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Altera Corporation (NASDAQ:ALTR)

February 13, 2013 7:00 pm ET

Executives

Scott Wylie - Former Vice President of Investor Relations

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

Analysts

James Schneider - Goldman Sachs Group Inc., Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Good afternoon, everybody. Welcome to the Altera Corporation Presentation at the Goldman Sach's Technology and Internet Conference. My name is Jim Schneider from the semiconductor team here at Goldman. And it's my pleasure to introduce Altera Corporation this afternoon. With us from the company, we're very pleased to have CEO John Daane; VP and General Manager of the Communications Division, Scott Bibaud; and VP of Investor Relations, Scott Wylie. I think before we start, Scott, you'd like to read a disclosure?

Scott Wylie

Absolutely, Jim. This discussion this afternoon will likely contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of Private Securities Litigation Reform Act of 1995. Forward-looking information generally refers to any information relevant to a future time period. Investors are cautioned that actual results may differ materially from these forward-looking statements, and that these statements must be considered in conjunction with the cautionary warnings that appear on our SEC filings available from the company without charge. Further, this discussion may repeat elements of prior guidance, and in so doing, the company is neither reaffirming nor modifying that prior guidance. Thank you.

James Schneider - Goldman Sachs Group Inc., Research Division

Thanks, Scott. So, John, as we get started, I think the backdrop that we've all been living through in your part of the industry -- you've got half of your sales roughly exposed to the communications infrastructure space. And the backdrop I think has been pretty challenging over the past year or a little more than a year in terms of carrier spending. I think at the very, very broadest level, it makes sense that given where bandwidth is going, the carriers will eventually have to spend more. And then we've even seen more recently a lot of rhetoric from AT&T, China Mobile, all talking about intention to increase spending. But that really hasn't shown up on the order books for maybe your customers or you so much. So maybe you can give us a sense of do you think carriers will, in general, start to increase spending this year? And what do you think has kind of held them back over the past several quarters?

John P. Daane

So at a high-level -- I think if you kind of take a step back to 2011, you saw in the second half of 2011 a slowdown from North America. It was -- AT&T and Verizon were slowing down some of the LTE spending. Then you get into 2012. And in the back half of the year, you had some slowdowns in GSM deployments in China. And if you really think about the world really spending for wireless and, to some extent, telecom equipment, it's really been, in the last couple of years, a North America and China phenomena. So obviously having those 2 geographies slow down while nothing else is going on anywhere else has had an impact. What we see is it's really inevitable that we will see an increase in spending, obviously with deployment of 4G handsets, the uptick of tablets. There is going to be a demand for more data bandwidth, which requires us to spend not only in wireless infrastructure, but radios and the base stations, but also in the backhaul network, which gets into telecom, as well as microwave.

We've heard some of the carriers start to talk about an increase in spending this year, predominantly in wireless, some as well in the telecom space. So we think that things will get better. As we look at it, we believe Q1 is a low point for us, for instance, in wireless. We do expect at this point, wireless will actually grow for us in the second calendar quarter. And from there, we'll just have to take it a step at a time and see what actually transpires. But we're very happy that the carriers themselves are talking about increases and spendings going forward, both in China for LTE deployment out of China mobile, as well as North America for a combination of telecom and LTE spending.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. And then can you maybe just kind of walk us through the very short term of the business? You guided Q1 to decline, as you just mentioned. Can you maybe talk about -- and I think relative to some of your peer commentary or some of your other unrelated peers in the analog semi space as it's maybe a little bit weaker than what some others had reported. So can you maybe just kind of, first of all, walk us through the anatomy of your Q1 guidance? I think a piece of that was driven by a change in one of your customer supply chain arrangements?

John P. Daane

Yes, we've had -- traditionally, I think everybody had known that we've had one large customer in China that spent a 10% plus customer of ours, which is why we're benefiting -- continue to benefit from China deployments. We've also talked about the fact that we've been increasing our market share at the other large communications vendors, as well as many of the others. And then we expected -- well, we said this in Q3, we expected in either Q4 or Q1 that we would have a large European communications company as a 10% plus customer. And that actually came to fruition in the first calendar quarter. So we go into this quarter and we -- with that European company are transitioning them to VMI. And so essentially, what happens is they've been holding 1 month supply on hand of our product as you transition them to a vendor-managed inventory model. We're really carrying the inventory rather than them. So you're taking a 10% plus customer of ours, and you're shipping 2 months this quarter instead of 3 months, and that causes a short-term debt.

In addition, we really think this is a low point in China spending because you're in between, for China Mobile, phases. So they've been deploying TD-SCDMA, which is their version of the 3G standard. And there was a 6.1 round, where there were some good spending for us in the fourth calendar quarter, third calendar quarter. There's a lull this quarter, and then you're seeing 6.2 expected to pick up in the second calendar quarter. Add to that, that China Mobile is planning an LTE trial, so they're planning to build out LTE equipment that's also expected to ramp in the second calendar quarter. We really see this as a low point in the first calendar quarter in terms of China deployment. So overall, we think it's fairly considerable with what we're seeing in the marketplace. Some of it, short-term impact just because of a transitioning a customer to VMI. Some of it are short-term impact because of the slowdown, or really between phases of deployments in China. But we would expect wireless to pick up in the second calendar quarter.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. And then coming off with that second calendar quarter expectation for an increase, can you maybe just give us a little bit more color around what you have to substantiate that? Is it customer orders? Is it building into the programs or is it forecast? Maybe kind of -- or all of the above?

John P. Daane

It's a combination of talking to the end carriers to understand what their plans are and the customer's forecast themselves. And the carriers have shown a tendency at times to change decisions and push things out or pull them in at any given period of time. But it's really a combination of those things that's leading us to expect growth. And just the VMI program alone, right, as you return to normalcy, even if you saw no growth, you would expect an uptick in wireless in the second calendar quarter.

Combined with that, we've been doing extremely well for a series of years in 40-nanometer and 28-nanometer. We really have had over 60% plus of the market share in those sockets that are in the generations of equipment that are now being deployed. We should continue to benefit more than our direct competitors from the newer equipment deployments. And in addition, one thing that we've explained over time is due to the increasing complexity of the equipment combined with the fact that we have become more cost-effective generation and generation. Our dollar content goes up in the newer generation systems. So going from GSM, as an example, as a 2G deployment system for wireless to 3G, our dollar content doubles. You go to 3G LTE, our dollar content triples. So what you're seeing now, going forward, is more deployments planned around the third and what is fourth LTE generation equipment, which has much higher dollar content than GSM, as an example, right, and where I mentioned that, that declined late last year. So we would expect this as the newer deployments happen. And it's really inevitable that they do. But because we have a higher dollar content per box, because we have higher market share as a company, we expect it to obviously grow at a multiple of the CapEx deployment, as you've seen our ability to do in the past.

James Schneider - Goldman Sachs Group Inc., Research Division

Can you maybe just give us a -- last short-term question, I promise. Maybe just give us a sense about where customer inventory levels are right now? Are they pretty low? Are there still a little bit to be worked down in some areas? And then as you head through the quarter, what are the signs you're looking for to kind of confirm your outlook for Q2? Those are just orders or is it something else we should be looking for, for the investors?

John P. Daane

Yes. I guess if I look at 2012, first of all, over 2011, I think there are really 2 factors that happened in 2012. First factor is there was some onetime businesses in -- onetime business that we enjoyed in 2011, which didn't repeat in 2012. The reason I point that out is that I create sort of a trough, and you would expect growth this year. So first of all, remember in 2011, we talked about the fact that there was a networking customer procuring an ASIC in Japan due to the tsunami that hit Japan and closed a series of fabs. They were affected. They temporary moved the ASIC design over to an FPGA. For about 5 months, we shipped product. We disclosed all this at the time. So you get a bluebird in 2011, which obviously doesn't then repeat in 2012. The reason it went back to an ASIC, very high-volume part, and the ASIC was more cost effective than we could ever be with an FPGA. And so that created some headwind for your networking business. If you'd taken that out, actually, our networking business grew last year. And so therefore, we feel we're not as affected going forward as we get into 2013. Military was down. We had some programs I bought in 2011 that didn't necessarily repeat or repeated at lower levels in 2012. And part of the reason behind that is as we've drawn down some of the troops from deployments overseas, some of the spending for tactical elements such as countermeasures for IEDs or for radios were no longer required. And we saw sort of a drawdown in some of the spending in the programs that we were in. And we think military, really, is at a low point naturally should grow this year. Even with sequester going through, we're not really in the programs that we think would be affected. Then if you look at the other element that drove the decrease last year, it was really because of spending in infrastructure was weaker overall. We talked about communications, some of the carriers not spending as much in 2012 as they did in 2011. Looking forward, they're talking about spending more, which would be a positive. We also had industrial, which was down very strongly. And industrial was actually our poorest performing vertical market. That correlates with the analog companies. So when we go in, we talk about our industrial business with them. And remember, when we say industrial system, industrial, we take military out, we take [ph] measurement out. We're down about the same percentage that they are year-on-year, which is a good factor because we correlate very well. We ship into a broad customer base a lot of different equipment. But our numbers and their numbers are down more than the -- in industrial segment itself, which says in effect that what's happened is many of the industrial companies have been working down inventories as quickly as possible. And they've actually been shipping at a lower rate than their actual shipment rates themselves.

So overall, if you look at it, I mean, we've had a series of slowdowns, some onetime events. But in aggregate, the inventory is very low. People are living hand-to-mouth. They know that there is capacity available in the industry. They're waiting until they get an orders themselves, to order it on us, and then they expedite us. And that's very typical in this sort of the trough side of the semi conductor cycles of what you typically see.

And so until there is a shortage in the supply chain, I think this is just going to be the new norm as we've seen in the past, which is you're going to get a lot of turns. You're going to get a lot of expedites. And fortunately, we have a fairly solid inventory position to be able to service that as it comes in. But that's, I think, the environment that we're in. Inventory is going to be extremely low for -- it is now, and we'll probably continue to see 6 months being low.

James Schneider - Goldman Sachs Group Inc., Research Division

And then maybe I just want to kind of dive into the carrier and the infrastructure market for a second. I think we've seen a continued trend over the past several years where the carriers have essentially robbed from the wireline buckets to spend more on wireless, while keeping overall CapEx relatively flat. How much longer can that continue? Do you think we're likely to see that for again this year and the following year? Or do you think at some point, that starts to reverse itself?

John P. Daane

So effectively, last year, because you saw a slow down in wireless in China, there was more spend on the telecom side. And what you've seen in North America is sort of the opposite, where more money has been steered from wireline for a couple of years into wireless. AT&T was one company that, for instance, talked about the fact that they were going to substantially increase their spend on the wireline side. Both because video, as an example, is starting to saturate the metro. And so they need to upgrade the metro. They need to upgrade long-haul in some of the access points. As they deploy that out, they need more bandwidth and more equipment.

So I think what you're going to see is probably China slow down some of the telecom spend, go back more to wireless. And you're going to see North America continue heavy spend on wireless, but also add a layer of telecom spending.

The reason I point out those 2 geographies is we've seen an uptake in Japan for wireless spending for LTE. We've seen that in South Korea. But most of the other geographies are really quiet right now. Long term, I take that as a good trend because, ultimately, that means Europe, India, maybe other countries around the world are eventually going to have to start spending again. And having carriers at different points in terms of the cycle means you're going to get a good long-term growth spend out of the industry rather than a bubble, which lasts for 2 years and then spending goes away for 5, to some extent, as we saw with some of the W-CDMA spending, which happened very early in Europe. So overall, I think it's probably a balance, more telecom here, less telecom in China, more wireless probably in both.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. And then if we look at our own internal CapEx forecast, that shows we're expecting about a 3% dollar increase in the top 50 carriers worldwide according to our global forecast. That doesn't sound like a lot. So I want to get to the content issue that you touched on a second ago, John. But maybe I just kind of want to understand, first of all, geographically, where do you think the biggest increases or step-ups in carrier spending are going to be? Is it U.S.? Is it China? Is it Europe? Is India ever going to happen, et cetera?

John P. Daane

Well, so if you look at the last several years, CapEx generally has been fairly flat. It goes up a couple percent. It goes down a couple percent. But you look at our communications business, just telecom and wireless, you take out networking as an example, just look at telecom and wireless, it tracks exactly what the carriers are doing. And we've been growing at about 4x to 5x rate of the CapEx spend. And that's because our dollar content per generation has increased. It's because ASICs are becoming too expensive for people to use. I mean the rising cost of design, the rising cost per transistor is really making it so the people can't afford to implement ASICs anymore. So we grabbed that content.

And now what we're seeing in telecom is a lot of the ASSP vendors are exiting. And there's ability to take our FPGAs in combination with IP and start to replace a lot of ASSP content. And that allows us to significantly grow the dollars per box that we have, and therefore grow it at a multiple, as we have over the last 5 years. And we expect that trend to continue. I think right now, you're seeing more of the spend in North America and China. And I think that will continue. China Mobile as an example, was as a company, somewhat hamstrung in that each of the carriers, the 3 carriers in China, got a different 3G standard to deploy. They got the homegrown CDMA standard, which has not worked as well. The handsets are expensive. China Mobile really wants to get to LTE as quickly as possible and then go replace all the equipment that they purchased over the last 4 or 5 years. And that's great because that means it's a throwaway, right? And it's a forklift upgrade. And they get rid of all the equipment, and it's all a new buy. And so that means China will continue to spend, I think, very heavily for several years to come on communications infrastructure. I think North America's early in what will be a several-year cycle.

India has to happen. It's just that the government has to get out of the way of the carriers to allow deployment to happen, but that's in our near future. And I think you'll see eventually Europe start to turn on as the -- many of the carriers in Europe continue to improve their balance sheets. I think they'll be in a position to do the upgrades going forward. So again, right now, I think it's going to be driven more in the short term by North America and by China, and then will layer on the other geographies over time.

James Schneider - Goldman Sachs Group Inc., Research Division

And then you just alluded to the last question about your content gains in each new successive generation of technology. In the investment community, I think there's been a pretty healthy debate, shall we say, over the past year about some of your competitors in the process of, we'll say -- actually, we're taking share from PLDs. Other people have said ASICs are going to displace PLDs. Can you maybe just give us a little more color about -- traditionally you've had a big presence in the radio head part of the market. Where are you picking up the share exactly? And what kind of components are exactly getting displaced?

John P. Daane

Well, it depends on the type of equipment, and there are lots of different pieces of equipment out there. I think the one place that we've seen some competition that we talked about -- generally if you look at -- for all the comments people have made about taking market share from our FPGAs, either from other FPGA companies or from the multicore processor companies, it just doesn't make sense. Because when you boil it down and look at the applications we're doing, many of these companies can't do the same functions. They just are orthogonal. They fit other sockets within those systems. We've never competed with them. We're never going to compete with them going forward. I think it became one of those statements that was easy to make because everybody knew that FPGAs were very successful in communications, and particularly Altera. So it was easy for somebody you to say, "Oh, I'm taking an FPGA socket." But when you really look at the architectures, and we can show you locked diagrams in these systems, you can see that they can't fulfill the functionality that we're doing. We really do quite different things.

Overall, the one area that we've had some transition has been in radios. And if you've ever driven around and you look in your neighborhood and you see radio towers, basically a pole is going to have an oblong box about this big. There are going to be many around the pole. You want to think of each of those as having several FPGAs in them. And literally, if you think around the world, you're seeing millions of radios now deployed. And so you're getting to the volume where it makes sense to cross over from an FPGA to an ASIC.

There's always been a volume crossover point, where it may make sense to implement that ASIC. But that crossover has changed. 10 years ago, that crossover for us was about 10,000 units. So if you're in an application that got up to about 10,000 units a year, we would see customers migrate to an ASIC. The reason they wouldn't migrate earlier is in order to implement the ASIC, you have to pay what's a non-recurring engineering charge, which is an upfront fee, which for every generation of process technology continues to rise. And so because that continues to rise and because we very aggressively as a company move forward to a new process technology to make our components lower cost, that volume crossover has moved out. So that volume crossover now is at about 1 million to 2 million units a year, where it make sense. We had 1 customer and 1 customer only that got to the point where with wireless base stations, they had a lot of fixed functionality in that radio that was not changing, and they were in the several million units a year. It made economic sense for them to move to an ASIC, and that happened. We don't see any other customers doing that. We don't see any other volume applications doing that. We've said 10 years ago, we used to see a couple hundred designs convert a year. Now we see anywhere between 0 to maybe 2. This year, we don't expect any designs to convert.

And I would expect because the cost per implementation of designs is rising. And also wafer costs are rising, which impact a lot of the ASIC and ASSP companies as well. Not us, though.

That volume point in the next couple of years is going to go from 1 million units to 5 million units. And so a lot of those applications, the few that have been left like this radio one that converted, will come back to us. Now ultimately, if you look at the radio today implemented for that large China customer, there is still FPGA content in it. One of the sockets moved to an ASIC. One's still an FPGA because they need the flexibility. And again everybody else's architecture generally looks like that, so we don't see any other conversions happening.

Other than that, we really are in a position where we're continuing to sweep other functionality into our devices. We really don't see ourselves under threat from an ASIC, from an ASSP, from a multicore processor. There's nothing really that we see as a fundamental threat as much as it is more as well benefits us. And as long as we can continue to execute as a company, we're going to continue to take more market share.

James Schneider - Goldman Sachs Group Inc., Research Division

And then I wanted to move to the competitive situation a little bit, which is kind of a question a lot of investors have had as well. If I look at the situation between yourselves and Xilinx, which is your large competitor, and strictly look at the headline numbers, on my calculation last year, it looks like you lost about -- between 2.5 and 3 points of market share. Just from headline numbers, that despite you having gained substantial share in several years prior to that and also despite the fact that you've got what booked [ph]company technologies leadership position on 40-nanometer, which is a big piece of industry revenue right now. So how could we explain that? What's really gone on over the past year that would explain that delta?

John P. Daane

So coming out of the year, if you look at -- for the full year 2012, 40 and 28-nanometer, which both companies list as new products in their press release, it was about 32% of our revenues. It was 19% of Xilinx'. We had over $150 million more of the new product business than they had for the year. So clearly, from a revenue run rate perspective, we're doing much better and have roughly 2/3 market share in 40 and 28. The older nodes, where our competition has more of a dominant market share, obviously come into play here, and we'll talk about that in just a second.

But fundamentally, as the new nodes grow, where we have very high market share, and the old nodes decrease, where they have very high market share, we should just gain market share. Our overall market share as a company is only 42% in FPGA, so the math just simply says, as 40 increases, as 28 increases, we will continue to take market share. There's nothing that can be done to stop that.

Now we did not take market share last year, and so what happened? And there are really 2 components to that. Remember, I mentioned earlier that in 2011, we had some onetime ASIC business that converted from a networking account converted into 40-nanometer. So it artificially made our 40-nanometer business larger in 2011. And really the delta where Xilinx claim that they did gain market share really is attributable to that, plus a little bit of military business. Overall, though, if you look at it over the last several quarters, the 40-nanometer market share delta between the 2 companies is very stable. It's not changing. So that was the onetime change because of the ramp down of the ASIC conversion, which was temporary in 2011. Overall, it's stable. Overall, we have again $150-more million of business last year than them. And so we expect that nothing is going to really drive a big change in 40-nanometer. In 28, as we can talk about, we really believe and we believe, the statistics show, we have 2/3 of the business as we did within 40. Nothing has changed there.

Overall, of the 2.4% market share gain or 2.6%, that accounts for 0.8%. So what's the other? The other is really a gain that our competitors saw in the mainstream and mature businesses. To some extent, the only reason you're going to see a gain in your mainstream and mature businesses is if you're increasing prices or if you're doing obsolescence. Because in effect, that's the only way that you can prop those businesses up in the short run. And our competition has talked about the fact that they're doing that. We think it's transitory. And obsolescence is where you say, that old product, I'm just not going to make anymore. And you have to buy a lifetime supply now. And so it accelerates your lifetime business into a short period of time, which then temporarily props up your revenue and, obviously, your gross margins as well, because it tends to be very profitable business.

Then on the other side of it, when it's gone, we'll still be shipping that product our competition won't. And so it will cause a very significant market share shift back to us. So overall, the trend, I think, on the long-term trendline is still there because we have such a strong position in 40 and 28, which really isn't changing and won't change. And then I think that the old business, which is driving a majority of that, is just a transitory reaction because of obsolescence of price increases.

James Schneider - Goldman Sachs Group Inc., Research Division

And you've touched on 28 very briefly, but I kind of want to dig into that a little bit, because both you and Xilinx have claimed roughly 2/3 market share on design wins that you see in your book. So obviously they both can't be right. Now granted this is a tiny, tiny piece of the industry right now, so we're talking about the law of small numbers. So can you help contextualize for us what it is exactly that gives you confidence that you have a majority, at least, market share on 28? And then maybe summarize some of the data points over the past few quarters in terms of very early tally from that?

John P. Daane

So in FPGAs, a lot of people think that prototyping drives our revenue. And it really hasn't for a long period of time. Prototyping is a very small portion of it. Really it's getting customers into volume production, as 90% plus of the revenue that you see from the company is on a year-to-year basis. There are really 4 slices of FPGA business right now. And there is what we all call the low-cost family, the midrange family, the high-end family. And then there's the true prototyping business that you have. Of the first 3, which are your production-oriented products, both us and the competition agree that the high-end family is still 50% of the revenue. The midrange and the low-cost family are going to split the other half. If you look at our competitor, they've talked about the fact that they really introduced what is a midrange family as they're really one architecture, but they're, call it, 3 different things, but it's a midrange family. And we're very competitive with them there, but that's where we see them. The high-end family, where we introduced Stratix a year before, they talked about a Virtex product. We really had a dominant position there. Not only because of having a better product, lower power, higher performance, significantly higher performance, better transceivers over our history, better software, but also because we have incumbency. And this was actually a term that's Xilinx coined about a decade ago. And it's very true because I came from the ASIC industry. In the ASIC industry, if you had a better value proposition, you could get somebody to switch vendors. And when I walked into this, they were talking about incumbency. And when I would go to accounts, I realized it's very hard to get somebody to switch. The reason is the engineer works with that one company's design tools. And as long as they're comfortable that you have the right product, the right service, and they like your tools, they will not switch. It's really hard to get them to switch. You have to have a better product.

And so 10 years ago, Xilinx had incumbency. And for us to gain market share meant we had to have a better product to get the guy to switch. Today, if you look at our position of 40-nanometer, which really grew up over a series of generations, we have incumbency. So Xilinx has to have a better product. And not having anything that competes with us at the high end means that they can't compete in 50% of the business. And that will show now and 2 quarters ago they talked about the fact that really all of the revenue was driven by the prototyping business that they have with SSIT or Kintex, which is a midrange product. They just haven't been successful at the high end. So just because the high end is 50% of the business, and because we really are the player there, it's very easy for us to say we've got that. We really are the ones that are wrapping up all the low-end business right now only because we've been out earlier than them with the product. So it's hard to see based on whether it's account feedback or based on the products and where the products are positioned that our competition could get to 2/3.

What they do have revenue is on the prototyping business. And the prototyping business is interesting because you do have a series of accounts that will buy your largest high-end device, and they'll pay anything for it. So this is in effect a Qualcomm or an Intel or a Broadcom. Any company that's doing a complex chip wants to prove out the chip works first before they go prototype it. So what they'll do is buy several FPGAs from you and put them on a board and then partition the chip into that, prove out the design before they tape out. And so they'll pay whatever for your biggest chip. So we'll charge between $15,000 to $35,000 a unit for those high-end devices. At $15,000 a unit, nobody's going to take those into production, right? So it's just prototyping only. And it lasts for about 2 years before it goes to the next node. Because as soon as your next node's available that has a higher density part, they'll jump to that, and then that business goes way. And right now in this generation, we had 100% of that in 40. We're just not participating because we chose not to participate at 28. And that's all going to Xilinx. And they're getting that revenue right now. But if that revenue goes away and goes to 20-nanometer, it's going to leave the hole in their 28 flow. And that's been driving a lot of their revenue flow. And so we feel whether it's looking at the revenue numbers, whether it's looking at design wins, which, quite honestly, if you look at the communications business, which drives the majority of our revenues, they tell us who -- you won, you lost, all the sockets. We have the visibility. We equate it that way. We equate it based on where we're strong in families. And no matter where we get to, we feel we're winning 2/3 of the business.

James Schneider - Goldman Sachs Group Inc., Research Division

Do you think that'll show up in the numbers over the next year or 1.5 years or so?

John P. Daane

In a year, you're going to see it. We're going to be in the production flow. Usually, year 3 and 4, you see the production ramp of the products. We're starting to get into that phase. You're going to see us ramp, and I think you're going to see us ramp more successfully and get 2/3 of the business over the long haul.

One of the things that -- we really feel comfortable that we're winning 60% plus. But our competition says that they're winning 50%. Well, even if we only won 50%, we still gain market share because we only have 42% market share in FPGAs. So even by their argument, they can never increase market share with where they are. So I mean we win no matter what plays out here.

James Schneider - Goldman Sachs Group Inc., Research Division

And then I want to ask you about -- you talked about the issue of incumbency. But you've actually -- seems like you turned one of those customer relationships around. You mention a large European customer. Maybe give us a little bit of the anatomy of how that customer got to be 10%. What the -- how long was the design win process and the engineering process working in that company.

John P. Daane

Communications, as well as industrial, tends to be -- I mean, each business has its own cycle. The comm accounts usually are 2 to 3 years before they'll ramp production. So if you go back with the account, for instance, in Europe, we started to really do well there in 65-nanometer, 40-nanometer, and now 28-nanometer. And we've been winning most of the major programs there, in fact, all the major programs for years. And now we'll continue to ramp over a series of years. So we've yet to hit our high in terms of market share with that account. So we expect that to increase for a long period of time. And overall, because of that, because of how we're doing over a series of other communications accounts, our expectation is our communications market share will continue to increase.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. And then I want to ask about 20-nanometer when I know it's still -- we haven't ramped 28 yet, but people are always looking for the next thing. So I wanted to kind of just get a sense of -- you maybe leaked some technology announcements. When can we expect -- I think TSMC has been -- has been open about talking about kind of ramping initial 28-nanometer capacity by the end of this year. And so typically, you guys are pretty close on the heels as any new capacity ramp. So can you maybe give us some kind of feel for when we can see the first products come out the line?

John P. Daane

So we try to give some color in November as to what we're spending on R&D. And what we said is we're doing a new CPLD family. We haven't actually done one for a long period of time. This more competes with what Lattice produces and is an incremental spend that we're doing right now. And you'll see more from us this year on that. We're doing FPGA development both simultaneously in 20-nanometer planer technology, as well as a follow-on FinFET. So we're actually doing multiple FPGAs and multiple process generations again as we follow-on with a tailored approach towards trying to create the best vehicles, feature and cost points, to hit the various market requirements that we have.

As an example, automotive needs a very simplistic device. They don't need high performance, a lot of transceivers, but telecom will. So you need to really fracture your product, and use the right process technology appropriately for those.

20-nanometer, I think both on ourselves and our competitor -- major competitor, Xilinx, have talked about the fact that we'll be introducing 20-nanometer parts this year. Neither company has really put out much more than that. In other words, some fluffy press releases, but I think ultimately it's hard to read into anything. We believe that we're going to be competitively advantaged in 20. We just have to see what our competitor will do. I think what you'll see is product announcements and rollouts this year in terms of capabilities, really across the industry.

James Schneider - Goldman Sachs Group Inc., Research Division

John, I would be remiss and skewered if didn't ask you a capital allocation question for a second. You're sitting with about $3.7 billion of gross cash on the books. You're doing about 1% dividend relative to a lot of your peers doing more like 3%. So I guess -- and you've clearly talked about the capacity and willingness to increase the dividend over time and potentially do some buybacks. But a lot of investors have been waiting a long time for that to happen. So cognizant of the fact that a lot of your cash is trapped overseas, but can you give us any kind of update in terms of what kind of make -- what might prompt you to make a move there as it's more than what you've done before?

John P. Daane

So I think if you look at the company, obviously it's a great business model even in a down year like 2012. It's still -- the operating margin, the cash generation is wonderful because of the stability of the gross margins that we have and because of the overall strength of the revenue line in general. What our -- our basic use of cash has been to repurchase shares and to increase the dividend. And our intention would be to continue to do both. We'd like to get the dividend up significantly by increasing it on an annual basis as we've done. I think, if you look at it in the last 2 years, we doubled the dividend on a dollars basis. If you look at us probably over the last 5 years, I think we've done about $2 billion worth of share repurchases. Over the last 10 years, we've reduced the share count, I think, from about 375 million, 370 million -- or 379 million shares down to about 315 million. So we've taken the share count down substantially. And that would be the intention of what we try to do with our cash over the long haul. We just don't have a lot of capital requirements. We don't see that changing. We're not getting into the fab business. We don't need to do take-or-pays. We don't need to pay for capacity. So we've got a lot of cash available to use for dividend and share repurchase. And again, that would be our intention going forward is continue to focus on those drivers.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. So I think this brings the formal session to an end. So we'll kind of cut that off, but we're actually supposed to stay in this room for a breakout session. So I think now we can probably take some questions from the audience. Thank you.

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Source: Altera Corp. Presents at Goldman Sachs Technology & Internet Conference 2013, Feb-13-2013 04:00 PM

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