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Executives

Scott Wylie - Vice President of Investor Relations

John P. Daane - Chairman, Chief Executive Officer and President

Ronald J. Pasek - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Analysts

Ruben Roy - Mizuho Securities USA Inc., Research Division

Christopher J. Muse - Barclays Capital, Research Division

Nathan Johnsen - Pacific Crest Securities, Inc., Research Division

David Wu - Global Crown

Mark Lipacis - Jefferies & Company, Inc., Research Division

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Sanjay Devgan - Morgan Stanley, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Shawn R. Webster - Macquarie Research

Vivek Arya - BofA Merrill Lynch, Research Division

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Unknown Analyst -

Altera (ALTR) Q3 2011 Earnings Call October 20, 2011 4:45 PM ET

Operator

Good day, everyone, and welcome to the Altera Third Quarter 2011 Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Scott Wylie, VP of Investor Relations for Altera Corp. Mr. Wylie, please go ahead.

Scott Wylie

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'll 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 would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear on 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 and John will follow. After John concludes his remarks, we will take your questions. Part of 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.

Ronald J. Pasek

Thank you, Scott. Revenue for the third quarter of 2011 was $522 million, a sequential decrease of 5% and below the bottom of our updated guidance. In Q3, we saw a 31% sequential increase in our Networking, Computer & Storage vertical, but declined in the other 3 verticals. Since our mid-quarter update on September 6, we experienced weakness in several of our large customers. Although it's difficult to say with complete certainty, our view is that we are under shipping end demand, as customers remain extremely cautious.

Absent the affect of the one-time ASIC replacement business, the sequential declines were more pronounced than our large customers. The broad-based was essentially flat. New products grew 43% sequentially. 40-nanometer revenue increased 33% and is now 27% of revenue. Within our new product category, Stratix IV increased 49% with Arria II up 59%. Cyclone IV up 43% and HardCopy IV down 14%. Stratix V was slightly more than $2 million for the quarter.

Q3 turns were in the low 30s, which is less than guidance and a reflection of the softness in the quarter. Book to bill for the quarter was below 1. Gross margin for Q3 was 68%, a decrease of 2.9 points from Q2 and lower than we anticipated.

All of this negative margin variance can be attributed to mix, although 2 distinct types of mix. The first is the growth in the Networking, Computer & Storage vertical, associated with the one-time ASIC replacement business, which carried with it some lower-than-average margin. The second mix element was due to the change in the mix of revenue from the time we gave you guidance in July, until we finished the quarter, which impact our higher margin verticals, somewhat disproportionally.

Operating expenses of $150 million were lower than guidance. Most of these variance is associated with R&D, and was a result of a slight pullback in hiring and other miscellaneous savings. Although R&D was below our guidance, our product roadmap remains on target. Operating margin for Q3 was 39.3%. Our Q3 effective tax rate was 9.7% and net income for the quarter was $185 million or $0.57 per diluted share.

On the balance sheet, cash and investment balances increased to $3.3 billion. Cash flow from operating activities was $283 million for Q3 and our cash conversion cycle was 78 days. We were active in the market this quarter, repurchasing 4.8 million shares at a cost of $197 million. Our philosophy remains one of being opportunistic and we have 9.9 million shares left in our current board authorization. As we have in the past, we'll limit future repurchasing updates to the quarter end release.

We ended Q3 with total pipeline month supply in hand of 3 months, which is comprised of 2.4 months for Altera and 0.6 months for distributors, in line with expectations, and essentially unchanged from Q2.

Moving to our outlook for the fourth quarter. We expect Q4 revenue to decrease sequentially, 7% to 11%. This range of guidance reflects a negative hedge to some of our large customers' forecast. Q4 turns look to be in the mid-40s. Gross margin for Q4 will improve to the 70% range, plus or minus 0.5 point, as we expect some positive vertical mix. Military business should return and will not see repeat of the high-volume ASIC replacement business, so we'll naturally see improved gross margins.

We're targeting Q4 R&D spend at $91 million to $93 million. SG&A for Q4 will be $70 million to $72 million. We expect Q4 month supply in hand to be in the low-3s range. The tax rate for Q4 will be 10% to 11%, and the diluted share count for Q4 will be approximately 326 million shares.

As we have in the past, we'll provide next year's gross margin operating expense and related guidance during our November 7 Analyst Meeting. If you have already RSVP-ed for the New York meeting, thank you. If you want to attend but have not contacted us, please do so, so that we can plan accordingly.

Finally, beginning with our Q4 FY '11 earnings call in January, we'll be moving to a new call format. Essentially, we'll expand the press release to include more the basic information, and as a result, use the actual conference call time for more Q&A.

With that, let me turn the call over to John.

John P. Daane

Thank you, Ron. We had expected broad-based end market growth for the third quarter, but instead saw customers aggressively reduce inventory due to concerns of the global economy, along with the downturn in some end businesses. In our Q3 update, we revised guidance downward due to non-Asia communications weakness, as well as broad military test and industrial softness. Late quarter softening in communications in Asia resulted in a close slightly below the updated guidance range.

In the third quarter, telecom wireless revenue decreased 13% sequentially, with broad-geographic declines in both markets. Industrial military automotive decreased 7%, with automotive up strongly, but industrial and military down. Computer, storage and networking, as the recipient of a majority of the short-term ASIC replacement business, increased 31%, other declined 11%. We had one customer represent 12% of revenues in the quarter.

For the third quarter, we are forecasting what we believe is a conservative range of a 7% to 11% sequential decline. We expect a decrease in communications, driven by wireless; and increase in automotive industrial military, driven by military and automotive; a significant decline in computer networking, with the end of the temporary ASIC replacement business as previously forecasted; and for the other vertical to be down.

Overall, we believe that a majority of this decline is due to customers sharply reducing inventory below normal levels, in anticipation of a slow-down in their business.

Our success in 40-nanometer, with over 65% market share, continues in the 28-nanometer node. We shipped over $2 million in Stratix V revenue in the third quarter, a similar ramp to Stratix IV during the same time period, and we estimate our 28-nanometer market share to be about 70% thus far. Within the quarter, we shipped Stratix V GT devices, with industry-leading 28 giga bit per second transceiver capability, extending our high end FPGA leadership. We also announced our fourth and fifth 28-nanometer families, name Cyclone V SoC and Arria V SoC, with embedded dual ARM Cortex-A9 microprocessors, as part of our broader embedded initiative, and released the industry's first Virtual Target for processor software development on these products.

Forbes magazine named Altera as one of the world's top 100, most innovative companies, for our culture of innovation that drives business success. It is through innovation that we deliver PLDs to replace ASICs, microprocessor solutions for the embedded market, and complex intellectual property blocks to replace ASSPs, opening a combined opportunity space, 10x larger than the total PLD market. Our goal is to continue to grow at a rate of twice the semiconductor industry. And with our leadership in 40-nanometer PLDs, coupled with our broad portfolio of 28-nanometer tailored products, we believe we are well positioned to succeed.

Now let me turn the call back to Scott.

Scott Wylie

We would now like to take questions. [Operator Instructions] Operator, would you please provide instructions and poll for questions?

Question-and-Answer Session

Operator

[Operator Instructions] We will go first to Vivek Arya of Bank of America.

Vivek Arya - BofA Merrill Lynch, Research Division

John, you mentioned that you have 70% market share on 28-nanometers. I hope I heard that correctly. But could you help us understand how you're measuring it? And what is, specifically, helping you gain share? Because I think Xilinx said yesterday that they are first to market, with a couple of their midrange products, and they have over 50 customers. So just, how are you looking at that 28-nanometer market right now?

John P. Daane

So we are first to market with the high-end FPGAs, similar customer count, I think, in terms of number of customers shipped to. The difference is, we had the software out a year earlier than our competition for any product, that allowed a number of customers to design their software, ready to receive silicon to do Prototyping, as well as in some cases, as I mentioned last quarter, that we anticipated they would start taking production. And so we were able to ramp revenue very aggressively. Very pleased that this is a similar revenue ramp to what we saw in Stratix IV at this time. Stratix IV has, of course, been our most successful FPGA family to date. We have about 2/3 market share in 40-nanometer. And we're estimating the market share of 70% on 28-nanometer just based on revenue. We did about $2 million in the quarter. We're just making a guess at what the competition did, because they didn't release a figure. We figure we're pretty solid around 70% at this point.

Vivek Arya - BofA Merrill Lynch, Research Division

Very helpful. And one for Ron. I think mentioned that you have some negative hedge in your Q4 guidance. Could you help us understand what that means?

Ronald J. Pasek

What that means is, when we look -- as I said at the beginning, the miss we had in Q3 was a function of some of our large customers. And we rely on their forecast and have in the past. And in the current environment, what we're doing is hedging that a little bit and, basically, under-forecasting what our customers are in the Q4 quarter.

Vivek Arya - BofA Merrill Lynch, Research Division

By how much?

Ronald J. Pasek

I'm not going to give you a number, but we're just hedging it based on our experience in Q3.

John P. Daane

And that's why we said, both of us, that we feel that we've been, or hope to be, conservative with our forecast this quarter, is because we have taken down our customer forecast quite considerably.

Operator

We will go next to David Wu of Indaba Global Research.

David Wu - Global Crown

Can you clarify one thing for me? In the network and computing area, I guess, if I take out the one-time benefit, would the market be down or not in the fourth quarter, relative to the third quarter? Sort of excluding the one-time effect, are you still forecasting a decline in Q4?

Dawn M. Owens

So we're forecasting a decline in Q4 because the ASIC replacement business, obviously, as we had said last quarter, would be a one quarter phenomena only. Predominantly, within the computer and networking market, as you see now. However, we entered into the business for 2 reasons. One, it was very accretive for us, so it was worth doing. But more importantly, we were able to secure some very solid customer goodwill, which we believe will translate to further business with these customers going forward. The customers, themselves, were very concerned with disclosure. And since we don't want to lose the goodwill that we built up, we're not going to be providing any further granularity on the customers, market segments or, ultimately, revenue size. There were segments within that area that were naturally growing our last quarter, and that's about all I'll say, and perhaps where we'll leave it at this point.

Operator

We will go next to Shawn Webster of Macquarie.

Shawn R. Webster - Macquarie Research

First question or my pre-question is on the R&D side, it sounds like you had some good cost savings in the quarter, but you're guiding for a significant increase in Q4. I guess my question on the R&D is twofold. One is, was there anything that changed in terms of tape outs for you in Q3? And my second is, is how do you expect to grow -- or what will be driving the growth going sequentially into Q4?

Ronald J. Pasek

Shawn, this is Ron. So, no, nothing changed in Q3 as far as tape outs. We're very consistent with the Q4 number to our full year number I gave you a year ago, $330 million, we're slightly under that now. There is some lumpiness in Q4. Again, we've been hiring, so that's one thing, and there are some tape outs in Q4 as well.

David Wu - Global Crown

Okay. And then I was wondering if you could expand on what's going on in your wireline business for Q3 and Q4?

John P. Daane

Wireline was down in the third calendar quarter. We expect it to grow in the fourth calendar quarter, but slight growth.

Operator

We would go next to C.J. Muse of Barclays Capital.

Christopher J. Muse - Barclays Capital, Research Division

I was hoping to dig a little bit deeper, I guess, into your large customers. Can you comment on kind of your visibility there into their inventories, and end demand there? And I guess, how quickly you think they will come back and have to start reordering again?

Ronald J. Pasek

So this is always a difficult question. It's very difficult to get really good information on our customers' inventories. What we tried to intimate, and both what John said at the beginning and what I said, is we feel that those inventory levels they have are naturally getting squeezed because of their uncertainty and anxiety. So what we have is some, probably, unnatural levels of inventory at some of these customers. When that comes back, it's really difficult to tell. But obviously, it will.

John P. Daane

Yes. I think what we're seeing is not that they have excess Altera product that they're trying to work down, as much as they're just trying to work their inventories below what are a normalized level for them, in anticipation of business changes, or perhaps because they're nervous about that. We saw a very sharp correction in the 2008, 2009, recession period. I think, if you go -- kind of go back in time, you'll notice that the semiconductor industry, for a while, under-shipped its end-customer base. And if you go further back in the supply chain and look at the foundry industry, it was even much worse, as everybody cut back very aggressively, very quickly. I think that phenomena is going on right now. I think how long it lasts, whether it bounces back, is all dependent on how the end businesses look. And that's very difficult for us to know at this period of time.

Christopher J. Muse - Barclays Capital, Research Division

And just as a quick follow-up, on the military side, helping gross in margin Q4. Can you talk about, I guess, budget flush, or re-upping the budgets and how that may help or hurt gross margins looking into Q1?

John P. Daane

This was something that we had forecasted in the coming out of the second calendar quarter, we said that -- or in our update. We said military would be down in the third calendar quarter, really because of timing on programs, but that we expected our revenue would be up in Q4, as those programs did come in. They are -- we have the backlog at this point, we'll be shipping the product for them. As to what our gross margins will be next year. As Ron pointed out, we have an Analyst Meeting coming up in a few weeks in November. At that time, Ron will be highlighting the expenses and margin profile for 2012.

Christopher J. Muse - Barclays Capital, Research Division

I guess the question was military season-wise, is that typically up or down in Q1?

John P. Daane

We haven't seen a pattern, historically, with military to be able to say that there are -- it is strong in any particular quarter or weak in any other particular quarter. So for us, there hasn't been a pattern per se.

Ronald J. Pasek

It's definitely not a military flush. I think that was part of the thing you said. That's not, at all, what's going on.

Operator

We will go next to Srini Pajjuri of CLSA.

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

John, on the wireless segment being kind of soft late in the quarter, and looks like you're guiding for further weakness in Q4. Just wondering as to what's going on in China with the carriers, if the 3G transition is mostly done? And then, what can we look forward to, as we look out to the next 12 months? And then, given that in the U.S., at least, Verizon is talking about LTE rollouts, and AT&T is talking about it. So I'm just wondering why we are not seeing that translate into revenues for the PLD sector?

John P. Daane

So I think what we've seen is a slowdown in communications in several geographies. In anticipation that, perhaps, some of the carriers will change CapEx deployments. It could be temporary. We have seen that in past years. If you go back to -- I want to say it was 2007, perhaps. One quarter we saw both AT&T and also NTT, basically, for one quarter, shutdown on CapEx purchases, and then return the following quarter. It's possible that it could be that. It's possible that we could see a change for a period of time. It's very difficult for us to exactly know. What we did see last quarter is telecom was down more than wireless. We expect actually this quarter, as I mentioned earlier, telecom will be up slightly, wireless will be down further. We have seen some delays in some rollouts for 3G for China. Again, very difficult for us to know exactly how it will map going forward. I do expect that communications over a 3 to 5-year period of time will still be a very solid business, because as you pointed out, you do have Verizon in the middle of a rollout for FTE, actually, in early innings for that. AT&T has renamed their 3G network 4G, but eventually, we'll have to actually upgrade to 4G. And you have now soft bank starting LTE deployments in Japan. NTT is starting to do that also for data overly DOCOMO. And then you'll continue to see rollouts in China because that's not completed yet. And then at some point, we'll also see 2 and 3G deployments within India. So I think there is enough geographies purchasing enough equipment. And as we've discussed before, our dollar content rises with every new generation of equipment. So we still think communications has legs. Whether this is a temporary slowdown or several quarters or several years, I think we'll just have to wait and see how this all transpires.

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Okay. One quick follow-up. You did say that your Q4 guidance is somewhat conservative. Just wondering, have you seen the business stabilize a bit here, since the last -- in the past few weeks, are you still seeing continuing weakness?

Ronald J. Pasek

I would say it stabilized. There's a couple of different ways to look at that, but it's certainly on target based on the linearity for this quarter of the year.

Operator

We will go next to Nathan Johnsen of Pacific Crest Securities.

Nathan Johnsen - Pacific Crest Securities, Inc., Research Division

I was just wondering if you could come back to the reductions of inventory for your customers. Wondering if that's, predominantly, isolated to the communication segment, or if it's a fairly broad-based activity? Just curious what we could expect to see, kind of leading the way out of the end of the inventory correction, whenever it does occur?

John P. Daane

We saw, actually, fairly broad reductions, as Ron said, tied to, generally, the larger accounts, however it was spread, as we mentioned, over industrial communications. Also, you could protest in broadcast equipment into that as well. I think the military sector, which we said was going to be down in Q3 and was, really, is just more program timing. Not inventory, specifically. So from an end-market perspective, fairly broad-based.

Nathan Johnsen - Pacific Crest Securities, Inc., Research Division

Great. And then just one quick follow up. I was wondering if you could provide an update on the progress on your embedded strategy on 28-nanometer?

John P. Daane

Yes, we announced the products. As a tradition with us, we announced the products when we have software and product availability. So we've just announced the products within the last week, on track for deployment next year. We did deploy a -- what's called a Virtual Target, which is a software simulation environment. So the customers can start developing software for these devices. Specifically, something that we've developed with Synopsis, and also, in conjunction with ARM. So we think we've got an advantage having a very solid software development platform, and those products are predominantly targeted at the industrial automotive and parts of the communications market. So far, the engagements have been really positive. And I think, to a large degree, because many of the microprocessor vendors are interested in developing specific products for these markets. We have great software and hardware solutions now, and I think it's just a natural evolution of our business, to start displacing some of the traditional 32-bit embedded business.

Operator

We will go next to Uche Orji of UBS.

Steven Eliscu - UBS Investment Bank, Research Division

This is Steve Eliscu for Uche. Our first question, in terms of understanding in customers and the destocking process, how do you see the destocking going on currently? And how do you know at what point that they may need to start ordering again?

John P. Daane

So Steve, the basic answer to the question depends on what their business looks like. So if their business continues on a flat level, you could estimate, given a few months, that they would need to reorder product. If their business goes down, perhaps they anticipated it correctly, they've taken down their inventory at some level, and then you'll return to business that's a little bit more normalized with them but, perhaps, reflecting a lower level. If their business goes up, obviously, they'll be in a panic to go purchase equipment or product very quickly. It's really hard for us to predict because we're in the early cycles of this process right now. We'll just have to see how that progresses over this quarter, and perhaps, a little bit later than that. So we cannot accurately predict exactly what's going to happen or where this is going to go.

Ronald J. Pasek

Remember, also, we're pretty much at standard lead time. So there's no incentive for them to take inventory or put orders on us in an unnatural way.

John P. Daane

Yes, I mean they know that we have inventory. They know that our suppliers have excess capacity and are in a position to support quick turns orders. And therefore, are taking advantage of what is a very solid supply chain that they have not only with Altera, but other vendors as well, and they can reduce their inventory and just see how this develops. And that's what's happening.

Steven Eliscu - UBS Investment Bank, Research Division

Well, are there any subsegments that you've seen, what could be characterized as a bottoming process?

John P. Daane

I think we prefer to talk about that at the end of the quarter, Steve, rather than trying to get in to all of that. Because as you know, there are lots of customers here, all are in different stages of doing different things. In general, I'd say, rather than many of these customers saying that their businesses are really going down, there are some that are saying that, but many are just on the other side of the coin, taking advantage of what is very minimal cycle times to reduce inventory, just in case things get back, and we'll see.

Steven Eliscu - UBS Investment Bank, Research Division

And on a longer-term basis, with regards to wireless infrastructure, we've seen some companies announce products for the, essentially, SoCs, that are a bay station on a chip. And how do FPGAs play in this world of where the infrastructure is potentially dominated by these LTE small cells?

John P. Daane

Okay. So we've been in direct communication with the major carriers around the world, and we will continue that, to understand their architectures and what they're looking to try to do. Obviously, our business in macrocells and the radio world with remote radio head is very solid. The content there is significantly higher than prior generations. And that equipment will continue to be deployed in the near term. What carriers are looking for is how to use their spectrum more efficiently, particularly in areas of congestion, because in many geographies, governments are not auctioning off more spectrum. So if you've got a fixed amount of spectrum, how can I utilize that, particularly in cities where you may have some hotspots. And there are many ways to do that, one of which has been to offload through WiFi, which has being fairly effective for many customers. Pico cells, as they've been currently architected, actually do not address this particular issue. Because just adding more cells that are effectively independent, or dumb cells, does not increase spectrum efficiency. So in talking to the carriers, that's probably not what you're going to see deployed, certainly not in many heavy volume versus macrocells. So in the near term, I don't see any challenge to the business. What is being discussed is heterogeneous networks. Heterogeneous networks require a network of bay stations and radios, and that means that they all have to communicate and coordinate amongst the traffic, which does require a lot more functionality than what you see in the current systems, and those will provide an ample opportunity for FPGAs to be successful. So right now, we actually -- and there's a lot of ASSPs that have been talked about for a long period of time, for femto cells, for pico cells. They haven't been a threat, we don't see them as a threat in the interim. And again, as I'd highlighted our content in LTE is about 3x -- over 3x, what it was in GSM. We'll see how this develops. We do have competition on many fronts of many different types of technologies. DSP's, ASICs, some of the standard products. But right now, we feel we're in a pretty solid position for the next several years.

Operator

We will go next to Hans Mosesmann of Raymond James.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Guys, you may have asked this before -- or I may have asked it before. Your book to bill was what, in terms of expectations for next quarter?

Ronald J. Pasek

We didn't give it. But so far, through the first couple of weeks, it is slightly negative.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Okay. And then a question on 28-nanometer yields. Just in general, are they meeting expectations? Or are there any issues that we need to be aware of on that front?

John P. Daane

Yes. 28-nanometer yields are strong. They're ahead of where 40 was at this very particular period of time. Again, that's a commentary for us. I don't know how other companies are doing at this period. Just going back, again, to 40-nanometer, we were yielding well, some others are struggling. So I can't make an industry-wide projection, but for us have been, actually, very strong and we're very pleased with the progress to date.

Operator

We will go next to Sandeep Shyamsukha of Auriga USA.

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Just wanted to get a sense in terms of OpEx plans for next year. With the changes in macroeconomic going on, I mean, do you think there is potential for pulling back on R&D for next year?

Ronald J. Pasek

Sandeep, this is Ron. Listen, I'd really like to answer that question at the meeting on the 7th in New York, rather than try to answer it today. Is that okay?

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Okay. Sounds good. I'll just ask another quick question then. Just wanted to get a sense if you can maybe provide some color, in terms of your new products, how much of it is high, middle and low end for you right now?

John P. Daane

From a revenue perspective?

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Yes.

John P. Daane

So, it's high end right now. You'll be seeing revenue in the midrange this quarter. And then as you get into next year, you'll be seeing the additional low-end products.

Sandeep Shyamsukha - Auriga USA LLC, Research Division

No, actually, I meant your new product category, which includes your 40-nanometer also.

John P. Daane

I'm sorry. I'm sorry. I thought you meant the 28-nanometer.

Ronald J. Pasek

I'm sorry, your question is what on new products? How much is mid...

John P. Daane

How much is mid. To be honest, I don't think we have the breakout that way to be able to provide that at this point. So probably, rather pass on that, and we'll look and see if we can get any relevant data here. But none of us have it readily available scanning the room. So with that, next question, please.

Operator

We will go next to Chris Danely of JP Morgan.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

I know you're not giving next year guidance on anything. But how about this, is the increase in R&D this quarter a one-time occurrence or is it expected to last a while longer?

Ronald J. Pasek

I'm not going to say, because I know it would kind of give you an idea of what we're taking on next year. So I can't answer that, Chris.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

That's okay. I can start over. A much easier question. So John, you talked about more inventory reduction than demand softness is there. Is there any guess you might offer as to how much of the correction is softness in demand versus inventory? And maybe give us your sense of the state of the end markets, and which ones you feel better about versus which ones you're a little more concerned about?

John P. Daane

Well, for this quarter, the ones that we're feeling better about are areas like automotive and military. They're definitely, right now, going to be up. Longer-term, we'll just have to see how this plays out. I would say, ultimately, most customers have far less than 3-month supply in hand of inventory. So they can't go to 0 on your -- you can kind of do the math to kind of figure out how much they can go down, for how long they could go down. We'll just have to see how their end businesses turn out. We Are actively talking to lots of customers, not only the typical management, but also their marketing departments to see how the business is going. There are some customers that have clearly seen a downturn, no doubt. There are others that are concerned about the macroeconomic environment. They're concerned whether banks in some geographies will be able to lend. And they have, in fact, reported to us in some cases, that they've had end customers that have not been able to secure loans, places like Eastern Europe, that have had an impact on some equipment deployments. So we'll see how this all pans out. It's definitely not just purely inventory. It is -- there is a slice of reduction in some end businesses as well, as we pointed out. But we can't provide any more detail at this time.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

That's fine. And as my follow-up, just a quickie. So I think you guys have 10 million shares left on the buyback. But I think that's less than 10% of your cash. So we've seen some of your peers crank up the buyback a little more here. I'm just curious as to why you guys wouldn't maybe crank it up a little more.

John P. Daane

The process for the buybacks, is every time we get low on the number of shares on the authorization, we go back for a new authorization for the board. And never had any challenges in the past getting it. So how many shares that we have within the authorization, I wouldn't say is a direction or something that you should read into, as far as what we might do.

Ronald J. Pasek

So Chris, we've said repeatedly that we will continue to buy back shares opportunistically. So that is our plan.

John P. Daane

And again, we don't talk about it ahead of time, we've tended to talk about it after we purchase the shares. And so every quarter, we'll give you an update as to whether we've been in the market or not and how many shares we bought.

Operator

We will go next to Glen Yeung of Citi.

Unknown Analyst -

It's Evelyn Lee [ph] for Glen Yeung. Can you just tell us a little bit about your 28-nanometer capacity availability? I know you've talked about yields before, so what about capacity?

John P. Daane

So capacity for us is not a challenge on any process node right now. We do not anticipate that it's going to be a challenge going forward. As I think everybody is familiar with, but I'll highlight it nonetheless, we've got a very, very long partnership with TSMC, I think it's over 10 generations of process technology now. We do 100% of our capacity there. They've always taken very good care of us. And so, I am not commenting on their total capacity situation at all, because I do not know that, I just know that where we are and what we need, we're fine, and do not anticipate any issues.

Unknown Analyst -

My next question is that, given your revenue is down sort of 9% at the mid point, what about your plan to manage expenses going forward?

Ronald J. Pasek

So I think within the full year, well within the business model we gave you on the Analyst Call last year. That is 67% gross margin, we're well above that. R&D at 18%, we're below that this year. And SG&A, ultimately, long-term at 11%, we're slightly above that. But as far as next year, we'll tell you on the seventh.

Unknown Analyst -

So, no change.

Ronald J. Pasek

Not for Q4, no.

Operator

We will go next to James Schneider of Goldman Sachs.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

This is Gabriela Borges on behalf of Jim. Just coming back to the gross margins, if I could. You talked about the ASIC business going away and high in military sales. What are the other puts and takes that we should be aware about when thinking about the gross margin profile in 4Q?

Ronald J. Pasek

Well, you'll see -- I think what you'll see is, those are the 2 big factors that will show a 2-point increase. It's just a one-time business going away in Q4, and then a higher mix of military business. Candidly, I think some of the other high-margin verticals will probably recover, so you'll see gross margin in the 70%, plus or minus 0.5 point.

John P. Daane

And I think that the real driver is the ASIC business going away, the ASIC replacement business rather than -- don't read in that the military business comes back and, therefore, the margins go up. It really is the ASIC business. It did pull our margins down, as we expected. And as it transitions away, our margins go back up. And I think that's a simple story.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

That's very helpful. And I have a follow-up, if I may. You mentioned that a lot of the larger customers are taking down inventories. Can you talk about the visibility you have into the rest of the customer base, and whether you would describe that as being relatively more stable?

Ronald J. Pasek

Again, this is the one area where we -- for visibility in anyone's supply chain after we ship it, it's very difficult. What we did see, as I said, is in the Q3 quarter, some of the softness was in the larger customers. But the broad-base remained fairly steady. As John alluded to earlier, it's not unique to one vertical, and all customers are in different phases of whatever they're doing, as far as right-sizing their level of inventory, and, so, their supply chain.

John P. Daane

We are forecasting the smaller customers to be down this quarter. So we're sort of assuming that the cut back in inventory and some of the softness of the end business is going to be broad, just as a base assumption again, trying to be fairly conservative.

Operator

We will go next to Ruben Roy of Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

John, with the Stratix V design starting to accelerate a bit here and some revenues coming in, can you characterize what end markets you're seeing traction, and is it similar to your 40-nanometer or different at 28? And also, are you starting to see some evidence at 28 that you're gaining some traction in sockets that might have not been FPGA sockets previously?

John P. Daane

Yes, absolutely. I think to start with the last point. The number of opportunities that we have, on the dollars basis, has increased quite steadily, over the last few years, from 65-nanometer into 40-nanometer, now into 28. And I think that's because, a, many of the ASICs are not economical any longer. Fewer ASSP solutions and, obviously, we've also, with the SoC products, opened up the embedded base. So we've seen a quite significant uptick in opportunities. We're seeing a lot more competitors with every generation than we've seen in the past. So do we see our primary PLDs competitors? Yes. But we see ASICs, DSPs, microprocessors, ASSPs, a lot from different vendors. And I think that's good news. And in many of those cases, we're winning quite solidly. So what we're continuing to see is more design wins against these other products. That's important because, if we're just winning against our competitor or winning against prior generations of our own technology, we're not growing the base. What we're seeing is still a majority of these design wins are displacing other technologies. And that should allow us to continue to grow 2x the overall industry. So we feel we're really solid with 28-nanometer in terms of its deployments. Early markets, typically for the high end, the early guys tend to be telecommunications. You also see military test, and it is branching out very aggressively from there into wireless and microwave, as other markets and medical. So very, very well broad customer base right now. Again, anything that tracks very similar to Stratix IV for us, we believe is a huge win, because Stratix IV, we have over 2/3 of market share in the industry. So if we're doing as good as we did in that generation, we're really enthused at this point.

Ruben Roy - Mizuho Securities USA Inc., Research Division

And has there been any falloff in Stratix IV design activity, would you say? And where do you think 40-nanometer ends up in terms of percentage of revenue, as you look into 2012?

John P. Daane

Yes. There's still activity within 40-nanometer at this point. And I think it's because we had a really solid product line there. And our midrange products will just now start being introduced. So there has been activity within 40-nanometer. That will not peak for several more years. Overall, 40-nanometer was 27% of our revenues. And so if you think -- I think if you take that, combined with what our competitors said, it's easy to get the -- we have 2/3 market share at least, if not higher for 40-nanometer. And again, that's going to peak several years from now. And I think with 40-nanometer, we're in really good position to continue to increase market share for the next several years.

Operator

We will go next to Sanjay Devgan of Morgan Stanley.

Sanjay Devgan - Morgan Stanley, Research Division

Just had a quick follow-up. I think one of the earlier questions pertained to kind of the evolution of LTE and the emergence of microcells and pico cells. I was wondering if you could just focus on the macrocell market, talk about design win rates there versus your competition? And was also wondering if you're seeing the emergence of alternative solutions in the form of multi-core processors, et cetera, starting to pull a front on the macro side.

John P. Daane

No, we haven't seen any change in competitive dynamics between PLD vendors, or for that matter, even other ASSPs or other types of vendors. I would say, generally, for some of the applications in wireless, our competitor may be an ASIC technology. Ultimately, that's why we have the HardCopy line, is so that we can participate in that ASIC business. Some of the radio applications are in the hundreds of thousands of units per year, microwave backhaul as well, and, therefore, it makes sense to move to ASICs for power and cost reduction. Overall, we're not seeing any other competitive threats in the near term. We'll have to see how this develop. I think you'll see some architectural innovation, which will make sure that there is a lot of PLD content, particularly, I think the existing pico cell architectures are not going to get massively deployed, and I think that has been already publicly talked about by some of these vendors. I think in terms of PLD vendors, specifically, in general in wireless, we have been with every new generation of technology expanding our market share. Our wireless business, probably over the last 3 years, has grown, I would guess 15% compound annual, maybe that's over a 5-year period. I think our closest competitor, maybe it's closer to flat. So clearly, we've been taking market share, and we would expect that to continue for the next several years.

Operator

We will go next the Mark Lipacis of Jefferies.

Mark Lipacis - Jefferies & Company, Inc., Research Division

John, in 2008, we saw inventories deplete to levels that were well below normal. When you talk about your -- some of your customers having well under 3 months of supply on hand. Are we getting to that level? Or do you think your customers are depleting well below normal levels now, or are they just lowering inventories to match lower demand and the shorter lead times?

John P. Daane

Well, I think there are some customers whose demand has fallen off, so, therefore, they're lowering their inventory to meet that. We have some customers who are anticipating that their demand will soften and are taking their inventories below very normal levels. Very few customers could we identify having excess supply on hand of Altera specific devices. So this is not your typical inventory correction, where they just maybe bought too much and, therefore, have to take a pause in the market to correct the inventory or get it back in balance. This is really people trying to draw it down very aggressively. I think what we've seen in the last correction, and I think what we're seeing in this correction, is people be very aggressive, very early, with trying to take inventory down. As you know, you go back to the last cycle, in 2009, some of the foundries were down 50% plus year-on-year in terms of revenue. Obviously, none of their customers were down that much, nor were the end-systems companies down that much. So I think, sort of similar, people are just being aggressive and they're being early. And the bigger question is, what will the actual end business do, and that we can't answer at this point.

Mark Lipacis - Jefferies & Company, Inc., Research Division

Fair enough. And then the follow-up, in 2000 -- late '08, early '09, what was -- was there anything that foreshadowed the kind of like the reversal of that trend?

John P. Daane

We did well during that cycle early, because if you go back to that, in towards the end of '09, we started to procure a lot of material, I think in the third calendar quarter. Because we anticipated that it would start picking up from our customers. And really, that was through understanding what they had in inventory and talking to some of their marketing groups, understand what they were shipping. That's something that we'll continue to look at. But now I think, because we're early in the cycle, it's hard to predict exactly where it goes.

Operator

And at this time, we have one question remaining in queue. [Operator Instructions] We will go next to Sujeeva De Silva of ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

First question, you talked about hedging or haircutting some customer forecast. Is that limited to the telecom market or the communications market, or is that broadly across your end markets?

John P. Daane

It's broad.

Ronald J. Pasek

Yes. Well, it's just some of our large customers, and it's just based on our experience recently with what they're forecasting and what they're telling us.

Sujeeva De Silva - ThinkEquity LLC, Research Division

So that was broad-based, you're haircutting?

Ronald J. Pasek

Well, it wasn't unique to one vertical, correct.

Sujeeva De Silva - ThinkEquity LLC, Research Division

And the second question is, do you have any 10% customer in the quarter?

John P. Daane

Yes. We had one customer that was 12%.

Operator

And we have had one more question come in. That comes from David Wu of Indaba Global Research.

David Wu - Global Crown

John, I got a question for you. If you're early in the inventory correction phase, excluding the '08, '09 period, does it feel like it's like your normal inventory correction we've been through many, many times before. All the classical inventory correction as opposed to a end market-driven downturn, that was pretty sharp in late '08, early '09.

John P. Daane

Well, I think, typically, in semiconductors, we've seen sort of boom-bust periods of time. And the recessions are typically caused by the semiconductor industry going from a period of too little capacity to too much, and that leads inventory drawdowns from end customers. That's not what we're seeing at this period of time. I take we're seeing something more like '08, '09, where customers are concerned about the end business environment. Some customers have seen a slowdown in their business, and naturally, therefore, look to purchase less. Some are anticipating a slowdown and are trying to get ahead of the curve, and reduce inventory as much as possible. So I think this isn't your typical cycle, it's more like, probably, what we saw in '08, '09. The big question which we just cannot answer is, how much does the end markets go down, if at all? How soon will it come back? And those things we simply, today, don't have the answer for, because our customers, in many cases, are doing this in anticipation of an event, but they're not sure the event is actually there. And again, I'd want to highlight, it's not just purely inventory, there are, indeed, some businesses that have slowed down as well.

Scott Wylie

And as we wrap up today, once again, I'll remind you, we'll host the meeting for the investment committee in New York on November 7. If you'd like to attend but have not notified us, please e-mail me, and we can give you the full details.

Also in New York, on the following day, November 8, John Daane will deliver a keynote address to the Piper Jaffray Technology Media And Telecommunications Conference.

This concludes Altera's Earnings Conference Call. Thanks for your interest and participation.

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