Altera's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Altera (ALTR)

Q3 2011 Earnings Call

October 20, 2011 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

Ruben Roy - Mizuho Securities USA Inc., Research Division

Christopher J. Muse - Barclays Capital, Research Division

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

David Wu - Global Crown

Mark Lipacis - Jefferies & Company, Inc., Research Division

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Steven Eliscu - UBS Investment Bank, 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

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Shawn R. Webster - Macquarie Research

Vivek Arya - BofA Merrill Lynch, Research Division

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Unknown Analyst -

Presentation

Operator

Good day, everyone, and welcome to the Altera Third 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, VP of Investor Relations for Altera Corp. Mr. Wylie, please go ahead.

Scott Wylie

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'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 and John will follow. After John concludes his remarks, we will take your questions. Part of 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. Revenue for the third quarter of 2011 was $522 million, a sequential decrease of 5% and below the bottom of our updated guidance. In Q3, we saw a 31% sequential increase in our Networking, Computer & Storage vertical, but declined in the other 3 verticals. Since our mid-quarter update on September 6, we experienced weakness in several of our large customers. Although it's difficult to say with complete certainty, our view is that we are under shipping end demand, as customers remain extremely cautious.

Absent the affect of the one-time ASIC replacement business, the sequential declines were more pronounced than our large customers. The broad-based was essentially flat. New products grew 43% sequentially. 40-nanometer revenue increased 33% and is now 27% of revenue. Within our new product category, Stratix IV increased 49% with Arria II up 59%. Cyclone IV up 43% and HardCopy IV down 14%. Stratix V was slightly more than $2 million for the quarter.

Q3 turns were in the low 30s, which is less than guidance and a reflection of the softness in the quarter. Book to bill for the quarter was below 1. Gross margin for Q3 was 68%, a decrease of 2.9 points from Q2 and lower than we anticipated. All of this negative margin variance can be attributed to mix, although 2 distinct types of mix. The first is the growth in the Networking, Computer & Storage vertical, associated with the one-time ASIC replacement business, which carried with it some lower-than-average margin. The second mix element was due to the change in the mix of revenue from the time we gave you guidance in July, until we finished the quarter, which impact our higher margin verticals, somewhat disproportionally.

Operating expenses of $150 million were lower than guidance. Most of these variances associated with R&D, and was a result of a slight pullback in hiring and other miscellaneous savings. Although R&D was below our guidance, our product roadmap remains on target. Operating margin for Q3 was 39.3%. Our Q3 effective tax rate was 9.7% and net income for the quarter was $185 million or $0.57 per diluted share.

On the balance sheet, cash and investment balances increased to $3.3 billion. Cash flow from operating activities was $283 million for Q3 and our cash conversion cycle was 78 days. We were active in the market this quarter, repurchasing 4.8 million shares at a cost of $197 million. Our philosophy remains one of being opportunistic and we have 9.9 million shares left in our current board authorization. As we have in the past, we'll limit future repurchasing updates to the quarter end release.

We ended Q3 with total pipeline month supply in hand of 3 months, which is comprised of 2.4 months for Altera and 0.6 months for distributors, in line with expectations, and essentially unchanged from Q2.

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