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Here’s the entire text of the prepared remarks from Xilinx’s (ticker: XLNX) Q2 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Maria Quillard, Senior Director, IR

Jon Olson, Chief Financial Officer

Wim Roelandts, Chief Executive Officer

Analysts:

David Wong, A.G. Edwards & Sons, Inc

Jeff Loff, Credit Suisse First Boston

David Wu, Global Crown Capital

Tim Luke, Lehman Brothers

Joe Osha, Merrill Lynch

Tim Kellis, Stanford Financial Group

Sumit Dhanda, Banc of America Securities

Seogju Lee, Goldman Sachs

Steve Ellis, UBS

Jeff Palmer, Friedman, Billings, Ramsey

Ruben Roy, Pacific Crest Securities

John Quarles, Citigroup

Pranay Laharia, University of Chicago

Operator

Good afternoon. My name is Jennet, and I will be your conference facilitator today. I would like to welcome everyone to the Xilinx Second Quarter 2006 Fiscal Year Earnings 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 period.

Operator Instructions

I would now like to turn the call over to Maria Quillard, Senior Director of Investor Relations. Thank you, Ms. Quillard. You may begin your conference.

Maria Quillard, Senior Director, IR

Thank you and good afternoon, everyone. With me today are Wim Roelandts, CEO and Jon Olson, CFO. We will provide a financial and business review of the September quarter, then we will 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 third quarter of fiscal year 2006 will take place in the form of a press release after the market closes on Wednesday, December 7. After we update our guidance, we will be in the quiet period until we report the following months.

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 financial results may differ materially. We refer you to the documents the Company files with the SEC, including our 10-K, 10-Qs and 8-Ks. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

This call is open to all and is being webcast live. It can be accessed from our Investor Relations website. Now let me turn the call over to Wim Roelandts. Sorry, to Jon Olson.

Jon Olson, Chief Financial Officer

Thank you, Maria. Revenues in fiscal Q2 decreased 2% from last quarter to $399 million. Compared to the same quarter a year ago, revenues were down 1%. Net income was $86 million or $0.24 per diluted share, up 11% sequentially. Net income was positively impacted by lower income tax expense and higher other income resulting from a favorable tax ruling during the quarter. This was a $0.03 favorable impact to EPS. Gross margin a 61.4% increase from last quarter's 60.9% and was in line with our guidance.

Decline in mainstream products, which have higher gross margins, was more than offset by better than expected improvements in 90 nanometer yield. Sales from 90 nanometer products doubled during the quarter as expected and now represent 10% of total revenues.

Operating expenses were up 3.9% sequentially, in line with our guidance of up 4%. The tax rate of approximately 13%, which was slightly lower than the 15% we forecasted, primarily reflects the impact of the decision by the Tax Court in the Company's favor, net of related taxes associated with interest income for the federal income tax refund.

Let me now comment on the balance sheet. Cash and long-term investments decreased $40 million to approximately 1.6 billion. We generated $62 million in operating cash flow and $46 million in free cash flow after CapEx of $16 million. In the last four quarters, we generated $271 million in operating cash flow and spent $62 million on capital expenditures.

During the quarter, we made a $50 million payment to Toshiba Corporation. This payment is consistent with the execution of a previously agreed advanced purchase agreement for foundry services.

In the quarter, we repurchased approximately 3 million shares for $83 million, an increase of 24% over the prior quarter and paid a quarterly cash dividend of $25 million. Day sales outstanding remain flat at 44 days. Due to the revenue shortfall, combined inventory at Xilinx and distribution increased by 14 days to 146 days in the quarter. The increase in days is primarily driven by lower revenue and higher than anticipated yields.

Next quarter we expect combined inventory levels to be approximately flat. Given the level of work in process at our foundries, our efforts to reduce inventory days is not expected to produce a material impact until the March quarter.

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

Wim Roelandts, Chief Executive Officer

Thank you, Jon, and let me first give my own comments on the September quarter.

The September quarter was disappointing from a revenue standpoint. The bright spots, however, were our increasing gross margin, the strength of our nontraditional markets, and the double-digit percentage of sales coming from our 90nanometer products.

While bookings for the month of September were healthy, they were not turns revenue. Instead we saw orders going to backlog for the December quarter. We believe that some advanced ordering or change in customer behavior is probably related to concerns over increasing leadtimes and back-end capacity constraints.

When we analyzed our revenue shortfall, it appears to be from a handful of wireless communications and storage customers with manufacturing operations in Asia-Pacific. This drove the weakness in Asia-Pacific revenues. Of the $90 million, approximately 40 million was organic business in Asia; about $50 million was transfer business. Quarter to quarter the transfer business declined double digits.

Another way to describe the shortfall is that it appears to be more end market and product specific, in this case wireless communications and Virtex-related. A handful of our top telecom customers who are primarily 3G wireless accounts contributed to approximately $15 million decline from the previous quarter. The same roughly $15 million decline was also related to a decline in Virtex, Virtex-II and Virtex-E products that typically are used in more traditional applications such as communications and storage infrastructure.

While we had expected communications and in particular 3G wireless to be down sequentially, it was worse than expected this quarter. Chinese 3G licensing delays and CDMA weakness were the primary culprits. The strength in our noncommunication infrastructure business could not offset the larger than expected weakness in communications and storage and servers.

On a brighter note, new products continue to lead our revenue growth. Based on our current classifications new products have achieved record levels on a absolute basis totaling $120 million, as well as on a percentage basis of total sales of 30%. New product growth, however, was less than the prior two quarters due to a decline in Virtex-II-Pro. The majority of the decline in Virtex-II-Pro can be attributed to one specific customer.

Next quarter that customer will no longer be a drag on Virtex-II-Pro revenues. As a result, we expect to see Virtex-II-Pro resume its growth in the December quarter. This quarter appears to be a unique onetime issue.

In terms of customer profile, the picture is very clear. Our global accounts were down 10% sequentially, but all other end customers as a whole grew quarter to quarter. Our global customers accounted for around 30% of total revenue, and no customer was greater than 10% of revenues.

We are very pleased with the progress we made this quarter in 90 nanometer, both from a yield and a revenue perspective. We expect Spartan-3 and Virtex-4 90 nanometer products, along with our 130 nanometer Virtex-II-Pro families, to drive revenues to over $100 million next quarter.

By product family, Virtex represented 51% of our revenues, Spartan 24%, and CPLD 9%. The total Virtex family declined by 5%, Spartan grew over 6% and CPLDs increased 3% sequentially.

From an end market perspective, communications and storage and servers were each down 5% or more. Consumer automotive was up 2%, but would have been up double-digit if not for a weakness in audiovideo and broadcast this quarter. Industrial and others was this quarter's highlights growing 9% sequentially due to strength in medical imaging and test and measurement equipment.

Let me now give our December quarter guidance. We started out the December quarter with a healthy backlog, which is up double-digits from last quarter. Given our belief that customers have placed orders earlier on Xilinx due to the well-publicized back-end capacity constraints, we don't expect the same level of turns as the prior quarter. Instead of 60% turns, we are forecasting turns in the low 50% range.

The first two weeks of October have started off on a strong note, but the December quarter is more of a front-end loaded quarter since the month of December has fewer working days due to the holidays. For all these reasons, our revenue guidance is for growth of 1 to 5% sequentially.

In terms of end markets, we are expecting communications to be up in dollars with storage and servers to be flattish. Consumer automotive should be up again quarter to quarter, and industrial and other should be up as well. By geography, all regions expect to show some improvement.

Let me now turn the call back to Jon for some final remarks.

Jon Olson, Chief Financial Officer

Thank you. To achieve the midpoint of our revenue guidance, we will require turns in the low 50% range. Gross margin is expected to be between 62 and 63%, a slight improvement over the September quarter as we continue to experience yield improvement on 99 nanometer products. Overall expenses will be down approximately 1% in the September quarter as we carefully manage our discretionary spending. Other income will be approximately $11 million. The forecasted tax rate for the December and March quarters is 21 to 22%. Fully diluted share count is expected to decrease by 4 million shares to approximately 352 million shares.

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

Question-and-Answer Session

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Source: Full Transcript of Xilinx’s 2Q06 Conference Call - Prepared Remarks (XLNX)

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