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Xilinx Inc. (NASDAQ:XLNX)

F2Q2011 Earnings Conference Call

October 20, 2010 5:00 PM ET

Executives

Rick Muscha – Investor Relations

Moshe Gavrielov – Chief Executive Officer

Jon Olson – Chief Financial Officer

Analysts

James Schneider – Goldman Sachs

Uche Orji – UBS

Glen Yeung – Citi

Mahesh Sanganeria – RBC Capital Markets

Shawn Webster – Macquarie

Tim Luke – Barclays Capital

Adam Benjamin – Jeffries & Company

Tristan Gerra – Robert W. Baird

Chris Danely – J.P. Morgan

Daniel Berenbaum – Auriga USA

Srini Pajjuri – CLSA Securities

David Wong – Wells Fargo

Operator

Good afternoon. My name is Kerry and I will be your conference operator. I would like to welcome everyone to the Xilinx Second Quarter Fiscal Year 2011 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Please limit your questions to one to ensure that management has adequate time to speak to everyone.

I would now like to turn the call over to Rick Muscha. Thank you. Mr. Moshe, you may begin your conference.

Rick Muscha

Well, thank you and good afternoon. With me are Moshe Gavrielov, CEO and Jon Olson, CFO. We will provide a financial and business review of the September quarter and then we’ll 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 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. Let me now turn the call over to Jon Olson.

Jon Olson

Thank you, Rick. Before I begin my remarks about the quarter, I would like to formally introduce Rick Muscha, our new leader of Investor Relations. Rick has been with Xilinx for 10 years in a variety of financial management positions, most recently Corporate Planning. He has strong finance knowledge as well as a solid understanding of products and the industry.

I believe he will be a strong contributor to our Investor Relations group. And you can expect the same high quality of support that you are accustomed to from both Rick and Lori Owen who remains a key interface to you all.

During today’s commentary, I will review our September quarter business results. I will conclude my remarks by providing guidance for the December quarter. September quarter sales increased 4% sequentially to a record $620 million. The September quarter was a strong quarter setting records for both sales and operating income.

Turns business for the quarter was 48%, down from 53% in the prior quarter. The lower turns number was indicative of a strong backlog going into the quarter with the turns level resulting close to the level we had anticipated. Supply constraints eased during the quarter and Xilinx exited the quarter with reduced delinquencies and lower overall lead times.

Gross margin at 65.6% was slightly higher than guided primarily due to both yield improvement and mix towards more profitable products. This is up from 61.9% in the same quarter of the prior year.

Operating expenses of $184 million represented 30% of sales down from 42% of sales in the same quarter of the prior year. This resulted in record operating income of $223 million, an increase of 170% from the same quarter of the prior year. This compares to a 49% increase in sales during the same time period.

Operating margin of 36% was up from 20% a year ago and a new record for Xilinx. New product sales increased 17% sequentially in the September quarter, 34% of sales driven by exceptionally strong growth from the Virtex-6 and Spartan-6 families. Combined sales from these families nearly doubled sequentially. Virtex-5 sales -- excuse me -- more than doubled sequentially. Virtex-5 sales also increased during the quarter. Sales from mainstream and base products both declined sequentially.

Japan was our strongest geography during the quarter with sales increasing 22% sequentially, driven by consumer and wired communications. Asia-Pacific sales increased 7% sequentially due primarily to increases from communications and data processing.

European sales increased 4% sequentially, driven by wireless and industrial and other. North American sales decreased 3% sequentially with declines from defense and communications more than offsetting increases in audio/video broadcast and test and measurement.

From an end market perspective, communication sales increased 5% sequentially driven by increases in wireless sales. Wireline sales decreased sequentially during the quarter.

Industrial and other sales were essentially flat as decreases in defense offset were offset increases in test and measurement. Consumer and automotive sales were up 7% sequentially, driven by increases in consumer and audio/video broadcast and data processing. Sales increased 6% driven by computer and data processing applications.

Net income for the quarter was $171 million or $0.65 per diluted share. Other income and expense was a net expense of $3 million and included approximately $4 million of investment gains.

Operating cash flow for the September quarter was $42 million before $15 million in CapEx. Cash flow was impacted primarily by an increase in receivables and to a lesser extent an increase in inventories. As we reported in our last 10-Q filing, we are temporarily providing extended payment terms to our primary distribution partner in exchange for a significant increase in technical selling resources designed to broaden the reach to customers worldwide, consistent with the sales strategy of the company.

Given distributor compensation for creating new business lags the investment, our temporary credit arrangement was designed to help offset working capital at the distributor. The impact to Xilinx is timing of cash collections only as we gradually return to historic credit terms by mid calendar year 2011.

After factoring in the impact to cash flow of the temporary credit terms, we are expecting FY ‘11 operating cash flow to exceed $600 million.

During the quarter, Xilinx repurchased 1.3 million shares for $33 million. We also paid $42 million in cash dividends. The tax rate of the September quarter was 22%.

Let me now comment on the Balance Sheet. Cash and investments was essentially flat during the quarter at approximately $2.1 billion. We now have approximately 1.3 billion outstanding convertible debt. And our net cash position is approximately $800 million.

Day Sales Outstanding increased to 82 days in the September quarter. We expect DSOs to decline quarter-over-quarter consistent with the explanation on cash flow provided earlier. Combined inventory days in the September quarter were 89, up from 80 days in the prior quarter. We were able to build inventory during the quarter easing supply constraints for most devises.

In the December quarter, we expect inventory days to grow as we return to full safety stock models and we build for the ramp of 40-45-nanometer product families. We expect days of inventory to be towards the high end of our model of 90-100 days.

Let me now turn to a discussion of guidance for the December quarter of fiscal year 11. Our backlog heading into the quarter is down slightly sequentially but at historic high levels. We are expecting to see continued strength from our Virtex-6 and Spartan-6 families.

From an end market perspective, we are expecting sales from communications to be approximately flat as increases in wired communication are offset by decreases from wireless communications. Industrial and other sales are expected to be approximately flat as increases in defense sales are offset by decreases in industrial, scientific and medical as well as test and measurement.

Consumer automotive sales are expected to be up, driven by increases in automotive and audio/video broadcast. And lastly data processing sales are expected to decrease. As a result, we are expecting total sales to be flat to down 4% sequentially in the December quarter with sales at North America expected to increase, sales in Europe expected to decrease and sales from Asia-Pacific and Japan expected to be approximately flat. In the mid point of our sales guidance is predicated on a terms rate of 48%.

Gross margin is expected to be 65% plus or minus a point. Operating expenses in the September quarter are expected to be approximately $190 million. This is higher than anticipated due primarily to our restructuring charge of $4 million covering a range of costs associated with continued realignment of resources and driving overall efficiency.

Other income and expenses expected to be an expense of approximately $9 million. The share count is expected to be 260 million shares. The tax rate for fiscal 2011 is expected to be approximately 22%. Let me now turn the call over to Moshe.

Moshe Gavrielov

Thank you, Jon and good afternoon to you all. We believe we’re experiencing stabilization in end-market demand. This is reflected in our lead time contraction which we expect to continue in the December quarter.

Having said this, demand for our new products remains resilient but we’re able to deliver our fourth consecutive quarter of record revenues. There are three key long-term secular trends that are enabling the growth in our market. Explosive demand for attenuation bandwidth, driven by the expanding number of connected users and applications who in turn are driving huge amounts of data and video traffic that at increasing rates.

The programmable imperative with the need for lower cost and flexibility are making SPGAs a preferred alternative to ASICs and ASSPs and the broadening of the markets where the benefits can be derived from semiconductors including access to the internet are rapidly expanding to reach greater population.

These trends are pervasive in multiple vertical markets including our core communications businesses that provide us with a significant opportunity to increase our long-term growth. New product sales drove our growth during the quarter.

Sales from all product families increased sequentially with particularly strong incremental gains coming from our newest Virtex-6 and Spartan-6 families. Combined sales of these 40-45 nanometer products more than doubled sequentially driven by wireless communications and 3D TV. As a result of the strong sales growth design activity for these products, we now believe that we will exceed the $100 million in accumulated sales by the end of the current December quarter, one quarter earlier than anticipated.

Sales from our flagship 65-nanometer Virtex-5 family also increased during the quarter, representing more quarterly sales than any other PLD family in history. Sales from this family reached another milestone by surpassing $1 billion of accumulated sales during the quarter, a milestone reached by only the most successful FPGA families in the past.

Xilinx leads the industry in transceiver shipments. We continue to have the industries only 45-nanometer high volume FPGA family with embedded transceivers. These devises are experiencing tremendous design win success for the little-to-no competition. 40-nanometer, 11.3 gigabit per second Virtex-6 HXT devices are also gaining significant customer traction.

These devises are the only FPGA’s on the market today that meet optical (inaudible) compliance providing Xilinx with a significant competitive advantage in servicing the increased requirements of the Next Generation optical deployment. These devises have recently won major design wins at a number of Tier 1 communications customers both in optical networking and packet optical transport systems.

Increasingly, our competitive advantages and focus extend beyond current PLD competition enabling us to also win key designs against ASIC and ASSP providers. We continue to win hundreds of designs against ASIC and ASSPs Next Generation customer programs providing further evidence of the programmable imperative is gaining momentum.

I’d like to provide you with an update on our 28-nanometer progress. We continue to execute a plan and our technology partnership with TSMC is progressing exceedingly well. In terms of early customer design activity, this family is ramping significantly faster than both Virtex-6 and Spartan-6. These seven series FPGA’s will offer the industries lowest power, highest density devices on the market.

They will also provide customers with the ultimate scalability from low cost to ultra high-end made possible through our unified architecture. Ultimately, this will extend the range of applications, we can address by solving customer challenges for lower power and costs without compromising on higher capacity and increased performance.

In addition, with our arm-based extensible processing architecture 28-nanometer, we believe we will have significant market leadership position enabling us to capitalize on incremental market opportunities. Look forward to providing you with further updates very soon.

In summary, I am very pleased with our financial performance for the quarter. We are experiencing exceptionally strong customer adoption for our new product families and we remain on track to deliver samples 28-nanometer products by the First Calendar quarter of 2011.

Let me turn – let me now turn the call back to the Operator to open it up for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of James Schneider of Goldman Sachs.

James Schneider – Goldman Sachs

Good afternoon. Thanks for taking my question. I was wondering, if you could comment on the customer order patterns that you saw as you progressed through the September quarter and what you seen so far in the December quarter. And I guess specifically with respect to the communications vertical, any color you can provide on wireless, wireline and networking would be great?

Jon Olson

Sure, Jim. Let me take that. So the pattern throughout the quarter was pretty much as we expected. We were very well booked going into the quarter. And so we felt it was more a mid-to-end of quarter turns kind of environment for us and while there was certainly better weeks than some weeks and worst weeks -- other weeks along the way in the second half of the quarter, it was actually a little more back-end loaded as we had anticipated.

That being said, if you think about another way to look at it is do we have lots of rescheduling cancellations, rebalancing of inventory, I would say we had a modest amount greater than we normally have and it does start. We are certainly seeing signs of stabilization along customers in terms of their demand, not us. So the demand is still very solid. It’s still at the higher level but the growth rates are certainly have mitigated to some degree.

And so the sense is generally across communications that where things are starting to get a little bit more balanced. Wireless is very strong for us this quarter. I’d say enterprise was flattish kind of thing and Telecom was a little bit down for us. And I’d characterize the wireless business as still being very, very good. And we’re still very bullish on wireless over the long-term and the enterprise business still is quite solid for us.

James Schneider – Goldman Sachs

Thanks, Jon. That’s helpful. And then as a follow-up, I guess one can’t help but kind of notice the divergence between the rates in terms of a sequential growth that you’re seeing relative to your largest competitor. So I was wondering if you could give us any kind of sense for what you’d chalk that up to. Is it the fact that your lead times have come down to faster than your competitor? Is it end market or customer exposure or some kind of competitive thing?

Jon Olson

Well, let me take a [path at] it. I know, it’s kind of all of the above. I think you cut all, all of the best. If you look at just as best as we can tell about the 40-45 nanometer share between the two, we shipped significantly more product this particular quarter. And our estimates based on what Altera said yesterday, we’re in the neighborhood of 40% share at this point in time acknowledging that we started later than they did in terms of shipping production worthy products.

And Moshe talked in his commentary about the strong high speed transceiver uptake in the optical area and other areas for us. And so I think we’re starting to gain lots of traction across-the-board in design wins and beginning to equalize that. And again, we have the only high-volume product out there on the market and that’s really doing very, very well particularly with the device of transceivers.

So all that feels really good. But having said that, you do look at their numbers and our numbers and clearly, there’s some elevated growth. And that I think is attributed to the different profiles of inventory. We have a lot of consigned inventory locations across and so any inventory – might there is any inventory adjustment that could be coming downstream, might be a little more muted with us.

Again this is a theory because I can only see what our business is doing. And we do play in different parts of some of these end markets. For example, we’re very strong in 3D TV. And they have strengths in other areas. So it’s a bit of a timing thing going on here, I would suspect as well between us relative to end markets and customers.

James Schneider – Goldman Sachs

That’s very helpful. Thanks very much.

Operator

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

Uche Orji – UBS

Thank you very much. Can I just ask you to explain a little bit more about the lead time contraction you’re talking about. Any way you can quantify that and also if you can talk about what’s available to you now from the foundries as you talk about stabilization? Is it, with all of the delinquencies going forward what should we be thinking about as long-term growth rate for Xilinx now?

Moshe Gavrielov

Well, from a pure lead time, leaving last quarter we had -- I’ll just talk average lead times about last quarter means June quarter, average lead times of about 12 weeks and then leaving this quarter or more in the nine week on average. And by the time we get to December, we think we will be pretty much fully across the board back to our normal four week lead time. So that should characterize for you that both we are getting more wafers quarter after quarter and then that should also say we’ve been able to manage through our delinquencies better than we anticipated in our level of delinquencies in this quarter, we’re significantly smaller than they were so certainly ahead of schedule.

And I talked about -- we’ve talked about the stabilization of our customers demand and some reshuffling of inventory and orders. I think what you’re seeing is the beginning of flushing out some of that inventory that our customers are holding and getting themselves a little more back in balance. I think we’re seeing that happen right now.

Uche Orji – UBS

Just a different question. If I look at the communications area, anymore detail as to what’s really going on with the wireless? So how should we expect and what are the key things that will drive wireless growth near term and over the next year and specifically we can talk about the differences as what’s happening in China versus India and also any comments on LTE at this stage? And then on wireline, also when you talk about inventory correction, this really weighs almost of the inventory correction within your customer base and just for me to understand why wireline is going to be down in your guidance for Q4.

Moshe Gavrielov

Yeah. So we talk a little bit about wireless first and then we’ll go to wireline. So the wireless piece, China is still very strong for us and we’re doing very, very well there, shipping into the Phase IV and the view there is that there is always a kind of a hump around these phases, but there’s also other providers and other technologies that are being deployed in China. So this isn’t like an all-or-nothing thing that ends and goes to zero towards a law, at the end of the cycle over the next quarter or so. There is a base business there and I think there will still be underlying strength that’s going on relative to the wireless business there. We are shipping products to customers that we do believe are ending up in India. I don’t believe there’s been a strong uptake relative to deployment yet from the new licenses, but there is a beginning of thins going on there and we are definitely participating in that area.

In the LTE rollout and HSTPA expansions in the United States those are going quite well. And I do believe those will continue to ship in high volumes over the next several quarters as well. So we are still very positive about the wireless environment going forward and we’ve had a very significant growth rate year-over-year in wireless and we do believe we’ll be able to keep that going if you will based on all those data points I just talked about. On the wireline, I believe I heard you say that we’re forecasting wireline to be down or actually……

Uche Orji – UBS

Maybe I misheard you, sorry.

Moshe Gavrielov

Yeah. We forecasted it to be up and the strength of that is both from the Telecom players that we see and then broadly, customers that we have and then broadly from an enterprise perspective, that also is a positive going in this quarter. So both of those areas for us we think will be up.

Uche Orji – UBS

All right. Great. Thank you very much.

Operator

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

Glen Yeung – Citi

Thank you. We’re at a period now whereas you say lead times are coming down and just mathematically your turns requirements this quarter are a little less and John I think when we talked in September you’d mentioned cancellations are a little higher than normal. All these things cyclically point to risk and yet the sense is that there’s some degree of orderliness if that’s a word in the demand environment or in your customer demand environment. I wonder if you could just look back at past cycles either Jon or Moshe and give us a sense if that’s an accurate statement. Does it seem more orderly despite the fact it should be more chaotic?

Moshe Gavrielov

Yeah. My view, Glen, your statements were accurate I believe, in terms of what you and I have talked about and I do believe at least at this point in time things still feel very orderly and not frantic from our customers in either direction meaning people are so frantic to get more inventory they will do anything and the other side is they are so frantic they are canceling everything across the board. Neither of those thins are happening. It feels very as you say orderly and non-chaotic and who knows what the environment will be another quarter from now, but it doesn’t feel like we’re in some sort of a, we’re just about to have some horrible cycle ahead of us but again, it does feel slightly different than previous cycles but maybe it also it could be early, you never know.

Glen Yeung – Citi

Okay. And then second question is really just a clarification. Did I hear you say that the level, sorry, I know you said that level of cancellations and rescheduling were a little higher than normal in the September quarter. Did I hear you say that it started to stabilize and that has come back to normal or is it still relatively high at this point?

Moshe Gavrielov

Well, I didn’t want to characterize in the beginning as it was high absolutely. I said the level increased a little bit from a little above normal, I wouldn’t call it high because I don’t want to project things are frantic because they really aren’t, but the stabilization comment was more about our customers changing their orders, swapping this part for that part, oversupply, undersupply, those things going on that when those things, when you start seeing those things happen, it isn’t, it changes from the environment.

I’ll take whatever you can give me of all these parts to now I’m rebalancing my supply chain, to be either consistent with what I need from an end market perspective or be consistent with what I’m getting from other semiconductor companies because we’re still hearing that some communication, some bills are being held up because of other semiconductor companies not being able to provide parts. So there still is a sense that there is some pent-up demand out there from some of our customers, but there have been not as frantic as they have been in the past and they are rebalancing supply.

Glen Yeung – Citi

That’s helpful. Thanks for that.

Operator

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

Mahesh Sanganeria – RBC Capital Markets

Thank you. Jon, a quick question on the segment for the December quarter you gave. Just want to make sure that I got it right. You said that the communication flat, industrial that one flat and data processing down and consumer up. And if that is correct, if I enter that number, I guess data processing will be down something like 40%. Is that accurate and if that is, is there a program ending, what’s going on in that segment?

Jon Olson

No. Because we didn’t give you the degree of up and down, I guess it’s a little hard to extrapolate that number but no, data processing is definitely not -- we aren’t expecting that to go down 40%. I guess I’m not really sure how you got all that, but --

Mahesh Sanganeria – RBC Capital Markets

Well you have two segments flat, one up and there is only one small segment down and to have the overall revenue down 2% that segment has to be down a lot.

Jon Olson

I see what you’re saying. Yeah, so the fact that the mid point of our range is down 2% that might indicate that maybe communications is -- when we say flat, flat could be plus or minus a percent or two, so I think I’m a scribing flat to be within a maybe a slightly broader range than absolute zero is what you are so. I think there’s a little bit of -- I would say potential rounding kind of things going on between the [two] and his dialogue but anyway.

Mahesh Sanganeria – RBC Capital Markets

Okay. Okay. That clarifies it. And again if you look at your sub segments, where would you think that there is most risk often inventory correction and is it ISM because that’s more broad based or can you point to a sub segment?

Jon Olson

Well, I would say -- history would say whether it’s a concentration of high volume with large customers there’s more risk than if it’s broadly distributed because if it’s broadly distributed then some customers designs could be more successful than others. So I’d have to normally say it would be something in the communications line where the biggest risk could be if there was a slowdown in telecom, capital spending or somehow wireless orders started getting cancelled or something like that.

Mahesh Sanganeria – RBC Capital Markets

Okay. Thank you very much.

Operator

Your next question comes from the line of Shawn Webster of Macquarie.

Shawn Webster – Macquarie

Great. Thank you. So on the days of sales you said you expected to normalize as we get into the middle of 2011. Does that mean it goes back down to the 40-50 range or is there a new range given the new programs you have in place?

Jon Olson

So the answer to your question is, yes, by the middle of the year it will get back to more of a historic range and I think you can look back at history, we’re always somewhere into the I’d say 45 to 55 day range, somewhere in that range. It can bounce around depending on how back end loaded the shipments are at any given quarter but no we’re not setting a new model for DSO. We truly will get back to our historic range.

Shawn Webster – Macquarie

Okay. Great. And then on the operating expense, as we get into the March quarter maybe beyond, can you give us a sense of how you expect your operating expenses to evolve recognizing you might have had some restructuring charges I guess in December?

Jon Olson

Yeah. The March quarter, we will start to have some tape out activity relative to 28-nanometer. So mass could, costs could move up a little bit in R&D and there will be a little bit of additional restructuring we believe in the March quarter as well. So there will be a little bit of -- again the same kind of up -- a little bit of upward bias but not to a great deal. And at this point in time we’re really not talking about the next Fiscal Year, but I will make the statement that we do believe mass and wafer costs will go up, just will cause engineering to go up next year, because we will be taking out a large number of 28-nanometer products and those mass costs significantly more than the last generation.

Shawn Webster – Macquarie

Okay. And then two more things if I may? On the 28-nanometer, do you expect to still be shipping those to your customers in Q1 and then also can you give us, on the programmable logic displacement theme, you’ve been talking about unique design wins last quarter they grew 50% sequentially. Can you give us an update on that for the September quarter?

Moshe Gavrielov

Okay. So we definitely expect to be sampling devices to our key customers in the first quarter of 2011 and that program is on schedule to deliver. And with regards to ASIC and ASSP displacement, I believe the growth was about 15 to 20%, something like that, vis-à-vis the previous quarter. So it’s in the hundred and it didn’t grow by 50% but it continued to grow in absolute numbers but significantly. This is something we’re tracking and this trend is just continuing to gather steam and with 40, 45 and then 28, it becomes much more prevalent whereas with 90 and 65, it was just the tip of the iceberg.

Shawn Webster – Macquarie

Great. Thanks a lot.

Moshe Gavrielov

Sure.

Operator

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

Tim Luke – Barclays Capital

Thanks so much. Jon, were you saying that your inventory was going to be higher as you exited the quarter? Could you just clarify what you were saying there? Could you also just clarify, with the $200 million rise in the accounts receivable, what is it that your distributors are doing for you to prompt that and what is going on there? Thanks.

Jim Olson

So on the inventory growth, inventory did grow a little bit. Net inventory was up like $18 million this quarter and we expect it will grow some next quarter and it’s really a function that we do have this higher revenue level rate, so we do need inventory to support it to get back to obviously a full safety stock. But also in the beginning of a -- what happens in the beginning of a ramp for new product introductions is the product always costs more in the beginning and therefore it becomes a – a few quarters it becomes a very significant part of your inventory balance just because of the cost content and that’s causing inventory to rise and I would expect then inventory to start declining after that towards the end of our fiscal year and into the next fiscal year.

So I’m really not too concerned about inventory dollars going up right now. From that perspective, I think we have a pretty good handle on things right now and we are getting caught up with all of the wafers we need from foundries and will adjust our wafer requests as appropriate in order to keep our inventory in balance. We think we have a pretty good shot at doing that, understanding how to do that.

On the increase in accounts receivable and therefore the impact to our cash flow and the question of what’s the distributor doing for us that’s so important. As I said in our remarks, they are putting in a significant number of technical resources and I think we’ve talked about in our Analyst meetings and some other conversations around how much focused and important it is for us to get the growth from our largest customers. And so it doesn’t mean we’re forsaking all of the other customers by any means, but there is some level of redistribution of where the focus is going to be from Xilinx sales initiatives and demand creation and where the distributor is going to focus on. And in order to do that we have to stay very tightly coupled with our distribution partner and we together have made the decision of where we want them and which customers and how those technical resources are deployed. And it’s basically a win-win for both of us along the way, because we can focus in what we think are the right things for high growth from our sales force and then get an opportunity to bring in a variety of new business for us in some areas and develop customers that we were beginning to develop on our own through our own sales force.

So as we talked about in previous calls, we have ended our relationship with another distributor and given all our business to Avnet as one worldwide distributor. There’s always a lag in when the compensation flows to the old guys and when it comes to the new person. And in order for us to really get this moving faster, it needed some of our help in anyway we can in order to do that. And it seemed like a reasonable way to do it was to help them through improving or offsetting their working capital penalty for investing earlier and faster like we asked them to do.

Tim Luke – Barclays Capital

But it normalizes by the middle of next year?

Jon Olson

Yeah. Totally normalizes by the middle of next year.

Tim Luke – Barclays Capital

And then on your interest expense, it seems the jump from negative 3.5 to – well, from 3.5 million to 9 million, what’s the dynamic there? What should we think about it going forward?

Jon Olson

All right. So in the 3 million that we had, there was a $4 million gain, so if you normalize for that, the number would have been more like a $7 million number. And we always have some positives and negatives that drag in addition to just interest expense and interest income. In the forecast that we have is 9 million, it’s kind of vanilla if you will. It’s the -- what ends up being about $13.5 million of quarterly interest expense offset by the interest income that we have which by the way -- how low the interest rates are, so the offset is it’s not as big as it was years ago. And so the negative 9 million is for the most part the pure interest expense offset by our income from our portfolio.

Tim Luke – Barclays Capital

Lastly, in March, having stabilized as you would put it in terms of the lead times and the availability of products. The beginning of the years has historically been a firmer period for you. Given the rate of momentum and the market seems to be slowing, do you have any kind of broad color in terms of how you’d expect that to be now?

Jon Olson

We’re really not going to forecast that quarter today, Tim. Our visibility still isn’t the greatest in the world on what’s going on and certainly, we feel like we can manage through any inventory adjustments etc. appropriately. But I think it’s premature to kind of pin an estimate or too much color on March at this point in time.

Tim Luke – Barclays Capital

Thank you, guys.

Operator

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

Adam Benjamin – Jeffries & Company

Thanks, guys. First just on wireless, I know it was asked a little bit but if you look at your business versus your main competitor, there is a divergence here and I was just curious if you can maybe elaborate, is it in terms of your specific customers that you think that you’re penetrated in or is there some other specific share loss that you think is explaining that?

Jon Olson

I think from an actual -- from September quarter I don’t know that I see the diversions the same way. We grew our wireless business double digits, so we had a very strong wireless business performance I think this quarter. With respect to the forecasted quarter, December quarter, I think that what we’re seeing is that the lead time issues that we were experiencing were heavily weighted towards our Vertex-5 family and that is a very, very strong performer in our overall wireless business.

It’s very a over weighted part if you will by a long shot in terms of our wireless suppliers and as lead times are shifting and changing, I think the order patterns from our customers are changing a little bit and this is probably -- I’d say rest of world taking China out and it’s just I think it’s just a matter of rebalancing the inventory flow and it’s not a long-term pattern that you’d see that much divergence between the two of us.

Adam Benjamin – Jeffries & Company

Okay. Got it. And then as it relates to the turns rates that you’ve guided to, can you just give a little more detail as to typically how you look at that and why you came up with 48% this quarter, I think historically that’s right around where it is but its been lower over the last several quarters. So I was just curious if you could give more color as to how you get to 48% this quarter.

Jon Olson

Sure. The turns rate for us is really a function of how the lead time and how well we’re booked going into the quarter and we had even though we’re down slightly in our backlog, we’re not down very much, we said a couple of percentage points so it really isn’t much of an adjustment down. And so we still continue to be very, very well booked and we kind of feel that if anybody was out there trying to take inventory early because of lead times and trying to scroll some things away if they were actually doing that out there, then they are not going to be doing that as their lead times come back to four weeks by the end of the quarter. So we look at all those patterns and say the December quarter with all its – its strength or the historical pattern. Looks quite a bit like the September quarter in terms of a good strong backlog in that turns level to deliver our number. That’s the thought process we went through.

Adam Benjamin – Jeffries & Company

Great. Thanks a lot guys.

Operator

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

Tristan Gerra – Robert W. Baird

Hi, good afternoon. You started the year more supply constrained then your competitor and now your supply constrain are diminishing assumingly faster. Is this related to fundamental shift in market share or is it due to timing as you mentioned earlier and also if you could expand on the consigned inventory arrangements that you have and perhaps quantify that?

Moshe Gavrielov

Yeah. So the supply constraints are related to our supply chain which isn’t, we don’t have the two companies on the same supply chain with different suppliers, so I can’t really comment on their supply chain versus ours. I can only comment on ours and we spent a lot of time with our foundry partners were the primary shortage has been working through this with them and as certainly as they’ve gotten freer, they’ve allocated more and more wafers in our way because we still really need them, so I think from that perspective, the supply side, our objective was to get well and we’re getting well by December.

On the demand side relative to delinquencies and again, there is some timing going on and I’d just point to the fact that we have supply models that we think are helping us mitigate any gigantic adjustment pending some macroeconomic set back going on in the world, but we think we’re pretty confident of that and the reference to supply chain models like consigned inventory, we really don’t disclose the percentage of what we have but they certainly have been growing in their favor with our large customers and we’ve been shipping more and more directly to them, to these very large customers and less and less using distribution models in order to do that because they want a lot more of a just in time, just in time model. And given the fact that we are -- our top communications customers are very large for us and most of them have moved to some variation of that model, within our top 10, there’s are quite a bit of that revenue is supplied that way.

Tristan Gerra – Robert W. Baird

Great. That’s very useful and finally, since the delinquency rate is falling, should that trend into a higher gross margin because I think you had a comment earlier this year that this was putting -- sitting on your gross margin as a result.

Jon Olson

I think the delinquency -- the only thing that related to the Supply Chain and the gross margin with the delinquency is as the foundries have been very, very full, the rate of cost declines that we’ve been getting has been more difficult to achieve. And at this point in time, I’m not changing that statement because the foundries still are full and we’ve been doing everything we can to expedite things for our customers. And there’s been cost pressure as a result of that.

Tristan Gerra – Robert W. Baird

Great. Thank you.

Operator

Your next question comes from the line of Chris Danely of J.P. Morgan.

Chris Danely – J.P. Morgan

Thanks guys. Jon, just to follow-up on your response to the previous question, so when do you expect your foundry supply to be all set, done and normalized, I guess, in terms of wafers?

Jon Olson

We believe by the end of the quarter, we’ll be back in, what I would call the historical shape of getting everything that we want and need both is kind of how I’d describe it. So by the end of December, we should be in that state. And we should be -- well it won’t be everything won’t be -- all products won’t be at safety stock -- full safety stock levels, a majority of them will be.

Chris Danely – J.P. Morgan

Great. And then so you guys laid out your 28-nanometer ramp and ship schedule. I’m sure you listened to your competitors call yesterday and seen their press release. How would you compare your pace of 28-nanometer product introduction versus your competitor, sort of better, worse or about in line?

Moshe Gavrielov

I think the approaches are very different. We have product which is targeted at scalability, low power with the highest capacity possible. They have somewhat of a different approach. They are targeting the very high end of the product offering. They haven’t yet revealed the rest of their product line, which I’m sure they will. I’m very confident in our ability to deliver this in the dates that we have committed to. And the way that the family has been defined, designed and in particular, the unified architecture should enable us to roll it out very efficiently during the year. And that’s sort of the core of what we’re doing.

We feel very comfortable with that approach. And again, I can’t overstate how important the low power is. It is even at the high end. It is by far the biggest issue. And as a result that’s why we have -- we can enable a part which is close to 2X larger than the competitor’s largest part. Because we focused on power and it’s actually thermal envelope that precludes reaching these levels of density and the low power enables us to get there. So I like our strategy and we’re going to focus on the execution and deliver to these programs.

Chris Danely – J.P. Morgan

Great. And I guess just one more longer-term question. In terms of foundry supply, if we’re looking out, let’s call it a year to two years, what would be your ideal mix of supply between UMC, TSMC and everybody else?

Moshe Gavrielov

Well, TSMC is the key foundry that we’re using for 28-nanometer and the FPGA business it takes time until you get to very, very high volume. UMC has been a fabulous partner for us and they will continue to carry the majority of our shipments for a very, very long time and if anything, since the 40-nanometer now is just starting to ramp up, there’s room for huge growth with our business with UMC. So overall, the balance should remain that way until the 28-nanometer becomes the largest shipping family and that’s going to take quite a few years.

Chris Danely – J.P. Morgan

Okay. Thanks.

Operator

Your next question comes from the line of Daniel Berenbaum with Auriga USA.

Daniel Berenbaum – Auriga USA

Hi. Good afternoon. Thanks for taking the call. A question on the industrial segment, I’m just wondering how we should think about the growth there. It looks like you’re shipping now about, sort of, 20% above prior peak in industrial and just wondering how we think about the long-term growth in terms of increased adoption of FPGA or would I expect that to kind of normalize or flatten out a little bit?

Moshe Gavrielov

Well, when you look at industrial, it’s really an umbrella for a lot of small-fragmented markets. Those small-fragmented markets, you just can’t justify ASSPs and/or ASICs. So if anything the transition in industrial away from historic old ASICs and away from standard products to FPGAs should continue to gather steam. It’s somewhat similar to the trend that happened in the middle aerospace a few years ago where the volumes there were low. They used to do ASICs, they stopped doing ASICs almost across the board at any level and they moved to FPGAs, that’s happening now in the industrial market and we expect that trend to continue.

Then, of course, the industrial market does depend on world economy and GDP and things of that sort because that’s the nature of that. It’s very broad and very diversified. So it will have fluctuations driven by that but I have no doubt about the secular trend in industrials.

Jon Olson

And with the new product offering, with the ARM-based processor, I mean, that’s going also be I think a very popular alternative to those using ASSPs and industrial and scientific and medical areas, certainly a target market for that product family as it rolls out. So our commitment is very strong and we think that’s a growth area for us.

Daniel Berenbaum – Auriga USA

Okay. Thanks very much.

Operator

Your next question comes from the line of Srini Pajurri of CLSA Securities.

Srini Pajjuri – CLSA Securities

Thank you, Jon. Clarification, I want to make sure I heard this right. Did you say the operating cash flow for the fiscal 2011 will be more than $600 million?

Jon Olson

I did say that and if you look at our actual numbers through the second half, you’d say do I understand my arithmetic, right Srini? But yeah, what happens here is as the credit terms start to come back down towards normal and we kind of work through this model, our belief is our modeling shows a tremendous amount of cash generation next quarter and the quarter after in order to get to that greater than $600 million number.

Srini Pajjuri – CLSA Securities

I guess you’d have to assume a certain amount of revenue growth in Q1 to get to that number or is it something that I’m missing here?

Jon Olson

Well, we’re not forecasting the March quarter.

Srini Pajjuri – CLSA Securities

Nice try.

Jon Olson

That was a really good way. I know that’s not what your intent was but I’m not going to go there yet – I wouldn’t -- I’m not counting on some sort of astronomical number to drive that. It really is the timing of our invoices with the distributor and our credits and how they get applied that driving this unusual pattern for this quarter and those things work themselves out in a quarter. And then we start generating quite a bit of cash.

Srini Pajjuri – CLSA Securities

Okay. Fair enough. And then on the OpEx number, Jon? Once you’re through the tax as well as the restructuring, is there a steady state number on a quarterly basis that we should think about?

Jon Olson

Well, I can’t really provide you a steady state number because there’s a cycle here. Every other year we have is a big increase and then it goes back down to a more normal rate. We aren’t counting the underlying R&D headcount and expense, we aren’t counting on some large growth rate out in time in the next year or so and that’s not what we’re planning on doing. There won’t be some significant like a 20% headcount increase in R&D and those kinds of things. We’re not planning that right now.

Srini Pajjuri – CLSA Securities

Okay. And maybe for Moshe, as you look out to 2011, where do you think you have an advantage versus your main competitor, whether it’s in a process node at a region or end market or should we expect to pretty much grow in line with the PLD industry in 2011? Thank you.

Moshe Gavrielov

Well, 2011 will be the design win, massive design win year for 28-nanometer. And that’s a very big family and we’re introducing it as quickly as we can across the entire product offering. And then there’s a derivative product which Jon had mentioned, which is the one we announced several months ago, which is the embedded ARM solution which will enable significant design wins in new markets that we have not had the same level of penetration and that’s the design win year. It translates into revenue in the following year and the year after that.

So that’s when the full impact of this great new product, which not only is it a market share changer but it actually is a market expander and enables us to win more business against ASICs and ASSPs, which we already have been winning. And that’s when that new generation has the impact. So it’s not 2011, it’s as a result of the 28-nanometer moving into revenue as opposed to the major design win phase.

Srini Pajjuri – CLSA Securities

Thank you.

Rick Muscha

Operator, we have time for one more question.

Operator

Your final question will come from the line of David Wong of Wells Fargo.

David Wong – Wells Fargo

Thanks very much. You estimated that currently your 40-45 nanometer market share is about 40%. How rapidly are your 40-45 nanometer revenues ramping? And does that percentage go up going forward or does it settle out at the 40, 50% range even as the node matures?

Jon Olson

Well David, the growth rate has been very rapid. I think we said more than doubled from last quarter. And we really don’t forecast market share. I was just trying to give a data point from -- since our competitor announced their actuals and made some comment about their number from a percentage perspective. We were just doing a Xilinx calculation on it and it came to that level.

And so that’s the best information we know. We certainly are planning on growth of revenues of that node over the next several quarters, but we aren’t going to forecast specific numbers at this time.

David Wong – Wells Fargo

Okay. Great. Then I could try a different one. As you transition to different fabs at 40-45 nanometers and another set at 28-nanometers, do you expect an impact either positive or negative on your gross margin from different cost or yield assumptions?

Jon Olson

So certainly we go into any relationship with any foundry with a joint understanding of what the yield curve looks like and the rate with which our experience has typically demonstrated itself on previous generations. And we’ve done the same thing in 28-nanometer. And it is true that this time working with TSMC, they have a tremendous scale. And I’m certainly counting on benefiting from lots of companies running things through the same tools and will it end up having a positive impact?

As Moshe said, it’s a while before the revenue becomes significant enough but downstream, I think it very well could have some positive impact, but way too early to tell.

David Wong – Wells Fargo

Great. Thanks very much.

Rick Muscha

Thanks for joining us today. We have a playback of this call beginning at 5 PM Pacific Time, 8 PM Eastern Time today. For a copy of our earnings release, please visit our IR website. Our next earnings release date for the third quarter FY ‘11 will be Wednesday January 19th, after the market close. This quarter, we will be presenting at the Barclays Capital 2010 Global Technology Conference in San Francisco on December 8. This completes our call. Thank you very much for your participation.

Operator

Once again, thank you for your participation. This concludes today’s conference. You may now disconnect.

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