Intel Corporation (INTC) Q2 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Altera's Q2 2013 Earnings Conference Call. As a reminder, this call is being recorded. At this time, I'd like to turn the conference over to Mr. Scott Wylie, Vice President, Investor Relations. Please go ahead, sir.

Good afternoon. Thank you for joining this conference call, which will be available for replay telephonically and on Altera's website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Altera's Investor Relations web page, where you will find complete instructions. The telephone replay will be available at (719) 457-0820 and use code 258712. During today's prepared remarks, we'll be making some forward-looking statements. In addition, management may make additional forward-looking statements in response to questions. In light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge. With me today are John Daane, our CEO; and Ron Pasek, Chief Financial Officer. Ron will open the call with a few brief remarks before turning the call over to John. After John concludes his remarks, we will take your questions. Prior to the Q&A session, the operator will be giving instructions on how you can access the conference call with your questions. I would now like to turn the call over to Ron.

Thank you, Scott. With 3% growth on the top line, we saw a fairly broad uptick in demand. Good cost discipline held OpEx to the low-end of guidance, but our gross margin performance was below our forecast and a disappointment in the quarter that was -- that otherwise lived up to expectations. We missed the bottom end of the guidance range by 50 basis points. The cause was an unanticipated intra-vertical mix towards access and networking and, to a lesser extent, some vertical mix pressure as well. We anticipate that we will see little change in Q3 gross margin, but mainly due to vertical mix. In addition, based on our current view of mix in Q4, we should see some gross margin improvement, which would lead to a full year gross margin of approximately 68.5%. Book-to-bill in Q2 was above 1. Our backlog also strengthened, which leads to the lower turns number for Q3. As a result, we feel confident with the 5% to 9% sequential increase. Lead times have extended compared to 3 months ago, as we expected, given the strong foundry demand, as well as obviously an increase in our demand. Book-to-bill for Q3 year-to-date is over 1. I am revising the full year OpEx numbers downward due to continued cost-saving efforts. R&D should be $392 million for the year, a reduction of $12 million from my previous guidance, and SG&A should be $319 million or a $2 million reduction. Additionally, although we have just begun our planning for our FY '14, you should expect a minimal increase in next year's OpEx. TPACK and Enpirion OpEx will be incremental, but the core Altera business will have a minimal increase. Also notable in the quarter is the announcement of a 50% increase in our dividend. The due dividend has tripled the rate of just 4 years ago. We are committed to growing the dividend over time and have done so. We also continued to view opportunistic share repurchase as another cash return mechanism. And this quarter we bought back 55 million of Altera shares. Going back forward, our goal is to return 60% to 80% of cash flow from operations to our shareholders. Last year, we returned almost 60%, so this commitment raises the bar on us a bit. Finally, a quick word on 28-nanometer. No change really from our previous view. While there has been a difference between us and our main competitor in terms of initial ramp rates, the difference in trajectory is attributable to 2 factors. As we have discussed before, our competitor has the vast majority of the relatively short-lived emulation market, which we chose not to pursue at this node. Second, they have been effective in the mid range, which over time will be about 30% of the revenue at this node, but as this early stage makes up the largest piece of their current sales. At the high end, which will be over 50% of the 28-nanometer node, the tables are turned, with our share, by far, the largest. And to round out the picture, we appear to be doing quite well in the low-end space. Taken together and over time, we are quite confident that the sales gap between us narrows. For the very near term, 28-nanometer Q3 revenues are forecasted to be up substantially. With that, let me turn the call over to John.

Thank you, Ron. Second quarter revenue increased 3% sequentially. Our telecom and networking markets each had strong sequential growth. As expected, our industrial market grew in the quarter. Our automotive business continues to climb and is now up over 20% year-on-year. For our third quarter, we are forecasting a 5% to 9% sequential revenue increase, driven by significant growth in our new market -- new products. Telecom and wireless should grow on China Mobile, LTE shipments. The auto, industrial and military category should increase driven by auto. The computer markets should drive growth in the computer and networking category. And finally, the other category, we expect to be flat. In R&D, continual improvements to our Quartus II design platform maintain Altera's leadership in design productivity. We are finalizing our first Arria 10 mid-range product implemented on TSMC's 20-nanometer SoC and with active design engagements across the wireless, computer, telecom and military customer base. We are also well into the design of our high-end Stratix 10 family using Intel's 14-nanometer Tri-Gate technology, which will position Altera with the only product line capable of competing in the high-end of the FPGA market, roughly half of the industry's revenues in the next 5 years. In summary, our investments and partnerships are leading towards a new generation of products which will continue to expand our addressable market for revenue growth, while also providing differentiation and separation from our competition. Now let me turn the call back to Scott.

We would now like to take questions. [Operator Instructions] Operator, would you please provide instructions and poll for questions?

[Operator Instructions] And we'll go first to James Schneider with Goldman Sachs.

First of all, John, given your outlook, can you maybe just comment on the Q3 outlook and your level of confidence in that numerical range and how that compares with your confidence looking into the past couple quarters?

Jim, as Ron mentioned, our book-to-bill is over 1. And Q2, our book-to-bill so far this quarter is over 1, our turns rate for this quarter is...

Low 40s. Yes, so it's actually a lower turns number this quarter than last quarter.

So we feel fairly confident and the fact that we are booking and continue to book turns business for the quarter that we should be able to deliver a number well within the range.

And then as a follow-up. You mentioned the China Mobile opportunity, TD-LTE ramping to start in Q3. Can you maybe talk about what your expectation is in terms of how much business you recognize in Q3 versus how much you would in Q4 or later quarters, please?

Yes, Jim, it's very difficult for us to know exactly at this point what will ship in the future quarters. China Mobile is yet to release the final results of the commercial bidding, and we get customers who are telling us they don't quite know exactly how much they'll get. Of the radio platforms, for instance, there are still questions around the D band and -- or F band deployments. And so ultimately, I think, there's a lot of confusion within the numbers. We feel very good about the shipments that we'll have this quarter. Those orders were put on the books last quarter and continuing into this quarter. I feel very comfortable that wireless will be up. But as we've always said, it's difficult to call one quarter beyond to know exactly what's going to happen, and even with China Mobile that remains the same. The one other thing I would tell you is there's also been discussion of China Telecom's deployment for LTE. We expect that to ramp next year. So we're not expecting that in the near term.

We'll now go to Vivek Arya with Bank of America.

This is Aashish for Vivek. The industrial end market was only up 3% in the second quarter and was relatively weak in the first half of the year. In contrast, several semi peers saw significantly better industrial and auto results. Could just walk us through some of the offsets and puts and takes in this end market?

Both industrial and automotive were up in the quarter. We did have a decline in military which pulled [ph] those numbers down. I think if you look at industrial, it was probably in the quarter up very similarly to what you're seeing out of some of the analog companies. Industrial will be slightly up, again, this quarter. So I think what we're seeing in industrial is exactly the same as what certainly we've seen out of some of the analog players in our conversation with analog companies what they're seeing. Automotive is a little bit different in that automotive, we're having very strong growth. As I mentioned in Q2, it was up 20% year-on-year and we would expect automotive to sequentially increase again going into the third calendar quarter.

Can I ask another question, please? Your older products and the non-FPGA products had healthy growth in the second quarter, right, I mean they were up 9% and 22%. Whereas your FPGA has only grown 1%. Again, was that kind of expected or was that like an unexpected tangent mix during the quarter, which also impact the gross margins?

Yes. So sequentially, the -- if you just look at it on a product basis, our mainstream products were down slightly, our mature products were up, I believe, 1% sequentially. That really is because the industrial sector started to come back. And remember that, that tail, which lives into the older products, is really dominated by the industrial sector as an overall sector. So that's what we saw from a product category perspective.

You shouldn't assume that those product categories would really cause a margin fluctuation. Really the thing that drives margin fluctuations are vertical mix and, in this case, intra-vertical mix.

We'll go to Ambrish Srivastava with Bank of Montreal.

Just a clarification, I thought I heard you say that you're expecting China Telecom LTE next year. There's a lot of debate whether what technology they're going to get, if it's going to FDD or TD. And I just wanted to know if you had color that a lot of us don't. And then I had a follow-up as well for Ron.

So I think there is a lot of confusion over that which is why I've seen some articles saying that China Telecom was going to deploy this year, and I'm really kind of clearing that up by saying we don't expect any China Telecom revenue in LTE this year. They're continuing to deploy in the 3G, as well as 2G area. What they have said publicly is they would prefer to deploy FDD and for -- specifically because of cost reasons. So we'll see what they end up finally deploying in terms of technology. But I have not seen anything definitive from them that absolutely states that, that is going to be one of the other.

Okay, no, that's consistent with what we've heard as well. My follow-up is on the gross margin front. Ron, thanks for giving the guidance for next year for OpEx. That's helpful. But when we think about you transitioning to Intel next year, is there a -- should we think of it a risk to margin with the new foundry? Or what's the correct way to think about it? Typically, we go to a new foundry, there's yield issues, all kinds of things that pop up. And then Enpirion, how much of that is included in your third quarter guidance?

So on the margin for Intel products, that's a -- it's a little bit away from now, so it's difficult to tell. But we'll have a full node -- a full node ahead of our competitor on the high end. So I doubt that we'll have margin pressure there. To your point, there are a lot of new things we have to learn in -- from the engineering side getting the product done and out the door that are different. But they're not necessarily at this point incremental per se. I'm not sure I remember the last part of your question.

It surely [indiscernible]

Enpirion, the acquisition.

We had a stub period for Enpirion. Together, TPACK and Enpirion together was a little over $2 million in the quarter. Very small.

Yes, just -- if I could add to that and, one, just as a cleanup to question that Aashish asked, our other products grew 22% sequentially. Remember that we put Enpirion in our other products, so it looks like the other products are up a lot. But also remember that category as a total is so very small, that just adding the Enpirion revenue, which was very small, caused that category to go up a lot and it's really the right place to put it because Enpirion is not a CPLD and it's not an FPGA. In terms of Intel, I think it's important to kind of walk through the cost structure and why we believe that choosing Intel was the right technology, specifically for us and for the high end. Just to talk -- and maybe it's worthwhile to take a step back and look at what's been offered from TSMC. So we're implementing our Arria 10, which is a midrange product in the 20-nanometer SoC product, which is a great midrange, has the right cost structure and future set for that. As we've also seen in the press, 16FF, which is TSMC's FinFET process, does not scale from 20 SoC. So what that means is, if you implement a design or the same design in 16FF, it results from the same die size as what you had in 20 SoC. As our competition also announced in their recent press release -- or press -- excuse me, quarterly announcement, they mentioned that a 16FF wafer is more expensive than a 20 SoC wafer simply because of the extra processing steps, which makes sense because the FinFET is more complicated to manufacture. All of which means if you take a design and move from 20 SoC to 16FF, the resulting die is more expensive to implement and your product, therefore, is going to cost more. We're working with Intel with 14-nanometer. Intel has a true 14-nanometer technology, which means that the product scales, you're getting much smaller die size. And therefore, your cost moving to Intel's 14-nanometer decreases, which is exactly what Intel has discussed publicly, where they've said that, as they forward to 14 and then to 10, Moore's Law will continue and Moore's Law, of course, is the doubling of transistors with a corresponding cost reduction. So we think from a cost standpoint, we've made the right move in moving to 14FF. Beyond that, outside of having a cost advantage over the competition, obviously at the high end, what we'll also have is -- because we're in a 14-nanometer transistor, we'll have a performance advantage, we'll have a power advantage. And then also because we're in a much smaller geometry [ph] process technology, we can make much more highly integrated devices, which means we're also have a density advantage. So this is why we say moving to the high end, our competition is somewhat trapped in that they're going to try to compete with us with a more expensive technology. We've got really a more cost-effective technology combined with better feature set. And we don't see anything coming on the horizon in the foundry industry, which really will catch up over the next 5 years, which is why I comfortably say that for the next 5 years, we will own the high-end. And as we've talked about before and our competition has as well, the high-end is half of the FPGA industry in revenue. So I just wanted to follow up with that because similar question was around why Intel, and I think it's important to understand that scaling that process advantage, that node advantage is really critical to high end, and that's what we get with Intel.

We'll go to Glen Yeung with Citigroup.

Tao Ling [ph] for Glen Yeung. I have first the first question being would you talk about gross margin being impacted by the vertical mix and the mix within the vertical mix? Can you just help me understand is that the -- is that -- how can I look at it in terms of -- are there any other drivers?

Yes, I mean -- let me break it down for you...

What's the positive, what's the upside and what's the downside?

Yes, okay. So what I tried to articulate was with Intel kind [ph] of wireless you have this access group, this subvertical, if you will, which tends to be a little lower margin than the higher level telecom wireless vertical itself. When we went into the quarter, I did guide downward for margin, did have turns in the high 40s, so it wasn't perfect visibility, but some -- there was some indication that we might, from a mix standpoint, see this kind of thing. And we're little surprised that the concentration of business in access and then in networking. So networking has sub-vertical networking, computer storage, as well, tends to be a lower margin. The other thing that we saw quite frankly is, obviously, we saw some intra-customer mix issues where you have some customers that in the beginning of the quarter have a forecast, you know what configs they're going to buy, you have an idea of volume, you know what your margin is on those. And where we ended up in the quarter on a couple of those customers was very different than what we thought. And that drove some of the margin degradation. That tends to be somewhat temporary because they still probably end up going back to that original forecast at some point. So that's why, I think, right now we're seeing flat guidance to Q3.

I think, the simplistic way to think of the way that we price products is again we have very few products that we manufacture. The price change is really as volume goes up, the price will come down. And if you think of teleconference and if it's an optical product, there are not many optical systems shipped, pricing is generally higher. Once you go into access, you're talking about systems that are deployed in the neighborhood. The volumes are much, much higher. And in parts of wireless, like radios, you'll find that the volumes are much higher. So that's what will drive the change. It's just the mix that you'll have and some of the sub-verticals that will really depend on the volume and that drives the different pricing and that drives the different margins.

So is that a link to the fact that you're saying China Mobile is coming up?

No, that's independent of that. I mean, certainly as Ron has mentioned in the past, wireless, if it's a radio, will have a lower margin than if it's, for instance, in the base station product. But ultimately, it will depend on a mix. And this is nothing new for us. We talked about this for the 13 plus years that I've been here that we will have pricing and gross margin fluctuation, not based on a product, really based on the end markets. Consumer, as an example, will have lower gross margins than military and again, you can kind of think of that in terms of volume.

Okay. And a follow-up is that -- so you said China Telecom is going to be probably in 2014. Is there any way for us to size your benefit from that versus your benefit from China Mobile?

No, we -- it's very difficult at this point because there hasn't been enough announced from China Telecom to say, number one. Number two, we do not break out specifically what we get from revenue because it will differ by vendor and ultimately, we haven't provided that deep level of granularity on the overall business.

We'll go to Christopher Danely with JPMorgan. Christopher B. Danely - JP Morgan Chase & Co, Research Division: Just real quick on the gross margin side. So you said you expect it to bounce back up in Q4. Do you think we can expect your gross margin next year to get back to that 69% to 70% range that it's been for the last 6 quarters and then talk about the drivers there?

Yes, first of all, the guidance we're giving for Q4 is based on, of course, what we assume revenue might be, obviously, because it's mix dependent. So we give very little detail on that second quarter out because we have very little detail ourselves. But based on what we can see, it should go up. Chris, it's really too early to tell for next year. I'm not trying to be evasive, but we really won't even start that part of the plan for a little while. So I can't really even give you an indication. But I can tell you that our desire is to have margin in that range as we have had since 2010, 2011. Christopher B. Danely - JP Morgan Chase & Co, Research Division: Okay, great. And then as my follow-up, just a housekeeping question. Can you give us what the 28-nanometer revenue was during the quarter? And then maybe compare and contrast your expected timing on your 14-nanometer products versus the competitors' 16-nanometer products?

So I'll take the last part. In terms of product comparisons, we have yet to specifically announce dates for either the Arria 10 or the Stratix 10 in detail. We have said in the past, in the press release, that Arria 10 will be for shipments in Q1 of next year. But we haven't said tape out. As I mentioned earlier when I was talking, I said that the tape-out for us is -- for Arria 10 is imminent. If -- Stratix 10 always said is that we will do test chips with Intel's 14-nanometer this year. In fact, we will have our first test chip tape-out this quarter, so we're doing extremely well with that technology. And I don't want to get out -- the reason I'm being a little hesitant here, Chris, is I don't want to get out ahead of our marketing group and they haven't announced dates. But I would say in the next couple of months you'll probably hear exact schedules of tape-outs on Arria 10 and Stratix 10. And ultimately what we've said in the press release in terms of first customer shipments in Q1 for Arria 10 absolutely still holds. So look for something in the next couple of months for us.

So the 28-nanometer revenue for the quarter, in total, was $22.5 million. But as I said, in Q3, we're guiding that to be up rather substantially.

We'll move to William Stein with SunTrust.

I'm hoping you can dig into the wireline market a little bit. We've heard a lot about wireless, it's great that we're seeing the ramps in China. Can you help us understand what's going on in your wireline business and maybe a little detail by geography?

I can't really break down the detail by geography, but we did see both networking and telecom up quite substantially in the second calendar quarter. We are expecting that the businesses will do fine into the third calendar quarter, but not increase as much as they did previously. So the telecom business is actually doing good and the networking business is doing very well at this point, as well. Again, I can't give you a breakout of geographies because at the end of the day, we ship product to a customer in one geography and then they ship it somewhere else. And unlike wireless, which will have some different standards for different geographies, it's very difficult to breakdown where this equipment is going to end up going and to what market segments. So we really can't provide any additional color.

That's helpful. One other if I can follow-up. You indicated that you're going to see some revenue ramp related to China Mobile in Q3. Should we think about that as being sort of fully ramped relative to the pace of the rollout of the base stations that they've discussed, I think the 200,000-or-so base stations? Or should we expect that number to creep up over the next couple quarters?

It's difficult for us to know with our customers exactly when they would take more product on this because they're in a mode of waiting for the final bidding. They've obviously made some assumptions of what they're going to win. They've made some assumptions of what the mix will be between the radios and they're building now because they're expecting an imminent release from China Mobile. But until we get all of that information out, it's difficult for us to know what happens in Q4, what will happen in Q1 and beyond. Obviously, this is just an initial trial. China Mobile intends to continue to deploy over the next several years to continue to build out their network which will require more hardware, both for the base stations and then also additional radios. So that will all be additive. And then obviously, as China Telecom and China Unicom, do their ultimate deployments in 4G, all of that will be new hardware as well because if you look at today's W-CDMA and CDMA2000 base stations, which are what those 2 carriers have, none of them are upgradable into LTE. So all of the LTE deployments for that geography, as well as others, are purely new technology and new chassis, new systems, new components. So it's all great for us. We just can't mention the timing because we don't know exactly ourselves.

We'll move to Ian Ing with Lazard Capital Markets.

First question for Ron. Can you talk more about this minimum increase in OpEx next year despite investing in 14- and 20-nanometers? Is that investment intensity going down or cheaper or less tape-outs or is there a lot of reuse?

I mean, I think you have to kind of go back at kind of high-level and look at where we started after 2010. And if you remember, we were fairly under invested in R&D back then and I said, we are going to grow R&D faster than revenue for 2 to 3 years, and we're here. We're done. I mean, we have enough resources, we have enough people, we have enough tools. We can do what we need to do in the roadmap with what we have. So -- and that won't be an added pressure on the OpEx side. It's as simple as that.

Every year, it used to be -- 10 years ago, that you'd see us really do 1 family every 2 years. And so in 1 year, there would be a number of tape-outs that would cause the mass [ph] costs to go up. What you've seen from us over the last several years is every year we're rolling out products because we have more than just 1 FPGA family. So where the mass [ph] costs may fluctuate year-to-year, the fluctuations are much smaller than they've been in past years. The investments that Ron highlighted were investments we made in tools, like completing OpenCL, a new compiler capability, additional investments that we've made in our design platform, IP that we've invested in, in order to replace ASSPs, the ARM microprocessors that we've added to our Cyclone and Arria products, the 3G packaging technology. All of these are areas that we've done substantial investments in order to deploy new products. Really those investments are because by integrating microprocessors, for instance, we can increase our ASP by pulling out microprocessor in from another vendor into our FPGA and allow us to expand our market and revenue.

Okay. And for my follow-up, it looks like your main competitor is actually exceeding you in gross margins last quarter. I don't think that has ever happened, historically, and that actually surprised me to be honest. Do you -- can you talk a bit about open mix, like the gross margin expansion opportunities? Is it more use of redundancy? Are we still in the early innings of 28-nanometers, et cetera?

Yes, I mean, I think all are true. I think on their side, they have some legacy business that's being pulled forward, particularly for the military which drives a very large margin. And they're probably making quite a bit of money on the emulation product they have. I think everything you mentioned is still true for our gross margins. Again, I still would want to reiterate the ranges we've been achieving the last couple quarters and years. So those are still very doable.

We'll move to Hans Mosesmann with Raymond James. Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division: John, what is the mix issue that is leading to these higher volume applications mean in the overall cycle or this recovery? It's a little unusual. And then the follow-up question is, if you can explain a little bit more granularity on 14-nanometer, is there some kind of exclusivity or some kind of timeline that allows you to have a sustainable advantage there in terms of access to this technology?

Yes, to start with Intel, so as we stated in our press release, by the way, our press release was vetted by Intel before it was released. We're the only major FPGA company that will have access to 14-nanometer and potentially beyond. So it's not tied to a few years, it's tied to as long as we continue to work with Intel as a partner. We will have access to it and the other major FPGA companies would not. Why did we say major FPGA companies? Well, remember they're working with a few startups. And so obviously they wanted those companies to have access and continue to have access to technologies. So our major direct competitor cannot work with Intel at this point for FPGAs. They wanted to implement a graphics product or something else. Obviously, that's not within the jurisdiction of this contract. In terms of volume, Hans, we've talked about for many, many years the fact that if you go back into the mid-2000s, we had a very big business in television sets with FPGAs and we talked about the fact that, that volume had much lower prices than would something, for instance, in the military business and depending on the fluctuation of markets or businesses, our gross margins would fluctuate. And particularly, what Ron was highlighting, if you take access, for instance, which was up very strongly in the quarter within our telecom business, well, you may think the telecom has very high margins and generally does. The access side, which is the neighborhood, has very, very high volumes and, therefore, the margins will be lower than what, for instance, if we had a huge increase in the optical business. So those fluctuations have always been part of what we've had. That's why we've said margins are not tied to products, they're really tied to end markets. And the markets are different enough. We talked, for instance, about wireless, the base station margins are higher than radio margins and it's just the difference in the volume drives that. So depending on the mix you get, any quarter could drive your margins one way or the other.

We'll move to Srini Pajjuri with CLSA.

This is Ryan Goodman for Srini. Just on 28-nanometer, so it looks like it was down a little bit, driven primarily by Stratix V declines. So just curious if you could let us know which markets were driving that? And also for housekeeping, could you let us know what the 40-nanometer revenue was for the quarter?

So I was just going to say, the new products really suffered because the computer market was down substantially in the quarter. That was something that we did highlight and something that did happen. Since automotive, wireless and computer are really the growth factors this quarter, we expect huge growth in our new products. And so that's why we're stating that. So both 40-nanometer and 28-nanometer should be up substantially this quarter versus the prior quarter. And again, it's computer that pulled it down. The way to think of that is computer has been a fast-growing market for us, I mentioned in Q1 conference call that we had 3 months ago, that computer was up 25% year-on-year. Obviously, if it's a new market for you, it's growing fast. It's really dominated by your new products.

So Ryan, the 40-nanometer was $132 million for the quarter. It was a 5% growth. It's 31% of the total.

Okay, great. And then just for a follow-up question. Can you talk -- I know telecom and wireless was up and it was driven primarily by networking and wireline in the quarter, could you talk a little bit about what you saw, specifically, on the wireless side of things this quarter?

You mean in Q2?

In Q2, yes.

Yes, the wireless was actually flat, just slightly up. That was a surprise for us. We had actually expected wireless to be down slightly because of a pause. Part of the reason it was up is TD-SCDMA shipments, part of the reason it was up is we also saw some additional shipments into North American LTE, and both of those elements picked wireless up to be stronger than we had originally thought.

[Operator Instructions] We'll move back to Christopher Danely with JPMorgan. Christopher B. Danely - JP Morgan Chase & Co, Research Division: I'll just ask a few housekeeping questions. You rarely [ph] had 10% customers during the quarter. And then can you please give us the impact of the Enpirion and QTM [ph] revenue in Q3?

Yes. So we did have one 10% customer in the quarter. It was a Chinese equipment maker, it was 11% of total. Enpirion and TPACK in Q3 will be roughly $5 million to $6 million.

And that is over the prior quarter. It was...

No, that's -- over prior quarter, it's about a $3 million -- $3 million to $4 million increase. Christopher B. Danely - JP Morgan Chase & Co, Research Division: Okay, great. And then last one, just expand a little bit on the lead time extension? I think, you mentioned that it's mostly foundry-related, I don't make [indiscernible] anybody else with lead time extension? So -- and do you think this is like TSMC's gaining [indiscernible] to Intel? Or maybe just expand on that a little bit?

No, it's actually something that they themselves have talked about the fact that they had a very strong increase in revenues going into Q1 and also Q2, a lot of it associated with the handset area. The areas that we saw some tightness were around 65-nanometer and 40-nanometer, in particular, it's not all products, it's a couple of products within each family. Based on available capacity for the industry, we expect that by Q4, at the latest, everything will be back to normal. And that's really because capacity is expected to open up, again, within that period of time. And so if you look at the back-end manufacturing, manufacturing there are no issues. And at a high-level, our relationship with TSMC is honestly quite strong. I continue to get together with Morris on a quarterly basis. Morris Chang, who's their Chairman, CEO. And they understood why we've made the move, I told them a year beforehand. And as he has detailed in their calls, he understands it wasn't one issue as much as many issues. And he's publicly stated, he would like to earn our business back. And we'd like to work with them and continue to work with them in the future. Obviously, we're one of their top customers still. So relationship is very strong and we're continuing to get good service.

We'll move to Shawn Webster with Macquarie.

This is Deepon Nag for Shawn. Can you give us a quick, maybe just talk about lead times, how they were in the quarter, maybe order lineary [ph] in the quarter as well?

Orders were actually pretty linear. We were not back-end loaded with the exception of one geography which is a little back-end loaded that was Japan. Lead times did, as John said, for 40 and 65 they did expand between the beginning of the quarter and the end of the quarter. But as we're indicating, I think that will come back as we transition through the end of Q3 and start to get a little better capacity in Q4.

Great. And not to beat a dead horse here, but on the gross margin outlook, revenues are pretty significantly -- so what is the biggest offset for that? Is that just a mix [ph] at the telco and auto? As we go further, I mean, how you expect the military to come back? I mean, do you expect the military to come back and kind of be a tailwind in 2014 or when should we expect that?

Difficult to know. I mean, just for next quarter, I think you're seeing increasing telecom and wireless business, which as I said earlier, all things being equal, put a little pressure on margin, there's broad increases across the board in some other higher-margin verticals in Q3, which tend to offset that, that's why I'm kind of looking at a flat margin. Next year with military, it's way too early to know. It's program dependent obviously. As you know, we really struggle even at our -- when we give planned guidance to give any color on revenue growth, in particular, vertical growth for the full year.

We'll move to Anil Doradla with William Blair.

It's Brian Leshion [ph] for Anil. On the China base station builds, just based on your knowledge of the timing, do you have a sense of whether the equipment will be more dependent on 40-nanometer versus 28-nanometer?

It's actually a combination right now of 65, 40 and 28. I think what you're going to see -- well, and that's because if you look at the entire industry across GSM, across the 3G technologies and across LTE. You'll see a combination of those devices. Getting into a LTE, it's probably 40 and 28, with some 65. I would say as this technology matures really where it's all going to center is in 20 and ultimately, 14. Because the initial deployments, obviously, will uncover things that need to be redone. And you'll see, I think, a significant redesign coming up. We already have some 20-nanometer design wins where customers are actively designing with our midrange product, both for base stations and radios. And as we release the 14-nanometer product, we expect that to pick up really a lot of the base station contents. So I would say, given a couple of years, most of that revenue probably moves from the size [ph] we have of 40, 28 into 20. And I think we're extremely well positioned for that.

We'll go to Romit Shah with Nomura.

John, if I look at new product growth, it was up 6% in the quarter, that was less than Xilinx which was up 20. You mentioned that computing was unusually weak. As I look back at the last 4 quarters, new product growth has been below Xilinx. I think, every quarter since 2Q 2012, so my takeaway from that would be that your new product market share is declining. Is that not a fair way to look at it?

I think this quarter, what you're going to see is a sort of a reversal. Unfortunately, if you think of Q1, remember we had one of our top customers, who was just under 10% this quarter. We moved to a VMI program, so we only shipped 2 out of the 3 months for that quarter, a lot of new product revenue in that particular customer and obviously, a very significant part of our total revenue. Then you look at Q2 and we had wireless was okay, telecom, obviously, because it's a long-lived product, many times will have mainstream mature business in it. And we really had computer, which is a lot of new products down [ph]. This quarter, what you're seeing is growth and the computer and wireless. And obviously, none of these one-time issues like we had in Q1. So we expect very, very strong sequential growth in our new products. And I think what you'll see there is on a comparison basis we'll continue to look good. Even last quarter in Q2 where we didn't do as well as our competition, we're still well over our overall market share in FPGAs. I think our overall market share is only about 44%. Our market share in new products is currently around 50% to 50-plus in that quarter, which was a weak comparison for us. So clearly as the new products ramp and the old products continue to fall off, whereas that old product finally falls off for our competition, we obviously will continue to gain market share. It's just a number of spaces. And again, I think as we get out of this quarter, you're going to see such a substantial growth on our new products, that the comparison will even look better.

Don't forget that even in this quarter, new products for us were 40% of total. For our competitor, it was up 30%. So we -- you're talking about growth rate -- we've got a bigger base.

Yes, that's fair enough, Ron. My second question was just on your 14-nanometer part Stratix 10. Have you guys gotten any customer feedback at this point?

Yes. It's been stellar. And the reason it works so well is the number of the major customers who use ASICs are looking at utilizing the most advanced technology for their ASICs. Obviously, as they've gone through and reviewed different foundries, they realize a substantial advantage that one would have with the 14-nanometer technology. So it was a pretty easy sell from that perspective. And this puts us so far out in the lead in terms of density, in terms of performance, of power, that the feedback has been from our customer base of trying to figure out with us how could we accelerate some of our designs into 14. So we really think that as we introduced this technology, that we will not have competition for many, many years. And no matter what the competition and there's many foundries that one can utilize, whatever they call their technologies, we don't see anybody catching up to Intel in 14 for the next 5 years.

We'll go to William Stein with SunTrust.

Just a follow-up on the adjustment in your full year SG&A guide, is that largely or entirely owing to the Enpirion acquisition? Or is there something else at play there?

Yes. We initially estimated what we thought the SG&A would be for both Enpirion and TPACK and this is the fine-tuning of it. That's really it.

Okay, great. And then one other quick one if I can, just kind of thinking longer term about the revenue split among end markets. Should we think about the split among the, what is it, 4 buckets that you report on, as staying largely stable over time? Or do we think about the automotive becoming big enough to making the industrial known auto bucket significantly bigger, let's say, in 2 years time?

Yes, I think, what you're going to see as a percentage, automotive's going to grow the fastest. It is smaller so that's understandable. Computer is also growing very strongly. We should get some solid continued growth out of communications. And so in the 2-year period, does the business fluctuate that much? Maybe not, so when you look at those categories. But overall, when you look at the growth factors, computer automotive today are the fastest growing and we would expect to continue to be fastest growing. And we have some solid opportunities in communications in a couple of those other buckets that we would expect to continue to see growth there as well.

There are no further questions at this time. I'll turn the call back over to Mr. Scott Wylie.

Great. Thank you, operator. As we're wrapping up today, with respect to conferences this quarter on September 4, we'll be at the Citi 2013 Global Technology Conference in New York. And a final note, Altera now provides highlights of its Investor Relations web page optimized for mobile users. A link to this capability is included in this quarter's earnings release and also appears on our IR webpage. This concludes Altera's earnings conference call. Thanks for your interest and participation.