Xilinx F1Q08 (Qtr End 6/30/07) Earnings Call Transcript

Jul.19.07 | About: Xilinx, Inc. (XLNX)
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Xilinx, Inc. (NASDAQ:XLNX)

F1Q08 Earnings Call

July 19, 2007 5:00 pm ET


Marie Quillard - Public Relations

Jon Olson - CFO, SVP of Finance

Wim Roelandts - CEO


Deepak Sitaraman - Credit Suisse

Rohini Raghunathan - Citigroup

Lewis Polshock - J.P. Morgan

Tristan Gerra - Robert Baird

Arnab Chanda - Deutsche Bank Securities

Louis Gerhardy - Morgan Stanley

Mark Sholes - Banc of America Securities

Danny Kuo - Bear Stearns

David Wong - A. G. Edwards



Good afternoon. My name is Kristin, and I will be your conference facilitator today. I would like to welcome everyone to the Xilinx First Quarter FY'08 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (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 conference over to Maria 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 June quarter, and then we'll open the call for questions. I will then end the call with a few housekeeping items.

As published in our press release, our business update for the second quarter of Fiscal Year 2008 will take place in the form of a press release after the market closes on Thursday, September 6. After we update our guidance, we will be in a quiet period until we report the following month.

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

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

Now let me turn the call over to Jon.

Jon Olson

Thank you, Maria. First of all, I would like to mention that we will only be reporting GAAP results going forward and will no longer detail our results on a pro forma basis, excluding stock based compensation expense. With our earnings release, we are now publishing selected cash flow information which will lift the impact of stock option expense or you can obtain the information from our 10-Q filings.

Revenues in fiscal Q1 increased 1% from last quarter to $446 million. Gross margin of 62.2% was in line with our forecast and was essentially flat to the 62.1% reported in the prior quarter. Continued yield improvement on 65-nanometer and 90-nanometer products more than offset a customer mix that was heavily skewed towards large OEMs. These large OEMs generally drive higher volumes which result in more favorable pricing.

Operating income was $97.5 million, up 23% from $79.4 million in the prior quarter and up 5% from $93.1 million in the same quarter a year ago. This increase is due to a combination of factors including continued cost reduction efforts as well as decreased stock based compensation expense.

Net income of $84.3 million was down 4% sequentially and up 2% from the same quarter of the prior year. Net income for the quarter was impacted by approximately $8 million of interest expense associated with our debt offering, our first full quarter since issuance, and $3.5 million discrete items in our tax provision. The improvement in our operating model is due in part to ongoing cost reduction effort across the company. OpEx reduction is a key focus for Xilinx, and during the quarter we continue to reduce discretionary spending.

Additionally, R&D expense is benefiting from improved quality and execution which is reducing product development expenses, as well as the impact of lower mass cost. As we have mentioned before, in fiscal year '08, we are committed to achieving the bottom end of our operating margin goal of 24% to 26% by Q4, which should be a significant improvement over the previous year.

Going forward, controlling cost will remain focus of the company as we work towards consistent performance at or above our corporate model. Other income including interest expense was $14 million, slightly lower than guidance of the $15 million we've provided. Free cash flow during the quarter was $111 million, after $16 million in CapEx. And we paid dividend of $0.12 per share during the quarter. The tax rate for the quarter was 24%, higher than our guidance for the reason I stated previously. Let me now comment on the balance sheet.

Cash balance increased $118 million during the quarter to $1.9 billion. Factoring in the $1 billion convertible, our net cash position is now approximately $933 million. Day sales outstanding increased seven days to 43 days. The increase was primarily driven by the timing of payments from customers, and the timing of shipments during the quarter. Combined inventory at Xilinx and distribution decreased 19 days to 101 days, with 79 days at Xilinx and 22 days at distribution.

Many factors contributed to the large decrease, including improved forecasting accuracy, fewer mixed issues and distributors decreasing our inventories, entering a seasonally slow summer quarter. In the September quarter, we expect to see a slight increase in days occurring at both Xilinx as well as distribution. Our goal for the remainder of fiscal year '08 and beyond is to keep combined inventory levels at 110 days or below.

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

Wim Roelandts

Thank you Jon and first let me give you my own comments on the June quarter. The June quarter result turned out as planned with just a few exceptions. From an end market point of view, communications showed growth as we forecasted. After three quarters of communication revenues declining, total communication sales increased driven by an improvement in both wireless and wireline. Our RSP and defense business also showed excellent growth this quarter, as we predicted after the seasonally slower March quarter.

During last quarters' call, we forecasted that all geographies extension plan would be up sequentially. Japan was down sequentially as planned, but so was Europe, which turned out to be surprise. This quarter our top 10 European accounts, which represent 45% of total European sales were up 16%, but the main remaining channel accounts were down 19%. The weakness was mainly in the distribution channel across a few end markets including industrial, audio and video broadcast and data processing.

On the products front, we saw that the new product category would show strong growth compared with the prior quarter. Indeed new products grew 17% sequentially and now represent 28% of total revenues up from 24% in the prior quarter. Revenues from Virtex-5 and Virtex-4 were particularly strong during the quarter and sales from the Spartan-3 families also increased sequentially. CoolRunner-II was the only product family that didn't show growth, but remember the CoolRunner-II grew approximately 30% in the March quarter.

Total booking for the quarter totaled 67%. April started strong, May was soft and June, although starting out weak, ended strong; a pattern very similar to the March quarter. Total Virtex revenues grew 3% to 54% of overall revenues. Spartan revenues increased 2% to 26% of total revenues and the CPLDs, however, declined this quarter and now represent 9% of total revenues. Down from the 10% last quarter.

From a geographic prospective Asia Pacific was the strongest region, growing 12% quarter-to-quarter and reaching a record 29% of total sales. China was a standout contributing about 12% of overall revenues and increasing nearly 30% sequentially. China revenue was driven primarily by communications-led customers, several of which are deploying TDS CDMA wireless based stations.

In terms of end markets, communication grew 3% to 45% of total revenues. Wireless increased sequentially as its wire lined, but to lesser extent. Wireless remains under 15% of total sales. Enterprise networking increased only slightly, while telecom remained lackluster especially North America.

This quarter our 25 communication customers grew sequentially after three quarter decline. The industrial and other category grew 7% sequentially driven by increased defense sales as we predicted. The double-digit strength in defense was offset by declines in industrial, scientific and medical, which was strong in the previous -- in the prior quarter and is expected to rebound in the September quarter. Consumer automotive declined 6%. Good growth in automotive was offset by a flat panel weakness and a seasonal weakness in audio video broadcast.

Lastly, data processing segment declined 8% of -- it declined to 8% of total revenues with weakness across server, storage and computing applications. We do expect to see some improvement in the September ending quarter as some of the programs ramp up.

On the product front new products grew 17% sequentially driven by double-digit growth of both Virtex-5 and Virtex-4 product families. Virtex-5 nearly doubled from last quarter and Virtex-4 grew almost 25% sequentially. The Spartan-3 families were nearly 10%.

Mainstream products declined 5%, which is the more difficult pattern expected to be seen going forward. Virtex-5 continues to receive extremely positive customer feedback. All the LX, LXT and SXT devices are now shipping on or ahead of schedule. Volume production has begun and the design in momentum continues to run.

Yields on this high-performance 65 nanometer family has been better than any other Virtex product family at the same point in this life cycle. This last quarter we've seen working silicon of our FXT Family, which includes both transceivers and the embedded processor. We are very pleased with progress made to date and expect to start sampling this family before the end of our fiscal year.

Let me now turn to the guidance for the quarter, the September quarter revenue guidance is for sales to be flat to slightly down. We are expecting North America and Europe to be down slightly on the sequential basis, either proceeding to be flattish and Japan to be up. From an end market perspective we are expecting communications to be down slightly due to typical summer season out in the wireline telecommunication industry.

Industrial and other is expected to be up driven by defense as well as rebound in science, scientific and medical. Consumer will be flattish and data processing is expected to rebound slightly from the June quarter.

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

Jon Olson

Thank you, Iain. Gross margin was expected to be approximately to 62% to 63%. Combined operating expenses are expected to be up approximately 2% sequentially driven primarily by our annual salary review process as well as increased stock-based compensation expense related to the annual option restricted stock unit grants.

Research and development spending will be approximately $90 million, SG&A spending will be approximately $92 million. Amortization expense will be approximately $2 million. Other income including the impact of interest expense was expected to be $16 million. The share count was expected to be approximately flat at 303 million shares. And the tax rate is expected to be 21%. Let me now open the line for questions.

Back to you operator.

Question-and-Answer Session


The floor is now open for question. (Operator Instructions) And your first question is from Credit Suisse, Mr. Michael Masdea.

Deepak Sitaraman - Credit Suisse

Thanks. Good afternoon. This is Deepak Sitaraman for Michael.

I guess, first off Wim, could you share with us, again the comments you made about ordering pattern in 2Q, and maybe also comment on order linearity in 2Q as well as what you are seeing in the current quarter?

Wim Roelandts

So, yes. I assume when you say 2Q you mean not first quarter for our fiscal year, the June quarter, is that correct? I assume it’s correct. So the order pattern that we have seen is that communications was up. Both the wireline and the wireless communications was up during the quarter.

We expect for next quarter this to be slightly down mainly because of the summer season and the vacation season. A lot of our communication business from Europe, which of course, closes down in part of this quarter.

Computing was down and we expect that to be slightly up going forward. The consumer and automotive was down this quarter. Automotive was up, the consumer was down. We expect that to be sluggish for next quarter.

And then the industrial and other, which contains aerospace and defense, industrial, medical, scientific we expect to be up – were up this quarter and we expect it to be for next quarter mainly driven by the defense.

Linearity, April started strong, May was soft, and then June order started off weak, but then ended strong. Next question, please.


Your next question is from Citigroup, Mr. Glen Yeung.

Rohini Raghunathan - Citigroup

Hi. This is Rohini Raghunathan calling in for Mr. Glen Yeung. My question is about the operating expenses. You have said that you are focusing on reducing the operating expenses. Can you give us some details on what specific activities you are targeting to reduce it?

Wim Roelandts

Sure, at the beginning of the year, the beginning of our fiscal year in the March timeframe when we were completing our annual budget process, that’s the what kind of a beginning of the self sided more structural conversation, what we wanted to do in the R&D in the SG&A area. And at that time is where we determined that we were going to cancel a major program of ours. So we did do that. It was an unannounced product, but we cancelled it to free up engineering resources.

And we also re-calenderized some of our engineering efforts, so as we didn’t have to higher more resources in order to complete the projects. So essentially re-aligning our product plans and the focus on the planning aspect that was.

So those were kind of some of the, I would say, some of the larger decisions. But since then, we have had also put together a variety of groups focused on discretionary spending, cutbacks, efficiency around the company, efficiency inside the business units and engineering.

And then lastly, we’ve launched some efforts around reducing product costs, cost type of -- a focus around, improving both our cost of our current products, as well as, focusing on design for cost going forward.

So, all those things, I would say, are in the beginning stages. We have seen some pretty good success so far. As you can see our spending number was down more then we had forecast, and a lot of that increased improvements from what we thought was really around the focus and the results around discretionary spending, as well as these decisions I talked about earlier in terms of the engineering projects. Next question, please.


Your next question is from J.P. Morgan, Mr. Chris Danley.

Lewis Polshock - J.P. Morgan

Hi. This is [Lewis Polshock] calling for Chris Danley. I was just wondering if you could comment on your market share? Do you think that you may be losing share, or gaining share, give me a sense of where that’s going?

Wim Roelandts

Well, so, you know our competition is not announced. There are a number of sell certificate to know but, my understanding is that the guidance is also in the pretty low single digits area side. If you lose any market share in this quarter, there will be minimal. The last study we did which was at the end of the calendar year, which was kind of where you see the full calendar year was that we maintained our market share during last year those were minus a few tenths of a percent maybe. So and I expect that this pattern will continue certainly for this quarter or for this fiscal year.

We have some very new products are ramping up, which are unique in the market like our Virtex-5 family and 65-nanometer. We are the only ones shipping high performance 65-nanometer products. And we are really gaining a lot of momentum there where as such there is no competition from our competitors.

Our Spartan family has very broad range of products covering multiple different aspects of the industry. So we feel pretty good that things will continue to ramp in these new products. Several of the new Spartan families were introduced earlier this year. So all of these families are slowly going to ramp up and that should help us in the second half of the year, next question please.


The next question is from Robert Baird, Mr. Tristan Gerra.

Tristan Gerra - Robert Baird

Looking at the recent pick up in wireline and networking, would you characterize this just as an easy comparison or is there any secular trend there? And if you had any comment beyond the September quarter as far as whether we should expect communication to stabilize or maybe even increase as a percentage of total revenues?

Wim Roelandts

Yes, you know there clearly is a lot of activity in the communication field, some of you have called it a Triple Play. And there is, when I visit customers there is indeed a lot of activity people are looking for higher speed, the metropolitan area networks which are there running a 10 gigabit, people are moving to 40 gigabit networks. There's a lot of activity in fibre-to-the-home delivering of video to the home, video servers. So there's a lot of things going on.

It's still too early to say that this up tick that we have seen this quarter in communication really is the beginning of longer term trend although up. Because you'd probably there couple of points before you can assert that but certainly within the next between the foreseeable future could it be three months, six months or a year, we won’t see an increase in the communication business because of the there are continued deployment of these side speed networks. The continued deployment in 3G wireless and of course our success that we have had in some of the consumer products related to that.

So I believe that we are at the verge of growth in the communication sector that is pass it on the what we have seen in the last seven years which has been pretty poor, so we expect that things will start to improve in the communication sector going forward.

Another thing that is important is this that the communications service companies the service providers' balance sheet is in very good shape. So I believe that they will start investing in some of these new capabilities going forward. Next question please.


Your next question is from A. G. Edwards. Mr. David Wong.

David Wong - A. G. Edwards

Thank you very much, Virtex-5 could you give us a rough idea of what their actual magnitude of sales are at the moment and what you expect out of Virtex-5 in terms of sales may be next year ?

Wim Roelandts.

Yeah it's difficult, David to predict. We obviously have not done our planning for next year yet. It will begin in this year but I continue to believe that even if the industry doesn't improve, that Xilinx will see a better results going forward, not in the September quarter, which is traditionally our weakest quarter, because of vacations and things like that.

But in the second half of the year, of the fiscal year that we'll see business starting to improves simply because of what I said, we have a lot of new families ramping up, Virtex-5, Virtex-4 is really still ramping up surely some basic or some big road for actually big big numbers. Virtex-5 is off course is just ramping up now but also we introduced I think three new Spartan families earlier this year and they should be a ramping up during the rest of remaining of the years, so that would help our top line going forward.

For us about it difficult to predict at the moment you know it's, like is I said, it really depends if the whole high tech industry starts to improve further. So, is telecommunication which is still 45% of our business, have been pretty weak over the last seven years. You know with very little growth in that period. And I think all of that came from the dotcom bubble and the access of all the that time, their the Y2K installations, I think they are slowly getting behind us now and I think that the industry is ready for some reinvestments and off course that will position driving very well to take advantage of that. Next question please.


The next question is from Deutsche Bank Securities from Mr. Arnab Chanda.

Arnab Chanda - Deutsche Bank Securities

First of all, do you think there is a difference between, what you are seeing to distribution versus their actual OEMs and then second question is if you look at the communication infrastructure market, is there a difference in behavior in wireline versus wireless and is that partly at all responsible? Thank you.

Wim Roelandts

Well, first of all on the what we have seen like I've mentioned specially in Europe, we saw a kind of a diversion picture where that large companies are growing, that is a good billing of smaller companies that declining it is to early to take a conclusion of that it could simply be a temporary one quarter affect of the other thing we could say is that in general, when things are going in different directions the small companies adapt faster and first, because they tend to be more nimble. And now we know the Europe has come up with a phase where there was a little growth happening in the last year, year and a half. So people are questioning if here the work will continue.

But I think it's too early to say that, but it certainly would be an indication that may be things are going to slow down there overtime. Next question? I am sorry, so your question was what?

Arnab Chanda - Deutsche Bank Securities

Wireline versus Wireless. The difference.

Wim Roelandts

The different between wireline and wireless. A very different behavior, of course, wireless is heavily focused in newly developing countries; Asia; in China, and in India. And we see that will continue. Clearly there's a tremendous growth taking place there, and we are very well positioned with the third generation systems. We are very well-positioned with the Chinese standard called TD-SCDMA. So that will continue to work for us. Now the wireless business tends to be more lumpier depending on certain [contact] wireline and things like that. So you will see probably more and more in the wireless business.

And wireline is a lot more stable, it's a lot more fixed. It's the traditional business, and so it’s a little bit better to forecast. And the increase totally in the wireline is certainly encouraging although it's rather a small increase in our business. Next question please?


Your next question is from Morgan Stanley, Mr. Louis Gerhardy.

Louis Gerhardy - Morgan Stanley

Hi, good afternoon guys. One housekeeping question, and I apologies if I missed this in the first round. But, what is your turns expectation for this quarter?

Wim Roelandts

Turn expectation, we didn’t mention it. So you didn’t lose it. But our turns equitation is pretty similar to the current quarter in the high 50s. The score was 57, it could be 57, 58, 59 somewhere in that range. Next question?


Your next question is from Banc of America Securities, Mr. Sumit Dhanda.

Mark Sholes - Banc of America Securities

Hi, this is [Mark Sholes] calling for Sumit Dhanda. I have a question on inventories. Your internal inventory was down 16 days sequentially, and the total inventory was down 19 days sequentially, implying that distribution inventory was down three days, and yet deferred revenues were up 10% quarter-over-quarter. How do you reconcile this? Thanks.

Wim Roelandts:

The deferred revenue, its heavily impacted by not just the volume but also the mix of what's in there. So, that might lead you to believe that gross margin of what's remaining in deferred revenue account might be higher than it was on average in the previous quarter, which then might lead you to believe, it's a mix of a higher, more expensive high-end products where margins could be higher. And I don’t have the precise analysis at my finger tips, but those are things that would cause that particular thing to happen.

I think another factor here is, if you look inside at where some of our inventories was down, I think wafer receipts were a little lower than we had anticipated. So you get low run with number in there that might have an impact that would drive inventory down as well in addition to what you are seeing in the deferred account.


(Operator Instructions). Your next question is from Bear Stearns, Mr. [Danny Kuo].

Danny Kuo - Bear Stearns

Just wanted to get some granularity on your consumer and automotive guidance for the quarter, it looks like in the past two years that business has been up missing or they are just contrary. And just in the quarter just wondering what's going on there, and if whether you're seeing a bit more drastic deadline on automotives, which is being offset by the strengthened consumer or you are just kind of staying away from the lower margin consumer business. Thanks.

Wim Roelandts

What we have seen in fact this quarter was really a strength in automotive and a weakness in consumer. And part of that is seasonal because typically the first half of the year consumer tends to be weak and then start moving upwards in the third quarter, and especially in the fourth quarter in preparations for the Holiday Season.

But this time we have also seen some weakness, and like I mentioned that in my prepared remarks about the flat panel market which is another sort of bonus that people expected. So there is pretty hefty ASP declines in flat panels but there is overcapacity. And so the ASPs are coming not just for planners of course, but also for the equipment which they are using. And so that could be another weakness that we are seeing beyond just a simple season weakness.

Our belief is still that for the second half of our fiscal year, especially the December quarter we see strength in the consumer market based on our designing activities that are ramping up and thing like that. Automotive is overall to be a small market for us, but has been a strong effort for Xilinx so we continued to grow there and we expect higher growth rates for the market continuing in the higher double digits -- I am sorry it's not higher double digits, 20%-30% range. Okay. Next question please.


You have no further question at this time sir.

Jon Olson

Great, that's good.


Okay, well thank you for joining us today. We have payback of this call began at 5.00 pm Pacific Time and 8.00 pm Standard Time. For a copy of our earning release, please visit our IR website. To reiterate, our guidance update for the September quarter will be posted after the market on September 6.

Our next earning release date for the second quarter of fiscal year 2008 will be Thursday, October 18th, after the market close. This completes our call. Thank you for your participation.


This concludes today’s conference. You may now disconnect.

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