Xilinx F4Q07 (Qtr End 3/31/07) Earnings Call Transcript

Apr.25.07 | About: Xilinx, Inc. (XLNX)
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Xilinx, Inc. (NASDAQ:XLNX)

Q4 2007 Earnings Call

April 25, 2007 5:00 pm ET

Executives

Marie Quillard - Public Relations

Wim Roelandts - CEO

Jon Olson - CFO

Analysts

John Dryden - J.P. Morgan Securities Inc.

Chris Danely - J.P. Morgan

Parag Agrawal - Jefferies & Co.

Han Lee - Global Crown Capital

Tim Kellis - Stanford Financial Group

Steve Eliscu - UBS

Ruben Roy - Pacific Crest Securities

John Dreyden

Parag Agrawal - Jefferies & Co.

Danny Kuo - Bear Stearns & Co.

Aalok Shah - D.A. Davidson & Co.

Peter Trigarszky - Citigroup

Tim Luke - Lehman Brothers

Christopher Danely - J.P. Morgan

Lindsay Mathern - A.G. Edwards & Sons

Presentation

Operator

Good afternoon. My name is Kristin, and I will be your conference facilitator today. I would like to welcome everyone to the Xilinx Fourth Quarter Fiscal Year 2007 Earnings Release Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session (Operator Instructions).

Please limit your questions to one and refrain from multi-part questions to ensure that management has adequate time to speak to everyone. After each participant has asked their question, their line will be muted and they will be placed back in the conference. If time permits, additional questions will be taken.

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

Marie Quillard

Thank you, and good afternoon. With me today are Wim Roelandts, CEO, and Jon Olson, CFO. We will provide a financial and business review of the March quarter then we'll open the call up for questions. I will then end the call with a few housekeeping questions.

As published in our press release, our business update for the first quarter of fiscal year. 2008 our guidance place in the reporting market closes on Thursday, June 7. After we update our guidance we will be in a quiet period until we report the following month.

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

We refer you to the documents the Company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections for forward-looking statements. This conference call is open to all and is being webcast live. It can be accessed from our Xilinx Investor Relations Web site.

Now let me turn the call over to Jon Olson.

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Jon Olson

Thank you, Maria. Revenues in fiscal Q4 decreased 2% from last quarter to $443.5 million, in line with the guidance provided during the March quarter business update. Gross margin of 62.1% was higher than our forecast of 61%, primarily due to improved yields on 90-nanometer and 65-nanometer technology.

Additionally, we benefited during the quarter from a product mix shift to higher margin products. We expect gross margin to continue to benefit from better than expected 65-nanometer yield, at this early stage in the production rollout.

Now let me turn to operating and net margin. Operating income was $79.4 million, down 3% from last quarter. Net income of $87.6 million, or $0.27 per diluted share was flat sequentially.

Both operating and net income included a $5.9 million charge related to an impairment of a leased building we no longer intend to occupy. Excluding this charge, operating expenses were up 0.5%, slightly better than we had forecasted.

Other income including interest expense was $22 million, slightly higher than expected due primarily to higher investment interest income. Free cash flow during the quarter was $43 million after $63 million in Cap Ex.

Capital expenditures were much higher than typical this quarter, primarily due to a spike in progress payments for the construction of our Singapore facility, and for land purchased in the San Jose area targeted for future expansion. We have no current plans to build on the property.

Next quarter we expect CapEx to be around $20 million due to the remaining impact of our Singapore facility. After the June quarter CapEx is expected to return to more normal levels of approximately 10 to $15 million per quarter.

We repurchased a total of 39 million shares during the quarter for $1.03 billion. 35 million of these shares were repurchased with the proceeds of the convertible note we issued. During fiscal 2007 we repurchased over 55 million shares of our common stock for $1.43 billion. We also raised our dividend twice during the fiscal year and are currently paying a dividend of $0.12 per share per quarter, a yield of approximately 2%.

The tax rate for the quarter was 13%. This rate was lower than expected primarily due to the refinement in methodology of stock option cost sharing charges and an increase in the R&D tax credit driven by higher qualified expenditures than previously estimated.

During the quarter we issued $1billion junior subordinated convertible note and used the proceeds in an accelerated share repurchase program, which was completed during the quarter. We chose to borrow the funds, to execute the buyback in order to more effectively manage our worldwide cash flow, while keeping the flexibility to continue the return, to return cash to shareholders in future periods. When comparing the economics of different debt instruments, a convertible represented the most attractive option.

The resulting impact to our financial statements is as follows. Our net cash position has decreased from $1.8 billion to $800 million. Our near-term objective is to keep our net cash balance in the $500 million to $1 billion range.

We used the proceeds of the convertible to repurchase 35 million shares in an accelerated buyback that occurred during the quarter. Interest and other will decline to about $15 million per quarter due to interest expense associated with the convertible.

The convertible has a net share settled featured, which means we will redeem the par value with cash and settle with shares for amounts exceeding the conversion premium. The terms of the convertible allow for a tax deduction greater than our coupon rate of 3.125%, which contributes to the cash flow positive nature of this instrument. In summary, the convertible is cash flow positive, accretive, and represents an inexpensive way to borrow money.

Let me now comment on the balance sheet. The cash balance increased $15 million during the quarter to $1.8 billion. Factoring in the $1 billion convertible, our net cash position is now approximately $800 million as previously stated.

Day sales outstanding increased seven days to 37 days, a reflection of our higher shipment profile at the end of the quarter. Combined inventory at Xilinx and distribution increased by two days to 120 days, with the increase coming from distributor inventory levels while our internal inventory levels remained.

I will now turn the call over to Wim to comment on our business and products.

Wim Roelandts

Thank you, Jon, and let me first give my own comments on the March quarter. The March quarter as expected, was a challenging quarter for us with sales declining 2% in line with our guidance.

As you may remember, we started the quarter with a lower beginning backlog and the knowledge markets would be sort should be that our defense and wireless end markets would be. Indeed this are not up being the case.

Defense business, which was exceptionally strong in the September and December quarters, slowed substantially in the March quarter, due to a few large customer programs taking a breather as well as a normal seasonal decline. The wireless infrastructure market was also down, as expected due to an over inventory situation and telecom consolidations.

These issues, coupled with a weakness in Japan, made for an atypical March quarter. Except for the communications bubble busting in 2001, every March quarter has shown a sequential increase for Xilinx.

In spite of the revenue decline, we were pleased with several things this quarter, including an improved gross margin, a strong Virtex-5 revenue ramp, stabilization of our wire line business, higher turns bookings, and a positive starting backlog position. We also saw solid growth from our small account customers, which we view as a leading indicator of inventory levels coming into better balance.

Total booking for the quarter totaled 59%. January and February turns orders were as expected. March orders started out weak and ended strong. Another reason why the March quarter was so atypical was that our new products declined sequentially, which we believe to be a one-quarter phenomenon.

In the new products group, Virtex-5 and CoolRunner did very well with Spartan-3 and Virtex-4 both saw sequential decreases due to the weakness in wireless and defense, as we mentioned earlier, as well as some seasonal consumer weakness.

Our 65-nanometer Virtex-5 family revenues approached $5 million, and CoolRunner II grew approximately 30%, driven by portable consumer device strength. These products grew this quarter due in part to some last time buys before the scheduled price increase goes into effect for some of the older parts.

We don't expect these products to grow sequentially in the June quarter. Again, this should be a one-quarter phenomenon.

Total Virtex revenues declined 6% to 53% of overall revenues. Spartan revenues declined 2% to 25% of total revenues. CPLDs, however, grew double digits this quarter, and 10% of overall revenues, their highest percentage in the company's history.

From a geographic perspective, North America and Japan declined sequentially while Europe and Asia Pacific both grew quarter-to-quarter. Japan weakness was wireless and consumer related, but North America's softness was due primarily to the predicted fall off in defense revenues this quarter.

Europe grew as weakness in wireless was offset by strength in industrial and automotive. Asia Pacific saw good domestic growth as revenues from China were up sequentially after being down for the last couple of quarters. Transfer business also increased during the March ending period.

In terms of end markets, the revenue percentages didn't change much quarter-to-quarter. Communication dollars declined but the overall percentage stayed steady at 44%.

Wireless was again the culprit because wire telecom and networking grew sequentially. Our wireless revenues are now under 15% of company revenues.

The industrial and other category was impacted by a more than 20% decrease in our defense revenues, offset by a very good performance in industrial and in test and measurement applications. Consumer automotive was flat quarter-to-quarter as good growth in audio video broadcast and automotive was offset by seasonal softness in consumer applications.

Let me now say a few words about Xilinx performance in fiscal year 2007 compared to fiscal year 2006. New products grew 102% while mainstream and base products both declined. Virtex grew 8%, Spartan grew 15%, and CPLDs grew 11%.

Revenues from all geographies except Japan increased from fiscal 2006. Europe was a top performer, growing 21%. Asia Pacific grew 15%, North America 2%, and Japan declined 13%.

End market trends showed that our diversification efforts are working. Only storage and wire communication declined year-to-year. All other end market segments grew and nearly all by double digits in fiscal year 2007, even wireless communications.

Industrial and other grew 22%. Consumer and other increased 18%. Communications was down 1% due to wire telecom weakness and data processing declined 10% year-over-year due to storage losses.

On the product front, we continue to execute on all fronts with our 65-nanometer Virtex-5 family rollout. We are currently shipping 12 devices across the LX, LXT, and SXT platforms.

By meeting our committed rollout schedules, we have established our customers to develop --sorry we have enabled our customers to develop up next-generation products well ahead of our competition. Early this month, our Virtex-5 family won both the Product and the Innovator of the Year Awards of the EDN Magazine's annual award competition.

On the Spartan side, we introduced Spartan-3A DSP, which provides high DSP performance at the lowest cost points in the FPGA industry. With the addition of the new Spartan DSP series, we provide DSP engineers with the flexibility to choose the right mix of features to match application requirements. Spartan DSP complements the high performance processing of our Virtex DSP series.

Let me now turn to the guidance for the quarter. The June quarter revenue guidance is for a plus 1 to plus 5% increase. After three quarters of modest sequential revenue declines, we expect to return to growth in the June quarter.

We are entering the quarter with a modest increase in our backlog position. The mid point of our guidance will require a turn’s rate of slightly less than the 59% that we achieved in the March quarter.

From an end market point of view, we expect wireless and defense to show growth this quarter. We also expect all geographies except Japan to be up sequentially.

Now, let me turn the call back to Jon for some final remarks.

Jon Olson

Thank you, Wim.

Gross margin is expected to be approximately 62%. Combined inventory days are expected to be approximately flat at 120 days. R&D spending will be approximately $92 million.

SG&A spending will be approximately $94 million. This is a reduction of 4% to 5% sequentially. The drop in expenses is driven by the absence of the lease impairment, overall expense controls, and lower share-based expenses.

Amortization expense will be approximately $2 million. Other income, including the impact of interest expense, is expected to be $15 million.

The share count is expected to be 302 million shares. The tax rate is expected to be approximately 21%.

Let me now open the lines for questions. Back to you, operator.

Question-and-Answer Session

Operator

The floor is now open for questions (Operator Instructions). And your first question comes from the line of John Dryden.

John Dryden - J.P. Morgan Securities Inc.

Thanks, guys, for taking my question. First Wim, could you provide additional insight into the Com segment? Particularly, have you seen any visibility increase with the two large mergers, which seem to be off to a bad start, at least from an operating perspective?

Wim Roelandts

Yes, John. First of all, like I kind of alluded to during the prepared remarks is that our wireline business increased, in fact, quarter-to-quarter. So I think that the mergers are stabilizing and that we see a slight growth and my expectation is that this growth will continue for the quarters to come.

The culprit this time was wireless, which continued to decline this quarter, but they're also expect the growth for the next quarter. So overall our communications sector, which is still 44% of the company's revenue is expected to grow next quarter.

Next question, please?

Operator

Your next question comes from the line of Glen Yeung. Mr. Yeung, your line is open. I believe that question has been withdrawn. And your next question comes from the line of Chris Danely.

Chris Danely - J.P. Morgan

Thanks, guys. So if I plug in the new numbers and we look at normal seasonal growth this year, it looks like your revenue should be up, you know, say around 10% by the end of fiscal '08, but to meet your R&D and SG&A goals you'll have to hold those both flattish or flat to slightly down. I'm just wondering what the confidence is in that?

Wim Roelandts

Well, I don't know the fiscal year '08 growth seems too high to me because you know, if you look at the fiscal year '07, we had three negative quarters so we'll be starting a whole.

On the other part of your question, Chris, you're absolutely right. We have made a commitment to get our controlled expenses down by 5% by Q4. So Q4 FY '08 will be down 5% compared with Q4 FY '07 and that should help rebuild our margin levels during the year. Coupled with some growth we should be in target in our corporate model by the end of the fiscal year or may be earlier.

Jon Olson

Yes, Chris, this is Jon. The real target here is in getting back to our corporate model which restated on a GAAP basis is a minimum of 24% operating margin and that's really what we're shooting for. And we're controlling expenses and obviously assume some revenue pickup next year. But we are definitely in the mode of controlling expenses to get our numbers there the second half of the year.

Wim Roelandts

Next question, please?

Operator

Your next question comes from the line of Parag Agrawal.

Parag Agrawal - Jefferies & Co.

Hi, this is Parag for John Lau.

Coming back to your communications segment. Just wanted to get your comments on your design win activity in the enterprise networking and do you think that enterprise networking growth could make for a slowdown in wireless networking going forward?

Wim Roelandts

Yes, well, two things. First of all, clearly, there's a lot of design activity in the wireless space than the communications space due to the, what people have called triple play. So there is a lot of people especially in metropolitan area networks developing new routers that can do, run up to 20 gig, 40 gig or even 100 gig Ethernet instead of 10 gig today.

There is new activities in the areas of video servers and video delivery systems. So there is a lot of activity going on in the design space, and of course with our strength in our V-5 product family, we believe we will get the vast majority of these design and so we are winning the vast majority of these designs. Also, V-5 most of our products now have built-in transceivers, which exactly what is needed for that kind of an application.

On the other side, like I mentioned, we believe that the wireless business will start growing again starting next, I mean this quarter, the June quarter, and going forward. I think that we were in a situation of a pause that happened in the deployment of 3G, but the 3G deployment is still far from finished so I think there is going to be more coming.

So I'm very optimistic for both wireline and wireless segments of our market. And Japan was weak, for instance, because DoCoMo delayed infrastructure buildouts for their 3G their networks, but all that intelligence shows that this is coming within the next quarter, the quarter after this quarter, next quarter.

Next question, please?

Operator

Your next question comes from the line of Han Lee.

Han Lee - Global Crown Capital

Hi, this is Han Li for David Wu. I have a quick question about your operating expense.

Your competitors talk about lowering their SG&A expense to the mid teens so I just want to ask your opinion on, is that achievable? And if you are going to do that, what kind of restructuring would you need to -- what things do you need to achieve those kind of targets?

Wim Roelandts

Yes. Well, Han, I can tell you that our corporate model is for SG&A expenses to be in the 15 to 16% range. So we're talking about, sorry, and that is before stock option expensing of one of the old model. So we're talking roughly about the same order of magnitude.

Maybe Jon, do you have any?

Jon Olson

Yes. I'm not going to respond to what they're doing relative to their model versus ours. I mean, I think we certainly have a strategy as an innovator, which means our R&D spending and SG&A might have a different profile than others.

And so, you know, we've modeled our SG&A out in time to be in the mid to high teens and our R&D to be in the high teens. And, you know, if I recall what Altera has said and they're talking about out in time it, as well. I don't think that's something they're doing this year. This is '08 and beyond.

So I'm not particularly focused on that particular long-term model. I'm really focused on doing what it takes to keep the treadmill going here in terms of innovation and get to our 24% operating margin target this year.

Wim Roelandts

Next question, please?

Operator

Your next question comes from the line of Tim Kellis.

Tim Kellis - Stanford Financial Group

Yes, I was wondering if you were in the position to discuss any developments on 65-nanometer on the Spartan product line?

Wim Roelandts

Yes, of course. Most of our engineers -- all of our engineers at Spartan are working on that but we're not really ready to make announcements at this time.

Wim Roelandts

Next question, please?

Operator

The next question is coming from the line of Steve Eliscu.

Steve Eliscu - UBS

Yes, this is Steve Eliscu for Uche Orji. I wanted to get a better understanding with regards to 3G in China, and how much of what you're seeing in terms of China build outs and how well you're positioned and also how much you think in terms of your about 3G business is coming from China. Thank you.

Wim Roelandts

Yes, Steve. Well, first of all, we don't have exact dates on how much of our 3G business is coming out of China. We don't have the details or at least I don't have not seen the details on that level.

But clearly, China has been one of these regions that have kind of delayed their 3G deployment. And the reason is that the Chinese government is developing their own standard called TDMA, which is a Chinese proprietary stunt for 3G if I can say so.

And so what happens is the government is delaying in allocating the 3Gs licenses because they're waiting until CDMA's mature enough so it can compete against the wideband CDMA from Europe and CDMA2000 from the U.S. So that's part of the whole thing.

Now my understanding is that the first contract for TD-CDMA of about $5 billion have been allocated. So I think that the TD-CDMA is now in a strong enough position to really start -- for the Chinese government to give out the licenses and then let people decide if they want to use TD-CDMA or they want to use wideband CDMA or UMTS or so on.

So that's part of the reasons why I think the wireless sector has been a little bit slow in the last couple of quarters. So again, I think these things make us believe that the next couple of quarters will be stronger.

As far as our positions are concerned, we are very well positioned in all of the three markets really. You know, because of our strength in the DSP processing, which I think there, is no doubt that, we are the absolute leader in pure performance and in cost per whatever. We win a lot of the designs in all of the three different technologies.

Both wideband CDMA or UMTS like it's called in Europe, CDMA 2000 or the TD-DMA in China. So for us, it's really kind of to some degree not really important which one wins or which one is used because we are very, very well represented in all three technologies.

The only thing that because it of the delayed of course, all of that suffered. That's the problem. Now suddenly the government starts giving out licenses, we will win -- whoever technology they decide to choose.

Next question, please?

Operator

Your next question comes from the line of Ruben Roy.

Ruben Roy - Pacific Crest Securities

Thank you. Wim you talked about Virtex-5 winning the vast majority of designs available, I was wondering if you could talk about the types of designs you're seeing traction for that product family and also in terms of end market, as well if you could.

Also you mentioned $5 million, I think Virtex-5 has been shipping for almost a year now. Can you compare and contrast how that $5 million number compares to the Virtex will rollout? Thank you.

Wim Roelandts

Yes, Ruben. I mean, Virtex-5 is really the family that that is designed for infrastructure type of application. So we are widely used in anything to do with the communications. Heavily used in defense. Our design didn't obviously -- most people are not yet in volume production.

The -- another year that we are doing very well in is the audio video broadcast. The test of measurement, medical, electronics, so it really is a line, which represents over 50% of our revenues as a company. So it's pretty much for consumer, automotive, it's pretty much used across the board.

The -- as far the revenue is concerned, we think we are more or less on track. This is the third quarter that we are shipping Virtex-5. And if we look back at the previous history, I would say that we're probably a little bit ahead of where we were with Virtex-4.

But also the design momentum is really picking up. Dramatically -- especially in this quarter we saw a tremendous uptick. And I must say that since the introduction of the Virtex-5 LXT family, that has been extremely successful and that created a much strong momentum.

You remember we introduced Virtex-5 LX family in May and Virtex-5 LXT in October. So I think and we started shipping also, another factor is that we have now started shipping the largest parts the LX 330, which is like the largest FPGA by far in the industry.

And 330,000 logic cells we have also version with transceivers that is shipping. But that is not used in volume products. It is mainly used for prototyping and things like that and that is a very good business for us because of these large devices that we are able to ship.

By the way, the fact that we are able to ship these large devices, which are about 450 square millimeter size, also indicate that the technology is in extremely good shape because if you have a bad defect rate of course, you have no yield to these very, very large devices. So overall I am very pleased, and I think that Virtex-5 is ahead of Virtex-4 and will stay ahead from over the quarters to come. Next question please.

Operator

You have a follow-up question from the line of John Dryden.

John Dreyden

Yes again for Wim. Could you go over maybe during the nine-month downturn? Did you see any customer specific examples or product developments where they shipped it away from ASICs to FBGA's to take advantage of the downturn and enhance their design cycle time?

Wim Roelandts

Well, John, that's a good question. Although this trend is really been an ongoing trend for the last several years, especially since 90-nanometer and I think it will accelerate as 65-nanometer. If you look at the cost in ASIC there are fewer and fewer applications that can do that.

So if you really look at where you know a couple of years ago or five years ago the bulk of design were really ASICs. And you know the programs were used mainly largely.

I think what has happened now is that ASICs have become a niche for very high density, very high volume, very low cost applications. And I am talking here about this advanced technology. Those people who do ASICs in 250-nanometer of course I am not talking about these. I am talking about people doing ASICs in 90-nanometer or 65-nanometer or planning to do 65.

And so what has been replacing them on one side in the lower volume markets is FBGA's and in the higher volume markets it is ASSPs and on the other side lets not forget that an ASICs is for five customers. So whatever happened with the ASIC market overtime will happen with the ASSP market. That means that you need higher and higher investment in the ASSP’s and these advanced technologies.

And that is going to limit them to fewer and fewer applications over time. So the trend that we talked about in the infrastructure markets, you know you talk about communication infrastructure, you talk about computing infrastructure, you talk about areas like military, the audio video broadcasting.

You talk about areas like the Test and Measurement and so on. I think that the transition by and large has moved to FPGAs. As long as the FPGA can do the job there from speed performance point of view. While in the higher volume markets or in markets where customer’s notable customers do the same thing. The ASSPs have taken over, but again, with the technology going forward, I think that that will also move in favor of FPGAs over time.

Next question, please?

Operator

You have a follow-up question from the line of Parag Agrawal.

Parag Agrawal - Jefferies & Co.

Earlier last quarter you had talked about second half of the year being strong. Just wondering if as we go forward into the year, like you have changed in the sense that you expect better spends than your original view, or your real spend to the same.

Wim Roelandts

Yes, well I think that our forecast for the coming quarter is the first indication that we see a better business climate. And my belief is really not changed very much. I think that the second half of the year will be stronger. It is stronger for a couple of reasons. I think that the wireless side, which has been the primary reason for the weakness -- one of the reasons for the weakness will get better.

The wireline business is hurt by all the mergers going on and these will get behind us and I think also that we'll see more and more shipments related to the triple play coming on board when the year goes on. And then from a Xilinx’s specific point of view, I think that our Virtex-5 momentum, some of the newer Spartan three products that we have introduced, all of that will create momentum going forward that I think we can take advantage of.

So my view has not changed. If anything, I am even more confirmed that this is going to happen over the next fiscal year, yes. Next question, please?

Operator

You have a follow-up question from the line of Han Lee.

Han Lee - Global Crown Capital

Hi, thank you for taking my question again. Last quarter you talked about your OpEx had increased by 1% sequentially. And by now I'm seeing a, you know, about $5.5 million increase in your SG&A. Could you please comment on that?

Jon Olson

Yes. Han, the biggest single item that was in our OpEx was the impairment of a lease property, a lease building that we entered into an arrangement in previous period that we have now decided not to inhabit with employees as we are kind of cutting back our expenses and holding the line on headcount and things like that. So we don't need the added facility.

And while that's spread across both R&D and G&A and SG&A primarily a little bit into the cost of sales, you're seeing a reflection of that in there. Also there was a charge in the previous quarter that was in -- a benefit in the previous quarter in SG&A that didn't repeat itself.

So that artificially made SG&A lower the quarter before last. Those two things together are driving that increase.

Wim Roelandts

But on a controlled expense basis, in fact our expenses were below what we said so…

Jon Olson

Right, if you take out the one-time charge. Yes, that's correct.

Wim Roelandts

If you take out the one-time charges in fact that we beat the forecast that we had given. Next question, please?

Operator

Your next question comes from the line of Danny Kuo.

Danny Kuo - Bear Stearns & Co.

Hey, Jon, I just want to figure out the gross margin upside this quarter how much of that came from the yield improvement and how much of that came from your mix shift? And if you can also comment on the yield improvement on 90-nanometer, how far do we have to go on that?

Jon Olson

Sure, Danny. The split actually was pretty equally distributed. Maybe a little bit more towards the mix shift. But, you know, in the neighborhood of 50-50, 60-40 kind of a number.

So, you know, the mix shift was really driven by the fact that our base products were up in the neighborhood of 6%, and those are the older products, and they typically have, you know, very high margins, and etcetera.

And that was a, kind of a cyclical thing for us in combination with our price increase, which was mostly in the base, or in all in the base products area. So that's really what caused the uplift there.

On the yield basis, we still have an improvement to go on 90-nanometer relative to the product cost, products margin of our 90-nanometer products. I would say we're in the neighborhood of 75 to 80% of the way to where we are going.

But we also have an effort to improve our product cost as part of our overall cost control, cost improvement program this year. And so we're not giving up on where we are, being satisfied with history. We're trying to push ourselves beyond where we've been in the past.

And you know, the foundries have been full enough that have allowed essentially good through-put through the factories which then help us get to a lower cost as our yield engineers are working with their yield engineers to try to figure out how to make things happen.

So, a long way to go on 65-nanometer. Although, we're really pleased, and 90-nanometer, we're probably three-quarters of the way to where we need to get to.

Wim Roelandts

Next question, please?

Operator

Your next question comes from the line of Aalok Shah.

Aalok Shah - D.A. Davidson & Co.

Hi, Wim. I know you spoke a little bit new products being down and that being a component of how the wireless business was weak in the quarter but I'm wondering if that actually had any margin impact to you guys and over the next quarter if you expect new product revenue to actually sequentially the increase?

Wim Roelandts

Yes, Aalok. First of all, like I said, the weakness was due to the fact that both defense and the wireless declined and both of them were, I mean in these cases, it were V-4 customers. So our expectation is that V-4 will grow again this quarter.

In fact, all our forecasts indicate that and that overall the category of new products will grow this quarter without too much problem. So it's really a one-quarter effect that we had due to the specific weakness by a few customers.

Next question, please?

Operator

Your next question comes from the line of Glen Yeung.

Peter Trigarszky - Citigroup

This is Peter for Glen. I wanted to ask for next quarter with wireless defense coming back and margins staying flat, is there a potential, I mean, can you give me some sense of what would be the offset to a gross margin uplift from those two product categories coming back?

Wim Roelandts

Yes, Peter. I'm sorry, I was asked the same question, I forgot to answer that part.

You know, our forecast is for the next quarter to be around 62%, so pretty similar to what we are today, I mean we announced 62.1%. So we expect to be the same and so clearly we don't expect the all the products, the base products to increase next quarter. But on the other side, the yield improvement we expect that to continue. And so one will also the other loss to some degree, and that is our current one.

Also, like Jon mentioned we are continuous working on cost improvements. So there is lot of factor that play in the gross margin picture that makes us reasonably confident that we will stay around 62% for the coming quarter.

Next question, please?

Operator

You have a follow-up question from the line of Steve Eliscu.

Steve Eliscu - UBS

Yes, thank you. In terms of trying to calibrate Virtex by growth, and looking back in history at Virtex-4, seems like Virtex-4 had a nice initial ramp. You got to about 5% of revenue really quickly in just a few quarters, then it kind of flattened there. Do, you think Virtex-5 is going to be a bit stronger in terms of its ramp? And what gives you confidence if that's the case? Thank you.

Wim Roelandts

Well, we believe that indeed Virtex-5 will be stronger than Virtex-4. The problem is the slowdown, as you mentioned. But it also is that I believe we are going much ahead of our competition with the Virtex-5 compared with Virtex-4. Virtex-4 and our competitors announced roughly, I think in fact if I remember it correctly that our competition announced a month before Virtex-4 was announced. In this case we are anywhere between 15 and 18 months ahead of our competition. In fact today we are in volume production with Virtex-5 and our competition has not yet shipped their high-end product families. So and that is a really big difference so already our first, especially in the high-end markets, where technology and density and performance matter.

The other thing is that in Virtex-5, we need some architectural innovations with 16 foot lot a logic cell instead of a 14 foot lot and also a the three-dimensional routing system we put in place, it really gives us a significant higher performance bullet compared with Virtex-5, but also compared to the competition. So we believe that that both of these factors being ahead with the technology and having higher performance, I think it will allow us to grow to for a Virtex-5 to ramp up much faster than you had seen with Virtex-4 and also to sustain over time.

Next question, please?

Operator

Your next question comes from the line of Tim Luke.

Tim Luke - Lehman Brothers

Thank you very much.

Just within the call arena having seen the dislocation associated with the combinations of some of the major vendors Nokia, Siemens and Alcatel Lucent. Do you feel often that you're in a period where you're largely through the effects of that, and you may now see the more balanced environment in the second half of base wireline and wireless?

And separately maybe fit you on, can you just talk about the potential for incremental cost reduction, are these being moved through the second half this year and into the following fiscal year?

Wim Roelandts

Okay. Let me first answer the consolidation question, then you know, I think we are somewhere in the middle, I would say. You know, I don't think we are through it yet because for a very simple reason. We had three major consolidations one happened a year ago that was the Ericsson and Microni and they are pretty much behind us, I think that is pretty much finished by now.

Lucent, Alcatel happened in December of last year. And I think that they have made their first quarter like, you know, was not very successful part of it is because of this merger I think they are working very hard in business, still some work to do.

And of course the Siemens Nokia merger is just hoping or will happened, I think it just happened last Monday or last week or something like that. So clearly there are different stages that these companies are in. For us, of course, it depends for which company you're talking about.

So no, I think that we still have a couple of quarters to go before that is behind us. But clearly, it will be positive from now on. I think we have crossed the low point in this merger. And I think that things will start continuing to improve over the quarters to come.

And by the second half of our fiscal year, things will pretty much be back to normal, which means the December and March quarters.

Jon would you?

Jon Olson

Yeah, let me answer the second question.

Tim, yes, I would characterize our OpEx spending reductions that we talked about at our analysts meeting as on track to what we said. And while, I mean, we're showing a reasonable decline in the first quarter. There are a lot of other things going on in the middle of the year that we’re going to be working against us that we have to work through and offset with other kinds of things.

So our annual salary activity is in the September quarter. So beginning of the September quarter is when we do that. There's also some other tape out and other kinds of factors that kick in that particular quarter.

So while I'm encouraged by what I see right now in our forecast for the near-term quarter, we still have a lot of teamwork do to make sure that we achieve what we say we're going to achieve. In the area of product cost reduction, we real didn't talk about it that much at the analysts' meeting.

And we're starting to put a lot more pressure on that and model that, and try to see, if we can get some of our operating margin and earning growth coming from improved gross margin out in time. And again, we're digging it pretty heavily on that stuff now. So more to come is about all I can say on that.

Wim Roelandts

Next question please.

Operator

You have a follow-up question from the line of Chris Danely.

Christopher Danely - J.P. Morgan

Thanks, guys.

As you build up the cash again, how do you think about increasing the dividend versus more buybacks, and is there any reason you wouldn't take the yield to, say, 3% or above from like what if you competitors has?

Jon Olson

So Chris, the, you know, the current plan again is to keep these balance even though we did this one time, I will say one large, one time, but one large buyback, and then kind of just the dividend yield up a little bit, as well. And our thinking really is kind of walk through the next year or so and see how the top-line growth and our cash accumulates before we make any further decisions on that.

You know, it's easy to say, is there any reason that wouldn't cause us to go 3%, well, yeah, we have to carefully consider what our needs are and discuss it with the Board. We are definitely committed to keeping our net cash balance at the levels we've talked about, between $500 million and a$1 billion at this point in time.

And it's kind of premature to say that we're going to forecast dividends to rise faster than buyback. We want to do them, you know, in a balanced fashion and probably move them both. We're committed to doing both, maybe not as committed as you want us to be in the dividend side, but definitely we're committed to both.

Wim Roelandts

Next question, please?

Operator

You have a follow-up question from the line of Han Li.

Han Lee - Global Crown Capital

Hi. Thank you for taking my question again.

So, could you please comment a little bit on the yield for your 65-nanometer products? How is it compared to your 90-nanometer at the same point of the lifetime, and how does it compare to, say, the yield of 65-nanometer at TSMC?

Jon Olson

Jon, let me take that one. So, 65 compared to 90. Right now we're in a significantly improved position doing 65 and 90. And the real reason for that is the stability of our fab partners in addition to the stability of the tools and the process.

So, let me explain that a little bit more. So in our case we are producing 65-nanometer product in the same physical factories that we have 90-nanometer. And that's a big advantage to us because it's the same people, same kind of technology and tools, et cetera and that’s given us an advantage over some of the previous experiences we've had in transitioning from process-to-process.

The second point is that the number of differences in tools, involving the process and producing the device is significantly smaller. I mean, the change is less than it has been during a specific process. So, essentially mostly the same material, same tools. You know, pretty much the same, you know, physics involved in this, and it's allowed us to get improved yields at a more rapid time.

Relative to comparing to TSMC, we don't have any specific information that we can offer that right now. This is from a public perspective, I'm unaware of direct comparisons between the two that would be valuable because they are, you know, everybody runs their fabs a little different and their processes are also and technologies are a little different, as well.

Wim Roelandts

This is Wim. One another thing that I can add, if you look at 65-nanometer technology, there are really -- we're talking about two technologies. We're talking about what some people have called 65-nanometer low power and 65-nanometer high performance.

Our technology is 65-nanometer high-performance technology, which is more complex to manufacture. So the fact that we have better yields than what we've seen on 90-nanometer, and in fact if you look at our learning curves, we are ahead of every single technology node that we did with 65-nanometer.

It's not because, I mean, it's a very advanced technology and the low power technology is a lot simpler. It doesn't use straining or mobility enhancement techniques as they're called.

And I think that some foundries focus first on low power because they have large cell phone customers. Some foundries focus first on the high performance. You know, our UMC and Toshiba both have the high performance technology, and like Jon said, we are doing very well in that area.

Next question, please.

Operator

You have a follow-up question from the line of Mr. Tim Luke.

Tim Luke - Lehman Brothers

Thank you. I just had a question on networking. I'm not sure if you touched on this earlier, but your principal competitor was talking about that being somewhat softer because of the move to lean manufacturing while the others areas of com were up in terms of the coming quarter. I was wondering if you had any color on that?

Wim Roelandts

Yes. I mean you know, the company that we're talking about, we have been working with them over the years. We are the largest supplier in programmable logic to that company. So a lot of their plans that they're talking about, that our competition talks about, we have been working with them on establishing them.

You know, the relationship between Xilinx and our customers is more than just a supplier of parts. We also look at improving their inventory situation, their supply chain, being able to react if they have upsides or downsides. So all of these things are part of the engagement we have with our larger customers.

So we are, you know, we don't expect any big changes as far as our customer is concerned really because we have been evolving with them over the years to come. Because we are a major supplier to them and a very strategic partner.

Last question, please?

Operator

Your last question comes from the line of Lindsay Mathern.

Lindsay Mathern - A.G. Edwards & Sons

Yes, I'm here for David Wong.

I might have missed this but you talked about capital spending, was that considerably due to the impact of Singapore facility. And then you talked about it sort of coming down to, you know, more $20 million next quarter, and a little bit lower the rest of the year.

Is that something that we would expect to see? I mean are there any other things that could impact it that we ought to be aware of that could cause it to be higher than expected? Could you give me a little color on that? I appreciate it.

Jon Olson

Yes, I don't, Lindsay, I don't foresee anything right now that could have significant impact on that. I mean most of our Cap Ex since we're so heavily outsourced is on a steady state basis, are a combination of engineering equipment, IT equipment, and then on the manufacturing side testers and test equipment.

And we buy testers at a pretty steady rate as our revenue or technologies move forward, either one of those. And I don't anticipate anything to be abnormal after we get through completing the facility in Singapore that we have on the horizon.

Lindsay Mathern - A.G. Edwards & Sons

Okay.

Jon Olson

Operator, back to you.

Marie Quillard

Okay. Thank you for joining us today. We'll have a playback thereof call beginning at 5:00 p.m. Pacific time, 8:00 p.m. Eastern. For a copy of our earning release, please visit our Xilinx Investor Relations Web site.

To reiterate, our guidance update for the June quarter will be posted after the market on June 7. Our next earnings release date for the first quarter of FY '08 will be Thursday, July 13, after market close. This completes our call and thank you for your participation.

Operator

This completes the conference. You may now disconnect.

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