Altera Corporation (ALTR)

Q2 2010 Earnings Call

July 20, 2010 4:45 p.m. ET

Executives

Scott Wylie - VP, IR

John Daane - CEO

Ron Pasek - CFO

Analysts

James Schneider - Goldman Sachs

Ambrish Srivastava - BMO Capital Markets

Uche Orji - UBS

Shawn Webster - Macquarie

Glen Yeung - Citi

Adam Benjamin - Jefferies & Company

Srini Pajjuri - CAS

Ian Ing - Gleacher & Company

Ruben Roy - Pacific Crest Securities

Mahesh Sanganeria - RBC Capital Markets

Hans Mosesmann - Raymond James

Chris Danely - JPMorgan

Apurva Patel - Ticonderoga Securities

John Pitzer - Credit Suisse

Brendan Furlong - Miller Tabak

Presentation

Operator

Good day, everyone, and welcome to the Altera second quarter 2010 earnings results conference call. (Operator Instructions)

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

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 and 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'd 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 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.

Ron Pasek

Thank you, Scott. My commentary will cover our results for the second quarter 2010 as well as guidance for Q3 and full year.

Revenue for the second quarter 2010 was a record $469.3 million, a sequential increase of 17%. Q2 sequential revenue growth was broad-based. Both large and small customer categories grew, with the highest growth coming from our largest customers. New, mainstream, and mature product categories all grew sequentially. In addition, all geographies and vertical market showed growth quarter-to-quarter.

Q2 turns were 35%, which was slightly above our guidance. Incoming orders remained strong, and our book-to-bill ratio was well above 1.

Q2 gross margin was 71.7%, a sequential increase of 30 basis points, largely due to continuing const reductions that offset some negative vertical market mix. Operating expenses for the quarter were $130.4 million, an increase of $3 million or 3% sequentially and essentially in line with our guidance. Operating margin dollars grew 208% year-over-year and operating margin percent reached a record at 43.9.

Our Q2 effective tax rate was 12.2%. This rate is slightly less than our previous guidance and is the result of relatively stronger revenue growth outside the U.S., which resulted in an overall reduction to our tax rate. Net income for Q2 was $180.6 million or $0.58 per diluted share, an increase of $0.08 over Q1 2010 and an increase of $0.42 over Q2 a year ago.

For Q2 2010, our Board approved a $0.01 per share increase to our quarterly dividend to a total of $0.06 per share per quarter. This is the second dividend increase since 2007 when we introduced a quarterly dividend. As we have frequently noted, we intend to continue to increase the dividend over time.

On the balance sheet, cash and investments increased to $2.067 billion and cash flow from operating activities was $246 million for the quarter. Altera inventory increased Q1 to Q2 on a dollar basis, but was unchanged from the months of supply on hand basis. Total pipeline months supply on hand at 3.2 months was comprised of 2.3 months for Altera and 0.9 months for distributors, which is identical to our ending inventory months supply on hand for Q1 2010.

The cash conversion cycle for Q2 was 80 days, which is a 17-day improvement from the unusually high 97 days in Q1 2010. DSO came down and payables increased, which are both good trends from a CCC perspective.

Again, our accounts receivable aging continues to remain quite healthy. Stepping back, the second quarter results display a combination of strong end market demand aided by the tipping point dynamics we have been describing for the past several years.

Our impressive operating leverage is a function of robust gross margins and extremely focused OpEx management, reflecting the value our PLDs deliver to the customers in a disciplined operating execution.

Moving on to guidance for the third quarter, we expect to see revenue growth in the range of 4% to 8% sequentially. Third quarter turns look to be in the low to mid 20s. The third quarter gross margin rate will likely be in the range of 70% to 71%. We are anticipating some gross margin degradation due to a slightly unfavorable vertical mix.

R&D spending will be $69 million to $70 million, reflecting incremental hiring we spoke about last quarter to accelerate our 28-nanometer roadmap. SG&A will be between $64 million and $65 million. Our core tax rate will be 12% to 14%.

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