Actel Corporation, Inc. Q3 2008 Earnings Call Transcript

Oct.29.08 | About: Actel Corp. (ACTL)

Actel Corporation, Inc. (ACTL) Q3 2008 Earnings Call October 28, 2008 5:00 PM ET


John East - President and Chief Executive Officer

Jon Anderson - Vice President of Finance and Chief Financial Officer


Ryan Bouchard - Piper Jaffray

Richard Shannon - Northland Securities

Neil Gagnon - Gagnon Securities, LLC

Thomas Clogus - Graham Partners


Welcome to the Actel Corporation's conference call regarding its financial results for the third quarter of 2008. A replay of this call will be available for one week at 1-800-642-1687, Conference ID number 31168773. You can also access this call on Thomson CCBN through a link on Actel's website at This call is being recorded.

To ensure that the question-and-answer session proceeds in an orderly manner, participants will be returned to the queue after one question and one follow-up question.

All forward-looking statements during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those projected in the forward-looking statements are contained in Actel's most recent Forms 10-K, and 10-Q, which are available on Actel's website and will be provided to you free of charge upon request. At this time, all parties have been placed on a listen-only mode. The floor will be opened for questions and comments following the presentation.

It is my pleasure to hand the floor over to your host, Mr. John East, President of Actel.

John East - President and Chief Executive Officer

Thank you, Marcelo. Good afternoon. I'm John East, the President and CEO of Actel. With me is Jon Anderson, our Vice President of Finance and CFO. After Jon reviews the results for the quarter, I'll talk briefly about our current business environment, give you an overview of our plans for Pigeon Point Systems and discuss our newest silicon family called Nano.

And now I'd like to turn the call over to Jon. Jon?

Jon Anderson - Vice President of Finance and Chief Financial Officer

Thanks, John. Before I talk about the financial details for the third quarter, let me tell you how we will provide financial information regarding the fourth quarter. We have guidance on the call today. The guidance will be the Company's targets for the fourth quarter on sales, gross margin, operating spending, other income, tax provision, and share count. Next we expect to provide a financial update in early December. In the absence of a material change, this will be the only financial guidance that the Company will give during the quarter. A replay of this call will be made available. Please access the Company website for the replay information.

Now, the financials. Third quarter sales were $53.2 million, a decrease of 8% compared with last quarter and an increase of 11% in comparison with the same quarter one year ago. Revenue from flash technology based products was 29% compared to 24% last quarter. We have broken out our flash technology revenue by quarter from the first quarter of 2006 to date. Please refer to the Company website for this detailed information in the Investor Relation Section under GAAP quarterly analysis.

By market segment, 9% of revenue was in communications, the same percentage as last quarter. Aerospace and military was 36% compared with 41% in the previous quarter. Industrial was 36% compared with 33% last quarter. And consumer was 19% of revenue compared with 17% last quarter.

Market segment numbers are based on our estimate of end uses by our customers. Geographically, 49% of the revenue was in North America compared with 47% last quarter. 28% in Europe compared to 27% in the previous quarter. And 23% in Pan-Asia compared with 26% last quarter.

By channel, 72% of the revenue was through distribution compared with 75% last quarter, and 28% through OEM compared with 25% in the previous quarter.

Overall, ASP decreased 2% compared with last quarter, and unit shipments decreased by 6% sequentially. Net end customer bookings decreased compared with the previous quarter. Overall book-to-bill was well below one. Total backlog is lower entering the fourth quarter than it was entering the third.

Gross margin in the third quarter was 58% compared with 60% in the second quarter.

Now I will talk about operating spending, net income and earnings per share on a non-GAAP basis. Non-GAAP calculations exclude stock based compensation charges, acquisition related charges and other non-recurring items. A reconciliation of non-GAAP to GAAP statement of operations is included in our earnings release which is posted in the press room of the Company website.

Operating spending for the quarter was $29.5 million or 55% of revenue as compared with $30.6 million or 53% of revenue in the second quarter. The spending does not include the stock based compensation charge in the third quarter of $2.2 million.

R&D spending was $15.4 million or 29% of revenue compared with $16.2 million or 28% of revenue in the second quarter. SG&A was $14.1 million or 27% of revenue compared with $14.4 million or 25% of revenue in the second quarter. Other increment expense was $1.3 million, down from $1.7 million last quarter. This does not include a $0.9 million impairment charge on investments that were taken during the quarter.

Net income was $1.9 million compared with $4 million last quarter. Non-GAAP diluted share count was $26 million and $25.7 million for GAAP. This all resulted in earnings per share on a non-GAAP basis of $0.7 compared with $0.15 last quarter. Not included in these numbers was the $0.8 million charge associated with the acquisition of Pigeon Point Systems.

Cash, cash equivalents and investments were $144.7 million at the end of the quarter, a decrease of $11.2 million from the end of the previous quarter. This decrease was driven by the purchase of Pigeon Point Systems which used $8.4 million in cash and the growth of net inventory of $11.2 million.

Accounts receivable decreased sequentially by $7.5 million to $29.6 million. DSO decreased by 8 days to 51 days. Net inventory increased sequentially by $11.2 million. Net days of inventory increased by 51 days to 229 when compared to the second quarter. Capital expenditures were $7.4 million during the quarter and we recorded $3 million of depreciation. Headcount increased sequentially by 13 heads to 614.

In the last two weeks we announced the Company reduction of force of approximately 10%. This reduction along with other cost savings is expected to save the Company over $10 million in 2009. The Company expects to take a one time charge of around $3 million in the fourth quarter for this action.

Now I will give the financial outlook for the fourth quarter. Taking into consideration all the information currently known by us, we are projecting revenue to be flat to down 4% sequentially. Gross margin is expected to be approximately 59% to 60%. Operating spending is anticipated to come in at about $29 million which does not include a non-cash charge for equity compensation of $1.8 million. Other income will be around $1.5 million. The tax revision for the quarter is expected to be a credit of approximately $1 million. Fully diluted share count is expected to be 25.9 million shares.

This guidance for operational expense does not include the ongoing amortization of intangibles and deferred comps for the Pigeon Point Systems acquisition of approximately $700,000 nor the one time charge for the reduction of force for approximately $3 million.

Thanks and now I would like to turn the call back to John.

John East

Thanks Jon. First I would like to talk about Q3. As Jon told you our sales fell by 8% quarter to quarter. That was quite in the middle of our revised range although it is clearly nothing to brag about. Still we are up about 11% from the third quarter of last year which puts us among the best of the FPGA suppliers.

The shape of the quarter started out to be similar to many of the summer quarters that I have experienced in the past. July and August bookings weren’t particularly strong. Net new orders were not bad but that was negated to some extent by cancellations of some of the orders that we saw in the first half.

Our hope was that in September the bookings would come roaring back as often the case in the summer quarter. It did not happen. The net new order rate for September was actually below July and August. As Jon told you our book-to-bill was well below one, per se though that is a little misleading.

A lot of the gross order shortfall was due to the cancellations of orders that we received in Q1 and Q2. In retrospect it is now clear that those orders were way too optimistic. If we ignore those cancellations and look at the net new orders for the quarter the book-to-bill was still below one but not disastrously so.

Essentially none of our net adjusted order bookings came from the large customer that we referred to last quarter. In fact, our two biggest consumer customers were pushing orders out in light of the fact that their business was not that strong as they had expected back in Q1.

The effect of this was to reduce the flash billings number from what we had originally planned to a number that showed growth but not nearly as much growth as we had planned for.

Now let's move on to Q4. We will begin in Q4 with a reasonable backlog. It is a bit lower than we would like but it’s not too bad. The net new order bookings have been reasonable so far. So we are going to call the number at somewhere between flat and down 4%. To make that number, we will need in the neighborhood of 40% turns which is a perfectly reasonable number for us.

Now, let us talk about Pigeon Point Systems. We told you last quarter about the acquisition. Today, let us talk about our next steps. As we told you, Pigeon Point has achieved a surprisingly high level of acceptance in a TCA market. All the customers that I have talked to insist on either using Pigeon Point designs or else seeing concrete evidence that whatever they choose to use is compatible with Pigeon Point.

Today that does not really help our silicon sales because few of the Pigeon Point reference designs use ACTL silicon and those that do are very new. So as we see it, the first couple of steps to be taken seem clear. First, part more of the Pigeon Point offerings over to use our Fusion and IGLOO products. Parenthetically, today, Pigeon Point has reference designs for seven different TCA controller types. Many of these reference designs can be bought with a variety of different microcontrollers. So in all, they are in neighborhood of 15 or 20 different permutations. Today only two of those use ACTL’s Fusion products. I will be happy when all controller types are supported with production solutions based on the ACTL silicon. Second, we need to come out with an improved Fusion product family that is optimized for TCA applications. This is an important step because we have no intention of porting designs to ACTL silicon if the resulting product would not be any better than original product.

Now, let us talk about ACTL’s silicon products. You probably saw yesterday that we announced a new family, the Nano family. So what is that? What is ACTL Nano all about? Basically, we are pressing our best. We have seen a great deal of interest in our IGLOO families, which are all about really low static power. Some of the interest has come from our traditional customer base, industrial, medical, transportation, military, etc and some of the interest is coming from the consumer sector.

Consumer applications generally call for small form factor and really low static power. As I told you many times, we are the kings of those two attributes. No one else even comes close to our combination of low power and small form factor. However, in most consumer cases there is a third leg to the school, low cost.

In many, many cases, the applications can get by with smallest FPGAs with a minimum of features. So once you get by the power and space issues instead of being driven by features and density, the designers are driven by cost. In fact, it is a rule of thumb that I run into quite often and that is that those customers want to spend less than $1 for their PLD.

In review of this sort of customer, our previous IGLOO and IGLOO PLUS families suffered from a drawback. Practically none of the family members could be bought for less than $1. IGLOO Nano addresses that drawback. The IGLOO Nano family contains more than 50 different package combinations that will sell at less than $1 if the volume is big enough.

So the Nano family is largely about cost, but it is not totally about cost. There are several other improvements that we made to the family. I will mention just two of them today. First, we are offering the smallest member in a new package, which is even smaller than the one that is allowed us to lead the league in small form factor. Our new microchip scale, [micro CF 36 package] uses 0.4 millimeters pitch it measures just 3 millimeters by 3 millimeters and we are still able to get a 10,000 data FPGA into us. Second, we are dropping the typical power spec on smallest part from five microwatts for our original IGLOO family to two microwatts for the smallest Nano part. That is a pretty impressive number when you consider that the “zero power” products that our competitors are offering are all in neighborhood of 50 microwatts. So what is the bottom line for the IGLOO Nano family? In a market they want three things, small form factor, low power and low cost. We have just raised the [inaudible] for all three.

That concludes my formal remarks. Marcelo would you please open the lines for questions?

Question-And-Answer Session


(Operator instruction). Your first question comes from Ryan Bouchard – Piper Jaffray. Please go ahead with your question.

Ryan Bouchard – Piper Jaffray

Hi, this is Ryan calling for Gary Mobley. I was wondering; are you guys seeing any gross margin improvements yet in your flash-based product?

John East

You are pretty faint, but I think you asked have we seen gross margin improvements in a flash-based products. The answer is yes. The margins picked up in the past quarter and we expect a more or less gradual increase in those margins over time. Do you have a follow on?

Ryan Bouchard – Piper Jaffray

Yes. What should be the overall impact due to gross margins in the coming quarters?

John East

Well, as I have talked about before, I believe that we will see a steady increase in the margin percentage in flash products. I also believe that we will see a steady increase in the percent of total of Actel that comes from flash products. So if you think about that for a minute, those two can cancel each other out an overall effect on Actel and as a result, I do not really forecast or see changes in either direction for overall Actel margins and timeframe that I can foresee. I think it will be up a point or two down a point or two but mostly stay in the neighborhood that it has been in.

Next question please.


Your next question comes from Richard Shannon – Northland Securities. Please go ahead of your question.

Richard Shannon – Northland Securities

Let us see here. I guess maybe a quick question on inventories. Obviously, it is come up here the last couple of quarters. I am kind of curious where you see this going. You have talked about, I think in your press release about Nano having fairly low lead-time availability for those products. I am kind of wondering how we should view the inventories trending over time, the next couple of quarters.

John East

Yes, that is a great question. Richard, even before I ask that. I think I left one thing out of the last answer. I mentioned that the margins were going up on flash. I mentioned that the percent of flash was going up. I forgot to remind you that typically our margins on flash are less than they are on any of these products. So if you put those three things together, you can arrive at even though the percent margin is going up, the overall stays flat.

Now, let us talk about inventory, which is particularly good question given the big rise that we had in inventory. So let me do a little bit of history to kind of remind you how we got where we were.

In a conference call, just six months ago, then on Q1, we were on cloud nine. We were being inundated by orders, particularly from Asian consumer people. We were delinquent. Our customers were irate that we were delinquent. We were seeing many other opportunities that we thought had the possibility of turning into pretty big orders in relatively short term and we were basically afraid. We were going to end up letting our customers down because they were going to need a lot more product than we could ship.

So, we embarked on a program to crank up our capacity. The first thing we did, of course, was to make starts, or actually to be more precise, to arrange to make starts because classically in most of our fabs is we have to give them a little bit of head start, a little bit of early notice before we can actually get the starts in. So our real cycle time from the time we notify them of how many starts we are going to want in coming months until the time the first wafers come out is typically it depends, but four, four and-a-half maybe sometimes five months, something like that. So we got the ball rolling on starts, and then we also went out and got the ball rolling by placing orders for capital equipment for testing, most of which we have taken delivery on and actually put offshore now.

Now, what has happened since then? The huge customers to whom we were delinquent have backed way off on a rate at which they need product. By and large, they are not at zero but way down from where they were. So a lot of the orders they put in place have been cancelled. And a lot but not all of the new potential business that we saw coming up has been postponed before it slow downed that sort of stuff. So, we want from a place where we had delinquencies and we are really afraid we would not have enough to a place where we are overloaded with the product, as you can see by looking at our balance sheet. So now what we have done and what is the result going to be, which your question basically is.

We have cut the fabs in question back to the point that I think we are at a needed to sustain run rate. You cannot really cut fabs back to zero and then expect to get products a month or two down the road on that process. You need to allow them to keep running a little bit of material.

So, the rate at which we have cut back to, I think, will take inventory down. We will be flat to down, but at a really low rate. It would not come down like a rocket ship. It will come down at really low rate. And even that, probably does not take effect until Q1. So in Q4, I am not sure, it depends on how you do the calculation. We might be up at that. We might be flat. We might be down with that. But it is in Q1 that I think we can start to expect decreases in inventory but at a relatively low rate. So, does that answer your question? If not, you have a follow on, Richard.

Richard Shannon – Northland Securities

Yes, maybe I will follow up on that one directly John. Do you have a goal over you would like to get your inventories maybe in two to four quarters or so? I mean, you have been running at turns in the two and 2.5 range in the third quarter graph like one and half or so? May I presume you would want something closer to two? But, you also mentioned with your Nano product, your press release having unavailability of four weeks of lead time. Is that an opportunistic thing or is that something you are intending to offer going forward such as your inventory turns might a little bit lower?

John East

Great question, so which one should I start? Well, let us start with the goal. Yes, I have a standing goal which is I would like to have four to five months of inventory; that has been a goal of ours for a long, long time. And seems like whenever we reach at them something happens and it jerks back up.

I am not confident that we can get into that range in the next two to four quarters as your question asked. So, let us analyze that a little bit. If you look at our flash shipments, they have two components. One is what I am going to call our traditional or based component and one would be our consumer component. Now, the traditional based component, I have said in many times over the years, typically, peaks about seven years after you introduce the product. Then it was always hard for people to believe, but when I started saying that about 10 years ago and every time we get some more data it proves to same point. So, if you exclude the consumer kind of stuff, the peak is neighborhood of six, seven, eight years after we announced it.

Now, the two product families we have inventory on, are two and three years old respectively. So, I would expect the base business to continue to grow, and I would expect to use the inventory, but I am on time frames now of years, not of quarters.

So, now let us slip out of the discussion of the base to the discussion of the consumer. The consumer, as I have said, probably each quarter for the last six or so, is extremely hard for us to forecast because our customers can not forecast it. So, we went from a low number of consumer orders to almost, hopefully delinquent in the period of 90 and 120 days, and then we went back to where we started. Not, on where we started, we are already ahead of what we started, but we took fairly significant steps back. That could happen again, and put us back in a delinquency position or it might not. It is too hard to forecast.

If that happens, our inventories would go down in quite a hurry. If that does not happen and we have to fall back on the base business and the inventory would go down more slowly. Of course, all of this is conjecture and my legal guy would tell me, be careful of what you promise. I cannot promise any of this things and betting on orders we have not seen yet. But that is my gut feel and it is based on years and years of data. So, I feel really good about it.

Now, your last question, dealt with the fact that we are promising really short lead times on the new products. Yes, given the inventory position we are in today on the older flash products, and by that I do not really mean the really old ones, I mean the two and three year old ones. We do not really need to start more of those, and as I have mentioned already we have a needs to start in a certain number in our fabs to keep our fabs whole. And remember these fab people, they are our partners and this is a long term deal and we were going to treat them like partners. So, to keep them whole and to keep the process running we have to start wafers, we do not need very many if any of the older products. So, all of those starts can go into the newer products, which since new products, never take off in sales right away. That would allow us to build pretty healthy inventories there. And we would do so without incurring further inventory growth, we are going to be burdened by the inventory problems I already mentioned. But, we may as well be burdened by having an inventory in our brand new products as to be burdened by having staggering inventories on all of our products.

So, it just fits pretty well and if you think about it gets around the problem we were having six to nine month ago, which was that the consumer people cannot forecast and then they want zero or they may want a million. And unless you are dealing with pretty substantial inventories, you cannot ship a million in the time frame they want them. They will come on and say I want a million or I want two million and I want them in three weeks or four weeks and even though our fabs cycle time, if measured on the pure basis, is maybe more like two and a half months. The fabs in general still require advance notice of what we are going to need. So, if the advance notice were, let us say, a month, I have to tell them a month in advance the quantity of wafers I would need, and then a month later, I would start to specific mix of wafers. But, when you integrate all that out, it is closer to a four month cycle time. So, if I did not have good inventories and somebody came in and said “Gee, I want two million units of this and I want it right away.” I have to go back to fab, wafers do not come out of fab for may be four months, may be three depending on how I could play games with my wafers start schedule. And I still have to wafers sort sample the final test mark packets. It is five months or so to do that.

So, I think you used the term opportunistic. Yes, it is more or less an opportunistic way to put the heavy inventory position we were into now in to good use in such a way as it pleases our customers.

So, you just asked two wonderful questions. I appreciate that Richard. But I think you are in for your question on your follow up already. So, let us go to the next question please.


(Operator Instruction) Your next question comes from Neil Gagnon – Gagnon Securities LLC.

Neil Gagnon – Gagnon Securities, LLC

The inventory question begets one more question and that is the likelihood of, does this stuff stays fresh?

John East

Yes, that is another good $64 question.

My gut feel is that it does, there are obviously a thousand things that can happen between now the time is it is all used up. And that some of them are bad and they are within the realm of possibility. We could find some technical problem, the more with one of the parts and find out we do not need a spec. I am doubtful that will happen, because these are brand new.

We could find that the orders for flash are coming out for the older parts, but for they are for the newer ones, I think you will see some on some there, but we have got three years of design ones on the older parts. And I do not think those will all flip over the new ones right away.

So, my gut feel is they stay fresh and that we use the part. But it is certainly an appropriate question and we could get on to a debate and you could argue that sometimes it does not stay fresh and you would be right. But, again my gut feel is, yes it does.

You have a follow on?

Neil Gagnon – Gagnon Securities, LLC

Yes, totally different subject. On the Nano, is that the same design requirement as the IGLOO and can customers begin to use it right away?

John East

It is based on the same design that our PA3 and IGLOO was based on. So, we have taken that, actually, I think I would take a step back there because it has a little history as well.

We classically can get a brand new technology into the market every three or four years. But what you find out is that the bloom goes off the rose on a new family, and maybe a couple of years. So, what you do not want to do is announce a new family and have that be the only thing for couple of, for maybe a four year period. So, what we have tried to do very strongly in the case of our 130 Nano meter is to keep figuring out ways to make improvements to it in line with new things that we learn about the market. And that is in fact what we have done for IGLOO Nano. It is by no means the 65 Nano meter product that I have talked about a few times. That I have said, we would expect to tape out at the beginning of 2009 and which we still expect to tape out in that timeframe. So, it uses the same base technology as the IGLOO and in fact the PA3. So what have we done? Well, to go from PA3 to IGLOO, we had to make some process changes to get onto a low power process and then we made a lot of circuit design changes that did not change the overall architecture. It did not change the routing. They did not particularly change the place in route software. But these design changes allowed us to get rid of static current anywhere that we could find something that was not so absolutely necessary. So, when we went to IGLOO Nano, we did a little more of the same, so the static current came down even more. It does use the same process but we made a handful of other changes, for example, well, I mentioned a couple of changes. We made a still smaller part, one that is down to just 10,000 gates and put it in a very, very small package. If you have not seen it in the press releases that had come out yet or the coverage you should look for it because just looking inside the package is very impressive. So, that was one change, another change I mentioned already would be on the static power little bit and got rid of some more of it. And then there were some changes that added and subtracted features. We added the feature of what we called Bus Hold which is arcane . You do not really want to know what that is, we added some snip trigger capability which is again in sort of arcane but these are things that our customers had been asking for. They would say “well I like IGLOO but boy if you really had Bus Hold and Snip Triggers, you would be even better off.” Then on some cases, we took things out that allowed us to get the cost down somewhat. One of the things we took out in some cases was gate, to offer a lower density solution. In some cases, we took out IOs. We have a lot of customers that want every IO we have and then some more but there are pretty good number of customers that do not want nearly as many as we have and in that case, they would say, well why should we pay for those IOs because even if the package does not have the IOs, the dye does. So dye with lots of IOs sits in a package that does not use many of them.

So, the changes that we made from the base technology where not rocket science but they were more along the lines of talking to customers, listening to them, hearing what they want, understanding better what changes we could make to let us know more of what the customer’s wanted. So, Neil that is my best shot at that question and I think you have your follow on in already so can I take the next question please?


Your next question comes from the line of Richard Shannon - Northland Securities.

Richard Shannon - Northland Securities

John, I was wondering if you could talk a little bit about the guidance for the fourth quarter revenues as you think about your end markets and also by technology type and maybe specifically address the fact that it looks like anti-fuse business since it came down fairly well in the third quarter kind of what do you expect in terms of a bounce back if that all in the fourth quarter?

John East

Anti-fuse is on a slow decline but I should emphasize the word slow. We have not introduced new commercial anti fuse products in two to eight years or something like that, so we do not win that many designs on the commercial stuff anymore. Now, I think you are all aware that we still shift the first product we ever announced, the ACTL 1010 and we announced that pretty much 20 years ago today. Well, it is an anniversary if you think about it. So, when I say it is on a slow decline, I do mean slow. These things will trickle down over time and on average, they do not come down very much but it did come a little more steeply than generally last quarter. Biggest single cause of that was the quarter before, we had a nice little pop of satellite business in Japan and that went away. I do not attribute that to any sea change that is just that the satellite business comes in pops and goes in pops.

So, if you looked at any of anti fuse business year to year, you would say yes, it is a little lower each year but not much. So, that was the first part of the question…

Richard Shannon - Northland Securities

And by end market as well.

John East

It is also by end market, right. I have a kind of short term look and longer term look. Well, the toughest to call of all is the consumer and in fact, we just called our sales at flat to down four. Actually the sales in marketing team did not call us. They called us flat and maybe had a little chance for upside but the executive staff sort of overruled that. My theory is larger wins. When bad things happen, they tend to keep coming and clearly overall economy out there is bad and it makes me nervous. So, the forecast that they gave me do not necessarily tie to the guidance that I gave you and that makes it a little harder to add things up but overall I would say I think we are going to have flattish quarters all around. I do not look for any one segment to be particularly good and I do look for any one segment to be particularly bad. If there were going to be segments that would turn out to be bad, it would be the consumer cause that is the one that can go the fastest and the one that has the least ability to forecast well but that is an area where again our sales and marketing people took the field forecast, chopped it down before the yearend demand and I chopped it down some more so I hate to predict that that ends up looking like a really bad number. It is just a hard to forecast number.

If I take a look a little further out, the segments I would be worried a lot about and this is not based on facts that I know of with respect to Actel but rather facts I think I know of with respect to the overall economy but I would be worried in the longer run about maybe communications business and automotive business because a lot of communications deals with infrastructure and well I do know with Actel, when they come and ask for a new router, they are not going to get it, the old one works just keeping using and that would not be just communication infrastructure, it might go on to software infrastructure and a lot of other things like that. It just seems to me like one of the areas that when you are trying to conserve cash can take a back seat and automotive I think is in that area as well. People liking cars, hey, I like new cars, everybody likes new cars but I personally intend to drive mine right now until the wheels fall down of it and I suspect there are a lot of people in that camp. A new car is something you can get along without, and I expect people will be getting along without new cars. In fact I think I read that, US auto business anyway is down by 30% already.

So, if I look I little further out, those would be areas that I would be keeping my eye on. Fortunately, neither is really big to Actel today although I spend a lot of time over the last few years wishing they were big and particularly on the automotive. We have put a lot of effort trying to get into that but today, it is not huge for us, so we could withstand drop offs in those areas without really feeling it that much. Now, June this has been, I do not want to say idle speculation on my part, it is not idle at all, but it is speculation. I could not at all tell you that our backlogs or our customers have expressed my sentiments.

Richard Shannon - Northland Securities

Fair enough. Maybe a follow up question, John, I was wondering if you could give us a sense in terms of the opportunities on what you are seeing so far, what you see potentially in the future from this really large orders you talked about like with the Nano in either 100,000 units kind of block through even million unit, kind of blocks? How many customers or orders have you seen in next year so far and what do you see as the potential for like the number of orders to that size going forward in '09?

John East

Well, for starters, thank you for wording that question that way. So nine people out of ten will say, "So, that means you are after the cell phone market?" So, let me start there and kind of work my way down. There is not much in life I would like better than few orders and few of the really big buying cell phones. So from market today, I think it is a neighborhood of a billion units a year and so nice piece of that would not bother me then in fact we are working hard on in it and then we have today and have had in the recent future a fair number of opportunities that I would say were more long shot and sure bets but we are working all of them and I suspect sooner or later we will get into some of the cell phones and I will be really happy when we do but the customers that came and went were not cell phone people, I have only told you they were Asian consumer and that is all I am going to tell you today but they were not cell phone people.

I spend a lot of time in Asia these days because I just think, boy to me, the center of gravity of the world economy is moving towards Asia and I want to be there when it gets there. I do not want to be looking and asking people, "Hey, what just happened?" So, I have been spending more time with Asian customers and perspective customers than I have with Europeans and even United States. When you go to China or Taiwan or Korea or other places there, you find the smallest companies and in some cases, the bigger ones but in most cases, smallest companies that have a platter of different applications. You get the portable media player guys, you get the portable GPS people, you get a world of different add-ons for cell phones, something that they will plug in to a USB kind of a card or SD interphase kind of a card that makes the cell phone into a television or an MP3 or a GPS or a game or I do not know what all they have, all the things that I have mentioned I have seen over there and they are working on ones that I have not mentioned. You have the handheld portable games, you have [modes] for console games, you have MP3 players. It is just a bunch of different applications if you think about it for handheld battery powered, inexpensive consumer kinds of things not to mention the fact that as I have mentioned in the past, a lot of industrial and medical equipment is moving into the area of being handheld and battery powered.

So, I think we could do quite well without ever being in a cell phone although I hasten to say I want to be in a cell phone, I plan to be in a cell phone but that is not a necessary condition. So, now you asked how many 100,000 and 500,000 and million unit kinds of customers have we seen in the last year, I think that was your question anyway, probably 10 some have come and stayed, some have come and gone, some are just in the middle of negotiating with us now but 10 that we have either done deals with or I think are really close to doing deals with and that number is what I am going to call an engineering rectal extraction. I do not have the list in front of me. I maybe wrong but my sense is that that number goes up, not down because I see more and more of that kind of business and then the ones fly in the, ointment is as everybody knows Asia consumer took a skydive starting about six months ago and not just for Actel but for the world and that could in fact it seems like it has slowed down our closure rate on it., It has not slowdown the rate which I find customers that are really interested in this but it seems to have slowed down the rate in which they say,” Okay I am in to some of your bunch of units.” They are trying to preserve capital and be surer as well.

But I just cannot believe that that is a permanent condition. I think this handheld battery powered consumer plus industrial plus medical is just a better way to do things and to me that is going to gradually take the world over. What the economy has to say about is one thing and that can clearly affect the rate at which it happens, the speed at which it happens. But it does not seem to me like it should affect the inevitability of it. Again my lawyer with warn me to not use the word like inevitable so I hereby retract that word but that was my gut feeling anyway.

So, again good question. I think you have had your follow on already, Richard so Marcello, can you give me the next question please?


Your next question comes from the line of Ryan Bouchard - Piper Jaffray.

Ryan Bouchard - Piper Jaffray

I was wondering if you could give an idea of where the headcount reduction was and was that reflective of any difficulty to grow over that being proactive and driving the operating margin.

John East

Those are kind of the same thing to me. First of all, where was it? It was across the board. We did not take a huge whack out of R&D. We are not going to push in the R&D projects out. Generally, I think for reduction of that size, you can figure out a way to get things done still it is not quite as much fun and people that are left get more off. They are trying to get it done but generally they figure out a way to step up the plate and hit the base well and they get it gone. So, when you see P&L for the coming quarters that Jon presents them, I do not think you will see in one area. In fact, I know you will not see in the one area. They got a disproportion amount of the hit. So, now was that I think you gave me choices was it just proactive management or was it a result of difficulty to grow and I would say, hey it was both. The same vectors that you guys just saw, I got to see or at least see being forecast are a while back fundamentally are the vectors where our sales were going down. Total margin was going down. Our overall spending has been creeping up. Our inventory was growing and a lot of that was based on the fact that we thought we were going to see some good growth and we were going to grow in all of that.

So, we were putting capability in place be it inventory or capacity or test equipment or people and anticipation of growth and that is what we told you guys. So, when the growth did not materialize, it felt like the appropriate thing to do was take it back to where we probably would have been and we not anticipated to grow or that probably is for where and I probably should use your wording. It was just proactive management to try to get us a place I think we could all at least agree is a good place to be. I know some of you guys could argue we should spend a lot less and I have heard those arguments I do not necessarily fought them but I have not necessarily believed it but there are many I think that will find where we are today as the reasonable place to be. I think where we have been, most of you would have judged it was not a reasonable place. So, follow on?

Ryan Bouchard - Piper Jaffray

Yes, where do you see maybe the operating margin goal at now?

John East

Long term or short term and I will let Jon get into that.

Jon Anderson

Yes, long term, Ryan we want to be able in that 20% range. Currently that is just about 3% last quarter that figure on a non GAAP basis. So, yes I agree what John said, we are trying to be proactive to matching the top line with the expense line and but 20% for Company goal is where we want to see going out for future longer term.


(Operator's instruction) Your next question comes from the line of Thomas Clogus - Graham Partners.

Thomas Clogus - Graham Partners

I do not believe it is but I just want to ask you a quick, Boeing is not a big enough customer to affect the business, right?

John East

No, we do not ever mention customers unless we have expressed written permission to do so and Boeing’s case, we do not have or else if they are over 10% customer and they are not. So, I will just generalize with you. About a third of our business is material and in that business, it is pretty much every big aero guy that you can think of. So, in one way, you would say, "My God, John just said Boeing must be in there," although I did not. I just said most of the big guys are but in another way you would say, "Well if it is a third of Actel business in total and there are a huge number of those guys," which there are a huge number then no one can possibly be dominant and that is probably true as well but I have to leave it with that generalization. I am not going to give you the amount of our shipments that go to Bowing and by the way if I were to give you the shipments that go to any one of those major space guys, they would be up and down like yoyos because particular I think it deals with space. It tends to be lumpy and the big lumps from anyone particular guy may come once a year or so, so you would see one really nice quarter and then three bad quarters and you probably conclude something based on it.

I guess I can have one other little add-on there and that is that whereas I do not want to answer a Boeing question but I can answer a more general question on how do I feel about our space business going forward and the answer is I feel fine about it. I have been talking about that business for a long time and we have seen gradual growth and I do not see the reason why we should not continue to achieve gradual growth as long as you guys are willing to average out the perturbations that come with lumpy business like this. So, you have a follow on?

Thomas Clogus - Graham Partners

Yes, the follow on is I had never heard you expressed exactly when you guys are going to go to 65 nanometer. Now, if that occurs, what ends to the value of the inventory in the die bank?

John East

Well, not much. Some but I will tell you what, positive and I mean a really down economy is that the questions that I am getting are really to the point. That is a great question so let us talk about it. If you notice our competitors, now it runs to one to two generations ahead of us in process technology because the user is staying to the process. So, they always get the next generation before we do and if you go back in the history a bit, maybe 10 years ago when they announced their smallest SPGAs they run the order of 50,000 gates. I do not know when they run the order but that is where they were, 50,000 gates.

Nowadays when you see them announced their smallest products, they tend to be $0.5 million gates, about 10x bigger and it is my projection that when you see the 40 nanometer and the 32 nanometer stuff that comes out, the smallest products are going to be a million gates or maybe 2 million gates by then. So, first of all why does that happen and then second of all, what does that have to do with your question? Well, the reason it is happening is that when you do a shrink, what we call the fabric, the actual program will beat some sales, get smaller and smaller and smaller and it get cheaper and cheaper and cheaper but the periphery generally does not shrink at all. What is the periphery? It is the scribe line. It is the bonding pads. It is the buffers that drive the IO for the bonding pads which have to have a certain amount of current capability no matter what technology you are on. It is the ESD circuits which have to be big enough and strong enough to hold back 2000 volts no matter what technology you are on, well the periphery tends to not shrink or at least not shrink very much. So the size of the periphery is the same when you do a shrink but the cost of the wafer is more when you do a shrink so if you were making a product that was only periphery then when you do a shrink, it would cost more because the die would be the same size but the wafer would cost more so the sort of that is actually cost more and you would say well why would ever shrink something like that and the answer is you would not.

On the other hand, if your dye comprises almost totally fabric, it is all full of program with gates and they swamp up the periphery, then you get a nice shrink in the cost coming down. Well, at what gate count does that happen? Well, you can pretty much spot that gate count by looking to what our competitors are coming out with now. If they are coming out with a half million or million gates in density, that is a pretty much a tip off than when you get below that that the periphery eats up so much of the total area that you are not really saving any money. So, what they tend to do is put out bigger products that sell for in the neighborhood of the same price as what the smaller product did in the early generation. But what IGLOO is largely about and where most of our inventory resides is in the smaller products. So, the setting is going to be true when we announce our 65. Our 65 will probably well, certainly over to that sum with our IGLOO and our IGLOO Nano but there will be a pretty good area where we will not overlap. I have been talking about our 10,000 gate products. Well, there will not be any 10,000 gate 65 nanometer products, I will guarantee you that, not from us and I am pretty sure there will not be from anybody. I cannot guarantee you because I have not seen the other people's product lines but that would shock me to death.

So, at the really low gate count and there has that over left. Now, the other reason that that would not have the much effect is that as I point it out in a number of times including once a day, the peak of the family typically happens maybe seven years after you put it out and that it is not some phenomena. They only happen if you do not put out a new family right away. You always put out a new family right later but that peak happens and apparently in the new family and the reason is that again particularly our all time customer base, the military and the satellite and the industrial and the medical, a lot of these designs get done way, way, way before they take the products and once they start taking the products, they kind of take it forever. So if they better design a year ago and now they are going to a 2-year approval cycle for their medical equipment and then they put a product on the market, and then a year after that, a new Actel product comes out, it is not going to have any effect at all on the run rate of our old products or the usage of our old inventory. They are not going to redesign their system which had took them forever to get out just because there is some new parts is better on some regard even if one of the regard is cost.

So, that is a good question and again I would put it a camp of a pretty high number of good questions that you always have to ask when inventory goes high and you have the small stop in the day and again I am not going to say none of these things could happen but what I will say is the thought all of this over to some link and the way I see it today, we end up using up that inventory. The problem maybe that it takes us a lot longer to use up then I would like to have a take.

So, I think you guys are following already? I think so, so Marcello, do you have other questions, please?


And there are no further questions at this time. Sir, do you have any closing remarks?

John East

I do not expect I look forward to seeing you at the same time, same place next quarter. Good set of questions, see you later.


This does conclude today's conference call. We would like to thank you for your participation and I ask that you now disconnect.

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