Advanced Micro Devices, Inc. (AMD) Q3 2009 Earnings Report, Transcript and Summary

I would like to welcome everyone to Xilinx’s third 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, Ms. Quillard; you may begin your conference.

Thank you and good afternoon. With me today are Moshe Gavrielov, CEO; and Jon Olson, CFO. We will provide a financial and business review of the December 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 December quarter. I will conclude my remarks by providing guidance for the March quarter. Revenues in the December quarter of $458.4 million were down 5% sequentially from the prior quarter and down 3% from the same quarter of the prior year. The months of October and November were in line with our original guidance of approximately flat sales. In the month of December, however, we experienced appreciable weakness in sales across a broad base of end markets resulting in our guidance revision on December 16th. Continued cost reduction efforts contributed to improved gross and operating margins during the quarter. Gross margin of 63.9% was up 60 basis points from last quarter and in line with our guidance of 63% to 64%. It was also the highest gross margin we have reported in four years. Combined R & D and SG&A expense was $173 million, lower than our revised guidance of $175 million to $177 million. As a result, operating margin improved to 26.1%, up from 25.8 % reported in the prior quarter and the highest we have reported in three years. Net income during the quarter was $139 million or $0.51 per diluted share and was impacted by a couple of factors. First, we spent $146 million in cash to repurchase $241 million face value of convertible debentures. This resulted in a pre-tax gain of $89.7 million or $0.24 per diluted share after-tax. This unique opportunity to improve long-term shareholder value presented itself due to the unsettled credit markets causing the overall convertible debt market to trade at deep discounts. In the short-term, we view this as an excellent way to leverage our strong cash position. We also recorded a pre-tax impairment charge on investments of $19.5 million or $0.05 per diluted share after-tax primarily related to losses on a certain cash portfolio investment in the financial sector. Almost all of this impairment was due to the write-off of the remainder of a cash investment partially impaired last quarter. The bankruptcy was resolved in a manner that will make it unlikely that we will receive any value from this investment. Collectively, the $89.7 million pre-tax gain and the $19.5 million pre-tax charge represented approximately $0.19 per diluted share gain after-tax. Operating cash flow for the December quarter was $128.5 million before $11 million in CapEx. As I mentioned earlier, we paid $146.3 million in cash during the quarter to repurchase $241.1 million of convertible debentures. We also paid $38.4 million in cash dividends. The tax rate was 26.3% higher than our forecast of 21%. The tax rate was heavily impacted by the gain on repurchase of the convertible debentures, which is taxed at US rates. Partially offsetting the increase in tax due to the re-purchase of the convertible debt was the impact of the reinstatement of the Federal R&D tax credit made effective during this fiscal quarter. Let me now comment on the balance sheet. Cash investments decreased $94 million during the quarter to $1.7 billion. We now have approximately $760 million in convertible debt on our balance sheet and our net cash position is approximately $920 million. Day sales outstanding decreased two days in December quarter to 42 days. Inventory dollars at Xilinx increased by $8 million sequentially in the December quarter representing 82 days. This is up from 73 days in the prior quarter and up from 69 days in the same quarter a year ago. Worldwide distributors held 17 days in the December quarter down from 20 days in the prior quarter. Combined inventory days in the December quarter were 99, up six days from the prior quarter, but within our target of 90 to 100 days. New product sales increased 2% sequentially driven by exceptionally strong Virtex-5 sales, which Moshe will discuss in more detail. Mainstream and base products experienced sequential declines of 9% and 17% respectively. Sales from all geographies declined sequentially during the quarter. North American sales were down 4% with the largest declines coming from wired communication and audio/video broadcast, but partially offset by an increase in defense sales. Asia Pacific sales were down 1% as strong sales from wireless communications was offset by weak sales in other end markets. European sales were down 12% in the quarter with all major end markets declining during the quarter. Sales from Japan were down 4% sequentially with gains from Consumer and Automotive partially offset by declines in other end Markets. In terms of our vertical markets, sales from wireless communications were up more than 10% sequentially to comprise 18% of overall revenues. Our wireless strength was virtually all related to China 3G infrastructure build. Wireless communication revenues from North America, Europe and Japan were all flat sequentially. Approximately 70% of our Asia Pacific revenues currently come from wired and wireless communication applications. Overall, wired Communications declined approximately 10% quarter-to-quarter. Wired communication revenue in North America, Europe and Japan were all down sequentially. Of the total communications revenue for Xilinx about 40% are currently wireless applications and 60% are wired telecom and networking applications. The other standout this quarter was our Defense and Aerospace business, which is part of our industrial and other category. Defense sales increased nearly 20% sequentially to comprise 15% of total revenues. While we are expecting defense to be seasonally weak in the March quarter, we still believe that Defense/Aerospace is our most recessionary proof end market. We have a good backlog in defense business for the next fiscal year and the US Department of Defense has already increased its budget for the September ‘08 to ‘09 year and we expect to see our Aerospace/Defense market grow year-over-year. Unfortunately, declines in the industrial, scientific and medical and test and measurement areas in December quarter offset the increases in defense, so the overall category was flat sequentially. All other end market segments, which include audio/video broadcast, automotive, consumer, computing and storage, declined quarter-to-quarter. Let me now turn to guidance for the March quarter of fiscal 2009. First, PLDs and Xilinx specifically appear to be laggard into the cyclical downturn due to our limited consumer exposure. As Xilinx business begins to feel the full impact of the recessionary times, we are entering the quarter with significantly reduced backlog. Forecasts for the most of our major end market customers suggested the band environment will remain weak in the March quarter with customers working through internal inventory levels. Defense sales are expected to be seasonally weak in the March quarter, as I mentioned earlier. Additionally, while 3G activity in China remains healthy in the long-term, we are expecting to experience a pause in the March quarter with sales picking up again in the June quarter for wide-band CDMA and GSM orders. As a result, we are forecasting sales to be down 15% to 25% sequentially with sales from all geographies and end Markets down sequentially. Because our visibility is so limited, we are providing a larger than normal range for our sales guidance. In light of the current economic conditions coupled with our wide guidance range, we have decided to provide a business update this quarter on March 3rd. We don't plan to reinstate the business update practice but if circumstances warrant, we will make an exception. Gross margin is expected to be approximately 61% to 63%. Combined operating expenses including $1.4 million of amortization are expected to be approximately flat to slightly down from the December quarter. Other income and expense is expected to be a net expense of approximately $3 million. The share count is expected to be approximately 275 million shares. And the tax rate for Q4 of our fiscal 2009 will be 21%. Let me now turn the call over to Moshe.

Thank you, Jon, and good afternoon to you all. On a relative industry wide basis, Xilinx’s performance was better than most in the December quarter, and expected to significantly outperform the vast majority of semiconductor companies, which are expected to be down over 20% on average. The 5% sequential decline beats our revised guidance on December 16th but was down 6% to 10%. In addition, shipments during the last two weeks of the quarter was slightly better than expected. Given our results, we expect to gain PLD market segment share. As we had projected strength from Defense and Wireless Infrastructure business in China, buffered softness in our other end markets. Our Virtex-5 momentum and leadership is the unequivocal bright spot this past quarter. Virtex-5 grew 35% quarter-to-quarter and that comprises approximately 15% of our total revenue. Virtex-5 sales should surpass Virtex-4 in terms of overall revenue next quarter to become the industry's largest revenue generating high-end FPGA family. We are very pleased with Virtex-5's strong sales growth and momentum, as several communications customers including China 3G customers, began broadly deploying it for their initial network rollouts. In the March ending quarter we are expecting this family to be flat to up modestly and it is well on its way to becoming a $100 million per quarter product line. Furthermore, as promised at our Analyst meeting last week -- last year, we are on track to rollout our next generation product road map later this quarter. In these tough economic times, we are committed to delivering on this road map. Fundamentally, we believe that this downturn provides long-term market expansion opportunities for Xilinx. In a recessionary periods as R & D budgets get capped, customers must do more with less. They need to reduce their risk profile. It's in order for them to succeed. They must continue to efficiently differentiate their products. All three of these trends underline the need for the cost effective flexibility, which is inherent to programable logic or what we at Xilinx call, the programable imperative. These trends, coupled with financial pressures, are hastening the competitive demise of ASIC Solutions for an increasing number of applications. In parallel, numerous mid to small volume standard product semi-companies used to target specialized niches will no longer be able to maintain competitive investment levels. Consequently I believe that as the economy recovers and Xilinx executes on its product road maps, we will come out of this economic downturn better positioned. That being said, both Jon and I are committed to tight spending control and maintaining financial discipline as we manage through this clearly challenging transition. Now let me turn the call back to the Operator to open it up for the Q & A session.

(Operator Instructions). Your first question will come from the line of Tim Luke.

Thank you so much. Jon, I was wondering if you could help us with some sense of what set of terms level may be required in looking at your guidance going forward, and separately, you mentioned in your comments that you expect the revenue in wireless and particularly from China to be sequentially lower this quarter and then perhaps improve in the June period and similarly in the military area, you suggested that having been weaker in March but in this full year you would expect some growth in military. Do those elements help you suggest that you would expect a flattish to slightly higher June or how should we think about that? Thank you very much.

Let me talk about the turns business, Tim. I got number a little bit Tim as well. So, yes, from a percentage basis, it's a little misleading because we do go into the quarter with a much weaker backlog than we normally would see even though we would might have entering January, normally a slightly weaker backlog, but this is substantially weaker. So, the turns number from a percentage basis is actually higher than we've been experiencing in the last few quarters and I’d say more in the low 60's from a percentage basis, but that really doesn't tell the whole story. It's really the dollar value of the turns amount that we're expecting and we set our number at the mid point of our range at a level of turns that turns on a weekly basis that are less than $20 million a week, and we haven't experienced a quarterly run rate that low in the last four years. So again, on a dollar basis, I think we've adjusted our turns down into a reasonable number that helps us land in that range, albeit a wide range, but on a percentage basis the way the numbers work out the percentages is going to make it look goofy to some extent. Your second question around the wireless business and a little bit of lumpiness here, and then what's really happening, what that going to mean as we go beyond March and into June?

Yes.

From a wireless perspective, we see, I want to characterize this correctly. We had a strong September in wireless and improved in December and it's not like it's all going to go away and revert back to the previous June. It's just going to decline, and that decline is really because the initial build out of the TD-SCDMA technology is happening and there is some installation time and those kinds of things that happen. As I think we've all seen the licenses have been left for some of the other 3G technologies and some of those suppliers that we have a good customers that we have of ours that we have a good position with, we believe will start to ramp some of that equipment in that time frame. It's really difficult right now to forecast, what June is going to be? Whether there's going to be some sort of an inventory snap back for a short time period or whether we're going to see our normal seasonal down in June. Typically, June is seasonally down for us a few percentage points, so I have a very difficult time picking, which way this is going to be, but that's pretty much how on the detailed part is how I see it.

Hey just if I could a follow-up, it sounds like you're guiding the OpEx flat. Is that how we should think about slightly lower, how should we think about the full year and then the gross margin, is it slightly lower range, how do you see that going forward?

Yes, so the OpEx flat in the December quarter is really a product of a couple of different pressures on us. We had a pretty significant drop between September and December, an $8 million drop. And I think if you look back at our last several quarters, four or five quarters, you'll have seen a sequential drop in OpEx. This is a pretty big drop. There were a couple of one-time items that helped us out here. The currency situation gave us the benefit that isn't likely. It's possible to repeat itself, but isn't likely so that probably won't happen. On the other side, as Moshe mentioned, we're going to be announcing our new products, there are tape out expenses that are increasing and so when you balance all that out, being able to maintain it at that lower level, $8 million down from September I think is a pretty good accomplishment. Beyond that, we're not making any statements. We're in the process of going through our planning processes; our overall desire on R&D is to continue to deliver to the road map expectations, which will put pressure on R&D next year. It's a little too early to say exactly what we're going to do. We certainly would like to figure out a way to keep it flat, when you look at fiscal year to fiscal year we've got a little more work to do to be able to make that commitment.

Your next question comes from the line of Randy Abrams.

Yes, thank you. Actually I'd like to follow-up on that last question on gross margin, which you probably didn't get the chance to answer, but if you could talk about what's driving this sequential decline this next quarter and then if we should consider that range to be the continued range through 2009?

Yes, and I didn't miss the question, Randy that Tim asked so let me address that. So, we set the range at 61 to 63, which is certainly down from our about 64% range and that's really driven by primarily by the significant revenue drop and the impact of what fixed costs we do have relative to labor that gets charged to cost of goods sold and any adjustment there. We are not planning on a gigantic mix shift that's driving it and it's really the drop in revenue. On an ongoing basis, beyond that, which is the next part of your question, what do we see revenue declines or improvement beyond the March quarter? It's really too early to tell. As I mentioned in my previous answer, I could actually see an inventory bounce back in June as people are work through inventory over the last four or five months starting from December forward, but then I can also see the seasonality kick in for us where we typically have weakness and typically in communications. So, we're not taking a position yet on next year and we gave a very wide range for the March estimate so as you can imagine, our visibility is pretty low right now with our major customers on what's going to happen.

And it looks like you had a good transaction with the debt this quarter. Maybe talk about if you have any other actions on the debt side or even just cash balance if you're right sized here.

Yeah, so we did see this what we thought was a wonderful opportunity for us to claw back some of that debt at a very extreme discount that really I don't think the markets has seen in certainly recent history in that area, but we are taking each quarter, a quarter at a time. And as you can imagine, with a sequential revenue decline like we are talking about and not good visibility into the next quarter, with our cash generation capability, while it's still good, it won't be nearly as good as having a revenue number much higher. So we aren't necessarily going to be jumping in, in any of the debt of the stock buyback market. However, opportunistically if we see the right situation, we still might do that.

Okay, and maybe just to sweep in one last one. For the end markets, I think you mentioned all of them will be down. Maybe if you could put a range if any of them are tracking more severe than the average?

I don't think so. I think the decline in wireless could be less severe than some of the other areas. When you start dissecting some of these pieces, let's just take Communications for a minute, Randy. The network infrastructure people by and large, we had anticipated what was going on there, we had good communications with those people before we gave our guidance for this past quarter, and there could be some declines there but not sequential declines, I don't think at the same percentage as we had between September and December. We do as we said; we stated we will have declines in the wireless space but again, probably around the average of what of the range or a little bit less than that. And then there's the pure Telecom play in that, that visibility has been very weak. It was very weak this quarter and it's hard to say what's going on there. Consumer will be weaker for us for sure. We've even though Consumer had some declines in the December quarter, the selling season for Christmas and Chinese New Years will be over. So that will also be weaker and what we've seen throughout our Channel and Industrial areas, everything just seems to be very, very weak. So it's hard to put a finer point on any other individual market other than two or three I was able to talk about.

Thanks a lot.

Your next question comes from the line of Uche Orji.

Thank you very much. My first question is for Moshe. First of all, congrats on the strength of Virtex-5, but I would like to understand how, when you rollout your road map, how you think you can close the design gap at 40 nanometers with Voltera, given the software has been out since most of 2008, is your software out already?

Well, we will be announcing our product roadmap with all of the elements and the entire breadth later this quarter. So I do not want to steal any of the thunder there, and it will enable us to compete in a very attractive way in our mind.

Okay. Just as a follow-up, in terms of when you talk to your customers, has there been any significant shut down of design activity or is this just production dial down from customers there. I just want to understand from the perspective of your customers how they view this downturn. So what are you seeing in terms of design activity versus just production being cut back?

Intuitively, it appears that it is mostly a production as opposed to a design halt. And just generally, our experience on 30 years of upturns and downturns in the semiconductor industry is that, it takes much longer to get to shutting down on the design side. And in reality, I think since the 2001 downturn in particular, companies have been a lot more cautious with their investment on the design side. So no, I do not think they have gone crazy and hence I think there is less of an opportunity to cut things down. If you think about the previous downturn, it was after a huge surge in the late 90's on the design side, where those view it as a tremendous shortage in engineering talent and that just caused lots of companies to over-invest and in particular, they did that in anticipation of huge growth and the bubble that was happening. Those same trends have not been evident in the past few years, for companies have been watching their design investments very carefully and obviously, due to the lag between your design investment to when you actually go into production, it behooves them to continue to invest in design at this point in time.

And just lastly for Jon. In terms of what you can do on the cost side below the gross margin, I'm sure you've answered that question exhaustively, but below the gross margin line, are there anymore levers you can pull in terms of taking OpEx down given the lower run rates for revenues. That's my last question, thank you.

Hi Uche, we certainly are aware of the possibility that this could be a very long, deep recession and we have to make sure that we do everything we can to deliver the best numbers we can while keeping the shareholder value aspect of our business going. We were at this point in time; we do see a possibility of some opportunities. We've been going through our planning cycle. Our annual planning cycle typically happens this quarter as well as March fiscal year. We've kicked off a variety of that planning earlier this year and we're in the process of evaluating it. As I think we have said a couple of times here in different ways, we are going to protect our 40-45 nanometer road map activities throughout this downturn and we're going to look at all other opportunities and all other organizations in the company to cut back further.

Thank you very much.

Your next question comes from the line of Glen Yeung.

Thanks, Jon, maybe just to follow-up on the last question. Is there something you need to see for you to take more aggressive actions? Is there some level of business, where you are going to say enough is enough and we just got to get aggressive here?

I don't think it's really seeing anything else. I mean, I think it's while we want to be cautious to make sure that we aren't wrong about these kinds of things because taking any serious action that would affect anybody’s job is a very serious thing to consider. But I think it’s really more about the progression of what we’ve been going through over the last year in terms of restructuring the company. We’ve gotten ahead of some of this a little bit by doing some level of restructuring last spring and functionalizing the company, taking some dollars out. I think we’ve done a reasonable job of achieving what we said we’re going to do from that particular time period and now its kind of a looking a little more deeply at a few things, now that we’ve got the basic structure of the company, the way we want, we’d like to have it is. Okay, so now how can we get a lot more efficient and I’ve talked about this in the past. One was taking out redundancy, the next step was about efficiency and that’s the process we’re going through now. We just don’t want to be hasty because we don’t want to start taking things out that we’d regret and we want to do this in a very metered considerate approach. So, I don’t think we’re waiting for any other signs or signals.

Okay, it makes sense. The other thing I want to ask you about is channel inventory and I have recognized that on a days’ basis I think they were down quarter-on-quarter. But just your sense here as you talk to your distributors and you get sensibility to the end markets, where their level of comfort is, obviously they are still working down inventory, but what's your sense as to when they think they might be coming to an end there?

Yes, I think it's a reasonable question to talk about. If you look at the way our days profile worked out it's pretty clear that with our channel days being so low leaving the quarter, there was not a big anticipation of lots of shipments early in January. So, they didn't take anything early from us. So, we like to keep as much back in Xilinx as we can to be able to manage the customer base properly and as best as I can tell, there's still another quarter of working through the inventory settled out at our overall customer base and I would expect a lot of fits and starts and changes in peoples ordering patterns over this quarter as they work through those issues.

Okay. All right, thanks, Jon.

Your next question comes from the line of James Schneider.

Good afternoon and thanks for taking the question. First of all, could you comment on, in the comp space what are customer inventories like and if you could separately comment on the wireline, wireless, and networking segments that would be great.

Yes, so let me take that one Jim. The networking piece, I think there was good anticipation by the customers there and I think they are in a position that to work off their inventory and started it much earlier. And I think this, if anything we're going to see some better business and build back Spring/Summer from them then we might experience from some of the others. So, I think they could be in a better overall position just based on what we've seen from some of the conversations we've had with them in the ordering patterns. The wireless space is really predicated on these big projects, and how they go through and, I think we feel pretty comfortable about the Chinese spending that will actually happen. And so, while there is quite a bit of inventory build up, and those customers as they get ready for their big push, I think it's all going to sell out, and I don't think we're going to have a big adjustment going on there. And the other, the telecom space and access in those places, I think anything that has that a touch back into the consumer is all up for grabs and I would suspect it may take longer in that particular space.

Thanks. And then this as a follow-up; clearly visibility very limited, but can you speak to your non-military industrial business right now and what you think you're going to see there this year?

Yes, that right now is very weak, and for us it's typified by our mid-sized customers, mid to smaller size customers and I think generally it's been pretty weak. Test and Measurement has got really weak in the semi space and weakened elsewhere, as well. I think the scientific and medical, while it was weaker this quarter. I think there's an opportunity for us there downstream because there is still a big push for more mobile devices in that space, so I think those projects are probably still going to continue, but again, it was sequentially weak.

Great and then just lastly, maybe you could share with us, Moshe, where do you think Virtex-5 revenues could get as a percentage of total by the end of this year, calendar ‘09?

Well, the percentage is tough for me to estimate but Virtex-5 basically has had for long periods of time a very strong leadership position and has accumulated a very large number of design wins and these design wins are now more or less three years since the product introduction, translating on mass to volume manufacturing. So I would expect Virtex-5, because it's on all of these new products and hitting sweet spot and it has the very strong market position to cross the $100 million and I would like for that to happen this calendar year. And I think that's doable. The question is what will happen with the non-Virtex-5, which have a different pattern and are later on in their maturity cycle, and that's the difficulty of pegging it as a percentage but I think Virtex-5 will continue to grow rapidly throughout this year.

Thanks.

Your next question comes from the line of John Dryden.

Hi. Thanks for taking my question. Could you go into what you believe is the bigger opportunity, both near and long-term, for market share expansion over your PLD competitor or increased sales of FPGA's over ASICs and ASSPs? I guess, has the interest for FPGA's increased each month of the quarter as the macros deteriorated?

Let me try and share my intuition, I had spent the whole year now at Xilinx and at least half of that time I had spent with customers and without exception in every geography, in every market, in every application, you can see that the customers are transitioning. Now, what is happening is that the finances required or the investment required to design an ASIC in an advanced process node and a standard product in advanced process node is in some cases approaching $100 million, which means that you need to sell a lot of these chips in order to just recover that investment. Fewer and fewer companies could afford to do that with the inherent risk involved and as a result we're seeing less ASICs started and actually less standard products being designed for niche applications. All of these trends help the programable world, as the programable world comes up with solutions, which can effectively address these. What I would call orphaned or abandoned applications and there are more and more of those. With each generation of technology we can cover more of these applications and the goal is to reduce the price and reduce the power and to come up with a tighter solution that addresses more of these applications and to make sure that we do it in a mode, which can be used for numerous markets, because if it's targeted at one niche market, we are in the same situation that the standard product companies are. So just generally speaking, I see this trend -- its imperative continuing to move in that direction. It definitely has moved there in anger on the ASIC side with a number of ASIC designs in particular in new technologies is just dwindling and the number of design teams is dropping. And I expected it to happen and it is happening to some extent in the standard product world and I think the first companies, which are going to have the biggest revelation there are the small and medium-sized companies who have typically focused on niches and their ability to come up with plans to address those niches and the financial investment will be beyond their capacity. And I think those companies will start focusing more on sunset environments, where they are looking at older technologies to try and address the needs and all of that helps us because we can afford to march forward. So generally, the [circular] trend is in our favor. We need to run like hell and to execute really well, but this is something I have heard consistently from all of our customers in a huge number of applications.

And Jon, could you update us on Virtex-5 gross margin? Was that negatively impacted again this quarter or with the majority of these sales into the higher margin markets is V-5 now accretive to corporate margins?

Virtex-5 is a little over two years from its existence and this is about the time that it would be clearly in the corporate margin range and then starting to improve from that so and we're certainly in that range and I would say the effect of increased sales is not in that particular product category is not a drag on our gross margin.

Thanks for taking my questions.

Your next question comes from the line of Mahesh Sanganeria.

Yes, thank you. A question if you can give us some comments on the impact you will see with what's happening with your communication equipment customers Nortel just filed for bankruptcy and one of the bigger customer, Alcatel-Lucent having problems, are we going to see a lot of platform consolidation and what will be the impact of the PLD?

Well, I mean with respect to that particular segment. In the last cycle that was focused more on communications, there was a huge shake out and business combinations and platform aggregations and things like that going on. And I think what you find just using wireless as an example, I think what you're finding is a lot more multipurpose, multi-band, multi-protocol line cards that they desire to get to right off the bat in order to lower costs and to manage their platform costs better. I think we see that, those kinds of requests from a broad set of those customers, but that being said there aren't very many of those manufacturers out there left and with the recent information about Nortel, while it could have some impact on our business, I think much of that business just floats to one of the other people if people don't stick with Nortel as a result. They are stronger, obviously on the wired side and that gets picked up by the other wired folks primarily. So, I guess it's possible, Alcatel-Lucent, I don't think they’re on the edge of bankruptcy, but I'm not the guy to ask that question. So, I'm not really too concerned about their viability throughout this cycle quite frankly.

Another question on operating margins, just want to reiterate you are still targeting to go to operating margins greater than 30%. If that's the case, why not use this downturn as an opportunity to be more aggressive on the expenses unless you think that you're going to grow much faster than what you had forecast?

Well, the operating margin target that we set for ourselves in the last Analyst Meeting over the next few years was 30%, and that didn't comprehend a significant recession or downturn, but it still remains our goal and our target. And sure, if there are longer term structural things that we can do that as opportunities present themselves in this kind of a situation. We'll go after those very aggressively. I think we probably would have gone after those things anyway despite that. But it isn't just a matter of, oh, let's just dial down the expenses, and life is better. We actually have to produce the products, serve our customers, get to the best technical solution. This is as much of a service business as it is selling silicon in order to be able to support our customers with some of these very complex solutions. So, we certainly don't want to enter the long term cash flow of the company by knee-jerking, and we want to do this in a more metered considered fashion.

But do you have, I mean at this point with the current structure, do you have a revenue level in mind to get to the 30% operating margin?

We've not reset a timeline because it's really difficult to tell that until we find the bottom of this recession and it's not clear we have found the bottom yet.

Okay. Thanks a lot.

Your next question comes from the line of Chris Danely.

Thanks. Hey Jon, you talked about your expectations for end markets in Q1. Can you give us a sense of your relative expectations for the end markets for I guess for 2009?

I don't have the great crystal ball on this stuff, Chris, and I basically have to go with I think most of what I have been reading and hearing and try to apply it to where our markets are and what's going on. This certainly feels like we are not going to get to the bottom until the middle of the year and then it's not clear, in terms of I'll say maybe some inventory adjustments and bubbles along the way, but really get to the bottom until the middle of the year and then stability and maybe some growth back in the second half of ’09, but that's certainly unclear at this point in time. I'm not anticipating us to keep slipping off quarter after quarter after quarter throughout the year, but this is definitely going to be a down year based on what I can tell and I don't think this is going to be a bounce back or any sort of we're not planning on some sort of Hail Mary saving fourth quarter or any of those kinds of things for us for next year.

I guess I was more interested in the end markets, I guess to paraphrase you it sounds like you believe the defense and military end market would be the strongest and then after that would be sort of 3G or China wireless, is that true and then which end markets would you be a little more concerned on for this year?

Definitely defense and definitely what we see in the wireless space, so that would be a correct assumption. I would actually still suspect audio/video broadcast to not stay down and to come back because there is still a huge wave of digital broadcasting implementation that have to be done. So, I still think that's okay. I think Automotive eventually will maybe as a fourth level fourth level could come back a little bit more in the second half of the year and that's predicated by the depth of our new designs, not by, not necessarily by sheer volume but introduction of new models and new capabilities. I would not expect Consumer necessarily to come back for us and possibly Scientific and Medical as I pointed out before could come back, but everything else is going to be not great.

And then just to clarify, you said turns, or your expected turns to hit the middle of the guidance were low 60% this quarter and were they around the mid 50% last quarter?

We were in the mid 50's last quarter and we said -- in the Q&A, I said in the low 60's but do not listen to the percentage because of the way the law of the way the numbers work, and we would prefer to think about this as what we need in dollar turns per week in order to pull this off and we picked a dollar number that's a sub-$20 million a week, which is pretty much of a low point for us.

Okay.

I think last several --for quite a few years, four or five years.

Okay. That makes sense, thanks.

Yeah.

Your next question comes from the line of David Wu.

Yes, good afternoon. I just wanted to get a clarification on a couple of points. First, Jon, when you talk about gross margin down because of lower revenues, I kind of remember also that the mix that the Defense has the best gross margin in your company and I do not know where comp infrastructure lies because -- is it mix dependent or is it more revenue level dependent in your comments on gross margin? Because I have got to think about the rest of the fiscal year moving forward?

Yeah, so the answer that I gave earlier and I will expand on that a little bit more. It's really driven more by the revenue drop than it is about anticipating any unique mix area. I mean quite frankly, the Wireless business is not quite as good as the Defense business and there's some balance actually going on there and so some declines there kind of balance each other out a little bit, so it's not -- we're not expecting a big mix shift in that number.

Okay. The other clarification I wanted to get was if you look at your R&D dollars and go back and take a look, the absolute number was back in December of a year ago when you had a $91 million number, and with all your new products at least initial 40-45 nanometers out in the March quarter, should we anticipate a drop off of those absolute dollars as we go into the early part of fiscal 2010?

Well you know, we would still be rolling out the tail end of the families and I do not know about going into our fiscal 10. Well our fiscal 10, no, I think talking about our fiscal 10, David that…

The June quarter?

That's starting the June quarter so no, we have upward pressure for new product introductions.

On mass costs?

Yes.

Okay. And the last one I have was the $3 million of remind me of something, the $3 million of net interest expense in the March quarter that you guided to, is that a function of -- I remember the convertible bonds didn't carry any interest; is that right? And if you use cash to buy that, that's why you get hit on the interest income line?

No. The convertible bonds carried 3.125% interest.

Okay.

And so interest expense is exceeding interest income and as I think we all know that borrowing money is or just investing your money in treasury doesn't get you very much, in the number of basis points that we are dropping on our average yield this past quarter to the forecast is quite significant, as many of our rates start to reset themselves to the current market levels. So our interest income is depressed relatively to the December quarter quite a bit.

Okay. Looking forward, I assume that that trend unless things change would continue, that we have more interest expense than interest income?

Well certainly, if we're talking about 70 basis points for treasury in terms of the investment, yes, that would be the case because we don't get into a lot of speculative areas and we try to keep things that the cash is safe and conservative as possible.

Jon, last question, I'll try. If the revenues ever hit $300 million on the low end, or below, what does it do to your gross margin? I was trying to think one of the quarters in the early part of fiscal 2010 may very well be sub-$300 million.

Yeah, I don't see us going below, out of the 60's if that would happen. The difference was maybe, if you go looking back at history, it's really relative to mix and what happens to our inventory and our inventory position is pretty decent right now and I think I feel we can manage it down without taking any inventory reserves. So if you assume no inventory reserves or adjustments there, then it's just a matter of managing mix and the infrastructure of the company and fixed costs to try to keep the margins in the 60's.

Okay. Thank you very much.

Your next question comes from the line of David Wong.

Thank you very much. Can you give us some idea of what your foundry orders will produce in the March and June quarters? If you hit the mid point of your March sales guidance, do days of inventory rise or fall at the end of March? And are you ordering less for June than you have for March?

Yes David, our days will definitely rise because there's really no way to shed that much inventory with the broad mix that we do have, but we don't anticipate dollars rising significantly. In fact, on managing to dollars to take dollars flat to down in inventory even though days will spike up some. And we have been cutting our starts and foundries since basically November.

So, you would have less coming out in the June quarter than you do currently in the March quarter at least at the rate you’re going?

We haven't made that evaluation yet, but we certainly had less outs in December than September. We'll have fewer less outs in March than December most likely, and June, it's too early to tell. It may flatten out.

Right, thanks.

Your next question comes from the line of Adam Benjamin.

Thanks, Jon. If you could just take a look back to the October timeframe, when you were giving guidance for the December quarter and then compare and contrast that to today in giving guidance for the March quarter, just curious to get any differences or similarities between the two periods.

Well I’m certainly more depressed than I was I guess in October, but I think the differences really that lead there is the relative weakness of our backlog going in. We had this strong backlog going into the December quarter. I felt really good about where we were going and what was going to happen, and now I kind of almost have the reverse impact of saying wow, I need customers to start ordering stuff this quarter and etc. So, I think we've taken the appropriate conservatism in our forward-looking guidance, but there's a lot of business that has to get booked yet and we're very spending a lot of time with our customers trying to understand what they really need, so we can get it to them and make sure we have the right mix.

And when you talk about the business that's not yet to be booked that you're hoping to be booked, can you give a little granularity in terms of what end markets that you're serving in terms of how your business shapes up that you'd expect to see higher level of that turns business to come in?

It's mostly, we go through this large company forecasting process and it's mostly the large guys, who know they can lean on to get stuff at the last minute and things like that, with a short availability, and those are the people that we're going back to and who are not necessarily as booked as we like to see to say look, we're cutting back inventory lots of things so don't hang us out too long because you won't get the parts you need and we're working through that process right now with our sales organization.

Okay and then just one last question. Just to clarify on the Industrial segment, the Test and Measurement and Medical, you indicated were pretty weak. Is the 20% range even though the business was only down 5%, is that in the ballpark there for those two businesses?

I think that's probably the case. Remember the 5% in Industrial and other wasn't so bad because we had strong Aerospace and Defense business, which is also in that category and that very strong business offset that very weak rest of the part of Industrial.

Right, and that very weak, is that something that, because those have been relatively stable, so I'm just curious if that's something that you expect to see continued big drop offs like that or kind of stabilized at these levels.

Well, I would expect that there's a chance it could stabilize after March in that area because it appears they've been taking, making adjustments to their inventory and that will continue to happen through March. We'll just have to wait and see and give you more information later.

All right, that's all I have. Thanks, Jon.

Your next question comes from the line of Sumit Dhanda.

Yes, hi, guys. A couple of questions. First, Jon, on the gross margins, is there any benefit that might help offset it maybe perhaps a later point in time, the impact you're seeing from higher fixed costs either on wafer pricing or on continued yield improvements or is that really tapped out at this point in time?

Well, yes that’s I've got this question outside of these calls a lot about, is there an advantage for us on wafer pricing because factories want to fill up and things like that. And there could be some there over time, but right now, I don't see a lot. We have some pretty aggressive yield in wafer price road maps that this is not just new because of what's going on. We've had this for the last several years, worked very closely on yield improvement with our partners and throughput improvements with our assembly and test partners and we feel really good about those continual declines that will come to us that will help us in gross margin, relative to opportunistic inventory builds. If there was something there that made sense for us and them in terms of what kind of discounts we could get for some other terms and conditions that they would want, I'd certainly be willing to talk about it and we keep an open dialogue with our suppliers there and we'll pursue those opportunities, but there's nothing booked right now so to speak into right now that would suggest there is going to be some sort of huge discount coming to us or impact to the supply chain.

On the operating costs or expenses staying relatively flat and within the context of that picture, some upward pressure on R&D because of the mass costs that you anticipate. Can you help us perhaps quantify somewhat how much pressure that might be in terms of dollars or when that pressure might start to abate just a broad timeline or --?

Well, the ramp up of our mass take out expenses while we had some in December will continue to ramp I would say in the single digit millions of dollars, increase quarter-over-quarter, low to mid single digits in the first few quarters and then accelerate pretty rapidly in the back half of our next fiscal year and that whole profile is something that we are looking at and trying to understand how to manage over the next four to six quarters in order to not have our engineering dollars increase substantially.

Okay. And just one other more. On the Defense business, you said the budgets have been set, it's more visibility in terms of available backlog, the seasonality this quarter notwithstanding. Again any, can you help quantify perhaps how much the growth in this market might be on a full year basis, not on an internal quarter basis, just given what you see there?

Well, we've been clicking off some pretty good double digit full year versus full year kind of growth rates and I think we were in somewhere in the 20s year before last and this last year in 10-15ish kind of growth rate or something. I would expect us to be somewhere in the high single, low double-digit kind of a number year-over-year based on what we can see today.

And then very last question. On the China 3G side, either for you or Moshe, how is your positioning on with W-CDMA or CDMA 2000 or by carrier versus what you've seen so far or TD-SCDMA with China Mobile?

I think wide band CDMA is of equivalent strength of where we are in TD-SCDMA, and I think those are our two strongest areas that impact Asia.

Okay, thank you very much.

Last question.

Your next question comes from the line of Hans Mosesmann.

Great. I made it. Quick question, Moshe, you said the last two weeks business was better than expected. Did you mean the last two weeks of December or the last two weeks here in January?

It was the last two weeks of December, hence we ended up with a number, which was better than what we had projected in the middle of December.

I would say, we had a pretty healthy first couple weeks of December and it got us pretty spooked about what was going to happen and that low level did not absolutely continue for the last couple of weeks, it was slightly better than it was in this…

Wasn't great but better than the dismal first part I guess?

Right. It made us have a -- at least our Christmas that we thought was okay to have.

Okay. And then how have the last couple of weeks been? Have they been at that second half of December level or ?

Very choppy, and we haven't had a consistent pattern here. We are kind of early doing our announcement and that our fiscal year end ended before the holiday season was over. So during the holidays people really weren't ordering very much and turns were pretty weak and we had some slightly better numbers for last week but it is way too early right now in the quarter or even this month to figure out what the pattern is going to be. Really choppy.

Fair enough. Good job guys. Thanks.

Operator, one more question, please?

Your final question in the queue will come from the line of Ruben Roy.

Thank you. Question for Moshe. Virtex-5, a lot of success. Can you just maybe talk about -- you have five platforms.

Okay, well, two of the five families are relatively recent introductions so we're pleased with the uptick there but they aren't contributing significant revenue, so it's the first three that have the share of the revenue and it's those that are moving to higher volumes and we have with all of our higher volume customers, we have approaches to enable them to stay with FPGA solutions so that's done on a customer by customer basis and there are some definitely on the Virtex-5 which have that solution, and quite pleased with how well it's going.

Okay, great. A follow up Moshe then, are there any conversions to EasyPath today or do you expect any within the next few quarters? Thank you.

You know? We're doing conversions on an ongoing basis on the [ops] technologies and they continue all the time. It's part of the life cycle of the product is to go through those conversions at the appropriate point in time. And yes, it does happen and what typically happens is that these things happen somewhat later than the customers expect because they ramp up a little more slowly and they happen at a lower number than they expect but they do happen and it's part of the general life cycle of the projects. And it just continues, continues on an ongoing basis so I don't think there's any particular uptick at any point in time, it's just part of normal business.

Thanks very much.

Okay, well thank you all for joining us today. We have a playback of this call beginning at 5 p.m. Pacific, 8:00 p.m. Eastern. For a copy of our earnings release, please visit our Investor Relations website. As we stated in our Press Release our guidance update for the March ending quarter will take place on Tuesday, March 3rd, prior to the market open. Our next earnings release date for the fourth quarter of FY ‘09 will be Wednesday, April 22nd after the market close. This quarter we will be presenting at the Goldman Sachs Technology conference at the end of February and the Morgan Stanley conference in early March. This completes our call and thank you very much for your participation.

That concludes today’s conference call. You may now disconnect.