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Altera Corp. CEO Discusses Q3 2010 Results - Earnings Call Transcript

Altera Corp. CEO Discusses Q3 2010 Results - Earnings Call Transcript

Altera Corp., (ALTR)

Q3 2010 Earnings Conference Call

October 19, 2010 16:45 pm ET

Executives

Scott Wylie - Vice President, Investor Relations

John Daane - President and Chief Executive Officer

Ronald Pasek - Chief Financial Officer & Senior Vice President, Finance

Analysts

Uche Orji - UBS

James Schneider - Goldman Sachs

Apurva Patel - Ticonderoga Securities

John Pitzer - Credit Suisse

Christopher Danely - JPMorgan

Auguste Richard - Piper Jaffray

Daniel Berenbaum - Auriga USA

Glen Yeung - Citi

TheStreet Recommends

David Wong - Wells Fargo Securities

Srini Pajjuri - CLSA Securities

Shawn Webster - Macquarie

Mahesh Sanganeria - RBC Capital

Tristan Gerra - Robert W. Baird

Ambrish Srivastava - BMO Capital Markets

Hans Mosesmann - Raymond James

Presentation

Operator

Good day, everyone, and welcome to the Altera's Third Quarter 2010 Earnings Results Conference Call. Today's call is being recorded.

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

Scott Wylie

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. The telephone replay will be available at 719-457-0820, use code 258712.

During today's prepared remarks, we will 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 our financial overview 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 Pasek

Thank you, Scott, and good afternoon everyone. My commentary will cover our results for the third quarter, as well as guidance for Q4. Revenue for the third quarter of 2010 was a record $527.5 million, a sequential increase of 12%, and in line with our updated guidance.

Similar to Q2, our Q3 results showed growth in all vertical markets, in all geographies, although Europe showed only a slight increase. Our large and small customer segments both grew sequentially, with the highest growth coming from some of our very largest customers. On the product side, both new and mainstream categories grew while mature was essentially flat.

Q3 turns were in the mid-20s, which is slightly higher than our Q3 guidance, but is a reflection of our higher revenue result for the quarter. Book-to-bill for the quarter was above 1, although not as robust as the past several quarters. Through the course of Q3, foundry capacity improved, which allowed some of our lead times to shorten. As a result, we're slowly catching up to demand by shipping at an accelerated rate.

So, although book-to-bill was greater than 1 for the quarter, it was slightly less than 1 for September. Again, this is a function of record September monthly revenue rather than a change in underlying demand. Our underlying bookings rate continues to be quite strong and steady, with little change over the past six months.

Our Q4 quarter-to-date, book-to-bill is essentially flat. We're seeing a similar dynamic so far this quarter. Keep in mind, we did not expect lead times for most products to completely return to normal until late in Q4, with the exception of 40 and 65-nanometer, which should recover to normal early next year.

Gross margin for Q3 was 70.1%, 1.6 points lower than the second quarter, but consistent with our guidance. The margin degradation was a combination of some unfavorable vertical mix, as well as some unfavorable large customer mix.

Operating expenses for the quarter were $131 million and the operating margin for the quarter was 45.2%. Our Q3 effective tax rate was 8%, the result of some favorable discreet items. Net income for the quarter was $219 million or $0.69 per diluted share.

On the balance sheet, cash and investment balances increased to $2.4 billion. Cash flow from operating activities was $268 million for the quarter. The cash conversion cycle for Q3 was 68 days, 12 days less than Q2s 80 days. DSO and inventory decreased, while payables grew slightly. Again, our accounts receivable ageing continues to remain quite healthy.

Altera inventory increased 8% on a dollars basis, but decreased on a month supply-on-hand basis. Pipeline month supply-on-hand dropped to 2.9 months and is comprised of 2.1 months of Altera inventory and 0.8 months of distributor inventory.

Moving to guidance for the fourth quarter, we expect to see revenue growth in the range of 3% to 6% sequentially. Fourth quarter turns look to be in the mid-20s, gross marginally roughly flat to Q3, between 70% and 71%. We think R&D and SG&A spending will be slightly lower than the third quarter, as we have fully accrued the corporate bonus through Q3.

Q4 R&D will be $65 million to $66 million and SG&A in the range of $61 million to $62 million. Our core tax rate will be 11% to 13%. As always, there can be discrete items in any given quarter that add or subtract from this rate. This guidance assumes there is no US R&D tax credit.

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