Xilinx, Inc. F1Q10 (Qtr End 06/27/09) Earnings Call Transcript

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 |  About: Xilinx, Inc. (XLNX)
by: SA Transcripts

Operator

Good afternoon. I would like to welcome everyone to the Xilinx’s first quarter fiscal year 2010 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 to everyone. With me today are Moshe Gavrielov, CEO; and Jon Olson, CFO. We will provide a financial and business review for the June quarter and then we will open the call for questions.

This quarter we changed our revenue by product category classification. The last time we changed this classification was three years ago. We do this on a regular basis as product families age and new products are introduced making the product categories more meaningful for investors. A five quarter history of both the new and old methodology is posted on our Investor Relations website under the Quarterly Results page.

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 web cast live. It can be accessed from our 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 the June quarter. I will conclude my remarks by providing guidance for the September quarter. June quarter sales decreased 5% sequentially to $376.2 million in line with the revised guidance we provided on July 2.

Compared to the same quarter a year ago total sales were down 23%. Turns business was 57% for the quarter down from 66% in the prior quarter. I’d like to take a couple of minutes now to discuss the supply constraints that impacted Xilinx during the June quarter.

These constraints were primarily related to certain Virtex-5 devices which were in high demand. Yields of our wafers out of the factory met our expectation. The biggest factor leading to the constraints pertained to the ramp up of our foundries from a very low utilization level to a high utilization level resulting in through put issues.

We were aware early in the quarter that a limited set of V-5 parts were constrained. However achieving our revenue range is dependent on a mix of turns which is difficult to forecast. In the last four weeks of the quarter more turns than we had anticipated were for the impacted Virtex-5 parts.

Removing the business impact of the supply constraints we estimate our June quarter sales would have been essentially flat sequentially and Virtex-5 sales would have approached 20% of total sales.

As Maria mentioned earlier we reclassified our product categories during the quarter to better reflect the introduction of new products and the maturing of other products. Based on our revised category definitions, new product sales increased 3% sequentially and 60% on a year over year basis.

Mainstream and base products experienced sequential declines of 6% and 8% respectively. From a geographic perspective Asia Pacific was the only region to experience sales growth during the quarter increasing 2% sequentially to represent a record 37% of total sales.

With respect to communications in Asia Pacific region wireless sales were up sequentially and wire line sales were down. Sales from North America, Europe, and Japan were down 6%, 13%, and 4% sequentially respectively.

North America sales were characterized by strength in wire communications that was offset by all other end markets. European sales decreased sequentially in all end markets except consumer which was flat. In Japan consumer sales increased while sales from all of other end markets decreased.

In terms of our vertical markets, sales from all major end market categories declined sequentially. Communication sales decreased 2% sequentially representing 49% of total sales up from 47% in the prior quarter. Declines from wire line more than offset slight growth from wireless. The industrial and other end market declined as expected. Defense sales were approximately flat but declining sales from industrial, scientific and medical and test and measurement.

Sales from industrial and other currently represent 31% of total sales, down from 32% in the prior quarter. Consumer and automotive sales declined 5% sequentially during the quarter. Pure consumer sales increased driven by growth in flat panel and set top box designs but was offset by weakness in audio video broadcast and automotive.

Consumer sales now represents 14% of total sales, flat with the prior quarter. Lastly data processing sales declined 19% sequentially to 6% of total sales down from 7% in the prior quarter due to broad based weakness.

Gross margin for the quarter was 61.8% down from 62.1% in the prior quarter as the mix of customers was skewed towards large customers versus small customers. R&D and SG&A expense declined over 5% sequentially to $157 million, lower than anticipated as a result of continued spending discipline during the quarter.

Restructuring expense was $15.8 million, higher than our guidance of $11 to $13 million. A greater number of employees impacted by the transition were notified of their status in fiscal Q1 than was previously anticipated. Additionally we anticipate the full year estimate of restructuring reserve required to complete the transition will be approximately $26 million.

This amount is slightly higher than the previous estimate of $21 to $23 million due to higher retention expenses and some modification in employee packages. The remaining $10 million post Q1 recognition of expenses are expected to be spread over the September, December and March quarters of fiscal 2010.

While the timing of the charges are dependent on achieving transition milestones, we expect most of this charge to be incurred in the September and December quarters. Net income during the quarter was $38 million or $0.14 per diluted share. And was impacted by a couple of factors.

First we reversed $8.7 million of interest income recognized in previous quarters related to the loss of a court case on tax matters that I will discuss shortly. Secondly as I just mentioned our restructuring charges were approximately $3 million higher than anticipated. Collectively these items represented approximate $0.07 per diluted share after tax.

Operating cash flow for the March quarter was $128 million before $5 million in CapEx and we paid $39 million in cash dividends. The tax rate in the March quarter was 18%, lower than the 21% previously forecasted. The reduction is primarily due to the restructuring charges previously discussed, refinements of earlier accruals to our tax litigation and other uncertain tax positions, and the fact that our US income is lower due to the declining revenues associated with the economic realities.

With regard to the tax litigation mentioned a few times, on March 27, 2009 the Ninth Circuit Court of Appeals in a two to one decision, reversed an earlier tax court decision and found that the company should include stock options in its cost sharing agreements.

This issue impacts fiscal years 1996 and forward. As you can imagine there are many complexities associated with the accounting treatment. That being said, we had accrued a significant portion of the liability. There was an impact to the current period interest income and expense as stated previously, a charge in accruals for uncertain tax positions including a refinement to our reserve for cost sharing of stock option, and an adjustment to various balance sheet accounts associated with the accruals.

We believe that the Ninth Circuit Court majority decided the case incorrectly and we plan on filing a petition in Q2 fiscal 2010 seeking a re hearing. Let me now comment on the balance sheet, cash and investments increased $102 million during the quarter to $1.8 billion. We have approximately $690 million in convertible debt and our net cash position is approximately $1.1 billion.

In Q1 we implemented a new accounting treatment for convertible debt, FSPAPB 14-1. This required accounting treatment impacts how the nature of our debt instrument is reflected in the balance sheet and through the P&L and also adjusts our historic presentation of the balance sheet and income statement.

Specifically we have reclassed approximately $338 million of the outstanding balance of $690 million from long-term debt to the equity section of the balance sheet in the June quarter. This amount will be amortized over the remaining 28 year life to the long-term debt category with some charge to the interest expense line.

Our obligation to debt holders remains at $690 million at the end of the quarter regardless of the accounting presentation. Day sales outstanding decreased three days in the June quarter to 47 days. Combined inventory days in the March quarter were 78, down from 90 days in the prior quarter and below our stated inventory target of 90 to 100 days. We are expecting inventory levels to grow to the low end of our corporate target in the September quarter.

Let me now turn to a discussion of guidance for the September quarter of fiscal 2010. Our backlog in the September quarter is up in double-digits but primarily a result of our increased delinquencies. We continue to be cautious about the overall demand environment but have observed signs of stability in selected end markets.

On the positive side however we are experiencing growth from Virtex-5 during the quarter as supply constraints are relieved and this product continues to gain traction in the market. As a result we are expecting sales to be up 2% to 6% sequentially in the September quarter with all geographies flat to up slightly with the exception of Europe.

From an end market perspective we expect communication sales to be flattish sequentially with potential declines from wire line communications offset by potential increases in wireless communication.

Industrial and other business is expected to increase slightly sequentially as increases in test and measurement and defense sales are offset by decreased industrial, scientific and medical sales. We are expecting consumer and data processing to be up sequentially. The mid part of our sales guidance is predicated on returns rate in the low 50’s.

Gross margin is expected to be approximately 61% sequentially due to the fact that we expect to experience stronger than typical growth in our new products which are slightly below corporate gross margin coupled with customer mix which we are anticipating to be skewed to our larger customers that drive high volume business.

We do expect gross margin to recover to the range of 61% to 63% again in the December quarter. Combined operating expenses including approximately $5 million of restructuring charges are expected to be approximately $175 million in the September quarter. We continue to expect fiscal 2010 operating expenses excluding all restructuring charges to decline approximately 2% to 4% versus fiscal year 2009.

Other income and expense is expected to be a net expense of approximately $3 million. The share count is expected to be 278 million shares. The tax rate for Q2 and our fiscal 2010 is expected to be approximately 16%. This rate is substantially lower than our previously published rate of 21% for the fiscal year. The primary factors which led to the reset of the rate are the restructuring reserve and the fact that we are earning less income in the United States.

As the US market recovers, we anticipate that the rate will move back towards the historic rate. Let me now turn the call over to Moshe.

Moshe Gavrielov

Thank you Jon and good afternoon to you all. Jon covered a lot of territory in his commentary and my focus today will be primarily on product. However first I’d like to emphasize that Jon and I have worked in concert during the past 18 months to establish and operating structure that prioritizes financial rigor and efficiency.

To that extent I am exceptionally pleased with the progress we have made in introducing our next generation product while working in a far more disciplined framework. The March quarter we introduced and began sampling initial devices in both Spartan-6 and Virtex-6 product families.

This quarter we released our newest software to the public which significantly improves run times, quality, and overall capacity. This latest software which supports both and all of the Spartan-6 and the Virtex-6 FPGA devices is currently being widely adopted by our very broad base of several thousands of customers.

Our Spartan-6 family is the industry’s first and only high volume 45-nm FPGA family shipping today. This is a very important milestone for Xilinx because it makes us far more competitive in the high volume arena. As the lowest cost and lowest power FPGA solution on the market customer demand for Spartan-6 is high.

Spartan-6 LXT devices which for the first time offer low cost integrated transceivers along with PCIE are beginning to be designed into our customers’ next generation products including digital displays, software defined radio, ultrasound equipment, and driver assist programs.

Furthermore we are encouraged by our foundry partner, Samsung, and their progress to date. Samsung was a natural foundry choice for Spartan-6 giving their proven manufacturer of advanced high volume, low power solution.

In addition to the silicon and software [pre verified] reference designs targeting Spartan-6 devices, with fully integrated evaluation kits are now shipping. These kits are expanding our customer base by providing tools which [inaudible] PGA designers can very quickly learn to use to program FPGAs.

They help our customers shorten their development cycles, focus their engineering resources on creating greater product differentiation. On the high end our 40-nm Virtex-6 FPGA family extends our undisputed leadership position. Virtex-6 is the lowest power, highest capacity, and higher performance FPGA on the market.

Virtex-6 has 15% higher performance and 50% lower system power consumption compared to competitive 40-nm FPGA offerings. Quoting activity has been strong and we are very pleased with design win momentum so far.

Like Spartan-6 we are shipping Virtex-6 FPGA evaluation kits. These are the first in a series of kits that Xilinx will offer throughout this year designed to simplify the evaluation and development of our latest generation of programmable technology. Coming later a more specific evaluation kits aimed at engineers in a particular technical area such as connectivity or DSP.

After that we will be introducing market specific kits aimed at unique high growth end markets. In summary I am extremely pleased with our next generation product development efforts. In parallel our continued focus on operating model improvement has allowed us to develop these products while improving our expense structure.

We are meeting our initial product milestones and receiving strong design win activity for both the Virtex-6 and Spartan-6 families. We are the undisputed high volume FPGA leader today with our Spartan-6 FPGA family.

Additionally the introduction of our targeted design platforms further differentiates us from other PLD companies by providing an integrated PLD design solution which improve our customers’ design experience while reducing their overall development time and cost.

Xilinx’s strong new product portfolio should allow us to take advantage of future growth opportunities as we continue to benefit from accelerated ASIC and ASSP replacement. All of this is being accomplished while operating with a more financially disciplined framework.

This is reflected in the reduction of our operating expenses. The June quarter SG&A expense is down 21%, R&D expense is down 8% versus the same quarter of the prior year. Simply put we’re spending more responsibly while improving our product portfolio and competitive position.

Now let me turn the call over for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Uche Orji – UBS

Uche Orji – UBS

Let me start off by asking a quick question as to what confidence you have now that the supply chain constraints that you had in the initial ramp last quarter is completely dealt with now and for the guidance you have in the current quarter, that those issues will not be repeated. Then secondly I just want to get a sense of what, where gross margins could go going forward if you can give us a sense as to what the long-term model will be. There was a kind of expectation from last quarter that we should be heading up, but given the poor [inaudible] in gross margin in the current quarter is there any sense that we should get as to what the long-term model should be.

Moshe Gavrielov

With regards to our guidance this reflects all of the data we have today and there is always some uncertainty but we believe that the issues have been addressed and we’re moving forward with vigor to supply all of the parts that our customers have ordered from us.

Jon Olson

I’ll just make one comment about the supply chain, we certainly have gone into quite a detailed level in going through this handful or so of parts that we are limited on and I think we’ve been working very closely on I’ll say at least a daily basis, maybe even closer to an hourly basis with our foundry partners to fill that gap up.

So consistent with what Moshe said, you don’t know what could happen but we think we’ll have for the most part we’ll have this alleviated in a quarter. With respect to your gross margin question of where it could go, I think in the last call I was probably a little more bullish about how fast gross margin might go back up but quite frankly it really is dependant on a lot of different kinds of mix issues and just to give you a little bit of information, if you look at our top 50 customers and the decline, the percentage decline in our business from them from the peak which was one year, a quarter ago, Q1 in fiscal 2009 then look at the remainder of our customers so the broad base of all these other customers, the revenue impact is pretty stark.

Its approaching three times the percentage decline for the broad base customers and the top 50 and that customer mix if you will, has a pretty significant impact and can be a point or two drag on our margin in terms of our model, a point or two changing is pretty significant for us.

In addition to the fixed cost absorption issue that we do have with lower revenue as I would anticipate, as revenue picks up we will pick up some of those broad based customers and in those situations we tend to have better margins because its volume based issue. They pay us a higher price for a lower volume than the very large customers that we have.

So I’m still confident that our long-term model is 63 to 65. The question is when does that mix start getting back into balance as the economic situation comes back on balance.

Operator

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

Randy Abrams – Credit Suisse

I want to follow-up on the margin mix issue and if you could talk about how much is coming from having sequentially in the third quarter from the small customer mix and how much of it is a factor of the 65-nm business that pushed out booking next quarter and is that a function that a quarter or two from now you could get further along on the yield curve if its less of a factor.

Jon Olson

Clearly as we move along the yield curve and the foundries get up to high utilization again at the tool set, I think all those things tend to work in our favor. But even though our yields out of the factory are reasonable, we’re just not getting enough wafers and we need to get enough wafers out and we need to get to the other side of that and I think we will get the normal acceleration of that margin on newer products.

With respect to the next quarter, our Q2 fiscal 2010 which is Q3 calendar, the customer mix will be a little more skewed. It will continue to get a little more skewed to the top customers particularly because the delinquencies are focused on these larger customers that are focused on a variety of applications. China wireless is probably the leading application for that and that tends to have some downward margin pressure which is why we’ve guided the mid point down, the mid point of our range down effectively a point.

Randy Abrams – Credit Suisse

A quarter ago you mentioned the concern about the gap in third quarter and the push out obviously helps a bit but did anything else change in terms of the China program on bookings to give you a bit more confidence and if you were to say forward visibility, if you were to think about into second half of continued momentum there.

Jon Olson

It’s hard to have a lot of confidence going forward with the supply situation we’re in and the long lead times. So we have the issue of our key customers in the China area knowing that we have longer lead times so their ordering patterns have had to I would assume have had to have changed some. That gives us some mixed signals. While we’re catching up we’re certainly aware that the contracts for the next phase are starting to be whispered and rumored who’s winning and there’s been some adjustment of cancellations, push outs, changes, what parts they want among the broad base of customers that are supporting China.

So I would expect this sorts itself out in the next quarter as the awards become more public and they get their ordering patterns together, but right now it’s a little hard for me to look ahead another quarter with much confidence just because I think we’re in the realignment of backlog period right now.

Operator

Your next question comes from the line of Glen Yeung – Citi

Glen Yeung – Citi

If I were to look at the nitpicky numbers here and did some math on your September quarter guidance its actually slightly above normal seasonal, I wonder if I’m being to nitpicky or is there something I read into that.

Jon Olson

In speaking of the revenue guidance, actually I think its fairly in line with seasonal. We said that the delinquencies essentially would have had us more in the mid point of our range and if you add that back to, then compare that, add that to where we’re going to end up, we’re within a few million dollars of revenue of that and seasonally we’re normally flat to down a little bit, a point or two.

And so that kind of explains adding back the five percentage points that we’re off and the mid point range is the 4% growth and so that would put us net down 1%. If you could kind of rebalance those delinquencies.

Glen Yeung – Citi

I think I might be getting different math but the net of it is you’re suggesting that your guidance is largely seasonal at this point.

Jon Olson

Yes.

Glen Yeung – Citi

And then I heard your commentary about China wireless, I understand its always hard to pick and choose especially when those orders haven’t been defined yet, but what about on the wire line side there, what’s your sense as to one the trajectory of demand, and then perhaps I don’t know if its more importantly but also I guess the conditions of inventory change in that business. Are we at a point now where people are no longer reducing inventory and are actually trying to build some back into the wire line business.

Jon Olson

If I think about the wire line business and first talk about the networking infrastructure piece, I think we are seeing stabilization. I think that’s one of the points that I made that were in terms of some of the pieces where we are seeing stabilization. I think we do feel in the network infrastructure piece that orders are more stable, they’re done cutting inventory and now we’re back to more normal demand sell through kinds of situations. That doesn’t mean every quarter goes up from here but I don’t think we’re going to see, if you drew a line starting with this quarter out in time, I don’t think you’re going to see a big trend down or much of a trend down at all. I think you’ll see some ups and downs of a few million plus or minus.

I think we feel pretty good about that environment being stabilized. The rest of the wire line is not necessarily that case. We continue to experience downs this quarter in the rest of the wire line so its, I can’t predict that we’re stabilized there yet. [inaudible] and those kinds of things, I don’t necessarily feel like its stable yet.

Operator

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

Tristan Gerra – Robert Baird

Given that the supply constraints appear to be behind, do you expect Virtex-5 to reach 20% of revenues in the September quarter and also when do you think Virtex-5 margins get to the corporate average.

Jon Olson

We do think Virtex-5 will be in that range of 20% next quarter. I’m not giving you a hard number but plus or minus a percent or so. We should be in that range. Virtex-5 [yields] and margins are not far off that corporate margins. I hope that didn’t get characterized too negative but nonetheless I think on average as the broad base of V-5 demand picks back up and even with the price pressures of the very large China wireless business, I think overall those margins within a quarter or two are pretty much dead center of the corporate model.

Tristan Gerra – Robert Baird

And also you mentioned OpEx guidance for the year, looking at SG&A and R&D so excluding the restructuring we’re still at level higher than a few years ago or in other words if we had basically the same OpEx when your revenues were 15 or 20% higher how much room is there to further cut operating expenses and maybe give us a sense of what can be done longer-term beyond the near-term steps you’ve been taking.

Jon Olson

The data that I looked at, remember that we did have restructuring in last year’s expense number as well so you have to take out, if you’re trying to do this without this one large lump in both years, you take those out, and then if you just compare that to all the historic years before that plus or minus when stock option expensing started to hit OpEx, I think you’ll see a pretty significant decline over the last three or four years in spending.

And I think Moshe was trying to point that out that we’re very committed to continuing to run in an efficient operating model and clearly as revenue goes back up we’re not going to be adding spending at the same rate that we had declined in those time periods.

So we continue to look for opportunities to take cost out of the company broadly. We announced last quarter this multi quarter transition plan which is what’s the driver of the restructuring expenses in there which is a matter of taking some positions out of the company now and then throughout the next several quarters and then building up that capability in Asia and that is ongoing and as we get to the end of it at the end of our fiscal year we should see some more spending improvement on top of that.

That doesn’t mean we’re at the end, that just means that we’re at the end of this particular phase. We have other ideas and other things that we’re thinking about in order to take more dollars out. So we are committed to taking dollars out and getting more product out per engineering dollar over time.

Operator

Your next question comes from the line of Chris Danely – JPMorgan

Chris Danely – JPMorgan

I know you’re not talking about anything beyond this quarter but can you give us a sense of what now that things are getting back to normal I guess somewhat, what do you think normal seasonality will be for the December quarter.

Jon Olson

I don’t know are we normal, what does the manifesto say about that. I’m not sure. We still think, we think there’s a seasonal December quarter ahead of us and we think that’s again will be helped supported by A&D and to some degree consumer business. While the consumer business is not showing the same level of seasonality as it has in the past it is going up and we’ve been very successful in our designs in that area.

And so we still feel that that has growth in this next quarter and the following quarter as well. So those are two bright spots. If the wireless business is at least stable at this higher level, I would think we would end up seasonally up in December if I were estimating sitting here today.

Chris Danely – JPMorgan

By the way, I’ve changed from the manifesto to the Dairy Queen, I guess that’s the only way I’m going to get a double dip. As my second question, on the OpEx side, going forward is there anything we need to look out for in terms of [mask] costs or can you expect OpEx to trend up but less than sales from here on out.

Jon Olson

So we clearly are still in the adding several million of [masks] per quarter between this last quarter that we just announced and the coming quarter that we’re in right now and then again in the December quarter, going up and then they will come back down, start to come back down a little bit.

I think we still are going to experience some rollercoaster up and down but because we put both product families on top of each other even though we’ve done a number of things to control our costs by the way, things have gone, we’re going to see this trend up for two quarters and then back down a few quarters.

The other thing that’s hitting us in the December quarter which is not necessarily something that’s easy to talk about but we do have a even week calendar in this company and we happen to have a 53 week year in fiscal 2010 and our extra week of spending is in the December quarter. So that 14th week of spending is in the December quarter and that accounts for approximately $8 million of spending increase that’s going to hit us.

So there’s going to be a spike up in December on spending for this extra week of spending along with a few million dollars of [mast] increase.

Chris Danely – JPMorgan

But then I guess the spike down in the March quarter, right.

Jon Olson

Yes. Then you’ll see that $8 million going away in the March quarter along with mask expense going down several million dollars.

Operator

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

Tim Luke – Barclays Capital

I just want to make sure I’m totally clear on your guidance for the OpEx sequentially, can you just talk us through, you’re saying that if you, excluding the $5 million of restructuring the OpEx number which was 157 excluding the $15 million of restructuring is now going to be flat or you’re saying its going to be 175 basically minus 5. Can you just talk through that and then maybe talk through what the expectation should be for December just to be clear.

Jon Olson

So the forecast for the September quarter was $175 million of OpEx and included in that was $5 million of restructuring so that’s $170 million.

Tim Luke – Barclays Capital

So actually its going up $10 million in OpEx.

Jon Olson

No actually its going up—

Tim Luke – Barclays Capital

Once you exclude the restructuring but you add it to the June period. And that’s just mask costs.

Jon Olson

So in that $11 million is several things, one is mask costs are going up $3 to $5 million, that kind of a range. If you dissect the same numbers for Q1 you’ll see that we under spent our base OpEx and specifically what happened is we didn’t hire people into the transition positions like we had anticipated. And that was worth several million dollars of lower spending in Q1.

We will catch up with that hiring. So we have the catch up of that hiring going on in Q2, let’s say a few million dollars along with the mask costs, and our revenue is higher so we have a couple of million dollars of commissions and other profit dependent kinds of expenses that we have. That sort of explains this $10-ish million that you threw at me.

Tim Luke – Barclays Capital

And then for December.

Jon Olson

So then for the December quarter we have slightly less restructuring, a small decrease in restructuring and we also have several million dollars of mask costs that are going up but we also have this extra week of spending because of the 14th week in that quarter which is approximately $8 million. So you’ll see us go up again.

Tim Luke – Barclays Capital

It seems a little more elevated than the ranges in the sort of 165-ish that you had outlined previously. Does that mean the masks costs are in some ways sort of accelerated in terms of spending or what is the key variable.

Jon Olson

There’s only a little bit of mask costs. Some of it is this 14th week I really didn’t talk about a lot and I didn’t give a full year forecast last time in this kind of granularity and decided that because I think that I wasn’t as clear as maybe I could have been, I thought I would do it this time and give you a little more detail.

Tim Luke – Barclays Capital

And then in guiding for the gross margin to go back up in December the revenue inference you referred to seasonality in December what do you perceive the fairly normal seasonality to be for the December quarter.

Jon Olson

I don’t know, I think our history has been a pretty wide range but its typically a few, two to four, three to five kind of a percentage range is typical but I’m not necessarily forecasting that, I’m just giving you what the typical range.

Tim Luke – Barclays Capital

Maybe you could remind us what March is usually.

Jon Olson

March is usually up a few more percentage points as well from that.

Tim Luke – Barclays Capital

Just on the industrial side, just to clarify, you said that I think in the quarter that the military was slightly up and how did the other segments do and how do you see industrial broadly into the second half.

Jon Olson

Industrial is a bit of a quandary for us because broad based industrial is really weak and since we also classify aerospace and defense in that category we do have the seasonal effect of flat to up this coming quarter and then usually up in December. And we are experiencing weakness in broad base industrial that speaks to a lot of these smaller customers that I talked about earlier on the call that those percentage of small customers are declining as a percent of our total revenue and then scientific and medical is also been sequentially weak for us.

And I would thing there would be some stabilization and hopefully some strength by the end of our fiscal year.

Operator

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

David Wu – Global Crown Research

Can you give a little bit more clarity on the September quarter because if I assume that your let’s say roughly $20 million number that should have been in the June quarter got transferred into the September quarter and is that, or is it half of that actually you play catch up in the September quarter because when I look at the numbers at least my numbers would say that roughly half of that $20 million catch up in September quarter and also can you remind us what kind of a turns assumption are you assuming for the September quarter.

Jon Olson

My math on this is that the decline that we had which was a minus 5%, 5% of that number would be in the neighborhood of $25 million if we were trying to be whole, and we’re going back only 4% back up 4% at the mid point of that 5% so we’re about $20 million being added back. And that happens to be relatively close to our delinquency number and so to me I think it still is self, at least for my number set is self consistent.

David Wu – Global Crown Research

The assumption about the turns business—

Jon Olson

Low 50’s for turns, so we’ve gotten cautious in terms of the turns business we have although we’re obviously we’re fairly well booked on our China wireless because of the delinquencies. From a dollar base turns perspective we’d have to have about the same dollars, slightly lower dollar turns in the quarter in order to achieve the mid point of our range. So I think we’re being both fair and a little cautious that some end markets are still not stabilized.

Operator

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

James Schneider – Goldman Sachs

In terms of the ramp of Virtex-5, if a typical customer is ramping Virtex-5 now but had previously used Virtex, typically where is the fall off in the legacy family coming from when Virtex-5 ramps.

Jon Olson

That’s a really difficult question. I think in the I’ll say in the more advanced SOC spaces, think of line cards and things like that, a lot of these people were converting V-4 designs to V-5 but we also have a lot of older Virtex cards, V-2 Pro, Virtex and Virtex E that still are in designs and particularly in wire line applications they have been in designs and now converting over to V-5.

Moshe Gavrielov

The other thing to keep in mind is that as we continue to move forward aggressively with new process nodes you are seeing more ASIC convert to FPGAs because the new FPGAs have the appropriate level of serial connectivity in terms of bandwidth. They have the higher performance and they have higher capacity so we’re seeing quite a bit of that. This isn’t just an old FPGA being replaced by a new one, or several old ones being replaced by one new one.

Its also ASIC and other applications now being redesigned into FPGAs and we see a lot of that too. So I would say there’s two branches. There’s conversions of old FPGAs and then there’s just new business which is enabled by the enhanced capability and we’re seeing more of the latter with each generation of product as less and less ASIC are viable due to the cost and the risk and all of that.

Plus in some cases ASSPs are getting phased out in particular in key communications functions. And that’s a trend which we expect, we’re seeing it, it has already started and we expect it to accelerate in the future.

James Schneider – Goldman Sachs

And then just so I am totally clear on this, can you maybe give us the full year OpEx number excluding restructuring as some kind of rough dollar range in terms of absolute dollars.

Jon Olson

I don’t have, we did this percentage range thing that’s the 2% to 4% without restructuring. We had about $22 million of restructuring last year’s OpEx and this year we’re saying we have $26 million, so you have to subtract both those numbers from our OpEx and you can figure it out. Do the math, but we said 2% to 4% decline. Sorry I just don’t have a calculator and all the numbers at my fingertips.

Operator

Your next question comes from the line of Srini Pajjuri – CLSA

Srini Pajjuri – CLSA

More longer-term question I guess you set a long-term margin target of 30% and also gave us long-term growth rate of 5 to 9% but if look at the OpEx and the margin trends here, obviously you’re down 16% from last year on the top line at least that’s what my model is showing right now. I’m just wondering if given the OpEx increase and the margin decline, other than revenues coming back is there anything else that you could do here to kind of take the margins up from these levels toward your longer-term model.

Jon Olson

In the short run for this year I think we’re pretty [inaudible] because we’re going through a pretty significant transition of resources across the company. We’re certainly not going to short those, short that transition and we’ve made the decision not to short our rollout of Virtex-5 and Spartan-6 product families.

So while there are ways to chip around the edges, we’ve taken out significant amount of SG&A. We are running things leaner in that particular area so I would say in this fiscal year I don’t see a lot of major adjustments that we’re going to be able to make but beyond that we certainly have a lot of things that we’re considering to do in order to be much more efficient as a company.

So I wouldn’t expect us to be at 30% at the end of this fiscal year and quite frankly we are bullish about our prospects in terms of revenue growth as the economy comes back. We do believe that we’re going to enjoy a disproportionate share of design wins from our new product families as well as the penetration in to the ASIC and ASSP design as we go forward and that will start showing up in a variety of places in the coming years.

Operator

Your next question comes from the line of Mahesh Sanganeria – RBC Capital Markets

Mahesh Sanganeria – RBC Capital Markets

Quick question on the December quarter because of the extra week if we assume the revenue in a normal 13 week quarter to be flat does that imply we should proportionately scale the revenue numbers for the December quarter.

Jon Olson

I think that, since we’re not doing a revenue forecast for the December quarter I certainly think that there should be some benefit from that in there but I, its really driven by how our customers in total plan their factories and what their ordering patterns are whether you really see that as discretely for an extra week that quarter or it kind gets somehow spread across other quarters.

So I think we’re going to have to take a little harder look at that as we go through this quarter and think about our forecast for next quarter.

Mahesh Sanganeria – RBC Capital Markets

So just in terms of guessing will half the amount, will be a good guess because we don’t know right now but we still have to model that. Will half the amount be a good guess.

Jon Olson

I don’t know. If we didn’t have so many of our sub end markets still weak, I think I could probably give you a better forecast on that, but given we aren’t stabilized, we aren’t necessarily at the bottom universally across all of the areas of customer segments that we sell into, its hard to say its just half. I suppose that’s as good as any guess but I don’t think I’m going to go out on a limb right now.

Mahesh Sanganeria – RBC Capital Markets

Maybe you won’t have that answer in front of you but what will help if you can sometime circle back and talk about, say if we go back to September 2008 quarter if that was a normal quarter, now that there is so many things changing if you come back to that level, where should be the gross margin and OpEx, that will be a good comparison to have so that we can model properly. Are you in a position to give us some idea on where your R&D and SG&A would have trended at these levels—

Jon Olson

Well again, there’s customer mix and product family mix and those kinds of things, since I haven’t looked at all the mix implications of that from either our peak revenue and gross margin which was Q1 of fiscal year 2009, or should say September of 2008, but that was back even a year. We’ve changed so much of the company since then its kind of difficult. I would certainly expect if we got our revenues back up into the high $400 million a quarter number like where we were before we would be back in the same relative range of gross margin that we had back when we had that in Q1 of 2009.

Mahesh Sanganeria – RBC Capital Markets

How about operating expense.

Jon Olson

Operating expense is coming down, it would definitely be lower. Again I gave the comparison for what we think FY10 is versus all of FY09 and what the drop is going to be even with these increased mask costs that we had year on year we still had this drop which is pretty significant. That would indicate that on a go forward basis we’re going to enjoy some better comparative percentages of R&D expense as a percent of revenue particularly as revenue comes up.

Operator

Your next question comes from the line of Adam Benjamin – Jeffries & Company

Adam Benjamin – Jeffries & Company

I was wondering if you could comment a little bit about the China mobile that just got awarded and if that’s factored into the guidance that you’ve given. I know that these things come quickly and there’s fits and starts so I’m just curious. That’s very recent, I’m just curious if that’s factored in and then secondly in terms of your exposure are you significantly exposed to ZT and Walway specifically.

Moshe Gavrielov

Generally speaking these rollouts take quite a long time and the guidance we’ve given you for the current quarter has the rollout as we understand it. And as our customers have placed and are placing orders and there’s a bit more visibility just due to shortages which have extended lead times. So the short answer is yes and we have broad penetration in several of the suppliers actually, best I know, in all of the suppliers in different programs at different levels and so it’s a bit of a difficult matrix to figure out because there are numerous suppliers and there are numerous standards and they’re being rolled out in difference cities at different times.

But we think we’re getting a good portion of the revenue and this is driven by our very strong Virtex-5 position and as new ones get designed then Virtex-5 and Spartan-6 and Virtex-6 in particular are very well designed or developed and targeted to address those specific markets.

So no, we expect to continue to benefit as that continues to rollout. I wouldn’t say regardless of the mixes but generally speaking we are in a good position in all of the scenarios.

Jon Olson

One of the things I mentioned in my comments was about we did have some push out, changes of parts, etc. going on, changes in the backlog particularly in June and I think that was the beginning of the awards and people readjusting their backlog for the right parts at the right time. While I can’t guarantee all those have worked itself through our backlog for next quarter I think some of those have and I think our estimates are pretty decent.

Adam Benjamin – Jeffries & Company

Maybe asked a little bit differently you at one point talked about a little bit of a hole in Q3 for wireless and now you’re talking about some slight growth there, so I’m just trying to get a sense of your ability to accurately forecast given the fluctuations in those customers and so given the past how would you say your accuracy has been in terms of forecasting that segment.

Jon Olson

Well actually I think our accuracy has been pretty good because we did have a hole and while the hole was slightly shallower than what I saw a quarter ago, the delinquency rollover has filled up the hole. It hasn’t exceeded the hole much but it has at least filled that up so I think our accuracy at least in the one quarter out horizon in the China business has been pretty accurate.

Adam Benjamin – Jeffries & Company

And then a follow-up as it relates to the gross margin ticking back up in the December quarter I think you talked about a mix back to small customers, just in terms of your lead times and your turns business what gives you the confidence there, is it just the mix issue and the mix to aerospace and defense and what other puts and takes are there that would support that higher margin.

Jon Olson

So it isn’t the smaller customers in the December quarter but it is aerospace and defense and consumer for sure. Those are two areas and probably automotive goes up in that quarter as well as new designs are rolled out in that area. So those are the segments that I would think would probably be better for us in terms of the typical seasonal impact for that.

The small customer, large customer thing, its not clear to me how that’s going to change dramatically until the overall economic situation gets better.

Operator

Your next question comes from the line of David Wong – Wells Fargo

David Wong – Wells Fargo

A clarification, you said that the Spartan-6 I think is done at Samsung, is Virtex-6 also done at Samsung and is Samsung the only fab that you’re using for these two product lines. \

Moshe Gavrielov

We typically for each new generation of technology we have two foundries, the foundries for Spartan-6 and Virtex-6 are UMC and Samsung.

David Wong – Wells Fargo

And the samples are coming out of Samsung at the moment or are they coming out of UMC.

Moshe Gavrielov

Spartan-6 are coming out of Samsung.

David Wong – Wells Fargo

And Virtex-6.

Moshe Gavrielov

They’re coming out of UMC.

Operator

Your final question comes from the line of Sumit Dhanda – BAS-ML

Sumit Dhanda – BAS-ML

Earlier in the year when you implemented some restructuring actions, you had suggested that you would see benefits from supply chain efficiency efforts, are all those benefits factored into the down 2 to 4% ex restructuring expense guidance that you pointed to today.

Jon Olson

All the actions leading to those benefits are there but you don’t see the, you’re not going to see the run rate benefit in that because we’re talking about all the spending it takes to do the transition that are in FY10. So if you think about FY11, you would say the restructuring is gone for that particular activity and all the benefits including some benefits we think will derive in our March quarter which is our fourth quarter of our fiscal year as most of the transitions will be completed just in the early part of that quarter so we should see some run rate benefits there.

And then you could extrapolate that into next year that should mean some goodness in the absence of anything else that might come up.

Sumit Dhanda – BAS-ML

Would you care to take a stab at what that quarterly benefit might look like when normalized.

Jon Olson

Well we said that, I did talk about in the absence of mask expense growth that we would be in the low to mid 160’s and then by the time the exit rate of the fourth quarter we would be more in line with low 160’s or maybe even a little below. So a couple million dollars of benefit, some of that comes in the gross margin line versus OpEx so its not all these benefits necessarily accrue to us in OpEx.

Sumit Dhanda – BAS-ML

Just in terms of the visibility anything you could say about how bookings have trended thus far this quarter and the pattern or the linearity of orders through the June quarter.

Jon Olson

June was actually a not all that great of a month for us in terms of bookings. I wouldn’t say that we had really horrible bookings but we had quite a few weeks where the turns weren’t as we would have anticipated but again on a seasonal basis, maybe I’m just jaded by the fact that our business is already low and I didn’t like more slow down going into summer but I think we did sense slow down and we typically would see July and August being slow in terms of bookings and September being strong in a normal seasonality.

But so far in July they’ve been okay.

Maria Quillard

Thank you for participating today. We have a playback of this call beginning at 5:00 Pacific, 8:00 Eastern. A copy of our earnings release, visit our IR website. We will not be providing a scheduled mid quarter update for the September ending quarter. Our next earnings release date for the second quarter of FY10 will be Wednesday, October 14 after the market closes.

This quarter we will be presenting at the Citi Technology Conference in New York City. And this completes our call. Thanks very much for your participation.

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