Xilinx Inc. F4Q09 (Qtr End 03/28/09) Earnings Call Transcript

Apr.23.09 | About: Xilinx, Inc. (XLNX)

Xilinx Inc. (NASDAQ:XLNX)

F4Q09 (Qtr End 03/28/09) Earnings Call Transcript

April 22, 2009 5:00 pm ET

Executives

Maria Quillard – IR

Jon Olson – SVP and CFO

Moshe Gavrielov – President and CEO

Analysts

Glen Yeung – Citi

Randy Abrams – Credit Suisse

James Schneider – Goldman Sachs

David Wu – Global Crown Research

Tristan Gerra – Robert Baird

Tim Luke – Barclays Capital

Uche Orji – UBS

John Barton – Cowen

Chris Danely – JP Morgan

David Wong – Wachovia

Suma Dhondo [ph] – Merrill Lynch

Operator

Good afternoon. My name is Michael and I will be your conference operator. I would like to welcome everyone to the Xilinx’s fourth quarter fiscal year 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

I would now like to turn the call over to Maria Quillard. Thank you. Ms. Quillard, you may begin your conference.

Maria Quillard

Thank you and good afternoon. With me today are Moshe Gavrielov, CEO; and Jon Olson, CFO. We will provide a financial and business review for the March quarter and then we will open the call for questions.

Let me remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially.

We refer you to the documents the company files with the SEC including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This conference call is open to all and is being webcast live. It can be accessed from our Xilinx Investor Relations website.

Now let me turn the call over to Jon Olson.

Jon Olson

Thank you, Maria. During today’s commentary, I will review our business results for fiscal 2009 as well as for the March quarter. I will conclude my remarks by providing guidance for the June quarter.

Revenues in fiscal 2009 were $1.83 billion, down 1% from $1.84 billion in fiscal 2008. While Xilinx is not immune to the current recessionary environment, we have benefited from exposure to defense applications, next-generation China wireless applications, and strong Virtex-5 sales momentum which has enabled us to significantly outperform the semiconductor industry.

As we exited the fiscal year, our sales of $395 million are 19% below our peak sales of $488 million recorded in Q1. This compares favorably to the vast majority of semiconductor companies that have experienced sales declines of nearly 40% on average. Additionally during the year, we made significant progress in reducing our cost and operating expenses. Gross margin improved by 50 basis points in fiscal 2009 to 63.3% as we benefited from improved yields and reduced manufacturing costs.

From a geographic perspective, sales from Asia-Pacific, a key focus market for us, increased 15% during the year to represent 33% of total sales, up from 29% in the prior year. Most of this growth was driven by strong sales to Communications customers. Sales from all other geographies were flat or down for the fiscal year.

We continued to carefully manage inventory levels during the fiscal year. Inventory days at Xilinx in fiscal 2009 were 65 days down from 59 days in fiscal 2008, and the lowest level since Q3 of fiscal 2004. We repurchased $275 million of common stock during the year and extinguished over $300 million of convertible debt.

Our net cash level after factoring in the convertible debt increased over $120 million to $983 million as we exited the fiscal year. Cash flow from operations remained healthy at $443 million for the fiscal year, but down from $581 million in the previous year due primarily to lower interest income, higher tax expense and a decrease in deferred income on shipments to distributors driven by lower distributor inventory levels.

Let me now turn it to a discussion of the quarter. March quarter sales decreased 14% sequentially to $395 million, in line with guidance we provided during our business update. As you may recall, we revised our sales guidance upwards during our business update on March 2 due primarily to better-than-expected strength from customers serving the China wireless market.

Compared to the same quarter a year ago, total sales were down 17%. Turns increased significantly during the quarter to 66%, up from 54% in the prior quarter. The bookings linearity was pretty much as anticipated with the month of January strong, and February and March in line with expectations.

New product sales decreased 6% sequentially, mainstream and base products experienced sequential declines of 22% and 20% respectively. Next quarter, at the start of our fiscal 2010, we expect to reclassify our revenue by products to better reflect the age [ph] of the product and advances in technology.

Sales from all geographies declined sequentially during the quarter as expected. North America sales were down 11% with broad-based declines in nearly every end market. Asia-Pacific sales were down 11% as flat communication sales were offset by declines in all other end markets. European sales were down 12% in the March quarter with flat communication sales offset by declines in most other end markets. Sales from Japan were down 34% with declines from all end markets.

In terms of our vertical markets, sales from all major end market categories declined sequentially. Communication sales declined less than the total sales resulting in sales from this category climbing to represent 47% of total, the highest level in nearly three years. Although wireless sales declined as a percent of total sales, they increased to a record 20%, up from 18% in the prior quarter.

Wire communications declined approximately 10% representing 27% of total sales, up from 26% of sales in the prior quarter. Wire communications increased sequentially in Asia-Pacific, driven by a metro and optical networking application that was more than offset by declines in all other geographies.

Industrial and other end market experienced broad-based geographic weakness declining 18% in March quarter. Sales to customers in defense, industrial, scientific and medical, and test and measurement all declined in double digits. Sales from industrial and other currently represent 32% of total sales, down from 33% in the prior quarter and the same quarter a year ago.

Consumer and automotive sales are also very weak across all geographies declining 27% during the quarter. We experienced double-digit declines in audio/video broadcast, automotive and consumer. Sales from consumer automotive currently represent 14% of total sales, down from 16% in the prior quarter and down from 17% in the same quarter a year ago. Lastly, data processing sales were down 5% representing 7% total sales, down from 8% in the March quarter of fiscal ’08.

Gross margin for the quarter was 62.1%, down from 63.9% in the prior quarter and in line with forecast. Combined R&D and SG&A expense was $167 million, lower than our guidance of $173 million as a result of continued expense controls and lower than anticipated map [ph] cost during the quarter.

Net income during the quarter was $70.5 million or $0.26 per diluted share and was impacted by a couple of factors. First, we spent $46.9 million in cash to repurchase $69.3 million of face value of convertible debentures. This resulted in a pre-tax gain of $20.9 million or $0.06 per diluted share after tax. We also recorded a pre-tax impairment charge on our investments of $1 million.

Operating cash flow for the March quarter was $60.9 million before $6 million in CapEx. As I mentioned earlier, we paid $46.9 million in cash during the quarter to repurchase $69.3 million of principal amount of convertible debentures. We also paid $38.6 million in cash dividends. The tax rate in the March quarter was 27.2% higher than our forecast of 21% impacted primarily by the gain on repurchase of convertible debentures which was taxed at U.S. rates.

Let me now comment on the balance sheet. Cash and investments decreased $6 million during the quarter to 1.7 billion. We now have approximately $690 million in convertible debt on our balance sheet and our net cash position is approximately $1 billion. Day sales outstanding increased eight days in the March quarter to 50 days due to a shipment profile that was skewed to the back half of the quarter. Inventory dollars at Xilinx decreased by $30 million in the March quarter representing 73 days. This is down from 82 days in the prior quarter and up from 68 days in the same quarter a year ago.

Worldwide distributors held 17 days in the March quarter, flat with the prior quarter and down from 24 days in the same quarter of the prior year. Combined inventory days in the March quarter were 90, down nine days from the prior quarter and at the low end of our target of 90 to 100 days.

I would now like to discuss the restructuring announcement we made last week. As we stated, the global workforce will be reduced by approximately 200 positions. This is a net reduction number that will be implemented over the period of fiscal year 2010. There are two phases to our restructuring plan.

The first phase is a broad-based reduction impacting most functions of the quarter – of the company. There will be an immediate impact to the ongoing spending base of the company in the range of $4 million and $5 million spread between operating spending and cost of goods sold. This phase results in a pre-tax charge of approximately $11 million to $13 million in the June quarter, primarily related to severance expenses.

The second phase of the restructuring relates to the implementation of additional supply chain efficiencies and the transition of certain engineering and transactional functions to our Asia locations over the course of the rest of the fiscal year. More specifically, we will be consolidating most of our logistics, manufacturing, planning and new product test functions in Singapore. All production testing in U.S., Europe and Asia will be outsourced to the current supplier base.

Production engineering support for these functions will also move to Singapore as will a number of transaction-based functions. Lastly, we will be adding to our existing engineering research based in Hyderabad to support next-generation development activities. Hiring for these positions will begin immediately and will be phased in over the next several quarters. These long-term restructuring measures will result in additional charges totaling approximately $10 million over the September, December and March quarters of fiscal 2010.

While the timing of these charges are dependent on achieving transition milestones, we expect most of his charge to be incurred in the September and December quarters. In addition to the restructuring activities, Xilinx is implementing other short-term cost saving actions including executive salary reductions, a broad-based employee salary freeze and a reduction in cash compensation of the Board of Directors. This savings is included in the $4 million to $5 million savings I mentioned earlier.

As we exit fiscal year 2010, we expect to realize incremental savings associated with the second phase of the restructuring measure, although smaller than the initial Q1 impact of $4 million to $5 million. I do not plan to provide explicit operating guidance for future quarters on this call. However, we are expecting fiscal year ‘10 operating expenses including all restructuring charges to decline versus fiscal year ‘09 as recent cost reduction efforts and – more than offset a significant increase in new product development expense. At this time, our 63% to 65% gross margin target remains unchanged as does our 30% operating margin target, although we will require revenue growth to choose it.

Let me now turn to a discussion of guidance for the June quarter of fiscal 2010. There are a number of dynamics impacting the June quarter. On the positive side, we are heading into the quarter with backlog that is up double-digit sequentially. We are expecting China wireless to be strong in the June quarter driven by deployment activity associated with China Mobile, China Unicorn, and to a lesser degree China Telecom.

We are also seeing isolated instances of recovery in areas like audio\video broadcast and stabilization in enterprise networking and automotive. Additionally, we are expecting strong sales growth from Virtex-5. However, on the negative side, we are expecting wireline sales to decline primarily due to continued weakness in Telecom offsetting a slight improvement in enterprise networking.

We are also expecting defense sales to decline sequentially due to product cycle transitions at a couple of large customers. This anticipated decline in defense sales is uncharacteristic of the June quarter and is not expected to continue at the December quarter. As a result, we are expecting sales to be flat plus or minus 4% in the June quarter with growth from Asia-Pacific and Japan, and declines from Europe and North America.

The communications category as a whole is expected to be flat to slightly up sequentially. We are forecasting the industrial and other category to be down sequentially in the June quarter. Consumer automotive is expected to be up sequentially driven by a broad-based rebound in audio/video broadcast and increases in LCD and PDP businesses. Lastly, data processing is expected to remain flat. We are providing a broad revenue range as our visibility remains poor. The midpoint of our sales guidance is predicated on a turns rate in the high 50s.

Gross margin is expected to be approximately 61% to 63%. Combined operating expenses including $11 million to $13 million of restructuring charges are expected to be approximately $173 million to $175 million in the June quarter. Other income and expense is expected to be at a net expense of approximately $3 million. The share count is expected to be flat, and the tax rate for Q1 of our fiscal 2010 will be approximately 21%.

Let me now turn the call over to Moshe.

Moshe Gavrielov

Thank you, Jon and good afternoon to you all. Overall, I am very satisfied with the progress we have made over the past financial year.

Both our functional reorganizations last June and the recently announced restructuring efforts have resulted in a significantly simplified multi-pre-integrated organization driving improved operating efficiencies. These steps while challenging to the entire organization were necessary to position Xilinx for long-term success. They have been taken without compromising our technology leadership.

On the product front, this past February, we announced in parallel both our next-generation Virtex-6 and Spartan-6 families, the combination of an unquestionable engineering (inaudible). Virtex-6 stands our high-end leadership position which is being unquestionably demonstrated by the Virtex-5 hegemony in 65 nanometer volume shipment. Virtex-6 provides the lowest power, highest capacity, and highest performance FPGA on the market.

In parallel, Spartan-6 is the industry's first and only high-volume 45 nanometer FPGA family provides the lowest cost and lowest power solution shipping today. With the simultaneous introduction of these new products, we have the strongest product portfolio we’ve had in many years. We began shipping devices from both families on track with our plans in the March ending quarter and quoting activity has been exceptionally strong. In fact, it is five times higher than the prior generation of the product the same time of their life cycle.

Already over 700 customers presenting more than 1,000 different opportunities are engaged with the Virtex-6 and Spartan-6 early exit program. In the current quarter, we are unscheduled to broadly release our newest software capabilities significantly improving runtimes, quality and overall capability. We expect this release to be widely adopted by a broad base of customers as full public access to Virtex-6 and Spartan-6 will occur this quarter too.

On all fronts, we are tracking extremely well to our initial product – production plans. Our increased recur in both the design and process technology side has contributed to successful execution thus far promising to be a repeat of our flawless execution with the Virtex-5 family. Scalability of the remaining members of the Virtex-6, Spartan-6 families is scheduled by the end of the calendar year.

In addition to our base silicon and software, we will be delivering targeted design platform to differentiate us from all other PLD companies. These targeted design platforms improve ease of use, decrease development costs for our customers by providing bundle tools both in IP core into an integrated PLD design solution. As Jon mentioned, our beginning June quarter backlog is up quarter-to-quarter, 3G wireless infrastructure deployment in China is the main drivers of improved backlog along with some inventory replenishment occurring in our other end markets.

However, beyond the June quarter, we continue to remain cautious about our trail end demand till we see more signs of the true economic recovery. The one thing we are certain about is that our customers must do more with less given these tough economic realities. In order to succeed, they need to accelerate product development, provide product differentiation, while reducing their risk profile and development costs. These trends coupled with financial pressures are hastening the competitive demise of ASIC solutions for an increasing number of applications.

Perfect example of this trend is a major wired communications customer made the decision to entirely eliminate ASICs in their next-generation equipment used in core network infrastructure. Our Virtex-6 technology meets their applications critical performance and power requirements. Furthermore, its flexibility and scalability enables them to use a differentiated solution deploying fewer design resources and is scalable enough to be used in several different products providing a hedge against uncertain demand.

The customer was able to validate the design and capability in Virtex-6 – in Virtex-5 for its chosen Virtex-6 for the final production. At the same time, numerous mid to small volume standard product semiconductor company's, we used to target specialized niches will no longer be able to maintain competitive investment level. This tool will accelerate the transition to programmable solution. An example of this trend is an automotive infotainment customer was chosen Spartan-6 to replace several ASSPs.

Given the diverse needs, it is not possible to find a single ASSP to meet all of their system requirements and the volumes are not just high enough to justify the standard product investment. Instead, multiple Spartan-6 FPGAs were chosen and within each Spartan-6 FPGA, they are implementing slightly different variant of their base design. Customers currently completing the simulation portion of the design will be moving to the prototyping phase with our Spartan-6 FPGA.

In summary, I believe that with these new product introductions, the programmable imperative is rapidly becoming a reality and Xilinx’s exceptionally strong new product portfolio positions us better than any other time in our history to capitalize on these future growth opportunity.

Now, let me turn the call back to the operator to open it up for the Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Glen Yeung with Citi.

Glen Yeung – Citi

Thanks. Jon, I think you said that your order pattern was strong in January, then as expected in February and March. I wonder if you could just put that in different terms, maybe just in terms of month-to-month-to-month growth of decline, what was that pattern like and how has April shaped up in terms of order flow?

Jon Olson

Well, if you – Glen, if you remember back, our quarter began in the middle of the Christmas season, it was like – December 27 was the first day of the quarter, so we had ahead of us a week or two essentially manufacturers not producing very much. So we clearly went into the quarter – with a very weak situation and we didn't have – we did not have the lion's share of our China wireless business booked at that time. So we had anticipated that January was going to be a very strong and brisk month, and in fact it rather was. So I think in terms of relative size, January was the largest turns month for us, because of that I would say pent-up the orders that should have been booked, and then February and March were below that, but relatively equal.

And I think going into April, we are much better booked primarily due to the 3G business in China and I think we've had – I would say the first part of this – the first three weeks of this month we've had I would say reasonable turns, I wouldn't say they are outstanding, but they are pretty solid.

Glen Yeung – Citi

Can I ask a follow-up?

Jon Olson

Sure.

Glen Yeung – Citi

Your thoughts on the sustainability of the China wireless business, its sort of the question on everybody's mind is, is it something where you think personally [ph] in your pocket somewhere in the back half of the year or any visibility you may have on how the pattern of that business may look?

Jon Olson

Yes. And Moshe talked a little bit about our concerns about the economy going forward. I mean one of the things that, patterns that we do see in our forecast from the China and 3G wireless is, right now we're looking at our September quarter is not being nearly forecasted – not nearly as strong as the previous quarter and this quarter in terms of wireless business in China. And so is that a pause between phases is that some sort of transition? We don't have enough information – you have to know exactly whether that hole is going to fill itself, but right now we actually do see a hole in September and then in the second half of the year we're getting at least the indication from our customers that second half of our fiscal year, I mean December and March, if those quarters will continue to be relatively strong. So at this point, I would say if there is a hole right now we would estimate that it's in September.

Glen Yeung – Citi

Interesting.

Jon Olson

That’s also – and think about any longer-term revenue forecast, September is typically a down quarter for us. Anyway because of summer and European sale [ph] weak in particular, right now it's too difficult to predict, but September looks like – think you have more of a challenge.

Glen Yeung – Citi

Thanks, Jon.

Operator

Your next question comes from the line of Randy Abrams with Credit Suisse.

Randy Abrams – Credit Suisse

Yes, good afternoon. Wonder if you can comment on the new base for OpEx if you exclude the charge of about 162 million, with the second phase of restructuring were you are doing some more outsourcing on the back end. Do you see opportunity to take that even a step down or is that going to be most of the OpEx flowing in? And then gross margins, do you see some incremental benefits coming through later in the year from that restructuring?

Jon Olson

Yes. So Randy, the number of forecasting for next quarter would be charges between 173 million and 175 million, and then $11 million to $13 million charge. So if you net those out, I guess the number that you refer to and that really is driven by the fact that we are – we have this broad-based reduction in force in the quarter. As we execute the transition of hiring people and doing knowledge transfer to our Asia locations, we would anticipate at the end of the year to have a couple of million dollars more benefit exiting the year.

However, I do want to caution you about something that I said in the past around the fact that we have a many tape out plan for the new product introductions and that our spending for maps and tape outs is going to start to rise. And so we believe that will raise several million dollars from the current base and peak in the December quarter and then start to fall a little bit. So there's going to be, from an R&D perspective I think you're going to see some upward pressure on the current run rate and you will see benefits in SG&A as much of what we have done has – more of what we have done has impacted SG&A and our cost of goods sold line.

Now, with respect to your question around gross margins, clearly the thing that we're doing in consolidating our logistics manufacturing capability, outsourcing more etcetera we are doing that from the standpoint of cost improvement and efficiency in the company and we would expect that by the end of the year to have positive contributions to gross margin. We're just not forecasting the magnitude at this point in time because it's really dependent on how well the execution of those transitions go.

Randy Abrams – Credit Suisse

Okay. Thanks a lot.

Operator

Your next question comes from the line of James Schneider with Goldman Sachs.

James Schneider – Goldman Sachs

Hi, good afternoon. I was wondering if we could stay on the gross margin trend for a second and could give us some kind of sense of how you anticipate the profile of gross margin to go throughout this year, what benefits you will see operationally and then what kind of probations you may expect from mix in the next quarter or two.

Jon Olson

Yes. Just from the – riding the company through this transition period and taking the mix things separately from – just growing the company – we actually don't see any swings in gross margin. I would say that we would expect a gentle increase throughout the year from our current position, but not a dramatic one. So I think we will – we believe some of these efficiencies will accrue to us as we move along through the second half of the year and we have a number of other cost programs in place, not just this consolidation process much like we have been doing over the last couple of years in terms of improving margin. So I would expect some upward drift to open again, not a gigantic shift up.

The second question – the second part of the question around mix is that, mix is a difficult thing to know for sure what's going forward, but I will say that we already have seen a mix up in our wireless business and our margins are still maintaining at a reasonable level. So while there is a variety of margin implications to end markets and to mix of high-end or low-end price for us, we are going to able to balance that with a broad base – slightly higher margins in some end markets, slightly lower margins to some of our high-volume customers and I don't think we're seeing that there is going to be an impact – a negative impact to mix for sure out of the business that we see over the next two or three quarters.

James Schneider – Goldman Sachs

Okay, that’s helpful. And then, maybe as a follow-up, could I ask you about the industrial customer base, what you are seeing from your broader industrial customer base in terms of any areas of strength or weakness, I think your primary competitor know [ph] that instance is relatively weak? And can you talk about any mix of large versus small customers and what you're seeing in the current quarter?

Moshe Gavrielov

Yes, the industrial base, I would concur that it is quite weak and we’ve lost quite a bit of business – quite a bit of our run rate in the broad-based industrial taking our space into defense out of that for a minute. And I think in test and measurement, scientific and medical, we’ve seen a couple of quarters sequentially a weakness there and we are not anticipating much strength in that (inaudible) area, we’re certainly hoping for some stabilization there. Aerospace and defense remains cyclical to us and we still feel that’s a strong business and it should be flat to up overall this year, but it’s – it will have a different profile.

And then you asked to comment around small customers to large customers, and we have seen less of a drop at our large customers over the last couple of quarters than we have at the broad-based customers and we got a little investigation – it’s kind of interesting, our really small broad-based distributor customers that are managed by our distributor for the most part. That did has been sequentially weak for several quarters now and we’ve talked about that starting in North America and then moving to Europe and we don’t really see a lot of improvement there and actually not that much additional declines, some but not certainly a large amount.

But in this reception kind of middle size that are between the very large and the very small that is what’s dropped the most for us the last quarter or so. So we would describe it more as our midsized customers dropped more this quarter compared to the previous quarter, where our large customers certainly dropped less than the average.

James Schneider – Goldman Sachs

Okay, thanks very much.

Operator

Your next question comes from the line of David Wu with Global Crown Research.

David Wu – Global Crown Research

Yes. Jon, can you help me in one thing which is the, if we have a go back to 400 at or [ph] this restructuring, if we have a hit back to the 485 million a quarter, what kind of gross and operating margin should we expect? And then the new cost structure, we got up to I think almost 26% in the last peak.

Jon Olson

So David, we certainly have been doing – taking many steps at the company to lower that point, the revenue level which it takes to achieve our stated operating margin, gross margin and spending targets. It is a bit the moving target with all of the things we’re going on, so I hesitate to give you a number, but at the analyst meeting, you know about a year ago, we – not quite a year ago, we did talk about it needing to be north of $500 million in order to achieve it and we are south of $500 million in order to achieve a pre-quarter to achieve that. But I'm not hesitant to give you the number because there are a lot of specific numbers, there are a lot of things moving parts going on right now.

David Wu – Global Crown Research

Okay. Just a quick follow-up, I guess this repurchase of your convertible will continue, so you will get these capital gains somewhere every quarter, even though they are supposedly discrete events?

Jon Olson

Well, yes – maybe yes and maybe no. We’ve been treating this as a very opportunistic thing meaning if we can get a significant discount, we would be in the market to do that and we’ve stayed very aggressive on that meaning we want a pretty large discount in order to make those transactions. And you could see the amount that we did this quarter versus the previous quarter went down and that's probably a good indication that the overall market has improved and therefore we don't have the same opportunities that we’ve had in the past. So, we may have, there may be additional buybacks of debt or there may not, we certainly are evaluating the prize in our breakeven and the contribution to move into potential dilution factors in a model when trying to figure out what – when it makes sense to jump in and when it makes sense to stay out.

David Wu – Global Crown Research

Okay, thank you.

Operator

Your next question comes from the line of Tristan Gerra with Robert Baird.

Tristan Gerra – Robert Baird

Hi, good afternoon. How would you qualify the 45 nanometer ramp from a production standpoint versus previous generation products and versus ultimate expectation and when would you expect 45 nanometer to reach 1 million in revenues?

Moshe Gavrielov

Tristan, this is Moshe. We have already sampled the product. We are moving towards proliferation in terms of the members of the family. This is an exceptionally exciting product for us because we believe Spartan of the 45 nanometer addresses the fastest growing market in FPGAs and one that frankly we have not achieved, as well as I would have liked in the past, it is great opportunity for us. Typically that product ramps to volume faster than the Virtex product line. Virtex product line takes typically around three years to reach the 50-ish million dollar level, but here on the Spartan product line, which typically is the smaller overall number, but nonetheless ramps more quickly. We expect that to start ramping this year and those numbers that you mentioned are not huge numbers, they are actually just – you could achieve those numbers very easily just by shipping to tens of customers a few prototypes. So, it is not a big goal for us. We do expect to see very, very broad acceptance of the product and for it to hit significant revenue in the 2010 calendar time frames. And so, I don't know between, when it crosses the $1 million point, but I would say that that is largely relevant, what we're tracking at this point is mostly design wins and those are happening in space and we're very pleased with the results there.

Tristan Gerra – Robert Baird

Okay and also could you elaborate on the new software launch that you mentioned, is that a second generation software?

Moshe Gavrielov

Basically it is our 11.1 release, so it is the 11th major release, it has huge benefits over the previous generation in terms of numerous parameters turnaround time, which is very important for the customers, because they are designing larger and larger chips and hence they need the software to operate more quickly. It also reduces the memory footprint very significantly and it adds a lot of features, in parallel it provides the support for the Spartan-6 and the Virtex-6 product lines and those – that will be available this quarter too. So it is two phase approach and, no, I wouldn't call it a second generation, I think it is a significant enhancement of the previous generation of product we have.

Tristan Gerra – Robert Baird

Okay. And just to clarify, this is the first software supporting 45 nanometer though?

Moshe Gavrielov

It supports – yes, the answer is yes, it supports both Virtex and Spartan, so it is both the 40 nanometer high-end and the 45 nanometer high volume product, but it also has tremendous benefits to customers who are using existing technologies like Virtex-5 and Spartan-3, they will just see better results in terms of the turnaround etcetera.

Tristan Gerra – Robert Baird

Right, thank you.

Operator

Your next question comes from the line of Tim Luke with Barclays Capital.

Tim Luke – Barclays Capital

Gentlemen, can just remind us what the tons were in the current quarter and did you give any color on your book-to-bill as you looked at the beginning of this quarter?

Jon Olson

Sure, Tim. Tim, in terms we’re in the mid-60s percent, 66% this last quarter, and we stated we needed a pretty high turns number as a percent, but the actual dollar level of transfer that would [ph] require on a weekly basis were on average we are pretty low relative to a three or four year analysis and in fact we did achieve that. So, going into this next quarter, we said we needed, and I tell you in the high 50s, again that is difficult to assess because the revenue level is lower, but we have got, I would say a more, flat view of the world of how turns will happen this quarter in terms of the profile. And again it would take, in the same dollar neighborhood per week as last quarter. So, we don't think, we are hung out too much.

Book-to-bill to us is, while mathematically it says it is one, it is above one, but it is not really that important to us because it is really, I mean if we still do so much through distribution there can be a lot of stocking distribution shelves in that content. So, it is not a particularly meaningful number to us.

Tim Luke – Barclays Capital

With respect to the OpEx guidance, can you give some color with respect to where you see R&D and SG&A, I think that you were saying that the R&D would go up bounced by the SG&A, is the net of that following the restructuring so that you get like a 160 OpEx number by September or where shall we see that? And then just on the gross margin side, Jon any current things occur to you as reasons why you are inferring that your margins may strengthen in the back half possibly while you are, they are probably, were I would have seen this sort of mix issue? And then any offsets, you said China is going to be down in September, does military comeback at all in September or we should broadly expect to decline in their overall revenues in September?

Jon Olson

Okay. Let me start with the OpEx statement. So, we did say in my remarks that we would get benefit in the neighbor to $4 million to $5 million on the underlying operating net of the restructuring reserve that kind of a benefit to the run rate and some of it is in cost of goods sold and some of it is in OpEx, but quite frankly most of it is an OpEx. I would say 75% to 80% of it that kind of a number is an OpEx and most of that ends up being in SG&A again probably three fourth of that remainder ends up being in SG&A.

And R&D, the profile of R&D for the year, does rise throughout Q2 and Q3 fiscal for us because of increased mask expense. So, we see several million dollars being added to each quarter, there'll be a couple million dollars added as we go through the year and peak in the December quarter not because of the underlying spending, but because of the tape out expense. But that being said, if you compare our total operating spending at the end of FY10 including restructuring with the previous year, which we're all set to restructuring and you're going to see that we are still down and R&D has actually going to be in the neighborhood of being flat to may be a little slightly up and so most of the dollars will come out of SG&A. I'm not really going to give you a number, a precise number of what is exiting the year because again there is lots of – or which quarter will be on the low point, mostly because there is lots of milestones to be done in these transitions and we have to work through that before we are confident enough to forecast the number.

Gross margin, as I said I think we think that gross margin will be stable for us this year was slight up, I can't explain our primary competitors business or profile, we don't see mix driving anything different than it has ever driven for us in this particular area because we do feel we have a pretty good control of our pricing and good balance between end markets so that we can maintain our strong gross margin number, but moreover we are planning on getting more efficiency that of our organization. Somehow was due to the restructuring comments I made, some of it is ongoing cost reduction. So, we are continuing to press for efficiencies across the company in order to improve the operating leverage and I think we will succeed in that throughout the year.

And your last question was around the strength of aerospace and defense and military business, it is, we have a couple of customer situations of why it is weaker in June, but we do believe that overall we will continue to grow and continue to grow in the back half of our year much like the seasonal pattern, we typically have were September is okay, December is strong, as well as March.

Tim Luke – Barclays Capital

I was just trying to get a sense of your broad expectation for September because it seemed you are saying like China 3G is going to be down, anything broader with respect to the broader revenue picture for September?

Jon Olson

Well, I think Europe is going to be – continuing to be weak and it typically is weak for us in September quarter. To us the, you know for us September, the bright spots have typically been, you know some uptick in aerospace and defense and some strength in communication. And in the absence of at least the telecom leg not being strong and if wireless does take a dip then we're looking at aerospace and defense as being the only potential upward pressure in several other end markets where we have downward pressure. So that's why we are feeling right now and what we see at September could be little more challenging for us. But again a lot of work to that is being done between now and then and a lot of issues to be understood before we can give you a solid forecast.

Tim Luke – Barclays Capital

Thanks so much, good luck.

Operator

Your next question comes from the line of Uche Orji with UBS.

Uche Orji – UBS

Thank you very much. Can I just have a follow-up on Tim's question on defense? As we watch the defense spending currently in (inaudible) right now possibly coming down, assuming that the trend is currently defense spending goes down, do you think there is any share shift situation that may benefit you in that business, I'm just trying to understand what is driving your confidence in terms of the growth in the later part of the year?

Jon Olson

First of the defense budget of the United States is still the largest individual budget of anything else that goes on. So I don't think when they start flashing in everything is going to get flashed. So from an overall perspective, our business may not grow at the rate we had been forecasting because of certain key programs that get cut back or change, we still think relative to other businesses it has, it gives us the opportunity to continue to grow that that particular segment this year, excuse me this fiscal year. With respect to any shares shift, it is unknown because you don’t know which programs are going to be cut or live or die, so it is way too early to know because there is a larger list of things that have been proposed by the executive branch of the government, it is far from being done in terms of legislative branch deciding what they're going to vote for, not vote for so it's just way to premature, you change it to try to pick winners or losers at least to fill these space in my opinion.

Uche Orji – UBS

Sure. Actually specifically I was wondering whether there was a shift from ASIC to FPGA and this kind of leads me to my second question, Moshe, in one of your earlier presentations you talked about the ASIC shift benefiting ASSPs, as well as you guys, but do you think from your open remark it sounded like that shift maybe benefiting as the FPGA products a little bit more, is that the conclusion to draw now in terms of how you see that shift from ASIC into FPGAs and if you can try and – I know you gave two examples of industries where this is happening and benefiting you, is there any more that you think is more notable for us to, you know look at where we should be able to see more evidence of this shift happening?

Moshe Gavrielov

Yes. Well, I think the reduction in the number of ASICs is well documented, it is something I run into every time I go to customer visits and I spend about half of my time doing that. The number of ASICs that the customer is doing is going down and continues to go down significantly. The average revenue per ASIC design actually is going up to some extent because the number is going down rapidly, they are focusing on areas where there are higher returns because they can only afford to invest the millions, several millions of dollars in the design process if they have a higher likelihood of return. So, as the customers are doing less and less ASICs, their options are if they want to differentiate it than their only option is to come to an FPGA. If they go to standard products than there are viable standard product companies out there, but if you look at those companies, as done in the past there is a lot of mid-sized companies have focused on niche application. If you look at, you know one example is communications there is probably north of 20 communications infrastructure ASSP companies at a revenue base of over, of under $0.5 billion. Those companies cannot afford to invest in a 40 nanometer product let alone the generation beyond that and besides the customers are now stuck because they can’t afford an ASIC, they are traditional suppliers unless they are in a high-volume market, can't afford an ASSP to the extent that they require hardware differentiation, they come to FPGAs, we've seen that in several markets, consumer markets, communication markets, military markets that just, you know it is not even news there, it is history there. The number of military ASICs that are being signed, you know I think you can count, you know when your two hands or maybe the fingers of one hand it just doesn't make any sense. So this is a trend which is continuing, accelerating, and it is working in our favor.

In order to reap the benefits, you do need the right product and I would say that the 40 and 45 nanometer is probably the first time that we have products that can effectively replace ASSPs and ASICs on a broad front. And you know in my last trip I ran into customers who were taking ASICs and converting them to ASSPs and the reason they were doing that is their ASIC vendors are going out of business or they needed some ASIC [ph] a change and it was so difficult to make it in an ASIC, but they figured they might as well design an ASSP from scratch. So the extended (inaudible) both in this, this sort of reflects the enthusiasm they have for this trend it just is happening in states and you know the Virtex-6 and Spartan-6 will enable it to accelerate.

Uche Orji – UBS

Thanks. And just one last question for Jon, Jon just for me to understand a sensitivity to China, would you be able to provide us a percentage of your sales or backlog that is China communication equipment, your competitor yesterday talked about while we had 12% of their revenues last quarter, do you have any such metrics, just for us to gauge your account and revenue sensitivity? And that is my last question thank you.

Jon Olson

Sure, Uche. We have no customer. Xilinx is 10% or greater than the company, but we would have to expose that as well. Relative to the China business, our wireless business as you said is about 20% of our revenue in this quarter and the business associated with China is less than half of that business you know it is a little less than half of that business that gives you some kind of a ballpark of the scale of our business.

Uche Orji – UBS

And the backlog?

Jon Olson

Backlog is, I would say is probably disproportionately high from that percentage for China mostly because most of the suppliers have given us some long-range forecast and given SPO's [ph] to ensure supply of the right mix of products because there are some volumes that are pretty high there. So, I would say our backlog is higher. I don't have the precise percentage, but my guess would be that it would be higher than the percentage implied by what I gave you earlier.

Uche Orji – UBS

All right. Thank you very much. Thanks, Moshe.

Moshe Gavrielov

Thank you.

Operator

Your next question comes from the line of John Barton with Cowen.

John Barton – Cowen

Thank you very much. Moshe, a moment ago you highlighted on your recent trips, you have seen the dynamics of the economy moving from – the demand trends from ASICs towards ASSPs towards FPGAs etcetera, in those trips in those customer visits have you seen any significant change in the design activity level, meaning are people slowing down new product introductions to save R&D, or are they accelerating product introductions in an effort to be more competitive in the tough marketplace?

Moshe Gavrielov

I would say that the customers are all over the map, but I wouldn't, if you look at the net integration I think it is slightly up in terms of activity. All the companies are focused on making sure that they have differentiated product. So, I don't see that the level of development activities has gone down. You know this may be positively impacted by the fact that we have just announced two new product lines and the sales force is ecstatic of having these leadership products and hence they are pushing them very, very hard and those are the customers that I got to see, but overall my impression is that the design activity on FPGAs has not gone down. I see a lot of customers who, what we call ASIC refugees who used to design ASICs are now transitioning those people to design FPGAs, so that might be the other trend, I would say that over all the number of FPGAs and funds FPGAs which have been designed is going up best I can tell.

John Barton – Cowen

And Jon you had mentioned lower mass cost in the March quarter is one of the things that impacted the numbers, it certainly didn't seem in any other statements as there has been any type of product delays of push outs or whatever the case may be, what was or why were we seeing low mass charges relative to the expectations and am I correct that nothing has slowed down?

Jon Olson

Yes John you are correct nothing has slowed down. This was just something that was in the forecast that is happening in the last week of the quarter and pushed over to the first week of the following quarter and it just moves from dollars from the last week to the first week there was no delays or anything it was just an estimated forecast that we had the budget tied to and it moved out a little bit, but there are no product delay implication on any issue going on that caused from a product quality perspective.

Operator

Your next question comes from the line of Chris Danely with JP Morgan.

Chris Danely – JP Morgan

Hi guys thanks for squeezing me in. Jon you talked about the revenue from China might get a little bit in Q3, excuse me in the September quarter, would you expected it to rebound and be back at the June quarter level by the December quarter?

Jon Olson

Well I mean the level that we – we do think it is going to come back Chris and right now I would say we think it is going to come back to that level and some of that is around the wideband CDMA rollout. We are now selling parts in the wideband CDMA infrastructure, previous couple of quarters ago was only TD-SCDMA, so we are starting to say I will say two technologies different technologies that have their unique cycles and we're trying to match those things up, but I would anticipate that the December quarter for us to be a combination of wideband NTD [ph] technologies and right now I would estimate that it would come back up.

Chris Danely – JP Morgan

Okay great and then my follow-up, with all this restructuring and transfer of employees, could your tax rate go down at all because of this?

Jon Olson

Not because of what we are doing, we've taken some measures in that area, it has been difficult to reflect them in our ASICs because we’ve had all these other transactions going on like the debt buyback and whatever. So, I wouldn't anticipate any big reset of the download of the tax rate, I think it is going to be pretty stable in the low 20s.

Chris Danely – JP Morgan

Okay thanks a lot.

Operator

Your next question comes from the line of David Wong with Wachovia.

David Wong – Wachovia

Thank you very much. Can you tell is what products before provide sort of biggest market potential for Spartan?

Moshe Gavrielov

Okay. Spartan, this is Moshe, Spartan is actually used very, very broadly and so it is used obviously in areas that you would align with high volume, which is the consumer market and the automotive market, but it actually has very broad footprint and it is being used on the infrastructure and military applications too in higher volume opportunities, so it is actually in terms of its spread it has tremendous applicability and you know it is one of the areas where having leadership product in the fastest-growing markets, which we believe that inherently these will continue to be the fastest-growing markets even though, you know it is obviously challenged kind now, but this leadership position with the best product, the leadership product will enable us to grow very rapidly in all of those areas and you will see it across the board, you'll see it on consumer, you'll see it on automotive, you'll see it in industrial and military and in communications both on the wireless and the wired side. The product is very attractive product and when you look at the – what you could do with a leading-edge Spartan chip, this generation is equivalent to what you could do with high end Virtex chip two generations ago so, you know it is a very significant set of functionality and that is why it can be used in numerous applications.

David Wong – Wachovia

Right thanks very much.

Maria Quillard

Operator will have one more question please.

Operator

Your final question comes from the line of Suma Dhondo [ph] with Merrill Lynch.

Suma Dhondo – Merrill Lynch

Hi, afternoon guys. John, I just wanted a clarification on the benefit from phase 1 of your program, is that all of that benefit reflected by Q1 or is that phased in over the next few quarters?

Jon Olson

So you have to kind of dissect the total spending number less the restructuring charge and then the answer is yes, you know that all that is reflected in our underlying rate. So, we did significantly reduce the number of heads in the company this quarter making a decision to do that very early and then in the second phase is as we start to a higher more heads throughout the year to replace other people that will be leaving later in the company. So, the initial phase is this $4 million to $5 million benefit that's the underlying benefit after you net out the restructuring charge and that is kind of our new true run rate of the company. And then as we do this swap of hiring more people and transferring knowledge, we will get some incremental benefits from that although some of that benefit ends up being spent in these extra mass costs later on the year etcetera and so trying not to confuse you and hopefully I have it.

Suma Dhondo – Merrill Lynch

Just to be clear the Q1 number also includes all the benefits on the executive actions that you have taken in the quarter?

Moshe Gavrielov

Yes, it does.

Suma Dhondo – Merrill Lynch

The second question I have is, you know your competition is being quite vocal about what you – what they are seeing with their new 40 nm product of statics for product highlighting their projected revenue benefit from that ramp, you know and your clearly very excited about the Virtex-6 launch, I'm wondering whether you'll be providing any benchmarks of milestones in terms of how that revenue ramp in particular is proceeding over the next few quarters so that we can compare, you know was it really getting the upper hand?

Moshe Gavrielov

There is no doubt that they announced their products earlier than us and had design wins earlier than us, what we believe we have now is leadership on that product front, we will be rolling out all of the derivatives by the end of this year and in parallel we will have Spartan-6, which at this point has unquestionable leadership in a market which is growing very rapidly in our mind and so now, you know you can look at various things, the initial numbers in terms of reaching a threshold in terms of shipments mean relatively little, it is actually the design wins and how quickly they'll convert to revenue and that takes a year plus on Spartan side and three years on the Virtex side before they achieve large numbers and in the interim what we will be driving our results is Virtex-5 for the next few quarters, you know which is running at a very high level than we expect it to grow. So, the impact will be minimal to be honest and that is just because it takes three years to reach high volume to the point where it is interesting. So, we will try and provide you with some feeling, but you know arguing over who got to $1 million first is not necessarily useful, it is the breadth of the product offering and the range of it and the long-term implication that is a little more difficult to quantify.

Suma Dhondo – Merrill Lynch

Maybe just a quick follow-up on that, do you feel that the initial revenue trajectory is even meaningful in terms of determining perhaps who is getting a better share of the prototyping market which your competition assess to be something in the region of a couple of hundred million dollars a year?

Moshe Gavrielov

Okay. So, on the prototyping market they typically use the company with the most advanced technology and the highest capacity, we are going to have that real soon. And you know, the customers, it is an ongoing event, it is not a one-time, write a prototype continuously and we will have the best product and the highest capacity product for that market and these customers primarily have used us in the past for doing prototyping and I think to be honest both companies where the major players in this market are going to benefit significantly from this transition to 40 nm and I think we are seeing tremendous opportunities as undoubtedly there are to and I believe that these opportunities are not only stealing sockets away from each other, it is actually accelerating the demise of ASICs and replacing ASSPs, which we are both benefiting from. So, I don't think it is a zero sum gain from my perspective, I think we are both going to benefit from it and each of the target application has a different uptick and it is true that prototyping happens a little earlier because they need the largest chip and we intend to have the largest chip.

Suma Dhondo – Merrill Lynch

Okay, thank you very much.

Moshe Gavrielov

Thank you.

Maria Quillard

Okay. Well, thank you all for joining us today. We have a playback of this call beginning at 5:00 pm Pacific Time, 8:00 pm Eastern. For a copy of our earnings release, please visit our IR website. As we’ve stated in our press release, we will not be providing a scheduled mid-quarter update for the June ending quarter. Our earnings release for the first quarter of FY 2010 will be Wednesday, July 15, after the market close. This quarter, we will be presenting at the CSFB London Conference, the Raymond James Conference in Boston and the UBS Tech Conference in New York. This completes our call, thank you very much for your participation.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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