it a policy not to say anything bad about them because I think they are a fine company. But, I think from what I’ve heard they have done really well at the 130-nanometer in comparison, but since I don’t have their numbers in front of me, I can’t quite answer that question.

We’re trying to parse out that some of the information that came out yesterday from Altera in that area, and as best as we can tell, our Virtex-4 increase was double their 90-nanometer product in terms of dollars, and we increased our share on the 90-nanometer basis at the high-end. Forgetting about the end market applications, because I think that’s much harder to understand that. As we said, we are very happy with where we are in the 65-nanometer node, but on the 130-, I think it’s a different story, and I think that’s where they talked about some of their strength. But again I’m only going by what we can parse together from some of their percentage growth information that they provided.

The target gross margin for September is 63 to 64%, and of course your new range is 63 to 65%. You’re bumping-up against the top end of the old range. Is it going to be a fairly linear progression you think to that 65% mark, or is it going to happen in one or two quarters all of a sudden?

No, I think mix plays a big factor into what happens in our gross margin area, and I think if you think about this quarter versus next quarter and you think about overall flat revenues, you can feel like what’s really going to go on with margin it’s not going to be a great advancement. As the mix changes and you think about the second half of the year where we have been typically stronger in Industrial and Other and higher margin products that might indicate that maybe there will start to be a more trend up. Linear, on our target forecast, whether it’s linear or not, I think we will have an upward slope as we go forward throughout our fiscal year.

Thanks so much.

Your next question comes from the line of Randy Abrams - Credit Suisse.

I want to see if you can comment on the inventory. It’s been coming down pretty steadily the last six quarters and stable this quarter, but want to see if you need to build in a little bit more buffer given the lower CapEx trends you are seeing at the foundries and now do you need to see that trend back up a bit?

Yes, actually I think you would have typically seen in at least more modern times our inventory lean out a little bit going into the summer where we typically have it flat and you saw it go up a little bit. We do look at the foundry forecast about their capacity and utilization out in time two or three quarters ahead and we do have certain kinds of relationships that allow us to do some build aheads in order to make sure we have the right inventory at the right time. When I spoke earlier and made comments about our working with the foundries very closely on making sure we had enough wafers at the right time, all of that’s part of our overall horizon planning we do with our foundry partners. We put all the things that you mentioned and more things into the hopper and understand what we need. So I think we are pretty well positioned for any potential upsides or even some shortages, if they would happen to occur later on this year.

Okay. And if I could fit in a quick question, the prototyping, you mentioned it dropped off after a strong March. Are you back to historical rates or does that still need to come off a little bit?

The prototyping comment was specifically around Wireless; generally prototyping was not off. It was just in that one particular sub-segment going on. No, I think there are still lots of prototyping in the hopper particularly in advanced communications designs ahead of us. I don’t think that’s backing off.

Okay. Thanks a lot.

Your next question comes from the line of Ryan Bouchard - Piper Jaffray.

This is Ryan calling in for Gary Mobley. Most of the questions have been answered, but I had a question about lead times. You just mentioned special agreements with your foundries but absent those special agreements would you characterize what would otherwise be normal lead times? What’s happening currently versus maybe how the environment was maybe three months ago?

Our lead times to our customers, which is what I know the most about, haven’t changed. Still most of them are four weeks or less. And at this point I don’t see any signs that that’s going to change relative to our supply chain. Again, there’s been nothing abnormal going on in the supply chain with respect to lead times.

Okay.

Your next question comes from Tristan Gerra - Robert Baird.

Looking at Virtex-4, it looks as if there’s momentum again after a couple of quarters where revenue was stable and Virtex-4 seems to now exceed Virtex-II Pro in terms of peak run rate. How much long longer does the trend continue and when should we expect the peak in revenues for Virtex-4, as Virtex-5 is now ramping and meaningful as a percentage of revenues?

Describing exactly what quarter the peak is going to be in is a difficult thing to do, but we certainly are in the time period where we would be getting closer to the peak, sometime in the next several quarters, and clearly as V-5 designs start to kick in there won’t be as many V-4 designs and that’s how all that works and then you get the peak in the profile. We did have a very good quarter in V-4. I don’t know that this was the peak quarter or not, we’ll have to see, but years from introduction we’re in that ballpark for the peak.

Okay. You mentioned on the call that it looked as if disti resales were slowing down a bit in North America. Are you seeing similar trends outside of North America so far?

I’m not seeing any consistent pattern. In any given quarter we might have had one of them up or one of them down. But then looking forward our forecast will be strong. I think the only pattern I can see anywhere has been just generally in North America, we’ve had several quarters of, I’ll say, small declines or drifting down in our smaller customers.

Great. Thank you.

Your next question comes from Ruben Roy - Pacific Crest Securities.

Jon, I think you mentioned Spartan as a group was up 3% for the quarter. Can you break out Spartan-3 and just give us an idea of how that did this quarter?

The entire Spartan-3 family was up not quite double digits.

Okay. Then in terms of Telco, can you give us the split between the three major segments there; Wireless, Wireline and Networking?

I know we used to publish information in those splits and we haven’t actually done much of that anymore. I would say that Wireless is somewhere in the 20-, 25-ish percent and Networking is probably about 40%; maybe 30% in Telecom, in round numbers.

Okay. Then the last one Jon, I think you mentioned that we might be able to look forward to a 40-nanometer announcement towards the ends of this fiscal year, is that correct?

Yes.

Okay, thanks very much.

It appears that there are no further questions. Do you have any closing remarks?

Thank you all for joining us today. We have a playback of this call beginning at 5:00 PM Pacific, 8:00 PM Eastern. For a copy of our earnings release, please visit our IR website. Our next earnings release date for the second quarter of fiscal year 2009 will be Wednesday, October 15, after the market close. This quarter we will be presenting at the Deutsche Bank Securities Technology Conference in early September. This completes our call. Thank you very much for your participation.