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Executives

Maria Quillard - IR

Jon Olson - CFO

Moshe Gavrielov - CEO

Analysts

Ruben Roy

Brendan Furlong

Uche Orji

Sumit Dhanda

Hans Mosesmann

Mahesh Sanganeria

Chris Danely

James Schneider

David Wu

Glen Yeung

John Pitzer

Tim Luke

Srini Pajjuri

Ian Ing

Presentation

Xilinx Inc. (XLNX) Q3 2010 Earnings Call January 20, 2010 5:00 PM ET

Operator

Good afternoon. My name is Cassie and I will be your conference operator today. I would like to welcome everyone to the Xilinx third quarter fiscal year 2010 earnings release conference call. (Operator instructions).

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

Maria Quillard

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

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

We refer you to the documents the company files with the SEC including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

This conference call is open to all and is being webcast live. It can be accessed from our Xilinx Investor Relations website.

Now let me turn the call over to Jon Olson.

Jon Olson

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

December quarter sales increased 24% sequentially to $513.3 million and an incremental increase of nearly a $100 million and a new sales record for Xilinx. Sales strength during the quarter was driven by all end markets and all geographies.

Sales from our top 50 customers and sales from the broad base of our smaller customers, both increased in line with total sales. Operating income of $136.6 million increased 66% sequentially representing a record level since the adoption of stock-based compensation expense. We achieved a couple of major product milestones during the quarter.

First and foremost, Virtex-5 sales continued to post exceptional sales growth, easily surpassing a $100 million in sales and becoming the largest FPGA family in history, a distinction achieved only twice before by Xilinx, Virtex-2 and Virtex-E families. Spartan-3 sales also reached record sales during the quarter, driven primarily by strength in wireline communications, automotive and data processing applications.

Sales of Spartan-3 devices currently represent 16% of total sales. New product sales increased 32% sequentially with significant increases from all product family. Mainstream and base products demonstrated atypically strong increases during the quarter as many customers in these categories replenished exceptionally lean inventories. All geographies increased sequentially during the quarter with Asia Pacific and North America posting the strongest growth of 27% and 25% sequentially respectively.

Strength in Asia Pacific was driven by a broad base of applications with exceptional strength coming from wired communications. Asia Pacific is our largest geography representing 36% of total sales, up from 33% in the same quarter a year ago. Strength in North America was also broad based with the largest incremental sales gains coming from communications and industrial and other. North American sales now represent 35% of total sales, up from 34% a year ago. European sales increased 19% sequentially during the quarter driven by strength from communications, audio-video broadcast and automotive. European sales represented 20% of total sales in the December quarter down from 22% a year ago. Sales from Japan increased 17% sequentially, driven primarily by strength in the industrial and other markets. Japan currently represents 9% of total sales, down from 11% sales a year ago.

All of our end markets posted strong growth during the quarter. The largest incremental dollar increases came from communications which increased 23% sequentially and industrial and other which increased 29% sequentially. Within communications, sales to wireline customers were particularly strong, while sales to wireless customers were up slightly. All sub-segments within the industrial category including defense, industrial scientific and medical and test and measurement increased significantly.

Sales from the consumer and automotive and data processing categories were also strong increasing 15% and 25% sequentially. During the quarter, consumer sales were driven primarily by growth within audio-video broadcast and automotive sub-segments. Data processing sales were driven by strength from computing as well as storage and servers.

For the quarter, communications represents 46% of total sales, up from 44% a year ago. Industrial and other represents 32% down from 33% a year ago. Consumer and automotive sales now represent 15% of total sales down from 16% a year ago and data processing sales were flat at 7% of total compared to the same quarter a year ago.

Gross margin for the quarter were 64.1% up from last quarter's gross margin of 61.9% and inline with the revived guidance we provided on December 8. Gross margin primarily benefits from the strong growth and our main stream and based products as well as continued yield improvement and higher sales.

Operating expenses were $192 million including $6 million in restructuring charges. Total operating spending was $6 million higher than forecasted due to the higher variable spending associated with higher sales and profits. Restructuring charges were higher than previously forecasted by $2.5 million and are related to additional realignment actions taken by the company during the quarter.

Operating margin increased to 27% for the quarter up from 20% the prior quarter and the highest we recorded in four years. Net income during the quarter was a $107 million or $0.38 per diluted share including the $6 million or approximately $0.02 per diluted share for restructuring charges.

Operating cash flow for December quarter was a $185 million before $9 million in CapEx. We paid $44 million in cash dividends and spent $25 million on stock buyback during the quarter.

During the calendar year Xilinx generated $511 million in operating cash flow, a testament to the resilience of our business model during period of economic uncertainty. The tax rate in the December quarter was 20% slightly higher than forecasted due to geographical mix but in line with our long-term model.

Let me now comment on the balance sheet, cash and investment increased a $123 million quarter during the quarter to approximately $2 billion. We have approximately $690 million in convertible debt and our net cash position at approximately $1.3 billion. Day sales outstanding decreased six days in December quarter to 44 days. Combined inventory days in the December quarter were 85 up from 75 days in the prior quarter but slightly below our corporate target of 90 to 100 days. We have improved our inventory levels by also shipping record level of our products.

Let me now turn to a discussion on guidance for the March quarter of fiscal year '10, our backlog heading into the quarter is up; however, we move back to a 13-week accounting quarter in March and therefore loose the benefit of an additional week of turns business.

We are expecting to see continued strength from Virtex-5 as well as the [entrouge] from our new Virtex-6 and Spartan-6 family. We believe growth for the mainstream in base family will abate as customer's inventories are replenished. From an end-market perspective we are expecting sales from communication to be up slightly considering auto motors speed down slightly in industrial and other data processing to be flat.

As a result we are expecting sales to be up 3% to down 1% sequentially in the March quarter but sales from Europe increasing and sales from all other geographies to be flattish sequentially. The mid point of our sales guidance is predicated on a turns rate of approximately 55% down from 58% in the December quarter. Gross margin is expected to be approximately 64% to 65%.

Operating expenses in the March quarter will decrease by approximately $12 million to approximately $180 million including $3 million in restructuring charges. Other income and expenses expected to be a net expense of approximately $2 million. The share count is expected to be 275 million shares and the tax rate is expected to be approximately 20%.

Let me now turn the call over to Moshe.

Moshe Gavrielov

Thank you John and good afternoon to you all. We are extremely pleased with our overall performance this quarter. The magnitude of the sequential revenue increase is absolutely a great achievement. We began to see the recovery in our business in the September quarter with broad based strength across all major end market categories. We then entered the December quarter with a solid backlog but were relatively cautious given the economic uncertainty the fact that our lead times have stretched out due to V-5 supply constraints in the past June quarter.

The recovery continued throughout the third fiscal quarter, we experienced much stronger than expected bookings across all end market. With the exception of wireless and consumer, all sub categories were up over 20% sequentially and some end markets like (inaudible) and test and measurements were up approximately 40%. Even with these incredibly strong revenue numbers, six of our ten secondary end markets have still not reached the same levels they were back at our previous revenue peak of $488 million. This prior peak was during the June 2008 quarter. We expect all the secondary end markets to recover above the June 2008 levels over the next year. Much has been said about lead times within the semiconductor industry. In our case our lead times have declined this quarter as we expected. With a vast majority of these within a normal four to six week range, customers can place orders with us close to their demand requirement.

In the December quarter, Virtex-5 surpassed a $100 million in revenues very handily. This revenue level we estimate our share of the high end 65 nanometer market to be over 80%. As the industry’s largest revenue generating FPGA family shipping today demand for Virtex-5 remains extremely robust.

We expect Virtex-5 to continue to be a primary sales driver throughout our next fiscal year. And comprehensive strength of our 65 nanometer sales provides compelling evidence the programmable imperative indeed upon us. The next node will continue to extend the inexorable march programmable logic placing A 6 and over tight selective ASSP solution.

We have built upon our Virtex-5 success to deliver this next generation of FPGA product Virtex-6 and Spartan-6. Earlier today, we announced that Virtex-6 has achieved full production qualification and is now shipping in volume production, reaching this production milestone signifies that we have stable and predictable yield to meet the strong customer demand.

By applying all this we have learnt from Virtex-5, we expect the Virtex-6 family to have a faster ramped volume production than Virtex-5. In fact many of our 3G wireless customers ready to signing with Virtex-6 expect to have their end product shipping in volume in the first half of 2010. Earlier this month, we announced the first shipments and availability of the industry’s largest FPGA 40 nanometer Virtex-6, LX 760 which is ideal for the most advanced prototyping platform and the ASIC emulation market.

In parallel, Spartan-6 is the industries only 45 nanometer high volume FPGA market the only high volume FPGA market with embedded transceiver technology. This is the key technology for XILINX because it makes far more competitive in the high volume arena. If the lowest cost and lowest power volume FPGA solution on the market design wins for Spartan-6 are very healthy.

Spartan-6 LXD devices are currently being designed into our customer's next generation product with design win strength coming from communication, industrial, defense and automotive.

In summary, I am extremely pleased with our performance this quarter and the compelling execution on all clients. A 65 nanometer leadership is virtually uncontested design win momentum for our 40 and 45 nanometer products is exceptionally strong. On the financial front, I am extremely pleased with our increased profitability. As John mentioned earlier, our operating margin is the highest it's been in four years and its nearing our corporate target. This is a testament to the continued effort across the company to control expenses and operate more efficiently.

Not withstanding the upturn in our business, I want to assure you that we will continue to as we have done over the past 2 years remain prudent about cost control.

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

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions). Our first question will come from Ruben Roy.

Ruben Roy

Jon, can you expand a bit on the communications commentary around wireline being strong, is that service provider related enterprise, networking related and maybe give us a little bit of detail by geography. Also in terms of your outlook, when you talk about communications being up a bit, if you could expand in kind of which geographies you're seeing strength from.

Jon Olson

The strength from this quarter in wireline was actually probably broad based, while the network enterprise fees was up quite a bit. We also had broad based improvement across a variety of wireline applications, on the telecom side, heading equipment, customers focused on that as well as some of the access side as well. So actually don’t have a percentage split of which one might have gone up more than the other because actually they all were pretty good. So this is one of the other reasons we feel pretty good about our overall business strength and moving forward is just because we have a lot of broad base strength across the wireline area, on top of the historic strength we have had in the wireline fees.

So we're feeling pretty good right now about communications infrastructure. With respect to geographies, I think we generally would say that as we said Asia in total was up as well as Europe and North America and we focused the Japan strength was in another area, so I think it's pretty broad based again, geographically speaking.

On the forward-looking communications, I think we do believe, both wireline and wireless will be up some, kind of the up part, we said everything was that comps is going to up slightly. Other things are going to be more on the flat side, now that's as compared to our 14-week period, and so now we have a 13-week period. We have fewer days to ship so to speak and fewer turns opportunities there, so I think we do believe that there are stronger set of business coming out of Europe in this next period. And so I think that's also true from our communications customers as well from other areas. So we see stronger European focus on communications as well as Asia should do somewhat better there as well.

Ruben Roy

Just quickly, are you comfortable with your inventory level at this point, or do you see yourself growing inventories going into the March quarter?

Jon Olson

When we sat here a quarter ago, talking about this and then after the call, people were kind of astonished when I said we were going to get our inventory back up to 90 days and the implication that how many dollars that would mean and could we really have that many wafers coming out et cetera. What we really did is we did get it up to 90 days. We add $28 million, which was almost 30% growth in our inventory dollars while shipping well over even our revised guidance at 24%. So, we do think we're still a little lean in some areas and it would be good to get a little bit more in a few areas but generally we're okay and satisfied. That doesn’t mean that that we're going to be continuously operating at this level in the high 70's, low to mid 80s but I think we have enough to satisfy what we feel is demand for our customers for the next quarter or two.

Operator

Our next question will come from Brendan Furlong.

Brendan Furlong

Hi, good afternoon, thank you very much. Your comment on the mainstream and base being a little bit lower for this coming quarter, and here with the strong inventory still in the quarter just completed. Do you think that the inventory fill is largely done or there is more inventories to be done by those mainstream and base customers?

Jon Olson

Well I think it's pretty difficult for us to dissect exactly of our growth, what was just replenishment versus not. I think the one thing that we can say about this Brendan is if you look at our new product growth, it was extremely healthy. It was $40 million, close to 40% of our total growth for the company. So that would imply, that wouldn’t be a lot of inventory replenishment because those are usually new designs and going new places. So that also gives us good, a good feeling about the future quarters, about building our business. I think that in some of our end markets there is probably still some inventory fill coming back. As Moshe pointed out, there are several of our sub-markets where we're not back to our record and I think some of those customers are still feeling out the economy. So I would guess there could be a little bit inventory replenishments left in few of those markets, where I say the highest percentage of that activity would work out this quarter.

Brendan Furlong

And my only other question is on the gross margins, the nice pump that you got this quarter, would it be safe to assume there is largely or a big part of that is coming from the better throughput on the Virtex-5 problems that you had in the last several quarters?

Jon Olson

Not really, I don’t think the fact that we were behind in the summer and producing it and now all of a sudden we're much better cost profile. I think we're getting a better overall cost profile because, A; we have higher volumes, so whatever fixed cost we do have are advertise over more dollars. But moreover we are very much focused on improving yields even on products that we have had out in the market for many, many years. It’s been a renewed focus for the company to starting to see some of those things come through from those efforts from our last two generations of Virtex in particular. And we just feel that different attitude and commitment the company about focusing on cost of some of our historic products families.

Operator

Our next question will come from Uche Orji.

Uche Orji

Thank you very much. Moshe, let me just talk to you about the 40 nanometer trends at UMC. There has been all kinds of trends as to whether that trends yields are improving in general like TSMC. I know you don’t use them. But can you just talk to us about what the yield trends are at UMC and also, along those lines if you can also explain given that [Altera] was able to have faster time to market, I would (inaudible) as how have you been able to retain your top customers given their needs for more advance technologies so two questions together there, thank you.

Moshe Gavrielov

Okay two excellent question, we use two foundries two different ones, one is UMC for the 40 nanometer and the second is Samsung at the 45 and based on the press release you've seen today in my previous comments we feel very comfortable with where we are on UMC and the yield is sort of going in the right direction and we've opened orders out so in a big way so we are very confident that all of the learning we have done plus all of the learning and the proven success on Virtex-5 will enable us to meet our customer requirement. In parallel we are on track for by the end of our financial year to move the Spartan-6 into full production too.

So we feel very good about those two product lines, the capacity and yield at this point to meet our customer requirements, with regards to competition, we have a very broad product offering we've been incumbent on the high end and that helped us through. And again we feel that are offering and incumbent position provide us with a good position there. So it looks really good. And we believe that the 40 nanometer node, the overall market is expanding and expanding significantly for FPGAs in particular vis-à-vis A6 but also vis-à-vis some select ASSP markets and that drives growth for everyone who is capable of participating in this trend.

Uche Orji

And just on a different note let me just ask you about wireless infrastructure. Wi-LAN was very strong particularly this quarter and not so much from wireless, so much has been made out to when the next phase of Chinese 3G deployment will kick in also some expectation as to India 3G licensing. Can you just give us any update you have on both key markets and what your expectation is for wireless infrastructure deployment through the second half of 2010? Thank you.

Jon Olson

Hey Uche, this is Jon let me handle that. It's still not clear when the ramps for this next phase will begin. I mean we are currently shipping products into the manufactures who are doing some prototyping work. I assume they are going to be in the competition for both China and India. So there are some early shipments going on now. But in terms of the volume shipments for the roll out of either the next phase in China for the TD roll out and India that remains to be seen.

Our taking on China is still that the ramp is going to start somewhere in April, May, June timeframe but again this is just on our long-term forecast that we are getting not the hard orders haven’t come yet so you know that’s all truth in the whole situation. We will also say that the server strength from wireless for next quarter is going to be related to wide band CDMA shipments in China. So we are just watching the TD side of things, it’s also like the CDMA and so that’s also another a strength that we'll have next quarter that is I'll say not really tied to this four phase situation in China.

Operator

Our next question will come from Sumit Dhanda.

Sumit Dhanda

Yes. Hi. Jon I had a question on the extra week I think going into the quarter, you didn’t think it would naturally contribute too much since there was a holiday week. Would you say that as you do an apples-to-apples comparison here in calendar Q1 versus calendar Q4 that full extra week did contribute about 7% of revenues?

Jon Olson

No, I mean our estimates are that we that the last two weeks, our 24% growth approximately 5 percentage points of that, five points of that 24 is related to the last two weeks and primarily in the last two weeks I had embedded both the holidays from virtually [company] holidays on Christmas and then New Year’s and our best estimate is based on the current patterns we had in the two weeks and trying to figure out what the one we could work and our best estimate on that is in the neighborhood of five points of the total of 24.

Sumit Dhanda

And just a quick follow-up on the mass costs and the trajectory of those mass costs in 2010, any outlook you could provide on how you would anticipate that in fact R&D given the mass costs had been a little elevated here recently?

Jon Olson

So, in our fiscal years and over until March we really haven’t finished our budgeting profits yet so we are not going to project anything about next year. We'll talk more about that at our analyst day which is in February and give you some more color about what we are thinking there, I mean mass costs are tied to what were our product introduction on a road map etcetera and they will start to decline, but there are some other factors going on as well, so we'll explain that more in February 22.

Operator

Our next question will come from Hans Mosesmann.

Hans Mosesmann

Moshe can you give us a little more detail about the evidence that you may have regarding the success of your next nodes 40-45 nanometer in displacing ASIC are there may be just some anecdotes you can share with us regarding that. And then I have a follow up thanks.

Moshe Gavrielov

We again we'll be providing more detail in February but as we go through the design wins with the sales force we continuously see ASIC being displaced in a big way and in some cases ASSPs and these are things like network processes things of that sort that had their moments of sun in the earlier part of the decade and there was huge flurry of investment and a lot of those products do not have a road map going forward and the customers are now recognizing that in some cases they would rather have the flexibility of using FPGAs to replace those products.

So we'll show quite a few examples of that and this is implemented to communication it definitely you know its broad based in A&D, its happening in other markets like (inaudible) and there is a whole host of examples that we'll show but this trend clearly is happening and it will accelerate at 40, it will definitely benefit from having the high volume product which broadens market reach and with each generation, we see that actually moving more and more in our favor and becoming less and less possible to justify in ASIC and a lot of these smaller and medium-size semiconductor companies are going to find it very difficult to invest in these areas. So it’s incumbent upon us to show you more examples, we have lots of them and we will try and share those in February.

Hans Mosesmann

Great and then as a follow up on the 40-nanometer or in terms of process node road map, can you share with us what’s the next node if we have that in terms of timing and who would be your partner there if you can share that with us?

Moshe Gavrielov

We don’t have any announcement along those lines yet, but you know we will be sharing those at the appropriate time.

Operator

Our next question will come from Mahesh Sanganeria.

Mahesh Sanganeria

Quickly on the industrial side, you mentioned something about the measurement being 40%, can you give us an idea of the defense side that you were very cautious last time and it looks like did better than that. So what was the driver for that?

Jon Olson

On the industrial side, test and measurements specifically, I think the biggest driver I would say would be the return to more classical testing measurement applications and instrumentation et cetera, the manufacturing, semiconductor manufacturing side of things is still relatively weak although the capital equipment suppliers are certainly trying to ramp up some, but on a relative basis to any previous peak time on that sub-segment. We are certainly not back there at this point of time. So I would say the more classic instrumentation side is probably the biggest strength during that time period. In defense, we were cautious because we did have one of our orders on a specific project come in the quarter earlier than we had anticipated, and so we knew that would repeat itself, so we were cautious and we were pleasantly surprised that we are up a little bit more than that we said.

We said we would be up some, but not necessarily up a lot. We were up, but not as much as some of our other end markets were either. So, a very strong growth calendar year-on-calendar year, quarter-to-quarter kinds of things. We still see that as one of our strongest markets as it has been for us and will continue to be for us.

Mahesh Sanganeria

And quickly on the gross margin side, the 50 basis point improvement, is that mostly coming from cost reduction or product mix?

Jon Olson

Cost reduction primarily, and as we mix more to new products, we talked about base and mainstream not being growing as much next quarter as it had and new products still being very, very strong. The new products do have a different margin profile, but the fact that we're getting stronger on the new products and also raising margin guidance, that’s a sign that we're very serious in making progress and headway in terms of improving costs at the company of our products.

Operator

Our next question will come from Chris Danely

Chris Danely

Thanks guys. I know you are going to save the specifics for the analyst meeting, but can we expect the gross margins to I guess bounce around this 64.5% range going forward and also do we expect the OpEx to drift down on a percentage basis going forward?

Jon Olson

Chris, this is John. Our gross margin range is 63 to 65. We are operating towards the high end of it. There is no boundary necessarily on the high end but it is obviously the practicality of introducing a whole new generation of products and the potential impacts on that. We'll talk more about our business model in February but I think that we can at a minimum continue to operate towards the high end of this range for a while longer and we're certainly working on trying to get higher than that. I'm not going to make any specific commitment. And OpEx we're just not going to talk about, the OpEx and R&D profile with any granularity at this point in time. We'll talk about it in a few weeks.

Chris Danely

That’s fair. And as to my follow-up questions on the manufacturing, so is everything I guess back to normal now from the delivery/delinquency standpoint?

Jon Olson

Yes. I think we're pretty decent shape on our delivery status and then also the lead times are starting to move more in line with our historic desire and model. That is not to say that we still, with full boundaries, while we're getting what we need from these customers, there is always spot issues on in terms of any sort of spikes along the way. So there are still a few products aligned where we're a little hand to mouth but by and large we're in a much better situation than we were last quarter and certainly the quarter before that. So, we have improved to a level that we can operate pretty well at this level I think.

Operator

Our next question will come from James Schneider.

James Schneider

Good afternoon, thanks for taking my question. I guess first of all to return to the gross margin side for a second. In the past, you've talked about gross margins from new products being a little bit of a drag on the overall corporate profile. Has that gone to a point where Virtex-5 for example would be at corporate levels and do you expect any marginal improvement there given the size of that business?

Jon Olson

So, the Virtex-5 margins are relatively close to corporate model, obviously there is mix issues that can impact at any given quarter or any given customer. But we still see headway in margin improvement and acknowledging that this is the largest family in the history of the FPGA industry and will have the largest total revenue of any family and we are still driving forward to higher numbers. Its not lost on us that it has an opportunity to be a continued large profit generator. So, the focus on gross margin, I would say -- gross margin improvement in that particular family is intense. We are extremely focused on improving that in order to deliver more profitability to the company.

James Schneider

That’s helpful, thanks. And as a follow-up, I think you talked about Spartan-6 shipping by March timeframe and you have already introduced Virtex-6 and talked about from substantial wireless design wins in the first half of this year. Can you give us a sense of where those two product categories could be, when they could be material? Lets say 3% or 4% of revenues?

Jon Olson

Well. I think usually it takes about four quarters before it starts really having much of an impact on that, I’m not going to say at what percentage level. But it will take a few quarters now. Moshe did point out that the wireless communications customers are very focused on introducing that, and this is also why I think this particular pattern maybe more aggressive growth in both revenue and design wins that even Virtex-5 in the early part of it's life cycle. And so it could become a little more significant more rapidly than Virtex-5. And I think a lot of that depends on the wireless base station rollout that I was speaking of earlier while we still have broad based design wins certainly the early shipment levels our way towards the con space pretty big, pretty largely.

Operator

Our next question will come from David Wu.

David Wu

I have two things. First thing is on the Virtex-6 rollout if I didn’t read your press release this morning correctly, all the family of the Virtex-6 will be shipping at least sampling by the end of the second calendar quarter of the year and Spartan-6 I guess will all be rolled out by June of this year also?

Jon Olson

I think that the base family of Spartan-6, they should be Virtex-6 that’s accurate there are some derivate families that won't be production worthy within a quarter or within two quarters at that point. But by and large, I think that sweet spot of things will be that’s what we are talking about, I'm getting and Spartan-6 will follow very shortly after that, I mean there's not going to be that much space in between having pretty much the full family available mid-year.

David Wu

Okay. The other question I have is when do you think the Xilinx 6 family will take over as the leading design winners for you and your design wins. I'm sure we wait, do we need twelve months or could it be earlier than that.

Jon Olson

Well, talking about the high volume family as the target versus you know any FPGA family because obviously our high end is the biggest thing we have going but you know Spartan-6 design opportunity and design win activity is probably already equal or bigger than our Spartan-3 series but you know I will have to go, we haven’t made derivatives on Spartan-3. So I guess I will tell you the effect of Spartan-3 family to get that. We are heavily focused on the design wins, converting opportunities and design wins on that family. We still have them on some of the older families but you know we are largely focused on having those [pile] up now.

David Wu

And what about the transition between Virtex-6 and Virtex-5 in terms of the design wins.

Jon Olsen

I think from that perspective you know Virtex-5 has been such a highly popular product family for us, we are still getting quite a few design wins on Virtex-5 and which also speaks to the longevity and the strength of this revenue curve over the life cycle. So I actually don’t have the never that my fingertips on the crossover quarter on Virtex-5 versus Virtex-6. But we’ve got some encoded and even converted some very large Virtex-6 design and design wins on life time revenue so some pretty big numbers.

Operator

Our next question will come from Glen Yeung.

Glen Yeung

Thanks for taking my question. You guys have said record revenues this quarter and congratulations on that, but we are relatively early into an economic cycle and I wonder as you look forward longer term, was there something or even look backwards just like that was there only structural in your business that led you get to record revenues this early that can impact us going forward? Or do you really think that even from these levels you can continue to grow with the overall economy?

Jon Olson

Well, I'd like to have more space between your record revenue and but okay, Glen because we would like to be feel pretty good about where we are and what we are forecasting for the next quarter before we get to all other buzz of trying to figure out what bad thing can happen to us now but quite frankly this notion that this is some sort of a one quarter flash and the world is going to turn bad on us is really not how we are thinking right now. Will there be some volatility ahead of us? Sure. Will there be some slower quarter than other ahead of us? Sure. But as we have communicated Virtex-5 has kicked in a huge way, corporate communication are strong, corporate profits are up, there corporations are trying to spend more money on IT.

We have talked about set top boxes being [vibrant] throughout the summer and fall which typically leads to more ahead in telecom equipment being purchased. All those things are happening, so sans some sort of another nuclear economic issue, we feel like the infrastructure has got a lot of length in it and if you look back the biggest thing looking back on the perspective is the fact that we have been so successful on 65 nanometer and the fact that we have thought about our financial discipline to company and we are delivering operating margin growth well in excess of revenue growth, I mean these are the things that we have been talking about and they are happening now and we are hoping everybody sees that these are incredible proof points about the strength of our company and we are just getting started.

Glen Yeung

Absolutely, as a follow up to that you make the point that you are more normal in terms of lead times today, but at the same time recognize that the foundries are relatively tight. When you look farther forward think second half of this year or even into next year, given where the capital spending is and what you see for capacity growth. Is your sense, are you concerned I guess about the availability of supply and as revenues do start to grow from these levels?

Jon Olson

Well as a CFO I was concerned about that because I see all those same signs that the capital investment levels have been pretty weak although now they are starting to come up quite a bit and so may be it will be okay. We have long term dialogues with our foundry partners about capacity and talk to them about our needs and do scenario planning, and we do scenario planning with them in order to get what we need and one of the advantages as I am sure I don’t know you know this the FPGA it’s a great lead vehicle for foundries for their process and its an exchange for working with them very closely we have typically been able to you know have a strong bond with them and it allows us to get the number of wafers that we need and obviously there is exceptions for that depending on how filled they are, but you know well I am concerned as a CFO we seem to be able to have, we have a very positive relationship with these suppliers of ours and its everything that we can tell right now says we are going to get what we need.

Operator

Our next question will come from John Pitzer.

John Pitzer

Yeah good afternoon guys thanks for taking my question a lot have been answered, but I guess Jon revisiting the inventory, I understand that was intent this quarter to build and quite frankly, you’re still operating below your day's target, but I guess I am struggling a little bit with trying to reconcile your comments about around lead times being relatively stable and manageable. Revenue expectations for the March quarter being kind of flattish and yet growing inventories 28% sequentially, can you help me understand why you feel like you have to get back to that 90 days right here right now?

Jon Olson

Our business is typified by, in many different combinations of products and low volume, high mix on a relative basis to people like you would think of profits or manufacturers or cell phone, ships that manufactures or et cetera. So we require lots of inventory on a relative basis in order to make sure we can full safety stock and can meet customers’ needs as rapidly as we can.

So we knew we were severely behind on our safety stock which is why we made such a commitment to try to build inventory this last quarter. We were relatively successful, not successful as we’d had forecasted and liked to be, but successful enough that we had the highest volume products and the ones that are the most important products to our customers. We feel we are in a reasonable safety stock position and that doesn’t mean that across the board we feel comfortable that all our parts are at the right level of safety stock, but we are ahead of where the long term forecast say we need from our customers, so we have adequate supply. We just haven’t built safety stock back on everything.

That being said, being between 85 days and 90, it's really not that many days because I see it’s operating consistently in 85 days versus 90 and 95. It's possible, it's just that there’s a few things that we would like to have a little bit more out, so I think it all kind of fits together. I mean we -- next quarter days are going to be down some, but dollars will be flat to up a little bit, so we will be fine.

John Pitzer

In your third comment you said, you expect Europe to grow sequentially in the March quarter, just kind of curious what's driving that?

Moshe Gavrielov

It's both comps and industrial segments. So, it's kind of lag, Europe is kind of lagged on recovery and that's helping us with I’ll say the broader base of customers and so distribution got stronger this quarter. It's going to continue to be solid next quarter and industrial customers are starting to come back in Europe, so that's helping us quite a bit. And then over the top of that as a very strong communications focus and in addition to the China focus, there’s also shipments of LTE products into the US and Europe and particularly the Verizon in the US and some prefer India going on, so those are the kinds of things that's getting some focus there.

The wireline part in Europe is also showing some strength in some of those key customers as well, so it will be a big communication focus and industrial improvement in Europe for next quarter.

Operator

Our next question will come from Luke Tim.

Tim Luke

Jon, just in terms of your color going forward, first, congratulations clearly on a very strong quarter, but for a while you had been, for some years in sort of passing around the $480 million in revenue. Now you've broken free to sort of 513, 514 and yet you're guiding up again in the March period. Can you just clarify what returns are for that and then it sounded like in thinking about the year you were saying that communications is going to be strong. Is it also infrastructure that makes you feel reasonably positive about the full year or what are the other sort of major contributors and it also sounded like you are thinking that China ramps again in April, May, June. Do you, after this sort of stronger quarters, should we expect some moderation in the overall revenue picture in June or how are you beginning to think about that? Thank you.

Jon Olson

Okay, Tim you've impressed with how many questions you can ask in two sentences. Once again, let me see if I've got them all as I click through them. So, yeah we did say our backlog was up going into the quarter. So we do have what I would say a pretty strong backlog again. We are forecasting returns rate of mid-50's. So 55% in that range which is lower than our actual turns for the last quarter and some of that is just related to what we think we're booked on and what customers and booked to head on etcetera. So maybe that could be called a little bit of a conservative play or not. I mean we think that turns will be a little bit lower in this particular quarter going forward.

So, the strength of the business is truly, for next quarter is going to be communications and even though the next phase of the TV rollout in China won't be necessarily happening in a big way next quarter there is still wireless strength we believe the Chinese manufacturers are still acquiring product wireless from that are attached to the older phase just because there is a bit of a ramp down, doesn’t mean its totally over and so those builds continue. But we are also getting strong wireline business out of China as well. So, as those companies start to take more share on a worldwide basis or can stretch out that is also a good customer base for us. So, by and large next quarter will become both wireline and wireless on a worldwide basis.

The wireline side is tied heavily I think to the infrastructure part of the enterprise networking part. If that continues to be strong, the corporate profits being up are typically true signal to people by IT equipment. If that continues to be strong in the first half of the calendar year, that bodes well for our communications and do I think there will be some bumpiness throughout the year? Sure, there probably will and accounts will probably be take a breather or the growth will evade sometime during the year and flatten out, probably will but all the times we see right now show this to be a year a very strong infrastructure play for a lot of companies.

Tim Luke

Just clarifications, the interest expense is negative too, is that how you should think about it going forward and the tax rate is 20% that we should think about going forward?

Jon Olson

Yeah, I think the net expense is driven by the fact that interest rate are so low and the convertible debt expense that we have more than offsets that. So depending on your position what could happen to your interest rate this year I guess we think they are going to be pretty low. I would say that’s a probably pretty reasonable forward looking forecast on that and the tax rate as we've said in the past will probably 20, 21% going forward, so that’s pretty reasonable as well.

Tim Luke

Thanks so much

Operator

Our next question will come from Srini Pajjuri.

Srini Pajjuri

Thanks. Jon just a clarification to the previous question you said you had acquired [turns] of about 55%, which is lower than the last quarter. I am just wondering why I mean given that you built some inventory I would have expected turns requirement to be little bit higher than last quarter, are you seeing anything in your forecast from the customer that gives you, that makes you a little cautious here, are you just being conservative?

Jon Olson

Well if you start off with the higher backlog number that’s really the key in there, so we have a higher backlog number and the turns, the percentages some times are deceiving, we've had such a strong growth patter last quarter, two quarter ago as last quarter. The dollar turns per week associated with these percentages are starting to be a pretty large dollar on a dollar basis. So we are concerned that there is some concern that possibly the other dollars are going to get kind of reasonable of what we could expect for the terms. If you take this mid point 55% turns and dollarize it, its about the same dollar turns that we had on a weekly basis last quarter. And the approximation and that was a very high run-rate for us from a historical perspective. So you know I mean that being conservative I don’t know is it being realistic and I guess probably being more realistic, more than it is being conservative.

Srini Pajjuri

Okay just then one for Moshe. Moshe you said that some of the segments are still below your peak levels, could you give a bit more color as to which segments you are talking about here and also is it your expectation that you know these segments will also come back to the peak level in the next few quarters? Thank you.

Moshe Gavrielov

Yeah, sure. Yes, six of the ten even though we had a blow out record revenue quarter six of the ten segments that we follow are not at the level that they were when we hit the previous peak which was 488 which about 25 million less than this past quarter. And we expect those segments over the next year fairly all in unison and there will be fluctuations but we see room for growth based on looking at the end market. So the ones which we have which hit the peaks are okay the yellow ones, okay, sorry I was kidding so wide IFM, test and measurement, AVB, computing storage have not yet hit the past peak items. Also there’s opportunities for them to grow and hit that and we see secular trends that can justify that as Jon talked about test and measurement, we see a recovery in that area. And I hear it consistently from CEOs from those companies they are seeing secular trends that are driving those requirements and their orders starting to build up and after a very challenging period and that’s just one example Jon talked about wireless 2, industrial is sort of the grab back for a whole always to smaller applications and that too we see growing having the potential to grow and hit those peaks. So, the bottom line there was we see opportunity for growth in these additional markets and we expect that to happen over the next year for them to hit or hopefully even exceed their previous peaks as they are transitioning to higher content in FPGA solution.

Maria Quillard

Operator one last question please.

Operator

And our last question will come from Ian Ing.

Ian Ing

So congrats on having the 40 nanometer wafers move to production. Is there any increase in the potential for sales of your cost of employee I know historically its been pretty minimal with 40 nano wafers?

Jon Olson

No, I don’t know.

Ian Ing

Okay.

Jon Olson

No.

Ian Ing

Engineering examples, the engineering examples.

Jon Olson

Yeah, for the most part you know the engineering examples are used for the testing process to verify everything and so anything that we produce in engineering example of that, that we think our sales though would have been valued in inventory already so its kind of a mixture of what happens engineering examples.

Maria Quillard

Okay. Well, thank you all for joining us today. We have a playback of this call beginning at 5 PM Pacific, 8 PM Eastern today. For a copy of our earnings release, please visit our IR website, we will not be providing a schedule mid quarter update for the March ending quarter. Our next earnings release state for the fourth quarter of FY ’10 will be Wednesday, April 28 after the market close. This quarter we'll be presenting at the Goldman Sachs and CLSA conferences in San Francisco. We will also be holding an analyst meeting on February 22. This concludes our call thank you all for your participation.

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Source: Xilinx Inc.Q3 2010 Earnings Conference Call
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