Q1 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: Good day, everyone, and welcome to the Altera First Quarter 2013 Earnings Conference Call. As a reminder, this call is being recorded.

At this time, I would like to turn the call over to Mr. Scott Wylie, Vice President, Investor Relations. Please go ahead sir.

Scott Wylie - VP, IR: 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' webpage where you will find complete instructions. A 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 on 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.

Ronald J. Pasek - SVP, Finance and CFO: Thank you, Scott. Revenue and the gross margin rate for the quarter were essentially at the midpoint of guidance. On the top line we saw the greatest downward pressure in the telecom and wireless vertical. The remainder of the verticals were essentially flat.

28-nanometer revenue for the quarter grew over 38% sequentially. More importantly, our design-win rate for 28-nanometer remains at 60%.

On the OpEx line, R&D in Q1 was $12 million under guidance. The majority of this underrun is due to timing, meaning the spending will occur later in the year. The timing issue is not the result of any scheduled slippages. However, some of the argument is genuine cost savings. In fact this Q1 R&D cost savings more than offset the small dilution effect during FY '13 of our recent acquisition of TPACK.

I will give you an update on our next quarter's earnings call of any changes to the full year R&D OpEx. On the income tax line in addition to the catch up of the reinstated R&D tax credit. We also had a discrete item in the quarter. These two events together, created a $3 million tax benefit in Q1. Although book-to-bill for the quarter was slightly under 1, we did see an acceleration of orders in the month of March. This change in ordering has continued into April where we see the book-to-bill above 1 thus far through Q2.

Onto guidance for Q2. We see revenue ranging between flat and up 4% sequentially, turns will be in the high 40s. This turns increase from last quarter, which was in the low 40s is primarily due to of a VMI conversion at a major customer. Still though, our turns are well below historical levels of the mid-to-high 50s.

Gross margin at 69% is at the bottom end of our forecasted annual range but will trend stronger during the second half of FY '13. R&D will range from $97 million to $99 million, while SG&A will range between $77 million and $79 million. All Q2 guidance assumes that recent acquisition TPACK, which is now closed.

Now, let me turn the call over to John.

John P. Daane - Chairman, President and CEO: Thank you, Ron. First quarter revenue decreased 7% sequentially, with telecom and wireless down, caused both by a one quarter pause in TDS CDMA deployments and a major customer transitioning to VMI. All other markets were roughly flat. We believe that the first quarter marked a bottom for our industrial and our telecom and wireless businesses.

For our second quarter, we are forecasting a 0% to 4% sequential revenue increase. Telecom and wireless should grow along with our auto, industrial and military category. Networking and computer should decline based on program timing, and our other category we expect to be flat.

Over the last few months, we've been routinely asked for our communications industry outlook for the second half of 2013. While still too early to call with certainty, the second half of the year has the potential for a step-up in our wireless and telecom business. First, we have several significant new design programs expected to ramp to production. Second, China Mobile has announced their plan to deploy 200,000 TD-LTE base stations in the second half of the year, combined with an undisclosed high-volume of radios.

I met with management of China Mobile last week and can confirm that the base stations will be new hardware, not software upgrades of existing TD-SCDMA hardware as some had suspected. As the leader in China wireless PLDs, such a deployment would clearly have a positive impact to our revenues.

In November we announced that we were developing a new CPLD family, two FPGA families, and continued investments in intellectual property cores to target ASSP replacement and microprocessors for the embedded market. Since then we have announced we will utilize 55 nanometer embedded flash and 20 nanometer from TSMC and 14 nanometer second-generation Tri-Gate from Intel. This will refresh are low, mid and high-end products and provide clear advantages over our competition.

With Intel, as an example, Altera will be using a process technology one generation ahead of our major competitors, which will result in higher density, higher performance and lower power products in the high-end FPGA category, which represents 50% of the PLD industry revenue.

We also recently announced the acquisition of TPACK, which combined with our acquisition of Avalon two years ago, enables Altera to expand our OTM solution portfolio to replace ASSPs in the telecom market.

In summary, our investments and partnerships are leading towards a new generation of products that will continue to expand our addressable market for revenue growth, while also providing differentiation and separation from our competitors.

Now let me turn the call back to Scott.

Scott Wylie - VP, IR: We'd now like to take questions. Please limit your questions to one at a time so that we give as many callers as possible the opportunity to ask questions during the call. Operator, would you please provide instructions and poll for questions.

Transcript Call Date 04/25/2013

Operator: Romit Shah, Nomura Securities.

Romit Shah - Nomura Securities: Thanks for letting me ask the question. On the Q2 guide, are you factoring any of the China TD-LTE build into your forecast of flat to up 4% growth?

John P. Daane - Chairman, President and CEO: Romit this is John. We are not, so we're assuming that the ramp is actually going to be in the third calendar quarter and reason for that is they have already qualified the equipment from a series of vendors and are entering into now the commercial phase, which is soliciting financial bids, and we expect to hear awards in June. So, I think we'll expect to see the ramp up in the third calendar quarter.

Romit Shah - Nomura Securities: Just along those lines, China Mobile is talking about 200,000 base stations. Could you tell us what this means in terms of PLD revenue opportunity or potential revenue opportunity for Altera?

John P. Daane - Chairman, President and CEO: Yes. So I think from a revenue perspective, as we've discussed, if you move from 3G to LTE or 4G, our revenue contribution, from a PLD perspective, goes up by about 50%. So, it is a very big step-up. We've mentioned 200,000 base stations. There is also going to be a very high volume number of radios. The reason that hasn't been disclosed is they're still deciding how many will be F band, how will be the D band and so, depending on that mix, of course, that will potentially change the number of radios because they do have some F band already deployed. So I think, all told, we're going to see a very substantial deployment in the second half of the year. We're obviously in an extremely strong position because we lead in Asia in PLDs for wireless. So, we're excited about the potential. We have to see how it goes, but that's what we understand as of Friday of last week.

Romit Shah - Nomura Securities: Maybe I am asking you to be too granular here, but in terms of dollars, is this an opportunity that's in the hundreds of millions of dollars? How do we think about the size of the opportunity?

John P. Daane - Chairman, President and CEO: I'm sorry. I can't break it out. We've never really broken out dollar content by base station, so I can't unfortunately do the math for you. So I apologize.

Operator: James Schneider, Goldman Sachs.

James Schneider - Goldman Sachs: First if all, John relative to the guidance you provided for Q1, you talked about you had confidence it was directionally up and I guess up 2% and midpoint is certainly up but maybe not dramatically so. Can you maybe talk through what happened during the quarter that either in terms of order push-outs or other changes in the quarter in terms of orders that would have kind of changed that outlook if it did change at all?

John P. Daane - Chairman, President and CEO: I think that probably the biggest change is the computer and networking area is weak this quarter, really due to some program timing, nothing fundamentally changing there. We do expect it to grow again going forward. Computer itself has been a strong growth area for us. In the first calendar quarter, it was up 25% year-over-year. Really because we’ve been designed into a number of solid state storage and server platforms, we expect that to resume growth. That probably is the only negative. Other than that, we do expect telecom and wireless to grow. We do think industrial will grow in Q2. Automotive has been a strong grower for us and we’ll continue to do so. So I would say it's just computer and networking and more program timing than anything else.

James Schneider - Goldman Sachs: Then, if you look beyond just the China part of wireless and look broader into the telecom vertical, was that for U.S., EMEA, et cetera, in the wireless side or just globally on the wireline side? Can you maybe give us a sense of whether you expect to see a ramp of CapEx materialize in the back half for these other geos?

John P. Daane - Chairman, President and CEO: Well, I think North America is certainly continuing to spend. AT&T reaffirmed our CapEx for this year on our conference call and both for wireline as well as wireless. So we expect North America and China to be active. Japan is also active currently, which is good for us because we’re very strong in wireless and Japan as well. Then we see some of the developing countries also deploying countries also deploying at this point. I don't expect any significant change out of either India or Europe really in the short run. The good news about that is, these deployments will be spread out over a number of years of continual upgrades and obviously as we increase our content with every new generation system, that means we can continue to grow our telecom and wireless number in the future.

James Schneider - Goldman Sachs: But does that imply an improvement in the back half relative to the first half or not?

John P. Daane - Chairman, President and CEO: We have to see, I mean that's what we are being told. We will have to see how that develops, but again as I mentioned earlier, I do think that second half has a strong potential for a step up for our telecom and wireless business both because of China, certainly also because of North America, but also because we have a number of new programs that are slated to roll into production and if so, provide again a big increase simply because they are new programs for us and we don't have the existing program. So again, it's a step up.

Operator: Ambrish Srivastava, BMO Capital Markets.

Ambrish Srivastava - BMO Capital Markets: John, you were coming off of a bad 2012 versus Xilinx. Then, looking into 2013 you had a bad first quarter, worse than what you had told us, only slightly worse. But then, looking out in Q2 you are not getting the bounce, so I'm really trying to understand how should patient investors and patients sell side guys who had stayed with you through the last several quarters should think about this. Is this – was it a one year phenomenon or is there something bigger in terms of market share loss that could continue well into 2013 and beyond?

John P. Daane - Chairman, President and CEO: See at a high level I think our market share in new products is quite strong. If you look at our market share in the new products, it's substantially above our market share overall as a company or – excuse me – as an FPGA company. I think our market share in FPGAs, if you just look at us – between us and Xilinx, it's...

Ronald J. Pasek - SVP, Finance and CFO: 42%

John P. Daane - Chairman, President and CEO: 42% and what is it currently if you split out the new products?

Ronald J. Pasek - SVP, Finance and CFO: It's 42%

John P. Daane - Chairman, President and CEO: So...

Ronald J. Pasek - SVP, Finance and CFO: No, much higher than that.

John P. Daane - Chairman, President and CEO: So as the old products ramp down and the new products ramp up, we would expect to simply continue to gain market share. There are some changes that can go on because of the program timing there are also some changes that can come with one-time events, such as obsolescence or price increases that can have temporary impacts. But it's hard to argue the long-term math. So there's nothing that we're concerned with on 28-nanometer. We're continuing to win 60% of the designs on a value basis. We're very confident on our products and our position, and that will lead us to continue to take market share into the future. On specifically what's happening any quarter between us and Xilinx's is really hard to decipher.

Ronald J. Pasek - SVP, Finance and CFO: Ambrish, just to add to what John said, in Q1 our new products were 39% of our total revenue. Our competitors were 27%. So where the growth is in new products, which is where most of the growth occurs in the next several years, we still have much higher percent of revenue.

Ambrish Srivastava - BMO Capital Markets: That's fair. I don't seek out on a quarter-over-quarter basis, John, and you know my track record on that.

John P. Daane - Chairman, President and CEO: No. Any question is a fair question. So we appreciate it and again, we're very confident just based on the math that we're going to continue to do well and continue to take market share.

Ambrish Srivastava - BMO Capital Markets: Then my quick follow-up on the gross margin side. So second quarter is slightly lower, what should we – Ron, you said that it should ramp up in the back half. What's kind of range we should be thinking about?

Ronald J. Pasek - SVP, Finance and CFO: Well, I'm going to just reiterate. The guidance I gave for the full year is 69 to 70 and I'm very comfortable that will still be within that range.

Operator: Steve Eliscu, UBS.

Steven Eliscu - UBS: Within the industrial segment, I guess there we expected a rebound – strong rebound through the year, especially within military. I think that's one of the things that you cited as a drag and in addition to your comments on industrial automation and automotive; can you give us a sense, how we should think about the rebound there, especially given all the headlines about sequester and just overall government spending potentially being constrained?

Ronald J. Pasek - SVP, Finance and CFO: So as we highlighted before most of the programs that were in at this point are not tied to programs that we think will be cut. I believe probably things will be cut are tied to programs associated with for instance tanks or planes or ships that may end up getting defunded or only partially funded. Our programs right now are specific more towards high-performance computing and cyber security, which continues to get funding from the government and in some cases has received increasing funding. So, we’re quite confident that going forward, after the decrease in revenue we saw in 2012 that we will see growth in our particular areas of the military. So we’re not overly concerned about sequester. We don't think it will have an impact and as we said earlier, we do expect growth this quarter from the auto, industrial, military category.

Steven Eliscu - UBS: Can you elaborate more on each of those three sub-segments?

Ronald J. Pasek - SVP, Finance and CFO: In general, I think it's all going to probably be up as a category area.

Steven Eliscu - UBS: As a follow-up question just on the 55 nanometer relationship with TSMC that you announced, this suggests that there is some interesting new products at the low end, and I guess, I'm trying to understand clearly the high-end with regards to the relationship with Intel, and we understand a lot of the directions that you've talked about with regards to what you've disclosed about silicon convergence. So we look at the low end, especially given sometimes there's challenging – profitability is challenged. Can you give us a sense as to what type of market opportunities you feel that you can address that can also be profitable and incremental to growth?

John P. Daane - Chairman, President and CEO: So this type of product is really aimed towards maximizing the number of I/O and trying to drive the lowest cost per I/O on a function perspective, which is why you typically will use a trailing edge technology. Technically, that may be a little bit complex, and I'll have to explain it to people on a one-on-one basis, but that's just the way that the technology sort of rolls out. Our main competition here has really been Lattice and we have not really refreshed the product here for many, many years. So our intention is to go back and address the space. It's not only a CPLD, but also does reach into the lower ends of the FPGA area. The reason for that is, with each new generation of technology, we tend to make the low end products higher density than the previous generation and we sort of abandon what was the really small part. This is to go back and fill that gap, because there is a substantial business in that space. It is a business that's extremely profitable and it actually is very pervasive across all market segments. So we currently see these chips adopted in automotive, in military and servers and communications equipment of all types and so it has broad appeal to us, it's an area for which we've had a strong traction in the past. We think by doing this particular product line it will be a strong revenue grower for us competitively differentiated from what others are offering in the space and again a good space to go back and address at this point.

Operator: Shawn Webster, Macquarie Capital.

Shawn Webster - Macquarie Capital: I guess, I’d like to go back to the operating expense and good news that normally it's great to see a restraint on OpEx, but I'm just curious it's a 12% miss versus your guidance for R&D. What were the programs that were affected and maybe can you help us understand how much of that was that cost reduction initiatives that you mentioned that might follow through to other quarters.

Ronald J. Pasek - SVP, Finance and CFO: Shawn, this is Ron. So of the $12 million, $5 million was permanent cost reduction and that’s simply getting better negotiated rates on mask and wafer et cetera. Then $7 million was pushed out to Q2 and Q3 and again, it's just the change in timing, some of the changes in assumptions from the original plan, which was done really in October of last year. It doesn't change any roadmap.

Shawn Webster - Macquarie Capital: So the better rates is something that would flow through to other tape outstanding over the course of the year, or was that a one-time kind of Q1 business?

Ronald J. Pasek - SVP, Finance and CFO: It was a one-time Q1 kind of thing yes.

Shawn Webster - Macquarie Capital: On the gross margin side of things, can you talk about some of the mix movements coming down in Q2 and then with the expectation that telecom wireless would recover in the second half of the year, why gross margins might improve, but I believe they are below the corporate average in that segment?

Ronald J. Pasek - SVP, Finance and CFO: Yes, so there is lots of puts and takes in this. But essentially we’re seeing some inter-vertical platform mix, which is a little bit rare, but we saw it in both Q1 and we're going to see a little bit in Q2. I don't assume that we're going to see that the rest of this year. That's why I'm saying we're going to be within the original range I guided for the full year.

John P. Daane - Chairman, President and CEO: We're also seeing industrial pick-up in the back half of the year. So there are segments that will begin to grow, like military. So we're pretty confident that the gross margins will start to increase in the back half.

Operator: Tristan Gerra, Robert W. Baird & Co.

Tristan Gerra - Robert W. Baird & Co.: Is the China Mobile award in June that you mentioned on the call a primary factor that's going to determine your market share trajectory in China, or is it fair to assume that FPGAs prior diversification is going to continue to take place in the second half, either way, given by how much you've been dominating so far?

John P. Daane - Chairman, President and CEO: We'll be number one in communications in Asia this year, next year and the year after. I don't see anything changing there. In terms of the award, the award probably will account more than just the Chinese suppliers. In other words, I would expect some of the European suppliers to also participate in it, which is a little bit different than TD-SCDMA and really, the reason for that is not everybody had a TD-SCDMA platform, but for TD-LTE, really, everybody does. What the percentage of award is -- can drive one of us to do better or worse than another, but in general, if you look at our position within the wireless platforms, I think we're very well advantaged within this, and I expect us to get a majority of the revenue. There is a play and obviously, that could be for any type of equipment from any vendor. We may be stronger (with one of) our competition may be stronger with another, but in general, with our strength in Asia, I expect us to continue to get a majority of the business.

Tristan Gerra - Robert W. Baird & Co.: Then it looks like you had a somewhat significant decline at the 40-nanometer node in the quarter. Is this just a one quarter fluctuation and I know that last quarter you mentioned that you expect that 40-nanometer to potentially peak. How should we look at your market share trajectory at 40-nanometer this year, given what you've reported for the just completed quarter?

John P. Daane - Chairman, President and CEO: We expect 40-nanometer to increase this quarter along with 28 and hopefully both strongly. Then I expect that that trend will continue this year, because again, some of the programs that we actually talked about going into production in communications in the second half of the year are actually in 40-nanometers still. So we believe that we can continue to see growth in that particular area. We'll see when it peaks, but I think in the near-term it should continue to grow.

Operator: John Pitzer, Credit Suisse.

Ryan Carver - Credit Suisse: This is Ryan Carver calling in for John. I guess, relative to sort of a normal seasonal growth for Q1 in Europe of about sort of low-teens sequentially, the Europe number was down about $30 million in that level? I guess about $10 million of it was originally guided to be VMI transition. So I guess, it's kind of a two part question, was that $10 million – did you guys hit that $10 million in terms of the VMI – is that the right way to think about the size of that and I guess what was the balance of the miss from the European number?

Ronald J. Pasek - SVP, Finance and CFO: So Ryan I think that what we saw was that the customer finished the transition through the quarter to managing VMI directly with us and probably see a little bit of softness through Q2 with that particular customer. But again, I think over the course of the year you'll see us do quite well.

John P. Daane - Chairman, President and CEO: I think in general we don't have the breakdown here by market segment, by geo, but I would have expected if I go back, probably also industrial was down in Europe in the first calendar quarter. Again, in aggregate, we expect industrial to grow this quarter and I would expect at this point that Europe will actually be up for us sequentially in the second calendar quarter as well.

Ryan Carver - Credit Suisse: As my follow-up. You talked about this 200,000 base station deployment from China Mobile, I guess how many quarters do you guys expect for this upgrade process to be? I guess, relative to the run rate of global base station deployments into 2Q, is there any way to kind of quantify what this upside might represent and how long of a duration we might expect that upside?

John P. Daane - Chairman, President and CEO: I can't break it out in terms of revenue as we talked about earlier and in terms of timeframe, I can't even break that out either. I think China Mobile has an intention to again deployed 200,000 base stations this year, so that would say it's put into a (six-pronged) timeframe, but that could certainly slip or be spread out over a little bit longer period of time. They also have a plan by the way to continue to buy TD-LTE base stations into next year and I wouldn't be surprised also see them continue to do TDS CDMA deployments into next year as well. So I can't quantify it for you and I can't even breakdown how many are going to be deployed in North America, versus how many are deployed in China. So I apologize about that.

Operator: Anil Doradla, William Blair.

Anil Doradla - William Blair: Couple of questions. Last quarter you talked about a VMI transitioned lasting for maybe a quarter or something like that. Can you give us an update and share your sense of the timeframe and I have a follow-up.

Ronald J. Pasek - SVP, Finance and CFO: What we talked about was from December quarter to March, we had a customer transitioning from a partner-managed VMI to a direct arrangement with us. There was some of the shortfall in the quarter for Q1. So that transition is done. They are now in a direct VMI relationship with us moving forward.

John P. Daane - Chairman, President and CEO: In essence, if you want to think of it if they were having – if they had a one-month buffer stock managed by a third-party and they moved to a direct VMI program with us, we lose about one month's worth of revenue which impacted us in the first calendar quarter. As we pointed out, that was one of our top 10 customers in Q4. So it obviously was fairly significant for top two customers over 10% of our revenues in Q4. So, obviously, had a fairly large substantial impact.

Anil Doradla - William Blair: When I look at your FinFET architectures versus some of your three-dimensional strategies, from a product point of view, what do you think will hit the market first? Do you think we'll see a 40-nanometers FinFET product or would we see a three-dimensional Altera kind of stacked silicon product?

John P. Daane - Chairman, President and CEO: Well, we're not in a position where we're going to announce specifically what we're going to come with in terms of 3-D products for 2014 or Flash. So, so far we've only announced the partnerships and who were using the process technology. We haven't announced the specific product details. Those will be coming in future months when we're ready to release software and ready to specifically go broad in the marketplace with the technology. In terms of the 40-nanometer FinFET, it is actually quite important. We've been, as an industry, using – with the exception of Intel, been using planar transistor structures. Intel, for 22-nanometer, moved to a FinFET and generally – and this is our general numbers – using a FinFET over a planar product for the same performance level, you'll get about 25% to 35% power savings or lower power, or for the same power you get about 25% to 35% higher performance. So the impact from a product perspective of using a FinFET is really tremendous. The advantage that well have is, Intel is clearly a generation ahead than the rest of the industry. The only one that we'll be doing a 14-nanometer technology or anything close, and so we’ll have the scalability, we’ll have the performance, we’ll have the power advantage and with the high end being 50% of the market, we really will be in a position to stake out the high-end for some years. Since we announced this originally in February, I mentioned that two to four year lead time, I felt over our competitors with this type of product. We've obviously known a lot more details but we weren't in a position to talk about it because not all of these companies had announced their roadmaps. Now that some have gone public with their roadmaps and timeframes, you can clearly see that it's a four-year advantage that we'll have over the competition and it will not be until 10-nanometer that our competition will have a chance to potentially do anything that they gets close to what we're up to. So, we really think that working with Intel does put us in a distinct advantage of the high-end which is right now half the industry's revenues and will also allow us to go back and purely take this prototyping market as well. So, we’re excited about the opportunity, product announcements will come in later date.

Operator: Srini Pajjuri, CLSA Securities.

Srini Pajjuri - CLSA Securities: Ron just to follow-up to that the question. What sort of implications if any, we should think of as you ramp at Intel, whatever the timeframe maybe; I am just wondering how that impacts R&D and any other gross margin line items going forward?

Ronald J. Pasek - SVP, Finance and CFO: As you know we always had tailored approach. So, we've tailored in the past with different process technologies from a TSMC. So think of this as just using a tailored approach with a different foundry. It really should have no impact on our R&D at all. We're not planning for it to have an impact at all. So that’s why I think that you could think that it would, but remember we've done specific devices at the high-end, mid-range and low-end for some time.

John P. Daane - Chairman, President and CEO: This was all contemplated in the guidance for OpEx that we gave in November of last year. In addition, we do not expect this to have any impact on our gross margin structure as a company moving into future years.

Srini Pajjuri - CLSA Securities: Then another follow-up. Obviously we're talking a pretty big potential ramp up in the second half. When you talk about 200,000 base stations, Ron, how well do you think you're positioned from a supply standpoint? I am kind of looking at your inventory. It actually came down. So if you are anticipating a big ramp, why bring the inventories down?

Ronald J. Pasek - SVP, Finance and CFO: Remember, we've historically had inventories between three and four months' supply in hand; and about a year ago when there was the first whisper of having capacity issues, we did take an inventory position through the June quarter, so that we move from essentially around three months' supply in hand a year ago to very quickly four-month supply in hand. So we've been operating at that level for nearly a year still well above – even though where we ended this quarter, we're still well above what would be an average inventory level. Keep in mind, we also use a die-bank approach where we have a completed die that’s not yet packaged. So that has the effect of giving us a lot of flexibility and actually having the cost be a little less in the inventory as a result of using a die-bank approach.

John P. Daane - Chairman, President and CEO: I think at a high level what you see is where the industry roughly and semiconductors has been flattish over a year or two basis, more of the revenue is – or production is flowing into the foundry industry away from some of the IDMs. So what we see today is capacity is starting to tighten, specifically, I think, heading into the back half of the year, but if you look at Altera specifically our lead times are stable. We generally have zero lead times for product that's been forecasted and between four to 12 weeks for un-forecasted orders. If capacity continues to tighten and we've heard now from a number of customers that prices have started to rise and sectors of the semiconductor industry such as memory like DRAMs and NAND Flash, we could indeed in the latter half of this year see customers start to increase orders to reinstall their normal inventory or buffer stock, but I think this is still a little bit too early to call. Certainly, if we look at our Q1 business, we don't see any of that business flowing in inventory at our customers. In other words, what we were shipping is what customers were actually using and so far within our bookings, we think that’s still the trend. In other words, people are not out buying from us just to reestablish a buffer stock.

Ronald J. Pasek - SVP, Finance and CFO: We still see customer inventories to be very, very low. No one is right now replenishing inventory.

Operator: Hans Mosesmann, Raymond James.

Hans Mosesmann - Raymond James: Couple of things. Just a clarification John, the positioning of your product next year the following year is basically is going to be 40 nanometers at high end and 20 nanometer in the mid and low end of your mainstream FPGAs, is that correct?

John P. Daane - Chairman, President and CEO: What we said Hans, and I apologize, because we haven't announced everything and really put out the positioning, and so we’ll do that in the future months and give you a real indication of how these all of these technologies play together. Certainly, if you think of 55-nanometer, that's going to be used at the very low-end. If you think of 20-nanometer, clearly, it makes sense for a series of things in the middle and then as we've announced 14, clearly is for the high-end. It gives you some color. I know it doesn't give you exact clarity, but we'd really like to wait until we announce the products at a later date in order for you to really understand how all of these things playing together.

Hans Mosesmann - Raymond James: As a follow-up, just from a historical perspective, in China and their deployments, how is this upcoming deployment in the second half potentially be relative to past ones in terms magnitude, in terms of timing and such things?

John P. Daane - Chairman, President and CEO: So the bids, if you look at TD-SCDMA have ranged from anywhere from 60,000 to, at times 200,000 base stations rolled out over. If you think of the China Mobile – this is just China Mobile specific. They roll these out maybe every year or year and a half that they have done one of these. They're still doing TD-SCDMA, as I mentioned earlier. The TD-LTE is actually – it's sizable in terms of its roll-out for a trail network and something that they continue to plan to deploy next year with. Again, we get the step-up of the content going from the 3G systems to 4G systems.

Operator: Ian Lee Ing, Lazard Capital Market.

Tyler Radke - Lazard Capital Markets: This is Tyler Radke calling on behalf of Ian. Just wanted to get -- and I know we've touched on it in the prior questions. I just wanted to understand the advantage you have with Intel foundry access now that TSMC has pulled in their schedule. Just help us understand how you can continue to preserve your relationship with TSMC to kind avoid some of the issues dialing, is that with UMC just given potential conflict of interest?

John P. Daane - Chairman, President and CEO: So I think if you look at the technology industry there is a lots of people who come out with different names and numbers for process technologies and it’s easy to get confused by those, but I think if you take a step back Intel is clearly a generation ahead of everybody else. So you’ll get a smaller dial, you’ll get a higher performance, you’ll get lower power. That’s over the next I would say four years, that that will remain that way. I think 10-nanometer is the point which you'll see companies try to all do things about the same time -- based on what I've heard publicly from roadmaps we’ll see how that all evolves. So clearly working with Intel you get the advantage of a generation ahead. You get the advantage of somebody who's already done a generation of FinFET. So that they have the knowledge and manufacturing skill, and I think that significantly decreases the risk. So for those reasons we think this clearly at the high-end puts us in a very, very strong position. Now with regard to TSMC, we’ve been talking to TSMC about the potential of this, probably for about a year. So it's not fundamentally I would say a surprise to TSMC and the reason we did that is because of the close working relationship. We wanted to make sure they understood what we're looking for, what we're looking to do and why. So as we made the final decisions that they would be that they would understand and be a part of it and would have a chance obviously. If they had something to -- that was competitive that they could potentially quote for what we are trying to do. Our relationship with TSMC continues to be very strong. Morris Chang, who’s our Chairman, discussed this on their last conference call. Specifically, when I asked a question and the reasons behind that is, number one, we're not second sourcing any of our existing products, so our business with TSMC is quite large and will be quite large for a long period of time. Numbers two, we're continuing to do product development with TSMC, 55-nanometer embedded flash, 20-nanometer, there will be other technologies that we will work with them on. So it's not like we're taking all of our business to another foundry will be a substantial part and a growing part of TSMC from a revenue perspective. Then on a personal level, Morris and I have always gotten together as individuals three to four times a year. We do that just to continue the personal (rapport). I want to see him in January, he came here to see me in April, I think that personal relationship is very strong. So from our perspective, and I think even from theirs, from public comments, we both view that the relationship is very strong. We're going to do things in the future together. We still have a very good business base and we still a very good personal relationship. So I see nothing fundamentally changing with TSMC.

Tyler Radke - Lazard Capital Markets: As a quick follow-up. Speaking of your arrangement with TSMC on the 55-nanometer high volume flash, so can you just help us understand what the strategy here, I mean is this going to be to increase – increasingly compete with Lattice and if so, I thought Lattice was, I might be mistaken, but I thought they were more on the 40-nanometer side with a different kind of memory?

John P. Daane - Chairman, President and CEO: So, we'll compete with Lattice. The products that you're mentioning from Lattice are actually not in this category, those are ASIC oriented products that are really meant for the consumer space. We are not trying to be a consumer player. So you want to think of the MoC series which is the products that we would compete with these types of products. To an extent, we'll compete with some of the older generations Xilinx's product lines as well. But predominantly it's Lattice and again it's not the Silicon Blue product line that they recently bought. It's more of the Mach XO and some of the FPGAs from Lattice.

Operator: Sumit Dhanda, ISI Group.

Ian Eigenbrod - ISI Group: This is Ian in for Sumit. Did you guys offer a target for 28-nanometer next quarter? Could you also talk about what appears to be a different pace of the ramp that (indiscernible) versus your sells for 28-nanometer, particularly given your thoughts on design wins?

John P. Daane - Chairman, President and CEO: Yeah, Ian, we didn't give a target, but we will grow from Q1 to Q2 in 28-nanometer revenue. So one of the differences (life to-date) between the two companies is our competitor has a stacked silicon product at 28-nanometer which we don't have. All of our revenue to-date is production and will be production FPGA revenue over the next 10 and probably 15 years. Remember that our overall share in the FPGA market against our direct competitor is 42%. We're seeing our design wins at 60%. So as long as that percentage win at the node 28 is above 42%, we will gain share. Again, I think what you have to do is decide how much of our competitor's revenue to-date is stacked silicon, which has a really good margin in the beginning and a good bump to revenue, but over time it fades fairly quickly. So, again, as I said earlier, our new product revenue is still much stronger right now than theirs was this quarter and it was last quarter and it has been for a while. It certainly was last year as well.

Operator: (David Wu), Indaba Global Research.

David Wu - Indaba Global Research: Two quick ones, number one is, I assume that you rollout John on this generation of products going to be stagnant like they’ve always been and as I recall it takes about a year or low-end, high-end, mid-range to all kind of rollout at different points. Is that rough cadence still true? Secondly, in terms of the R&D spend on these new products. Just remind me if there is a spike in terms of tape outs and all those activities during calendar '13?

John P. Daane - Chairman, President and CEO: David, I guess as you know, you will remember from years and years and years ago where we as an industry used to develop really one or maybe two product lines. There used to be – and second product line was somewhat of a derivative of architecture and process technology of the first. There used to be a lot of masks spend in one particular year. So, you'd almost get a signwave in R&D spending where one year it would be up because of the mask spend and then the following year would be down because you don't have as much and then it would go back up to following year because you are on a two-year cadence to introduce products. If you look at our industry over the last several years because we are doing far more products than we’ve done and in our case with the tailored architecture, we tend to do tape-out every year. In which case the growth and the decline of any mask spending is far more muted and therefore not as pronounced. In terms of the particular rollout or schedule of the products, what I prefer to do is really wait until we announced the products from specific dates, which we have not done at this time. So again, we’re going to aggressively develop and deploy the products as quickly as possible. As Ron mentioned, it is really a follow-on of what we've been doing in 40 and 28 where we've been using with our tailored approach different architectures and different processors to achieve different price performance and future levels to meet our different market requirements. This is no different from what we're doing now. We're just using two separate companies, but effectively still using several processors to accomplish that. So we will announce in the future particular schedules and products and I'd just like to wait until that point.

Operator: Christopher Danely, JPMorgan.

Shawn Backy - JPMorgan: (Shawn Backy) calling in for Chris. Thanks for letting me ask the question. Just real quick, going back to last year, you guys talked about a PLD to ASIC conversion at one or two of your major customers. Can you give us an update on how that's going and whether or not that's going to continue to be a headwind as we move throughout 2013?

John P. Daane - Chairman, President and CEO: Shawn that has played out already as we talked about that there were two specific ones that happened and that whole scenario played out moving from the third calendar quarter of last year into the fourth calendar quarter. Interesting though that we've always talked about the fact that as costs rise in the semiconductor industry, with every new node there will be fewer ASICs done. I was in China last week. I spoke with the R&D VP who actually executed one of those designs and he commented to me and the rest of the group that several years ago when they made that decision, it was economical to do that program. Today he would not make that decision. They could not afford to do the ASIC. Too expensive and he anticipates that in fact he's going to do fewer ASICs and fewer PLDs in the future. So I think that's just another indication of what we say that every generation there will be fewer and fewer ASICs done, evidenced by the fact that the ASIC industry really is under a lot of pressure, many of the top 10 ASIC companies, revenues over the last three years were actually down and in some cases very substantially and in many cases they're exiting or finding other businesses to go pursue. All of that long-term helps PLDs. The few that escape and there are a few every once in a while that will still go to ASIC. Increasingly there will be fewer and I think it's great evidenced by the comment I got from major customer last week.

Operator: William Stein, SunTrust Robinson Humphrey.

Joshua John - SunTrust Robinson Humphrey: This is (Joshua John) for Will, I was wondering if you could speak to the design wins at 28-nanometer what end markets they were geared towards?

John P. Daane - Chairman, President and CEO: The end markets are really broad, we are winning in everything from test, medical, telecom, wireless, automotive, industrial, you just take each one of our submarkets and I think we're seeing great success with our 28-nanometer products. The reason is we really have a broad portfolio we've got Cyclone, ARRIA and STRATIX, which are low-end, mid-range and high-end. We got the series of SoC products, which incorporate the ARM microprocessors and so this portfolio was designed really to be broad-based target of wide variety of markets and doing quite well on this and the markets based with those products.

Joshua John - SunTrust Robinson Humphrey: As a follow-on, you spoke about industrials bottoming this quarter, what specifically are you seeing there?

John P. Daane - Chairman, President and CEO: I think we're seeing stronger bookings for industrial out of several of our markets. Last quarter strong bookings for instance in industrial in Japan. We've seen that up and some of our other geographies as well. I think there was a lot of inventory depletion in industrial, obviously the market slowdown with the global economy as well. Like many others that we've heard from or talked too, they have also seen their business in industrial bottom and start to grow. So, we're seeing that same trend right now.

Operator: Glen Yeung, Citi.

Adeline - Citi: It's (Adeline) calling in for Glen. I just want to know, for your second half, can you sort of rank -- obviously, telecom and wireless is probably first, but can you sort of rank all your other end markets in terms of being a driver?

John P. Daane - Chairman, President and CEO: For long-term growth?

Adeline - Citi: No, second half and also, obviously, long -term, yes.

John P. Daane - Chairman, President and CEO: Yeah, I would say in the second half, we do not have enough clarity or visibility to really say what market is going to do well or not. As is the course here, we'll stay with one quarter at a time in terms of trying to provide some color on a market perspective. Long-term, we think telecom and wireless still has a lot of growth potential for us, simply because we do derive more content with every new generation. Again, the volume of most of these systems is really not that high and doesn't warrant an ASIC and increasingly so, many of the ASSP companies are exiting the space. So, as an additional opportunity, we have the ability to take IP as in the form of what we did with the acquisition of TPACK, put that on top of our FPGA and so that is an ASSP solution at a much higher ASP than we would have sold the FPGA for in its normal course. So we think the fact that ASIC replacement, the ASSP vendors exiting and the fact that we're doing more IP creation for those markets allows us to grow at a multiple of our customers and continue to grow in that space. I think the other markets that we have a good shot of very solid growth long-term, or areas like networking, automotive, industrial and computer. As I mentioned earlier, computer was one that’s been growing quite well for us as we've been designed into, for instance, a number of server platforms as we've talked about most recently. Computer itself was up 25% year-over-year, which is a pretty good clip for a business that’s already good size for the Company. So those are the markets that I probably call out is over a multiyear period, the strongest growth potential markets and if I didn’t mention automotive that's also in that sector as well.

Adeline - Citi: The follow-up is a clarification on for the quarter the tax benefit. Can you just describe that a little bit more again?

Ronald J. Pasek - SVP, Finance and CFO: So remember at the very end, or actually really beginning of this year, the U.S. government retroactively reinstated the R&D tax credit for 2012 and for 2013. When we gave the original guidance for this year, that wasn't the case. So the entire retroactive amount for last year hit in Q1 and that was what I guided as well. In addition, we had a discrete item related to our IRS litigation that came off our FIN 48 reserve this quarter and that was the thing that also helped to create a favorable tax event in Q1.

Operator: Ruben Roy, Mizuho Securities.

Ruben Roy - Mizuho Securities: I wanted to go back to some of the comments that Ron made on stacked silicon. It sounds like – and I understand that the argument is that these are very high-end products, good margin and (indiscernible) of revenue early on and fade off as potentially prototyping is over. But to the extent that you're not in the market with these products and the design win pipeline continues to fill for your competitor, it would seem that that's a source of revenue that could continue. So longer-term, is this something that Altera, you think would need to have or do you think once you get to the ultra-high-end 14-nanometer stuff that you would be able to compete with against you competitor for some SSI stuff?

John P. Daane - Chairman, President and CEO: So ultimately, the prototype business has always been here for the industry. What ends up happening is, as you introduce your next generation which has higher density than the current generation, all of the prototyping business immediately moves to that new generation and the reason is, typically if you look at a semiconductor company like an Intel or Broadcom or QUALCOMM, it's trying to do verification. What they – their design is bigger than just 1 FPGAs capacity. So they buy a handful of these devices, put them on a board, partition their design into that board of FPGAs and then try to do emulation to make sure that they caught all the bugs before they do their tape out. They'd rather have then fewer FPGAs, because it makes the partitioning challenge a lot easier in which case as you introduce your newest generation which has higher capacity that will immediately move to that. So, given the industry transitions to 20 nanometer this year and early next year, I would expect all of that prototyping business to immediately move over to 20-nanometer. Whether it goes to us or goes to Xilinx remains to be seen with the product rollouts of the two companies, but ultimately when we do introduce the 14-nanometer products, there's no doubt that all of that business will come to Altera. So that's why Ron was explaining that it's a little bit transitory is because the prototyping section always is just in your newest technology and there's no continuing production that stays with your older generations.

Operator: Richard Ong, Eagle Capital Management.

Richard Ong - Eagle Capital Management: Ron, could you flush out the tax benefit itself, how much of it – how much was the catch up in 2012 in dollar amount in the Q1?

Ronald J. Pasek - SVP, Finance and CFO: It was the majority of it. The discrete item was $8 million, so we would have had a slight tax drag if we didn't have the discrete item, but we did. So I think what I originally guided was we don't have a tax rate of something in the 6% range so you can kind of back into the discrete item.

Operator: We have no questions remaining in our queue. At this time, I'd like to turn the conference back to today's speakers for any additional or closing remarks.

Scott Wylie - VP, IR: So I have a few remarks at the tail-end of today's call and it relates to conferences this quarter. On May 8th, we'll be at the Baird 2013 Growth Stock Conference in Chicago. On June 4, we will present at the Bank of America, Merrill Lynch 2013 Global Technology Conference in San Francisco. This concludes Altera’s earnings conference call. Thanks for your interest and participation.

Operator: That does conclude today's call. You may now disconnect.