Altera (ALTR)

Q4 2011 Earnings Call

January 24, 2012 4:45 pm ET

Executives

Scott Wylie - Vice President of Investor Relations

John P. Daane - Chairman, Chief Executive Officer and President

Ronald J. Pasek - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Analysts

Aashish Rao - BofA Merrill Lynch, Research Division

Delos Elder

Unknown Analyst

David Wu

Uche X. Orji - UBS Investment Bank, Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

Christopher J. Muse - Barclays Capital, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Nathan Johnsen - Pacific Crest Securities, Inc., Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Sanjay Devgan - Morgan Stanley, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Shawn R. Webster - Macquarie Research

Ambrish Srivastava - BMO Capital Markets U.S.

Ian Ing - Lazard Capital Markets LLC, Research Division

Presentation

Operator

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Good day, everyone, and welcome to the Altera Fourth Quarter 2011 Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Scott Wylie. Please go ahead, sir.

Scott Wylie

Thank you for joining this conference call, which we 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, and be sure to 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. As we indicated during our last call, we have added some additional information into our earnings release that we previously have covered in our prepared remarks. And in an effort to get to your questions as quickly as possible, we are attempting to be briefer in our prepared remarks by no longer repeating information that is included in our release, unless there's a need for application clarification.

Ron will open the call and John will follow. 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

Thank you, Scott. Despite the headwinds of the second half, 2011 was a good year following a phenomenal 2010. We saw revenue increase nearly 6%, with another year of share gains versus our primary competitor.

Gross margin at 70.4% was stronger than our 70% guidance. As the year progressed, we successfully stepped up our R&D spend to a level more in line with our long-term business model as we began the introduction of our 28-nm FPGAs and initiated a series of strategic initiatives with a longer-term payoff. We were disciplined though. OpEx at $605 million was $5 million under the guidance for the year. Our profitability remains the best in the PLD industry.

Cash flow from operations in 2011 was $960 million, an increase of 12% from the prior year despite a net income decrease of 2%. As a result, we were able to raise our dividend by 1/3 as well as repurchase nearly 200 million of Altera shares. My impression is that we managed well during a year that had its ups and downs. Our response to the Japanese earthquake supply-chain issues was quick and effective, allowing us to avoid seriously disrupting our customers.

Facing cyclical revenue deceleration in the second half, we managed inventory adeptly. As we entered 2012, our inventory levels and lead times are normal. In 2011, 40-nm revenue increased over 100% and represented 22% of revenue for the year, with good growth prospects in front of us for the next several years. Looking forward, book to bill in Q1 2012 is now above 1 and although we are far from great visibility, we do you see revenue growth returning in Q2 2012. So all together, we are well-positioned this year for growth.

With that, let me turn the call over to John.

John P. Daane

Thank you, Ron. Fourth quarter revenue deceleration was caused by broad end market inventory reduction, coupled with slowdowns in a few markets such as wireless and test. As expected, Military grew significantly in the quarter and Computer Storage declined due to the end of the earthquake-related ASIC replacement business.

For first quarter revenue, we are forecasting a 5% to 9% sequential decline, with program timing in Military contributing to slightly more than half of the decrease measured to the midpoint. Wireless should also be down across multiple geographies due to continued inventory depletion aftermarket softening in the second half of 2011.

For 2011, Altera grew revenue 6% and we are very pleased with this result. Once again, we increased our PLD market share and we also outgrew the semiconductor industry by at least 2x. With design incumbency from our 40-nm product success, our momentum continues in 28-nm. With performance, power and software leadership, coupled with feature advantages, including transceivers and DSP, we are winning a majority of the designs in the market.

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