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Altera Corporation (NASDAQ:ALTR)

Q2 2010 Earnings Call

July 20, 2010 4:45 p.m. ET

Executives

Scott Wylie - VP, IR

John Daane - CEO

Ron Pasek - CFO

Analysts

James Schneider - Goldman Sachs

Ambrish Srivastava - BMO Capital Markets

Uche Orji - UBS

Shawn Webster - Macquarie

Glen Yeung - Citi

Adam Benjamin - Jefferies & Company

Srini Pajjuri - CAS

Ian Ing - Gleacher & Company

Ruben Roy - Pacific Crest Securities

Mahesh Sanganeria - RBC Capital Markets

Hans Mosesmann - Raymond James

Chris Danely - JPMorgan

Apurva Patel - Ticonderoga Securities

John Pitzer - Credit Suisse

Brendan Furlong - Miller Tabak

Operator

Good day, everyone, and welcome to the Altera second quarter 2010 earnings results conference call. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Scott Wylie, Vice President of Investor Relations for Altera Corporation.

Scott Wylie

Good afternoon. Thank you for joining this conference call, which will be available for replay telephonically and on Altera's website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Altera's Investor Relations webpage where you will find complete instructions. The telephone replay will be available at 719-457-0820 and use code 258712.

During today's prepared remarks, we will be making some forward-looking statements. In addition, management may make additional forward-looking statements in response to questions. In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge.

With me today are John Daane, our CEO; and Ron Pasek, Chief Financial Officer. Ron will open the call with a financial overview before turning the call over to John. After John concludes his remarks, we will take your questions. Prior to the Q&A session, the operator will be giving instructions on how you can access the conference call with your questions.

I would now like to turn the call over to Ron.

Ron Pasek

Thank you, Scott. My commentary will cover our results for the second quarter 2010 as well as guidance for Q3 and full year.

Revenue for the second quarter 2010 was a record $469.3 million, a sequential increase of 17%. Q2 sequential revenue growth was broad-based. Both large and small customer categories grew, with the highest growth coming from our largest customers. New, mainstream, and mature product categories all grew sequentially. In addition, all geographies and vertical market showed growth quarter-to-quarter.

Q2 turns were 35%, which was slightly above our guidance. Incoming orders remained strong, and our book-to-bill ratio was well above 1.

Q2 gross margin was 71.7%, a sequential increase of 30 basis points, largely due to continuing const reductions that offset some negative vertical market mix. Operating expenses for the quarter were $130.4 million, an increase of $3 million or 3% sequentially and essentially in line with our guidance. Operating margin dollars grew 208% year-over-year and operating margin percent reached a record at 43.9.

Our Q2 effective tax rate was 12.2%. This rate is slightly less than our previous guidance and is the result of relatively stronger revenue growth outside the U.S., which resulted in an overall reduction to our tax rate. Net income for Q2 was $180.6 million or $0.58 per diluted share, an increase of $0.08 over Q1 2010 and an increase of $0.42 over Q2 a year ago.

For Q2 2010, our Board approved a $0.01 per share increase to our quarterly dividend to a total of $0.06 per share per quarter. This is the second dividend increase since 2007 when we introduced a quarterly dividend. As we have frequently noted, we intend to continue to increase the dividend over time.

On the balance sheet, cash and investments increased to $2.067 billion and cash flow from operating activities was $246 million for the quarter. Altera inventory increased Q1 to Q2 on a dollar basis, but was unchanged from the months of supply on hand basis. Total pipeline months supply on hand at 3.2 months was comprised of 2.3 months for Altera and 0.9 months for distributors, which is identical to our ending inventory months supply on hand for Q1 2010.

The cash conversion cycle for Q2 was 80 days, which is a 17-day improvement from the unusually high 97 days in Q1 2010. DSO came down and payables increased, which are both good trends from a CCC perspective.

Again, our accounts receivable aging continues to remain quite healthy. Stepping back, the second quarter results display a combination of strong end market demand aided by the tipping point dynamics we have been describing for the past several years.

Our impressive operating leverage is a function of robust gross margins and extremely focused OpEx management, reflecting the value our PLDs deliver to the customers in a disciplined operating execution.

Moving on to guidance for the third quarter, we expect to see revenue growth in the range of 4% to 8% sequentially. Third quarter turns look to be in the low to mid 20s. The third quarter gross margin rate will likely be in the range of 70% to 71%. We are anticipating some gross margin degradation due to a slightly unfavorable vertical mix.

R&D spending will be $69 million to $70 million, reflecting incremental hiring we spoke about last quarter to accelerate our 28-nanometer roadmap. SG&A will be between $64 million and $65 million. Our core tax rate will be 12% to 14%.

Given the recent increase to our share price, the fully diluted share count for Q3 will increase to approximately 317 million shares. With respect to inventory, we expect to end Q3 with pipeline months supply on hand in the low 3s or roughly flat to the metric from Q2.

On a full-year basis, we are guiding OpEx to largely the same as what I indicated last quarter, R&D approximately $265 million and SG&A $253 million.

Now, let me turn the call over to John.

John Daane

Thank you, Ron. We are very pleased that Altera achieved record revenue in the second quarter. Our outgrowth of the semiconductor industry is a result of end market recovery combined with new product momentum.

In particular, we are benefiting from the tipping point where our latest generations of FPGAs are several process nodes ahead of mainstream ASIC and ASSP design for the infrastructure markets, and we are increasingly replacing these fixed function devices.

In Q2, our new products increased 36% sequentially. Stratix IV was up 52%, Stratix III 40%, Cyclone III 34%, Arria II 244% and MAX II 5%. 65-nanometer products were 25% of total company revenue and 40-nanometer 10% up from 22% and 7% respectively in the prior quarter. Stratix IV remains the fastest ramping revenue product line in Altera's history by a wide margin. FPGAs increased 20% sequentially.

Mainstream products increased 13% sequentially, predominantly in 90-nanometer Stratix and Arria products. A few military and computer programs were responsible for a majority of this growth, but they will not repeat this quarter. Mature products grew 1% sequentially associated with increases in our industrial business, but are still 32% below Q2 2008.

By market, telecom and wireless increased 21%, industrial military automotive grew 14%, computer storage networking increased 21% and other grew 11%. All 11 of our submarkets increased sequentially with automotive, military, networking, wireless, consumer and computer each upped double digits in percentage terms.

Due to the significant increase in demand, some of our product lead times have extended and now vary from 0 to 26 weeks. The longer lead time devices are not process node or family specific, rather a few part types spread throughout our product portfolio.

For Q3, we are forecasting a 4% to 8% sequential increase. Telecom and wireless should increase in each area. Networking, computer storage should increase driven by networking. Automotive, industrial and military should have growth in each submarket. The other segment should be flat to slightly up.

As we have discussed in prior quarter, we assume there is a component of customer inventory accumulation and have taken this into account in our forecast, even though it is not apparent in our product or market analysis or through discussions with customers.

Our book-to-bill was over 1 in Q2 and turns required to make the Q3 guidance are in the low to mid 20% range, well below our historical high 50% range. Due to the industry-wide supply constraints, customers have placed backlog further into the future than normal resulting in lower turns expectations in the near term. Our book-to-bill remains over 1 in Q3 quarter-to-date.

While we cannot offer revenue guidance beyond this quarter, as we have commented before, we believe we have a solid three to five year growth cycle in several of our end markets. Communications should continue to grow as India starts 3G wireless deployment and the U.S. and Japan deploy 4G. With 2G as a baseline, our dollar content doubles in 3G, triples in LTE and quadruples in LTE Advanced.

You should also continue to see growth in military, industrial and automotive as prototype programs transition to production and electronics content continues to grow. In summary, we are benefiting from end market growth combined with new product momentum. We recently released our latest edition of Quartus II software, which includes support for our next-generation 28-nanometer Stratix V FPGA family.

We are very pleased with our record revenue in Q2 and look forward to strong sequential growth of our new products in Q3.

Now, let met turn this call back to Scott.

Scott Wylie

We would now like to take questions. Please limit your questions to one at a time so that we give as many callers as possible the opportunity to ask questions during the call. Operator, could you please provide instructions and poll for questions?

Operator

(Operator Instructions) We'll go first to James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs

John, congratulations on the strong results, and clearly that's being led by the telecom for the last several quarters. When you talk to customers either on the wireline or wireless side, what are they saying about how sustainable that growth is going to be going into the fourth quarter this year? Clearly, you're guiding for again pretty good growth in the third quarter. And then is there any difference between the various regions?

John Daane

Jim, this is John Daane. Unfortunately, I can't really break out the regions or specifically the customers. What I can do is say certainly we've been seeing for several quarters now good growth out of telecom and wireless and in particular in Q2 on the wireless front. Telecom did grow as well, but wireless much more so.

We do see in the future a very strong growth continuing in communications, and really this is because today we're seeing deployment in North America and China in 3G. In China and India, we're seeing 2G. We will add to that over time. In 3G for India, obviously the auctions have already happened. So we should see that in the next several quarters a start of a 3G ramp. Plus we'll see the fourth generation LTE deployment in North America and Japan added to that.

There could be fluctuations at any given quarter, but again, over a long term basis we do feel very good about the growth within that area. On an inventory basis I can tell you that in telecom and wireless, customers have not been able, or purposely have placed or put in place buffer stock. These customers really have very low inventory, so the demand we're seeing is going straight to customer orders that they have today, which is very positive.

I really can't predict Q4, Q1, Q2 as much as I can say things are good right now. And over the long haul we think communications will continue to be a strong area for Altera.

James Schneider - Goldman Sachs

Thanks, that's helpful. And then just a follow up, I believe on the last call you talked about six of your 11 end markets being above their prior peak. Could you give us an update on where that is today?

John Daane

Yes, the reason I didn't do that again, Jim, is if you go back to our prior peak which was in Q2 of 2008 that is 30% below Q2 2010. So the comparison no longer is really that relevant. I didn't do the homework, but I would bet probably most if not all the markets are above that level now.

But if you look at it really, you know, the ones that are doing better are telecom wireless. Obviously there are a lot of deployments going on around the world as we have talked about before. Military is an example. Automotive, being some of the stronger markets, and you would expect that.

Certainly another good factor that you look at is the fact that really most of our growth continues to be in the new product area. And new products for us are 65-nanometer and 40-nanometer. These are products introduced over the last several years. And that's also good because that shows that we're really winning versus ASICs and ASSPs and the infrastructure space becoming a larger proportion of the bill of materials in the new generations of systems.

And if it were just a inventory build, we probably would see all of our products have significant increases and we really just don't see that.

Operator

We'll go next to Ambrish Srivastava with BMO Capital Markets.

Ambrish Srivastava - BMO Capital Markets

Question on lead times. John, you mentioned that lead times have gone up 0 to 26 weeks. Just refresh our memory, what are the normal lead times? And kind of related to that what is the causes, the front-end, back end, and how long do you expect the situation to continue?

John Daane

So our normal lead times are anywhere between 0 to 16 weeks. They're zero if we have the finished goods parts in stock. Generally most of that would be a distribution. If we have a wafer format it will be two to four weeks to do package assembly. If we do not have any WIP in the system, it's generally anywhere from 12 to 16 weeks to go through the wafer manufacturing and then also package assembly and test.

And within that generally our lead-times I would say are in the 4 to 6 week range on average. What we've seen now is, obviously with the very significant increase in demand and semiconductors, manufacturing lead times have stretched out.

We do have finished goods in stock. As Ron noted, the amount of material that we have in distribution on a month supply in hand basis is flat with prior quarter. So that would be the zero lead time. We do have wafers, some finished good material ourselves that still would provide customers anywhere between the two to four week lead time to six week lead time just to do assembly.

But we do have some parts where literally customers will come in with orders. Everything that we have in WIP is already dedicated to other customers. We have to get into the long queue lines that are associated with manufacturing today. And as such some of our part types are out to 26 weeks.

It's not family-related as I noted; it's not process-related as much as it is; a couple part types stretching all the way throughout our product line into even some of the very old products simply because demand has been very high on those few product types.

We will continue to do what we can to work those lead times down, but we thought it was important to note that in some cases our lead times have stretched out.

Ambrish Srivastava - BMO Capital Markets

And, John, was it again the foundries or the back-end?

John Daane

Predominantly the capacity constraint is in the front-end in the industry today.

Ambrish Srivastava - BMO Capital Markets

A quick follow up. You mentioned 3G. The licenses have been given out in India; are you seeing any evidence of when the CapEx starts to actually get rolled out?

John Daane

No, I think we are waiting for orders as our customers are. I would say in general, from discussions with our customers in the wireless and telecom space, they have not as far as I can tell pre-built for India. They're really building for existing demand within the other geographies.

They're not sure exactly when they will see orders for that, or even in some cases a resumption of GSM deployment, which is the 2G standard.

Operator

We will go next to Uche Orji with UBS.

Uche Orji - UBS

A couple of questions. First, let me just go back on this subject of inventory accumulation. You said, you're not seeing any evidence of it, not in your conversations, but you think some may have built. So who may have built inventory? And just let me understand what's leading you to suspect? Is there a mismatch between sell-through versus selling? I mean, I just want to understand what you're seeing that led to that statement?

John Daane

First of all, Altera services over 10,000 customers, and we only call on a few hundred on a direct basis. And so, it's very hard for us of course, therefore to ascertain exactly what all of our customer base is doing. We know from direct customers, and telecom, wireless, military as examples that they either have not had an opportunity, or they are not placing buffer stock generally in the past. And so, Altera's lead times have been generally short.

They have been able to get what they need. We haven't been the long pole in the tent in most of these systems. And so, customers really have been ordering what they need.

However, this is the semiconductor industry, and we have seen in past cycles that some customers may choose to put buffer stock in place or order more than they really need in order to make sure that they get some supply. And based on that, we are making an assumption that there may be some inventory accumulation somewhere within our customer base and are trying to take that into account.

Reasons that we do not believe it's pervasive for Altera include the fact that if you look at our mainstream and mature products, they have not performed like you would expect if it was inventory accumulation. Typically, when people accumulate inventory, you see a rise in all of your product categories.

Again, noting the mature products are actually down 32% versus Q2 of '08 even though our revenues are 30% higher than they were in Q2 of '08 mature products being down that much says there is clearly not much of any inventory accumulation going on there.

And then the mainstream products are a little bit higher. But part of that is because we've seen a resumption in some of the end markets and businesses. Prior to that were some one-time buys that we had in the quarter in computer and military, which were very explainable to us. So again, in mainstream we don't see much.

So therefore, we have not seen it, but do assume that there is some inventory accumulation. And I've tried to take that into account in the guidance and projections that we put forward.

Uche Orji – UBS

Let me just ask you about gross margin outlook. I mean, in your statement you said you now believe that you're seeing a few years of solid growth ahead of you after all these new products ramp. You've guided to a model of 65% for your gross margin.

Now, a couple of things here; first is, are you just being conservative, because, I mean, you've been above 70 now for two quarters in a row. Or should we think that the mix of where the growth is going to come from will be naturally lower gross margin areas, so you have the gross margin to drive growth. I just want to be sure I understand your guidance, your target and what is (deficient) for growth is?

Ron Pasek

Just to remind you what I said last quarter or so. What I said was we plan the company at 65%, meaning it's our long-term target. I did indicate that the second half gross margins of this year, including Q3 and Q4 will look similar to the first half. But again, what we've said is, we believe that over time we have to be conservative in the way we plan the company, and aren't going to assume that the margins will stay at the current rates for ever.

Uche Orji – UBS

I see. So the 65% is for planning purposes?

Ron Pasek

Yes.

Uche Orji – UBS

That's helpful. And just one last question, John. The other category has grown double year-on-year, and it's only 2% of your revenues. I mean it's kind of hard to prove what's there, but two questions here. Can you just point out what any particular segment within other category that has driven growth and the sustainability of that? And two, what kind of investments are you making to sustain growth within that category? Thank you.

John Daane

Uche, I think that the more relevant comparison is not to a year ago, it is to two years ago. The reason we use two years ago is that was the prior peak. And since our business in many of the customer categories has returned, I think it's a more normalized look at what our business should be.

A year ago, we obviously were in a trough where customers were trying to eliminate inventory they had on hand and ultimately were responding to what was considered to be a worldwide depression. And again, if you compare our business in the mature category to two years ago, it's down 32%.

The mature category should decline slightly every quarter. I would say 32% over two years is pretty dramatic. So we don't see really any cause for concern with that business.

Operator

We will go next to Shawn Webster with Macquarie.

Shawn Webster - Macquarie

Just really quick on the lead time question, it sounds like it's on the front end. When do you expect things to loosen up in terms of your product lead times, and are there any end markets in particular that are notably extended in terms of the products going in them?

John Daane

This is John Daane again. As I noted earlier, it's not a product or process node specific as well as much as it is just a few ordering codes where demand has outstripped our ability to get supply. I do not know exactly when lead times will come back into more normalized levels. We're certainly doing what we can with our subcontractors.

Within our model, we tend to use fewer subcontractors. I think that does give us priority at times of allocation. You can see that certainly from our history where we've tended to perhaps get more than other companies. We do think our subcontractors are taking care of us and giving us preferential treatment. Unfortunately, as you have seen from many of their announcements, their order base is tremendously outstripping their ability to supply.

I am not sure at this point exactly when we will see that come back into balance. There is a tremendous amount of capacity being added in the industry, but demand is really the key component to understand. And since there are many other markets and companies that feed into this, I don't know perhaps as well as you, I really can't say. Our indication right now is product will continue to be sold out for a while, and we'll just have to see.

Shawn Webster - Macquarie

And if I may, on the ASIC displacement theme, is there any way you can quantify how much of your business would you say is business that you've taken away from ASICs? And then as it relates to gross margins, for the systems where you think you've taken ASIC share, are your gross margins similar to where they are currently or are they more closer to the 65% long-term target?

John Daane

Certainly if you look at Altera's performance versus the ASIC industry, we've outperformed the ASIC industry for several years and really by a pretty wide margin and we'll continue to show you those statistics as they come out.

I think if you look at 40-nanometer in particular, a minority of the 40-nanometer designs that we're winning were actually Altera customers, Altera applications in the past, they really were either other PLD suppliers or were predominantly ASICs, DSPs or ASSPs, and much of that latter categories can be ASICs.

Examples of ASICs that we have displaced, we have certainly shown some of the past are in the military field and communications as an example and secured communications, wireless communications, the wireless base stations, as we sort of emphasized, our content is going up, has been displacing ASICs and DSPs. So we'll show I think over time or continue to show a number of applications where you see that increasing.

But I think that sort of matrix to show our dollar content increasing so much, so dramatically between each generation of new standards for base stations and radios is a great example of PLDs, in particularly Altera taking market share.

Operator

We'll go next to Glen Yeung with Citi.

Glen Yeung - Citi

Obviously, the world today is facing some macro-uncertainty and one would argue we started to see that early in the second quarter. And obviously your results and guidance will suggest you're not seeing that. I wonder if, John, you can maybe talk about if we sort of dug to the details of all your numbers if you actually did see any suggestion that from macro standpoint things were slowing down at all.

Ron Pasek

Glen, this is Ron. I think what we talked about at the beginning was the fact that all eleven verticals were up sequentially, all geographies were up sequentially, all customer categories were up. There wasn't a lot of softness anywhere in any of those results.

John Daane

I think as Ron went through the data, we haven't seen any change in cancellation or push-outs from the customer base. As we mentioned, the book-to-bill thus far this quarter remains over 1. And I think if you really parse apart the details, the reason that I feel good about I think Altera and probably also PLDs in general is the fact that the growth really is coming from the new products and it's coming in markets which are understandable.

Obviously for us, automotive and military, since we have lower market share, are going to be faster growing markets for us. Communications, you can see both strengths in the industry as well as an increasing amount of content from Altera.

If this were simply that the tide had come in and our boat was floating up because people were buying old products, I don't think you'd get excited. I think the fact that it's really 65-nanometer and 40-nanometer driving, the growth on a year-over-year basis, I bet you do feel that this is a good long-term story in terms of displacing ASICs, displacing ASSPs, growing in the infrastructure space, taking market share.

Glen Yeung - Citi

Maybe just to follow up on that, I'd ask a couple of things. One is what your target mix of 40-nanometer and 65-nanometer is perhaps exiting this year for the numbers you gave exiting the quarter and actually if you could just repeat those numbers. I didn't get a chance to write them down. And then related to that is, where you actually constrained on 40 or 65-nanometer, i.e., could you have had a greater proportion of those things had there been sufficient capacity in the market?

John Daane

To the last part, we have constraints in several different product families. So it's hard for me to know, because some of the mature or even mainstream product families may have been a little bit higher as well. So I can't give you really a breakdown as to whether 40 and 65 would have been higher.

In terms of the revenue of the company, 65-nanometer was 25% of total company revenue and 40-nanometer was 10%. Prior quarter Q1 was 22% and 7% respectively. I can't give you an indication as to where the numbers are going to be for the end of the year other than to say we do expect to continue to see growth out of those families this quarter.

Operator

We'll go next to Adam Benjamin with Jefferies & Company.

Adam Benjamin - Jefferies & Company

Just want to follow up on some of the wireless discussion. Clearly, you guys have heard over and over again the peak, peak, peak discussion. And you indicated you're clearly seeing a pretty significant increase in the content as you go from 2G to 3G to LTE.

I was wondering if you could frame this a little bit better for us in terms of the growth that you see in the overall end market on a unit basis and then just try and frame it in terms of that content and what that could translate into growth for you guys over the next couple of years.

John Daane

Sorry, I can't really break out the business plan there in terms of units or customers or ASPs that we have or revenue or so. We typically do not provide that sort of granularity, because it does get into customers, because as you can note, North America as an example, some of the operators will only award business to two or three and that would allow too many people to triangulate into what's going on. And we don't want to specifically break down our customer content. So we're not in a position to provide really any of that data.

Adam Benjamin - Jefferies & Company

Well, maybe I'll ask you a little bit differently. I think you misinterpreted my question. I wasn't looking for specific customers/ASP details. I was just looking for a better way to frame the growth potential that you guys see over the next couple of years. Clearly, the growth is well over 40% on a year-over-year basis this year. A little bit of that is recovery.

But is that a growth range that you see as realistic over the next couple of years or is it something much more moderate than that? If you could just give some directional color, maybe that's helpful.

John Daane

I understand what you're asking. Unfortunately, we just are not in a position to provide that sort of data. We'll talk about long-term macro trends, both positive and negative, headwinds that we have, positives going on for us, but we're really going to take the business one quarter at a time sort of level.

And it's difficult to be honest to break down communications, because as you've seen just with India alone, there have been many starts and stops with the 3G as well as 2G deployment. So it's very difficult to paint exactly what's going to happen in a given period of time.

Operator

We'll go next to Srini Pajjuri with CAS.

Srini Pajjuri - CAS

Looking at the comms business being up north of 20% and looks like you're guiding for another strong quarter there, could you maybe give us a bit more detail as to whether most of this is coming from China 3G build or if U.S. is starting to contribute here?

John Daane

U.S. is definitely contributing. I think you've seen and heard about challenges associated with higher end phones in terms of the pressure that they place on the networks. You've heard from some of the operators in the past talking about moving wireline CapEx to wireless as well as trying to build out the back-haul portion of the network in order to improve overall performance.

So we're certainly seeing North America contribute, certainly China, we've seen India in the past as well as other countries continuing to build out networks. We can't really break it down in terms of percentages for you today.

Srini Pajjuri - CAS

If you look out to the next couple of years, it looks like China probably is going to slow down a bit here and then you have India kicking in and then U.S. 4G. I'm just trying to understand relative to the China opportunity, how should we think about the U.S. 4G and India 3G?

John Daane

Well, I think India will be both 2G and 3G. As the networks continue to be built out very similar to China, I think in India, probably the build-out will go over a longer period of time, perhaps five or more years. I think within North America, we'll probably see a build-out over accretive time, but you've got two major operators that are competing with one another who I think are going to aggressively move to 4G for high-end services.

Don't leave out Japan. Japan has always been a leader in terms of customer usage of high-end handsets and data. And both of the major operators have already committed this year to start LTE deployments and ramping through next year. And so that's why we feel good about communications on the long haul is you have a few geographies that have been driving growth right now. Given the next couple of years, we really have several that will be added in.

Srini Pajjuri - CAS

I quick follow up on the dividend increase, maybe for you, Ron. If I look at your EPS for this quarter, $0.58 versus payout of about $0.06 and I went back and looked at your trough EPS probably close to $0.15, it looks like you have a lot of room. If you want it to pay out a bit more, you have a lot of room to payout. So I'm just wondering why not be a bit more aggressive given your confidence in the business for the next couple of years?

Ron Pasek

So what we've said before is we are committed to returning cash to shareholders through a combination of those dividends and buybacks. So it was a 20% increase in the dividend, I think it suggests a really great deal of confidence about the company. So I don't think you should just look it as a dividend only.

Over time, we've said we're going to buy back shares. We still 14 million shares that we can buyback and are authorized to. And not the least of which is to counter dilution. So don't look at it as just a loan example.

Operator

We'll go next to Ian Ing with Gleacher & Company.

Ian Ing - Gleacher & Company

You talked a lot about global wireless infrastructure and dollar content trends. Do you have a similar update on growth in back haul and network and deployments and content increases there? I know you're integrating 10 gig Ethernets for example?

John Daane

Our content is absolutely growing within newer generations of equipment. When you look at some of the base stations or the wireless summaries that we're feeding you, they do include a radio. If you go back to 2G, the radio intelligence was minimal. And there has been a lot of intelligence put into the radio systems, which introduced PLD content into the radios or including that in the figures that we're giving you in terms of the content increases, back haul is also a portion of that.

In terms of the rest of the market, we haven't broken it out that way. We certainly can look at doing that overtime in terms of trying to give you some other example of where our content is absolutely increasing and we will look at that.

Ian Ing - Gleacher & Company

And then moving on to a product questions at 28 nanometers, your main competitor talks about 30% lower power versus alternate FPGAs and of course you're going to get some rebuttal once you get more information, but my actual question is where do you feel most comfortable about low power advantages, whether it's certain architecture blocks or modes or applications?

John Daane

Well, I think what I've seen out of our competitor is they are hanging their head on static power consumption. And what you really have to look at is total power consumption of the device when it's used, because outside of consumer products, which are battery operated no product is just powered down or not being used in the systems, they are all being clocked constantly.

So to us, it's the total power consumption that customers focus on and there we've always had an advantage. Builder comes in through the fact that we came up with a new architecture and software scheme going back two generations ago in Stratix III, which allowed us to basically turn blocks on, either to be high performance blocks or turn them down to be lower performance low power blocks.

And overall, that's allowed us to have lower power consumption on the competition. I think we know what they are doing, which is a process play. It will give them probably slower devices, it will not give them overall power reductions over our products and so much to be disclosed I think ultimately from our competition as to what they are doing.

But so far, we believe will definitely have leadership at the high end with Stratix devices that we've announced. And there will be other families announced from us in the future.

Ian Ing - Gleacher & Company

And last question for Ron. You gave your full year OpEx guidance. It looks like you're suggesting a decline in fourth quarter, R&D, SG&A. Could you help us understand that?

Ron Pasek

Yes, that's a good question and I thought someone would probably catch it. So congratulations. So this is simply a factor of the way we do the accrual for the bonus. And the bonus for the year is very front end loaded to the first three quarter and that's really all there is to it.

Operator

We'll go next to Ruben Roy with Pacific Crest Securities.

Ruben Roy - Pacific Crest Securities

John, can you comment on design activity and how that's progressed over the last several quarters, you're clearly seeing LTE design at this point and some new telco et cetera, but when you look at your broader customer base and you kind of characterize how new design activity has progresses over the last several quarter?

John Daane

Yes, for us the design activity has picked up substantially over the last year, year and a half. And I thing there are a combination of events going on.

Number one, I think customers are recognizing that they really can afford to do ASIC design. In fact, if you need things like transceivers, you can no longer use older generations of process technology to get the performance that forces you into newer process generations for ASICs, they are just too expensive. So we've seen more customers abandon that approach and choose a programmable.

Number two, I think the downturn in the industry forced a lot of end systems companies to reevaluate their spending and decided in many cases to use FPGAs as an alternative architecture and I think that helped us accelerate design wins.

Number three, I think we ultimately had product superiority in the 40-nanometer node, and that has allowed us to really move in and win a tremendous amount of business. The reason I think we'll do very well in the next several years is really 40-nanometer will be the growth node of the industry for the next couple of years. 28-nanometer still several years before it become significant in terms of revenue, and I think that's a node that we've done extremely well.

This is an example in military. Many of the military companies are now looking at productivity and ways to reduce overall development cost because many governments are talking about assuring risks between the government agencies. And the military companies are wanting to speed up R&D, wanting to reduce R&D cost.

And what we're seeing now is a recognition out of many military contractors as well as government agencies that FPGA is a really the technology of choice to do that. So certainly seen a dramatic pickup in military design, but just this one example.

Ruben Roy - Pacific Crest Securities

Thanks for the detail John, quickly have you seen an increase in interest in HardCopy now as 40-nanometer really starts to roll out here?

John Daane

Yes, we have a number of designs that we've taped out. They're all with really the Tier 1 accounts that have a large portion of the overall basic dollars spend. And if they are new opportunities for us, because generally if a customer moves to HardCopy, they would have been moving to an ASIC anyway, and they were gone to another vendor.

So this is a way for us to hang on to that revenue. And we should see HardCopy really towards the tail end of the year next year in the HardCopy 3, 4 area start to go through I think a pretty strong ramp.

Ruben Roy - Pacific Crest Securities

Great and quickly for Ron, you talked about the highest growth this quarter coming from some of your largest customers, did you have any customers that contributed more than 10% of revenues?

Ron Pasek

No we did not.

Operator

We'll go next to Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

John, trying to figure out, separate out your secular benefits versus secular recovery and clearly wireless, and you have articulated the technology helping you in some stuff on military.

And if I look at the broadcast, it probably had similar thing. Can you just go over a little bit more on any of the segment that is seeing some kind of a secular shift or the other segments are or more a cyclical recovery?

John Daane

I think consumer have seen growth in televisions particularly in the 3D area, that's a new area that includes programmable logic. Within the industrial space as we mentioned we see growth and energy as well as in security. So a lot of the industrial security cameras are including programmable logic, that's a new market for us.

In servers, we're starting to see server companies or end corporations themselves start to add programmable logic content either for high performance computing, this is to accelerate certain algorithms or in cases to customize the hardware for some specific deed that they have.

Automotive is an example of purely all new content for us, we never participated there before that's mostly in camera electronics things like rear view cameras, car navigation systems as examples. Those are just some of the sort of ideas of top of my head. And then you see even in some of the older markets like networking increases in market share versus ASIC, certainly you see that in telecom, certainly you see that in wireless.

So I think there's just raw growth in all of our sectors and to a large extent if it were just a return of the business, I think you'd see all of our product categories up dramatically. The fact that really the growth is centered in the newer products, I think speaks to the market share gains much more than just our customers coming back.

Mahesh Sanganeria - RBC Capital Markets

Okay, that's very helpful and quickly on gross margin for modeling out quarters. How should we think of what margin? Is it more of a product mix driven or your ability to reduce the cost going forward? At what rate should we model gross margins going down in out quarters?

Ron Pasek

Yes, so this is a tough one, I mean, if you're talking about long term, I think again you would want to put something there around 65%, which is what we think it will be overtime and that's how we plan the company. From here to there it's really difficult to tell. We do get significant gross margin reductions as a result of product cost improvement and we can benefit time to time from vertical mix moving in our favor as well.

So I really, I'm sorry I can't give you is a specific answer. I think the near term, the rest of this year margins are going to be largely similar to what they've been the first half, but beyond that difficult to tell.

John Daane

And we'll be doing an update to provide you some guidance for next year late this year. And so in between now and then I think we'll just probably focus on what we know, which is the short-term this year.

Mahesh Sanganeria - RBC Capital Markets

All right, thank you.

John Daane

Thank you very much, next question please.

Operator

We'll go next to Hans Mosesmann with Raymond James.

Hans Mosesmann - Raymond James

A couple of questions, you released the software the Quartus and it was your top bullet in terms of accomplishments in the quarter, what is the designing activity that you can tell us at this point at 28-nanometer versus when you introduced the version of Quartus that introduced 40-nanometer software?

John Daane

I don't have the statistics. Good question. I should have them. We actually have a business review tomorrow morning. I'm sure we'll get them then. I expect it's going to be strong. I mean, Stratix V introduces some new capabilities that we've not done before in the high end. In particular, what it did is, one of the areas, we did some innovation. Like, couple of areas was around DSP blocks, providing more flexibility and performance; those will be very popular in military, wireless, and medical fields.

Number two, we added hard IP blocks or HardCopy blocks. This is the ability for Altera to add some, for instance, hardened specific protocols, I/O protocols in order to reduce costs and add functionality into these devices, or to allow customers to embed their own IP blocks to make sort of a hybrid ASIC/ASSP/FPGA.

And that is a new concept for the industry and I think is going to open up a large number of applications for us that we've not participated in the past.

And then as well in the transceiver front, we're continuing to innovate. We're the only company ASIC/ASSP that has up to 28 gigabit per second transceivers. And I think this really puts us in a new class.

When we are in Stratix IV, in 40-nanometer, we got to the point with 12 gigabit per second transceivers that we were in best-in-class with ASICs and ASSPs. Now we're ahead. And I think in many applications customers will just turn to us in areas like telecom and/or in even some of the new server I/O protocols, storage protocols that require very high performance transceivers.

So I think those are three categories which place us ahead of either other PLD competitors, ASICs or ASSPs that will enjoy some new markets for games.

Hans Mosesmann - Raymond James

And then a quick follow-up regarding your foundry partner. Has there been a change in terms of the availability of 40-nanometer? I know your demand has been very strong, but was there something that was different this time around from a quarter ago in terms of availability or capacity of 40-nanometer?

John Daane

I would say, what we've seen is, from six months ago, nine months ago, capacity was not an issue. Capacity is very tight; we talked about that last call, it's still tight today. As I mentioned, the lead time extension, and I think you're probably assuming its 40-nanometer, and I would caution you, it's not a process node specific challenge for us. It's not a product-specific challenge. It really is a couple of devices that lie across our entire product portfolio.

Some of them are mainstream. Some are mature; some in the new product category. And we'll just have to see what happens in the industry, both in terms of the demand and the capacity increase to see when lead times and manufacturing return to normal. But right now they remain tight.

Operator

We'll go next to Chris Danely with JPMorgan.

Chris Danely - JPMorgan

Hey, John, with the issues with wafer availability, have you guys given a thought to maybe expanding the foundry base you use?

John Daane

We have not, Chris. We continue to utilize TSMCs, our sole foundry. Continue to be very happy with the relationship, and we do think that that offers us some strategic advantages both in terms of access to technology service and many other elements. So we're continuing on the same strategy.

Chris Danely - JPMorgan

And as my follow-up, question on the finance part. I hear you guys' on the plans for returning cash to shareholders via a dividend and buyback in stock. But I think in the last year and a half year, your share counts gone up by like 20 million and your cash balance has gone up by 75%. So can we expect your cash balance to continue to go up or is there a level where you feel comfortable it could be maintained or will we ever see it go down? Can you maybe give us a little more color there?

John Daane

Yes, I think we're going to continue to generate quite a bit of cash, certainly in Q3. And what we've said in the past is that we will do buybacks opportunistically. And we will continue over time to increase the dividend as well.

I think we had a really good period this first couple of quarters, and we're going to keep thinking about how we return cash and as a constant focus for the company.

Operator

We'll go next to Apurva Patel with Ticonderoga Securities.

Apurva Patel - Ticonderoga Securities

John, can you just elaborate, in the past, there used to be seasonality in the September quarter and that seems to be no longer taking hold. Is that the way we should we be thinking about?

John Daane

I'm sorry. Can you repeat the question please?

Apurva Patel - Ticonderoga Securities

Sure. In the past, in the September quarter, there used to be seasonality. Obviously, we're seeing a new product cycle that has a significant growth compared to the past cycles. But going forward, is that the way we should be thinking about the September quarter seasonality that was in the past and no longer holds?

John Daane

It's a really good question. I think we've typically seen the third calendar quarter be the slowest of our three, and sometimes down predominantly because of communications. Purchases and vacations, and you're up in Japan and North America. If you go back in history, you'll notice is there is a tremendous amount of variation around that.

And so as we've noted many times, it's really very difficult for us to note or speak to any seasonality since it really has been all over the map. And so I hate to say that there is a pattern for the future based on what we were seeing this year or right now.

There certainly will be up quarters, down quarters, strong quarters, weak quarters in the future. It's just hard to know which quarter it's going to be. So right now Q3 is up for us and I just don't know how it's going to behave next year or the year after.

Apurva Patel - Ticonderoga Securities

If you had to elaborate on the PLD market, what do you think the (term) is? Can you put on a qualitative what the growth rate looks like?

John Daane

I do not know. You know, once we have the announcements out of some of our competitors and their guidance, I think you'll have a pretty good indication for this year. I do think the PLD industry will outperform the semiconductor industry in total. Certainly the numbers so far have played that out, so I do anticipate it.

I do expect Altera will take market share again this year. And we will expect that the PLD industry will once again outperform the overall ASIC industry.

Operator

We will go next to John Pitzer with Credit Suisse.

John Pitzer - Credit Suisse

John, you gave us a wide distribution on lead time of product. I am kind of curious, is there an average you can talk to, or perhaps even better, what percent of your revenue is at lead times where you start to worry about kind of potential inventory accumulation with customers?

John Daane

To be honest I don't know that I can cite any statistics to be able to answer that. So Ron and I can't really provide you a lot. I do know that customers continue to expedite us; I do know that customers continue to place orders with very short lead time expectations, simply because they get orders for delivery four weeks from now and therefore they try to get product from us four weeks.

So customers continue to place orders in the short run. I just can't provide you any statistics. We do talk to these customers, especially the larger ones. We do watch their activity in terms of what they are shipping. We do try to talk to their EMS companies where we can to understand what they have in place. We do watch the long term bookings behavior.

There a lot of metrics that we look at, but I don't have any good statistics that I can provide you right now.

John Pitzer - Credit Suisse

Not a prob. Maybe the follow-up, John. Your turns up-sided in the June quarter. Kind of curious was there any discernible pattern relative to end market or product on the turn side that you can speak of. And I guess other than conservatism, is there is a reason to believe that the turns level dip in the September quarter?

Ron Pasek

There really wasn't a pattern between the mid quarter update we gave. We gave a clarification the upside of the guidance being 12% and it came in a little bit higher than that. The only thing that saw was it tended to be, over extended to be mostly on the large cut terms, but it wasn't specific to an industry, etc. What we clarified in Q3 for guidance is the turns number in the low-to-mid 20s. That number as you know progressively moving down quarter-to-quarter as customers give us better visibility into what they need.

So they're putting orders on our books within the quarter in a way that makes our turns number lower.

Operator

And we'll take our final question from Brendan Furlong with Miller Tabak.

Brendan Furlong - Miller Tabak

You talked about the dollar content on the comm segment. I'm just curious if you have with the ASIC shift in the industrial and military, if you have some sort of conceptually, what you think the dollar content increases on the ASIC shift in future years?

John Daane

We haven't put any other I think metric out on any other types of equipments. We will look at trying to come up with, perhaps, some other examples to give you some indications. But right now, I don't have any other statistics to cite for you today.

Brendan Furlong - Miller Tabak

I guess my follow-up would be lot of discussion on the telco space, but can you give us some color on the networking and computer segment in the June quarter, how that shaped up between networking and computing?

John Daane

If you look at the second calendar quarter, we saw a growth in networking, really, I think associated with an increase in enterprise spending out of corporations. We also saw within computer and storage growth within the server space, and both of those areas were up for us. I think as we noted in talking about the increases that networking was a computer where each up double digits in percentage terms from the first calendar quarter.

Brendan Furlong - Miller Tabak

So no major discrepancy between both?

John Daane

Yes.

Scott Wylie

Listen, as to conferences this quarter, on September 8, we will attend the Citi Global Technology Conference in New York. This concludes Altera's earnings conference call. Thanks for your interest in participation.

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Source: Altera Corporation Q2 2010 Earnings Call Transcript
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