Xilinx F1Q07 Earnings Conference Call Transcript (XLNX)

Jul.26.06 | About: Xilinx, Inc. (XLNX)

Xilinx, Inc. (NASDAQ:XLNX)

F1Q07 Earnings Conference Call

July 25, 2006 5:00 pm ET

Executives

Wim Roelandts - Chairman, President, CEO

Jon Olson – CFO

Maria Quillard - VP IR

Analysts

Michael Masdea - Credit Suisse First Boston

Adam Parker - Sanford C. Bernstein

Mark Edelstone - Morgan Stanley

Chris Stanley – JP Morgan

Ambrish Srivastava - BMO Capital Markets

Hans Mosesmann - Moors & Cabot

David Wu - Global Crown

Sumit Dhanda - Banc of America Securities

Seogju Lee - Goldman Sachs

Ruben Roy - Pacific Crest

Tristan Gerra - Robert W. Baird & Co.

Tim Kellis - Stanford Group

Danny Kuo - Bear Stearns

Gus Richard - First Albany Corp.

Glen Yeung - Citigroup

Katherine Piro - A.G. Edwards

Steve Eliscu - UBS Warburg

Jeff Palmer - Friedman Billings Ramsey

Sam Ellis - Sanford C. Bernstein

Parag Agarwal - Jefferies & Co.

Operator

I would like to welcome everyone to the Xilinx first quarter fiscal year 2007 earnings release conference call. (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 are Wim Roelandts, CEO; and John Olson, CFO. We will provide a financial and business review of the June quarter, and then we will open the call for questions. I will end of the call with a few housekeeping items.

As we published in our press release, our business update for the second quarter of fiscal year 2007 will take place in the form of a press release after the market closes on Wednesday, September 13. After we update our guidance, we will be in a quiet period until we report the following month.

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 Company documents that they file 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 Investor Relations web site.

Now, let me turn the call over to Jon Olson.

Jon Olson

Thank you, Maria. Last week, we postponed our earnings release to allow for more time to review the results of the investigation of our historical stock options practices and to assess the resulting financial implications. As a result of this review, there is no restatement to the Company's financial statements.

The investigation did, however, find minor differences between approval documentation and the recorded grant date of certain historical stock options that resulted in a $1.5 million compensation charge, which is included in our June quarter results.

This one-time charge was not material to any particular quarter in the Company's history. The Company has, in nearly all cases, followed a policy of issuing its stock options on preset dates. The investigation into our stock option practices is not yet complete; we anticipate its completion prior to filing the 10-Q.

Revenues in fiscal Q1 increased 2% from last quarter to $481 million, in line with our guidance. Gross margin at 60.1% was lower than our guidance of approximately 62%, due primarily to two unexpected factors: product and customer mix shifts, particularly in the month of June, and a warranty reserve.

Let me first discuss mix shifts. Sales from products in the base category, which generally have among the highest product margins, decreased 12% sequentially. Entering the quarter, we expected sales from this category to decline, particularly coming off a strong March quarter. However, the magnitude of the decline was greater than anticipated.

Additionally, during the quarter and particularly during the month of June, our customer profile shifted meaningfully towards large OEMs, driving higher volumes and lower ASPs. To underscore this point, sales from our top five customers increased 18% sequentially. Our top 50 customers were up 9%, while the rest were down 5%. The combination of lower revenue and base products and a greater-than-anticipated shift towards larger customers resulted in an impact to gross margin of approximately 1 percentage point.

The second factor impacting margins during the quarter was a warranty reserve relating to a Spartan-3 quality issue experienced during the quarter. This reserve negatively impacted gross margin, but to a lesser degree than from the mix shift.

Let me step back at this point and give a brief recap of the Spartan-3 quality issue. On June 26, Xilinx issued a Spartan-3 quality alert to our customers. The root cause of this quality issue was related to packaging and assembly and specifically to the mold compound used in conjunction with a particular assembly process.

To date, only one customer has confirmed failures. All affected material has been identified. This material represents a subset of Spartan-3 material shipped from late 2005 through the first quarter of 2006, and our suppliers have corrected the problem.

To fully assess the financial impact of the issue, we conducted a number of internal tests that were only recently completed. Because there has been a fair amount of speculation and misinformation in the marketplace regarding this issue, I'd like to state that the associated revenue impact is immaterial, since we have ample replacement inventory available for delivery to our customers.

The majority of the financial impact is related to the warranty reserve I mentioned earlier that impacted our gross margin for the June quarter by less than a percentage point.

Now, let me turn to operating and net margin. First quarter net income was $82.8 million or $0.24 per diluted share, including stock-based compensation expense of $27 million as well as the $1.5 million charge related to minor differences between approval documentation and certain recorded stock option grant dates.

Excluding stock option and compensation, net income was $105.5 million or 22%, down 5% sequentially. Operating income was $122 million or 25%, up 2% sequentially. Operating expenses were down 2% sequentially, slightly better than expected.

Interest income of $14.8 million was better than guidance of $13 million due primarily to higher interest rates and hedging gains. We generated $140 million in free cash flow during the quarter and repurchased 4.7 million shares for $125 million. We also paid $31 million in dividends.

The tax rate for the quarter was 23%.

Now, let me comment on the balance sheet. Cash balance increased $18 million to $1.62 billion. Days sales outstanding decreased eight days to 29 days as a result of weak shipment linearity at the end of the quarter. Combined inventory at Xilinx and distribution decreased by 17 days to 117 days. Five days of this decrease is related to higher cost of goods. Internal inventory levels decreased by 11 days, while distributor inventory days decreased by 6 days. We are now within our corporate inventory target.

I will now turn the call over to Wim to comment on our business and products.

Wim Roelandts

Thank you, Jon, and let me first give you my comments on the June quarter. The June quarter was a bit of a disappointment. Revenues were in our guidance range, but towards the lower end. Over the past four quarters, Xilinx revenues have grown faster than any other POD company. Remember, we had 13% sequentially in the December ending quarter.

Bookings for the quarter were 54%. While bookings for the months of April and May were healthy, we saw order rates weaken as anticipated in the month of June, especially in Japan. Japan was the weakest region this quarter. Nearly all of our top three customers in Japan were down sequentially, which was unexpected.

The weakness was broad-based across end markets with particular weakness coming from communications, both wired and wireless, as well as Test & Measurement. All of these areas showed growth last quarter. The other geographies fared much better. Virtually all of our top ten customers in Asia-Pacific and Europe were up sequentially this quarter. North America was more of a mixed bag. Revenue was flattish, as we had forecasted.

New products were up 8% quarter-to-quarter. The Virtex-4 family is the fastest-growing 90 nanometer FPGA family on the market. Cumulative as well as quarterly revenues outpaced our competitors' 90 nanometer FPGA family. Compared to a year ago, Virtex 4 revenues are up tenfold. Cumulative Virtex 4 revenues have now surpassed $100 million. Combined with Virtex 2 Pro, quarterly revenues from these two families reached almost 25% of revenues.

For the first time, Spartan-3 is now the largest Spartan product family in terms of revenues, surpassing the peak of Spartan-2 during the quarter. Spartan-3 and 3E combined grew over 20% sequentially and more than doubled from the year-ago quarter.

We are the undisputed leader in 90 nanometer with over 16% of our revenues coming from this process technology.

Our base products declined double-digits sequentially after being flattish for the entire year. The older 4K families in particular were negatively impacted as some programs reached end-of-life. We don't expect this decline to be a significant in the September quarter.

By product family, Virtex represented 54% of revenues; Spartan, 25%; and CPLD, 9%. The total Virtex family grew 4%, Spartan grew 7%, and CPLDs increased 2% sequentially.

In terms of end market data, communications was up 3%. Wireless and wire communications were strong across the board, with the exception, like I mentioned, of Japan. They both were down sequentially. Consumer and automotive was up 2%. Both of these components showed good growth, while the audio/video broadcast component declined after a strong March quarter. Industrial and other was up 1%. Test & Measurement continues to be weak, but defense and industrial both increased quarter-to-quarter. The storage and server was down slightly versus our guidance of flat to up. Although the vast majority of our top 20 customers increased, there were two storage accounts that more than offset these gains.

Let me now say a few words about our latest product family, Virtex-5. Xilinx is the only PLD company currently shipping 65 nanometer FPGAs. On May 15, we announced initial shipments of three devices of our Virtex-5 LX family. The LX family is the first of four domain-optimized families that we plan to introduce over the next year-and-a-half. Also shipping is our 802-I integrated software environment tool suite supporting Virtex-5. The ISE 802-I design environment, combined with Virtex-5, enables 30% faster performance on previous generation FPGAs.

Let me now turn to guidance for the quarter. We ended the September quarter, which is typically our weakest quarter in terms of revenue growth. Our four-year average has been above minus 2.5%. Our beginning backlog is down very slightly. As a result, we are forecasting revenues to be flat to down 5% in Q2.

In order to reach the midpoint of our guidance, we would need turns in the mid-50% range, similar to this quarter.

As far as end markets, we expect communications to be down slightly, consumer to be up, storage to be flattish, and industrial and other to be flat to down this quarter.

From a geographic perspective, I expect sales from Europe and North America to be down due to summer seasonality, and Asia and Japan to be up slightly.

Now, let me turn the call back to Jon for some final remarks.

Jon Olson

Thank you, Wim.

Gross margin is expected to be 61% to 62%, including $3 million of stock-based compensation. We expect our customer and product mix to return to a more normal pattern. Even though we expect our consumer segment to increase in revenue where lower margins are possible, we do not anticipate the large customer overweight trend to continue.

Combined inventory days are expected to increase to about 125 days with five of those days the result of the lower cost of goods expectation in the September quarter.

R&D expense will be approximately $100 million, including $12 million of stock-based compensation. SG&A will be approximately $95 million, including $10 million of stock-based compensation.

Amortization expense will be approximately $2 million. Other income is expected to be approximately $20 million, up significantly due to an anticipated dividend from UMC and higher interest rates. Share count is expected to be 345 million shares, and the tax rate is expected to be 24%.

Let me now open the lines for questions. Back to you, operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Masdea - Credit Suisse.

Michael Masdea - Credit Suisse First Boston

Thanks a lot. I guess just looking from the outside in, over the last couple of years, it feels like there's more volatility in the orders and even movements between the groups. Let me know if, from your perspective, you would agree with that? If s, help us understand why there seems to be a little bit more volatility right now. Is it a function of visibility or anything like that?

Wim Roelandts

No, it's really difficult to pinpoint this exactly, Michael, but clearly, June was weaker than we anticipated. In our case, our lead times remained reasonably good during the last several quarters, and we shipped on time, so I don't think it's due to over-inventory. I think it just may be a weakness that is due to excess inventory of PCs, maybe some extra inventory of cell phones that is kind of slowing down the infrastructure business, which is the bulk of our business.

Next question, please.

Operator

Our next question comes from Adam Parker - Sanford Bernstein.

Adam Parker - Sanford Bernstein

I'm just trying to understand what's going on shorter term between you guys and Altera. If you look back, there's very few times where your sequentially revenue growth has been so different from theirs. Can you offer any explanation?

It seems like your new products grew pretty well, but I'm trying to figure out if there something else going on. W, and why do you think your normal seasonality in the June quarter is below theirs? Why did they grow sort of 14 versus your 2? Anything you can explain to help us understand share shifts versus kind of the overall marketplace.

Wim Roelandts

Sure, Adam. I think it's very well-documented that Altera had delivery problems in the last previous two quarters, so just to remind you, December, their quarter was negative growth. We had a strong quarter in December in part driven by general strength in the business, but also by several big military orders which we talked about at that time. So, just a little bit more than what you normally expect because of our strength in the military business.

We never had, like I said, delivery problems or lead time problems, so we were able to continue to ship pretty much during the last two quarters. So the March quarter grew 5%, which is expected after the strong 13% or 14% growth in December because the military business it appears was a one-quarter phenomenon, so you have to look at the sum of the two quarters to really look at the big picture.

Now in June, we see a weakening in the market. I think it's pretty well-documented. Other companies have reported on that, and we see this effect.

I think our competition, they had issues delivering in the last two quarters, so they shipped a lot of stuff this quarter. Of course, that in itself is not an indication of solid performance; I think it's rather the opposite. Because you know, when you had delivery problems, there's still ordering going on and things like that, and the excess inventory build, the customers aren't worried about delivery, so I think that explains in a few sentences what we see happening in the market.

Next question, please.

Operator

Our next question comes from Mark Edelstone - Morgan Stanley.

Mark Edelstone - Morgan Stanley

There is discussion that your larger customers actually were pretty good in the quarter. Based on what we've heard out there from guys like EMC and IBM and others on the enterprise side, I would think that it might have been a little bit different. So give us some perspective as to why those guys were stronger than, say, the large breadth of your customer base?

Wim Roelandts

You know, Mark, it's something that happens, that is very difficult to explain. Clearly, some of the strength was due to some programs going into production, especially on the wireless side. We grew very well. Telecommunication was strong.

On the other side, the industrial customers, they were weaker. Test & Measurement was weak; storage and service was weak. So I think it was more market-segment based rather than any other explanation.

There also could be some other factors specific to certain specific customers, but we have not been able to really see any good reason besides the ones that I mentioned.

Next question, please.

Operator

Our next question comes from Chris Stanley – JP Morgan.

Chris Stanley - JP Morgan

Thanks, guys. Going back, we had problems with the V4 FX on the back end last year and now we've had some back-end problems on the Spartan-3. Is there anything in common? Could you just shed a little more light on why we've had two problems in two product lines in the last year?

Wim Roelandts

Well, Chris, the Virtex 4 FX problem was a yield problem. You know, our yields per transceiver were okay, but when you put 16 or 24 transceivers on a chip, having all of them to work reduces the probability quite dramatically by the number, and that was the issue. We did some corrections and I think these issues are now being resolved.

The Spartan-3 was a much more limited issue. It was a manufacturing issue where a component delivered by a subcontractor of our subcontractors -- so we're talking about two levels removed here -- was not consistent, didn't have consistent quality. We really have roughly the small number of parts impacted, somewhere between 1 million and 1.7 million. We only have that one customer that has this problem.

We felt that we had to make the announcement because it is really not just a Xilinx problem; it is an industry problem. You know, we consume only 10% of the compound, so 90% is used by other companies. We felt that we had to warn our customers about this at the earliest opportunity.

Really, the first one was more a design abnormality problem. The second one was a quality inspection or quality assurance problem of a subcontractor to our subcontractor, a supplier to our subcontractor, in other words.

Next question, please.

Operator

Our next question comes from Ambrish Srivastava - BMO Capital Markets.

Ambrish Srivastava - BMO Capital Markets

Hi, Wim. Just following up on your comments from Japan, you indicated that Japan would be up this quarter. Could you just share with us the trends in the specific markets that were weak? Have they turned around or are they still weak, and something else is making up for the com segment that was weak in Japan?

Wim Roelandts

Yes, Ambrish. It was really I think a combination of long-time things that came together. We didn't expect all of our top customers to be down this quarter, and when you look at each individual case, there is a good explanation. It just bundled together to make this quarter particularly weak in Japan.

Two quarters ago, Japan was extremely strong. In fact, for several quarters Japan was extremely strong. So again, there is no real good trend except that we believe that the communication industry in Japan is weaker than it was two quarters before because both our wireless and wireline customers were both impacted, which are to be honest, the bulk of our large customers in Japan.

So this would indicate in my opinion maybe a weakness of that market or a weakening of the communication market in Japan at this time, because all of our big customers were impacted by this.

Next question, please.

Operator

Our next question comes from Hans Mosesmann - Moors & Cabot.

Hans Mosesmann - Moors & Cabot

Wim, a couple of questions. What's your gross margin model going forward? Has that changed?

Wim Roelandts

No, our gross margin has probably not changed. It's 61% to 63%. This quarter was unique; sorry, that is before option accounting, of course. Pre-option accounting, so I think if you have to reduce it by about 0.5 percentage point, roughly. Jon?

Jon Olson

Yes, it's a little bit more than that, but essentially we're still on the 61% to 63%. We still like to stay in that range, inclusive of the stock option expense. So I think one of the things that's been a challenge everywhere out there is the tightening supply lines, the filling up of the fabs, and that contributes to more price and cost advantages going towards the suppliers and less to us.

So we continue to work through our cost declines with our suppliers but things have been tight for some time. We still believe we can land in that range pretty efficiently.

Wim Roelandts

So there's nothing that changes really from our point of view. This quarter is unique that we had this warranty expense on top of a weak mix.

Next question, please.

Operator

Our next question comes from David Wu - Global Crown Capital.

David Wu - Global Crown Capital

Yes, good afternoon. I was just curious about one thing. A number of your competitors are reporting and the headline says that they are looking for a modest sequential increase in Q3, the number two and number three players in the PLD business.

I was just wondering. I understand Altera has its own issues and they may be a little strange, but is there anything that tells us that there's some design wins that's going against you in the September quarter?

Wim Roelandts

David, I am not aware of design wins going against us. Even if design wins were going to go against us, the impact really is not visible for six months in the consumer space to typically 18 or more months in the infrastructure space.

So, I think we are in fact very strong in the communication space, so that could be one of the reasons that we are a little different from these guys. But also very strong in the big corporations, so that could have an impact.

Overall, I would not put too much attention to 1% or 2% ups or downs, because to be honest I don't think we are precise at that level. We know that July and August typically are weak months, and so that would really depend on September and I don’t feel very comfortable to predict a big upswing in September, because I honestly don't know what's going to happen in September.

If energy prices reach $100 per barrel, September will probably be weak, but I don't want to stick my neck out that far because there's too much uncertainty going forward. So that's maybe where I'm a little more cautious than some of our competitors, but I think a couple percent up or down don't much of a difference in these forecasts because they are not precise at that level.

Next question, please.

Operator

Our next question comes from Sumit Dhanda - Banc of America.

Sumit Dhanda - Banc of America Securities

If you could address what is occurring in your storage and server segment. Your revenues have grown over the last couple of years, but within that segment, the revenues have declined in both years. Help us understand; what's going to stem the bleeding and what is really causing all of this over such an extended period of time?

Wim Roelandts

Yes, it's no problem to explain that. Several years ago, we won some really big sockets at one of the key suppliers in the storage area, because that company was losing market share and wanted to come out with some new products at a very short design cycle. So they heavily used FPGAs and that was very good business for Xilinx.

Once they were established in the market, some of these sockets were then converted not so much to ASICs but mainly to ASSP, some ASICs also. So that business went away. It was kind of what I call a couple years of windfall business, and we went back to the more 10%-ish that we have traditionally done in the storage and server market.

So, it was really a one-time I would say event that created all of the revenue growth in that segment and then disappeared.

The core of the business continues to be quite strong, so apart from this one event, if you take that out, the business is pretty stable. All of our statistics show that this is a market that is not growing very much for any company for that matter, so it's a business that is relatively stable over the last several years when you exclude this one design win that we received.

Next question, please.

Operator

Our next question comes from Seogju Lee - Goldman Sachs.

Seogju Lee - Goldman Sachs

Thanks. Jon, just in terms of the gross margin with the previous Virtex product families, there was quite a bit of volatility with the yield. As you've ramped Virtex-5 in the coming quarters, just how we should think about the gross margin going forward over the near to medium term? That would be helpful. Thanks.

Jon Olson

Yes, I think that we are planning maybe a typical or a little better than typical ramp, just given the fact that there's quite a bit of commonality in the toolset between 65 nanometer and 90 nanometer tools that are being used on the processes at our foundries.

I wouldn't anticipate any real impact to gross margin until we get into calendar '07 because, at this point, you know we are ramping or launching three products and three different SKUs, moving forward with that each quarter with a few more, so it will be relatively gradual. I don't think it will have any significant impact on our margin until maybe a little bit in the March quarter, and then maybe a little bit more in the following quarter.

But I'm hoping by then that we can kind of be ahead of our original plan on yield, given those factors. But it's way too early to give a commitment to that right now.

Next question?

Operator

Our next question comes from Ruben Roy - Pacific Crest.

Ruben Roy - Pacific Crest

Wim, can you speak a little bit about new design activity and trying to focus on the communication segment? Talk about the potential PLD content that you're seeing in next generation communications equipment versus what you might have seen two, three, five years ago? How is the content changing, if at all?

Wim Roelandts

Yes, Ruben, I would be happy to talk about that. In fact, when we look at the big picture, it's very clear -- and I'm not talking specifically about Xilinx, but in general, the programmable logic is more and more used by the communication companies. The reason of course is that the cost of ASICs, especially on past technologies are reaching a level that are difficult to amortize over the relatively low volume of these devices in the market.

I can tell you that several or most communication companies pretty much have abandoned doing their own ASICs or doing ASICs altogether. They are using a combination of programmable logic and in some cases ASSPs to build their products and that is why we have seen growth in the last several quarters in the communication market.

I believe that the strength is irreversible. I don't think that it's going to change, because now we move to 65 nanometer, later we move to 45 nanometer. The cost of developing ASICs will become bigger and bigger, and so the gap between the technology used in FPGAs and the technology used in ASICs is going to get bigger and bigger. I can tell you, 45 or a 65 nanometer FPGA can compete very well with 180 nanometer ASIC, for instance.

So, I think this trend is true not just in the communication space but in pretty much all of the what I would call the low-volume spaces, the industrial electronics, Test & Measurement, the high-end servers, the military, medical electronics.

We see the same trend happening because when you sell thousands to tens of thousands of units per year, amortizing the development costs of $20 million to $40 million over these units, it just is not feasible. So I think this trend is growing and the more we advance the technology and the lower-cost base FPGAs become programmable logic, the more that this trend will accelerate.

The other factor is also that some people have or feel they have to do ASICs in the past because of performance, but you know, nowadays with FPGAs containing gigabit transceivers and high-speed I/O, even the performance is not an issue because you can deserialize your input data and then treat them with programmable logic and then serialize it back again and pump it out at high performance.

So the FPGAs have evolved to become bigger, faster, and have a lot more hard-coded features compared with the past. On the other side, the costs for ASICs have continued to climb for every generation of technology, and I think that is what is happening in these markets.

Next question, please.

Operator

Our next question comes from Tristan Gerra – Robert Baird.

Tristan Gerra - Robert W. Baird & Co.

Good afternoon. Regarding pricing trends, have there been any changes over the past few quarters, and if you could talk a little bit about the outlook, any secular change in terms of the pricing dynamics in the FPGA space?

Wim Roelandts

You know, because of the movement towards the mass technology, the average price per logic continues to decline. There is a healthy competition but not a ferocious competition in our market. Otherwise, we obviously would not get 60% plus gross margins.

But there is a healthy price competition, and customers, especially large accounts, try to use that whenever they can. But otherwise, I don't think that there is any big change on what we have seen in the past. You know, it's a phenomenon that it's an aggressive price but never to the level of what I would call a price war that would drive gross margins down.

Next question, please.

Operator

Our next question comes from Tim Kellis - Stanford Group.

Tim Kellis - Stanford Group

Good afternoon. I guess it's understandable for weakness in the mature product lines, but it looks like, according to your dialogue on the newer product line, that after having a couple quarters of really some solid growth, that the growth rate may have been weaker. It looks like the Virtex-4 growth rate was about the same as the Spartan-3 off of a lower base.

I was wondering if you could just talk about the dynamics between the Virtex-4 and the Spartan-3. Are you seeing much cannibalization maybe in Spartan-3 sales at the expense of the Virtex-4 sales? What other issues do you see out there?

Wim Roelandts

I think there's no doubt that this quarter was lower than we expected, and especially new products were a little weaker than we expected. To me, I attribute it mainly to softening in the market.

When you talk about trade-offs between Spartan and Virtex, Spartan was designed for high volume, low-cost applications. Clearly, on the other side, Virtex is more the high performance, high-capacity type of product, so although the bulk of the Spartan devices are sold in the high-volume markets, although some are used in our traditional markets, but these are devices that I don't think are really cannibalizing Virtex.

Virtex has become more and more of a platform sale, where you don't just sell programmable logic and some I/O; you really sell the capabilities of an integrated platform solution where you have not just FPGAs but you have the processes, you have MGTs, you have DSP accelerators, and so on and so on. So you are really talking about a very different sale in this Virtex family, which of course Spartan cannot even come close to that.

In fact, when you look at our overlap, there is really not much overlap between Spartan and Virtex from a density point of view. The smallest Virtex is bigger; it is not that much smaller than the biggest Spartan. The overlap, if it comes, is that yes, some people use it for some blue logic on their boards. They would have used either a lower-cost device anyway because they don't need the performance or the integrated capabilities of the Virtex software have, and vice versa.

On the other side, I think that Virtex is a very strategic product for Xilinx because once customers start using some of these features, obviously gets us a tremendous advantage compared with the competition that doesn't have these features, and that of course is the big thing.

They also are getting engaged more and more with what the industry calls system-level engagement. It means you don't sell to an engineer; you sell the architecture, so with DPO engineering. it's really much more of a longer-term sale. You know, these sockets are not going to be replaced by a socket from a competitor, because the features they use can only be replaced by future Xilinx products over time.

We call them sticky sockets because once you win the socket, you are in that socket for multiple generations of product, and that is a very important part of our strategy.

Next question, please.

Operator

Our next question comes from Danny Kuo - Bear Stearns.

Danny Kuo - Bear Stearns

With the lower start for the what is a seasonally weak quarter, you guys are looking for a some type of turns requirement. How confident are you with your turns expectation for the quarter? Specifically, could you be more specific on telling us if the turns bookings have improved July relative to the weak June or if the Japanese customers have come back in terms of bookings? Thanks.

Jon Olson

Yes, I think there's, in essence, a level of detail that I don't think we're going to be comfortable in giving because it is pretty early in the quarter so it's hard to give geographic trends. As we stated, we think the Japanese customers, there will be some strengthening compared to last quarter and sequentially.

But to your overall turns question, we typically have a pretty reasonable July and then August is a very, very poor month for us. Then we rely on September to come back. This is what makes it pretty difficult for us, as Wim said earlier, to forecast, because so much of it depends on September.

We decided to play it as straight by the arithmetic as we can call it and given some of the signs we've seen at certain customers around inventory builds or slowness, we put that into our calculation and then obviously offset that with other customers who tell us they're going to be a little bit stronger. You know, you net it all out, it looks to us pretty seasonal, and it's really not much more complex about it than that.

Wim Roelandts

Next question please.

Operator

Our next question comes from Gus Richard - First Albany.

Gus Richard - First Albany Corp.

Thank you for taking my question. I was hoping you could cut your product line slightly different just by line width. When I look at new products as a percentage of revenue, Q1 FY07 over Q1 FY06, are those going below or could you just sort of walk we through where the breakouts are as far as line width is concerned?

Wim Roelandts

Yes, we don't give this type of information available, and I don't really have it handy here but I mentioned in my comments that the 90 nanometer technology represents over 60% of Xilinx revenues. But I don't have the other data in the form that you required.

We look at really at the different product families. I have to do a little arithmetic to add them all together.

But clearly, this 90 nanometer is doing extremely well for us, like I mentioned. We are continuing to grow both with Spartan and Virtex in 90 nanometer, and we're the only one who is really coming out with the OS shipping 65 nanometer product that again have included some very important architectural innovations and that in itself is creating stronger performance of these products than the previous families that we have had.

That's all I can say for the moment. Next question, please.

Operator

Our next question comes from Glen Yeung - Citigroup.

Glen Yeung - Citigroup

You know, Wim and Jon, I missed the first part of your call, so forgive me if this question has been asked already. But your competitor talks about 15% revenue growth just for the PLD industry over the next two or three years. I wondered if you felt like that was still a reasonable target?

Then secondly, we've seem some issues now with Spartan-3. I think we had some very minor issues in the first quarter with the Virtex-4 FX. What's your sense that that impedes your ability to gain or grow share, whatever the number is that?

Wim Roelandts

Yes, those are very good questions and let me put one caveat in there. We expect the industry to grow in the 15% to 20% range, but with the caveat of the industry that the overall economies remain healthy. I think what we're seeing here is that the impact of the higher energy prices is weighing on consumers, and that in itself could be a negative.

The reason why I'm saying that is that indeed there is a glut of PCs and cell phones in the world, at least from my understanding. So, assuming that the energy prices remain reasonable, I think 15% to 20% growth is reasonable for the industry. But if prices continue to go up like they have done in the last several weeks, I think there could be a worldwide recession that will impact the programmable logic industry like every other industry in the world.

On the issues that really have an impact, I think Spartan-3 I do not believe it will have any impact at all. It is an equality issue that is limited as we identified. In fact, I have had several customers that I personally spoke to about this issue that really were very positive about the way that Xilinx has handled this problem instead of hiding it away like other companies sometimes do.

So, people felt we are very, very positive and very thankful that we have warned them of this issue, we've give them the data, they have all the data that we collected, all the measurements that we do. I don't believe it will have any impact at all on our business.

On the Virtex-4 FX, we had delivery problems and certain customers we simply decided not to deliver to them in order to supply materials to the customers that we already had. So we had to turn away some customers during that phrase, and so that eventually will have an impact on our overall business two years in the future, but how much it will be is very difficult to say.

I can tell you that Virtex-4 FX design wins continue to grow through this quarter, so when you look at the leading indicators like design win activity, Virtex-4 FX is continuing to move in the right direction as far as that is concerned. So I think that these elements are now behind us and it's not just a question of delivering products to the customers, which we are doing.

Next question, please.

Operator

Our next question comes from Katherine Piro - A.G. Edwards.

Katherine Piro - A.G. Edwards

Yes, thank you. Can you discuss the impact of mix on Virtex versus Spartan versus CPLD on your margins, and when do you foresee the Virtex-4 margins up to the corporate average?

Jon Olson

Sure, Katherine. The mix impact of this last quarter on margins, let me just talk about the current quarter and then I can extrapolate a little bit from there. Really, it was a combination of both Virtex-4 and Spartan-3, relative to those issues. Again, it was related most to larger customers yield progress for both of those products.

We are very comfortable with where we are relative to the yields; they continue to improve. Spartan-3 is further along than Virtex-4 in terms of improvement, and we're starting to get to a level there where we are flattening the curve out a little bit and Virtex-4 is getting closer to that flattening point but we expect in this next quarter some reasonable decline in costs as a result of better yield, which helps us again mitigate any sort of a mix kind of an issue that may confront us next quarter, even though we think it's going to be relatively minimal.

So, if you look going forward, I think we're starting to move towards a sweet spot on 90 nanometer as both of those products get to be more mature and ahead of when we start having any sort of a margin impact on 65 nanometer.

Again, I will caution you about getting too excited about margin expansion beyond our 63% model, only because of the general tightness in the supply chain and the price impact.

Operator

Our next question comes from Steve Eliscu - UBS.

Steve Eliscu - UBS Warburg

Yes, on the wireline and wireless communications sub-segments, that is access metro long haul and 2G, 3G, where are you seeing strength and where are you seeing weakness in those sub-segments?

Then, on enterprise networking, are you seeing any change in the business other than seasonal trends?

Wim Roelandts

Yes, both wireless and wireline were weak in Japan. Both segments were strong in all the other regions. Our expectation is that we will see some seasonal weakness this quarter. I'm a little bit worried about the wireless side in terms of these operators put new capacity in place when they have new subscribers, and with some weakening or some extra inventory in the cell phone business, that means there's probably not as many subscribers as expected, so that's why we are a little bit cautious for next quarter on the wireless side.

The wireline side is more driven by seasonality and also the mergers. You know, several of these big wireline companies have now merged, the greatest one being Alcatel and Lucent. You know, the long-term effect of these mergers will be positive for the industry because it takes away some of the overcapacity that exists in that market.

But in the short term, there is always some management attention taken away from running the business, so we could see some delays in programs and things like that, maybe some projects get cancelled or consolidated. So our expectation is that also will have a little of a negative effect in the short term, a positive effect in the long-term.

As far as enterprise networking is concerned, really not seeing anything special except the usual seasonality that we've seen during this period of the year.

Next question, please.

Operator

Our next question comes from Jeff Palmer - Friedman Billings Ramsey.

Jeff Palmer - Friedman Billings Ramsey

Yes, my questions have been asked and answered. Thank you very much.

Operator

A follow-up question from Sam Ellis - Sanford Bernstein.

Sam Ellis - Sanford Bernstein

Yes, I just wanted a follow-up as well on next quarter outlook with new products. If you can maybe give us your outlook there. It sounded like you are expecting your base business to be relatively stable after the weakness in the June quarter. Would you not expect maybe some strength in the newer products to give maybe a better outlook, or what's your thought there?

Wim Roelandts

Yes. Well, the next quarter outlook is really a combination of several factors. We expect the base business to decline, but not as much as it did this quarter. But clearly, you know when there is a general economic weakness in the industry, base business is the first one to get impacted.

We expect, of course, our new products to continue to grow quite significantly, but then offset by a general weakness in our more core business, which is really the bulk of our revenues. You know, these are products that are in production and that's where we expect to see weakness, driven by just the seasonality and maybe a little of the slowdown in the wireless and DPC areas.

Operator

Our next question comes from Seogju Lee - Goldman Sachs.

Seogju Lee - Goldman Sachs

Thank you. Just in terms of the equity options review, in terms of the 10-Q filing, do you expect that to be on time? Thank you.

Jon Olson

Yes, at this point, we anticipate to be an on-time filer. We've been working very hard since the initial lawsuit activity and the informal inquiry late in our quarter, so as you can imagine, we've been scrambling pretty hard with the special committee of the Board and working through issues, and we really felt that delaying and earnings release to be able to say something that's pretty positive was worth it.

We're also working very hard to complete all of the activities so we can file the 10-Q on time. That's our intent.

Operator

Our next question comes from Sumit Dhanda - Banc of America.

Sumit Dhanda - Banc of America Securities

Jon, I know you've been asked this question but I'm not sure you've answered it directly. You said you can't get geographic information about orders so far this quarter, but could you give us a general sense of how they've been so far this quarter?

Jon Olson

I'm not going to provide any detailed figures. I think that Wim has already said that entering the quarter, we were down a little but not a great degree, so I would anticipate that July is starting off pre-seasonal here for us. I anticipate that July is starting off pretty seasonal for us in that regard. So, there's really nothing remarkable there.

Wim Roelandts

Next question please.

Operator

Our next question comes from David Wu - Global Crown.

David Wu - Global Crown

Can you comment on both the front end foundries and the back end test and assembly houses' ability to respond to potential upside in Q4? I read the Charter Semiconductor comments, and it sounds like the foundries, at least front-end capacity is loosening up as opposed to tightening. I was just wondering. When can you get some price relief from the foundries?

Wim Roelandts

Yes, David, that's a very good question and I certainly would like that. On the other side, we have such a strong relationship with our foundries that really we're not that much impacted from the silicon side with price increases. Maybe the effect is more that maybe it didn't give us much decrease as we normally see, but we certainly didn't suffer from increases.

Where the biggest price increases came from or where price pressure came from really was more in the back end, in the components, the piece parts and things like that. We anticipated this coming, in fact, in the second half of last year, so we put some things in place that allows us to have capacity that we need.

That's why we were able to deliver through the first half of the year without too much of a hiccup and with reasonable lead times.

The outlook I can see is indeed that maybe there is going to be a little bit more capacity available by the end of the year, which I think as good. You know, I'm always worried when there is tightening of capacity, because then people start building new foundries and eventually we pay the price when there is overcapacity in the industry. So I think that having a little bit dampening of the demand is in fact healthy for the industry and would avoid having a big recession somewhere next year.

So overall, I think there will be no problem of having capacity fourth quarter of this year or early next year.

Next question, please.

Operator

Our next question comes from Danny Kuo - Bear Stearns.

Danny Kuo - Bear Stearns

Yes, two questions if I could? One, what was your Virtex-4 revenue growth for the quarter?

Second, with the $1.5 million charge I guess you're taking for the quarter, is it fair to assume that there will be no further restatement of historical financial statements after the completion of the stock options review?

Wim Roelandts

Jon, why don't you answer the second question?

Jon Olson

Yes, I will get to the second one. As we pointed out, the investigation is not totally complete. However, we wouldn't have come out with this charge and the statements that we made unless we felt at this time that we would, going forward, we would be in a pretty good position the not have to restate. Again, that's really totally dependent on getting through all of the rest of the details.

As I mentioned before, this has been a situation where we've done a lot of work in a very short time period. There's a lot of double-checking that needs to go on to a variety of the source data. But at this time, we think what we've put out fairly represents our financial statements for everything we know up to this date.

Wim Roelandts

On your first question, the Virtex-4 family consists of several sub-families that all report independently. Could you please give Maria or Lori a call and they can inform you about the number, okay?

Next question, please.

Operator

I'm showing that we have reached the allotted time for questions. Would you like to continue taking questions, sir?

Maria Quillard

One more.

Wim Roelandts

Maybe a last question, then.

Operator

Okay, the final question comes from the line of Parag Agarwal - Jefferies & Co.

Parag Agarwal - Jefferies & Co.

Yes, I just wanted to get a feel for the change in design win mix, as you move from 90 nanometers to 65 nanometers. Are they getting increasing number of ASIC design wins or are they getting share from your competitors?

Wim Roelandts

You know, this is of course not easy to calculate because we just introduced the 65 nanometer family in May, so we really have only I would say a month and a half of data.

But in general, our expectation is that it really is both, because if we gain market share from the ASIC companies, I mean both us and our competitors are trying to get market share from ASIC companies, so if we get more than our competitors, we obviously are outgrowing them.

So, the key issue why we are pushing forward with advanced technology is that smaller geometry means smaller die, means lower costs, and that is really what will expand our market share in general in the semiconductor industry.

We believe that, with all the features we have on our chips, we have a total available market that is in the $30 billion to $40 billion range. So being a $2 billion company, we have plenty of opportunity to grow.

That is my key focus, is really trying to grab as much as possible of this available market and do better than our competition is doing, in doing so. So that's fundamentally why we are pushing technology and why we will continue to do that, because 65 nanometer is just one step on a line of products that we introduced in the last ten years.

So this was the last question, so Maria, why don't you take it over from here?

Maria Quillard

All right. Thank you for joining us today. We have a playback of this call beginning at 5 pm Pacific, 8 pm Eastern time. For a copy of our earnings release, please visit our Xilinx IR web site. To reiterate, our guidance update for this quarter will be posted after the market close on September 13. Our next earnings release date for the second quarter of FY '07 will be Thursday, October 19 after the market close.

This quarter, Xilinx will be appearing at the BofA investment conference in September. This completes our call, and thank you for your participation.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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