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Here’s the entire text of the Q&A from Xilinx’s (ticker: XLNX) Q2 2006 conference call. The prepared remarks are 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.

Questions and Answers

Operator

Operator Instructions Question by David Wong.

Q - David Wong

Thank you very much. Could you give us some idea of the consumer space in terms of demand, firstly reminding us what are the major areas in consumer that you supply into, and also whether this is a normal seasonal pattern in terms of your guidance or slightly less than normal?

A - Wim Roelandts

Yes, David. First of all, the key applications that we are serving in the consumer space are, first of all, the network premises equipment. You know, set-top boxes, things like that. Secondly, or I should say primarily, flat-panel displays, flat-panel TV technology, advanced slide projectors. But also we have a growing business in the wireless side in the cellphones. If you just look at the pure consumer part of the consumer automotive sector, consumer business grew in double-digit rates this quarter. Next question, please.

Operator

Question by Glen Yeung.

Operator

Question by Michael Masdea.

Q - Jeff Loff

It is Jeff Loff for Michael. Just quickly on revenue being down this quarter, can you talk about whether you saw any issues stemming from the merger of your distributors, and if so, when that could be resolved?

A - Wim Roelandts

You know, Jeff, it is difficult to say. You know, there are clearly, any merger creates some disturbances. But we expect that if there is any shore back, it will be more on the long-term. Most of our revenue comes from manufacturing business, and that is pretty much independent of distributor. Customers order the parts they need for their manufacturing, so I would expect that or my belief is that this quarter would have a very minimal impact. Next question, please.

Operator

Question by David Wu.

Q - David Wu

Yes, good afternoon. I was wondering about the expense side of the equation. When you talk about a, I look at the big drop really was concentrated in R&D. When do you think R&D will be bothering out I guess those some types of takeouts and when do they start going up again?

A - Jon Olson

Well, there's two things going on here, David. There is, first off, our new initiative investment in our DSP and embedded areas, so that is growing a business in a market segment that expands business for us in total. So that is an ongoing set of expenses going forward. The second area is kind of the second part of it is the total R&D number in total. The other big thing that impacts that is the timing for when we go through our development cycles specifically as we start to engage with 65 nanometer and then move forward. There is some very, there is some low, I will say low-level spending going on in that area right now. I would not expect any significant impact to the R&D number for a couple of more quarters in total. So in general we're trying to take a posture to restrain ourselves on spending growth right now given that we missed revenue, and we're trying to gauge what the next couple of quarters growth rate is until we get back on our investment track.

Operator

Question by Tim Luke.

Q - Tim Luke

Just with respect to your guidance now for the comm area to be up, could you give us any color on what you have seen in terms of the areas where you saw some softness, i.e. wireless and networking and wireline in terms of how you see that?

A - Wim Roelandts

Sure. You know clearly one of the things we did was to talk to these handful of customers like I said, and you all know who they are, the big wireless customers who have their inputs, and it seems that things were mainly delayed by one quarter and that they are expecting business to grow in this coming quarter. Of course, outside events, you know, could delay that further. But at the moment our customers are perceiving across the board a pretty healthy business for the next three months. Next question, please.

Operator

Question by Joe Osha.

Q - Joe Osha

One business question and one housekeeping question. The business question, is there any reassessment of how you may be dealing with in particular some of your OEMs being as it looks like you are kind of back into an inventory situation here pretty quickly? And then the housekeeping question, in terms of the FAS 123 run-rate, should we think about that for those of us who are going to be ramping expenses into our out year number as maybe 20 million a quarter?

A - Wim Roelandts

So let me answer the first question, and then I will leave the question to Jon. Well, the problem with inventory is that it is a division between two numbers. So when business is down, your own inventory goes up, and then the revenue goes down. So you have kind of a double whammy. And then on top of that, you had very good yields in 90 nanometer, which although it impacts our inventory is really a good thing because it lowers our overall expenses. So unfortunately we can not, wafer orders have to be put in several months ahead of time, so really pretty much the loading for our fab is done for the rest of this quarter. So the first we can impact it is next quarter, the March quarter. But, you know, it all depends, of course, on the business in December, and if that business is stronger or weaker, that will impact it further how much we have to cut back or even increase in March depending on the business level. Jon?

A - Jon Olson

Yes, Joe, it is a little too early for me to give you a forecast on the stock option expensing other than what you might see in the footnote. You know, we are a March quarter ending fiscal year, so we don't implement it until April, and I would hesitate to get locked into any different number sets until we've done a little more work on our end.

Operator

Question by Tim Kellis.

Q - Tim Kellis

I was just wondering if you could give us a little more color on some of the specific product lines, the new product lines? Could you maybe characterize your Virtex-II-Pro revenues versus like last quarter? Was it maybe flat, or how much was it down, and how do your Spartan-3E revenues compare to last quarter?

A - Wim Roelandts

Well, we don't give specific numbers like you know. But my Virtex-II-Pro was down because one customer thing, and we expected it to be up again next quarter. As far as Spartan-3 and Virtex-4 is concerned, both combined doubled this quarter like I forecasted as Spartan-3 is a better bigger product line, so it is a little bit less of doubling, and Virtex-4 is a smaller product line that did much more than doubling. But overall both with very very healthy growth, and although we don't expect it to double this quarter, we expect it to grow at substantial levels for the foreseeable future. Next question, please.

Operator

Question by Sumit Dhanda.

Q - Sumit Dhanda

I was curious about your comments on the backlog, specifically your commentary that you think that the returns been lower in the December quarter because you think people are ordering through the tightness on the back-end. Is that based on your actual conversations with customers, or is this based on some speculation on your part? Could you help us clarify that.

A - Wim Roelandts

Sure. It is really based on actual conversation with customers and on looking back to historical numbers. You know, our backlog is at, I don't say an all-time high, but at a very high-level. I mean when you go back to other quarters where we had that level of backlog, then we saw turns coming down. In talking to customers, clearly they were worried about the shortage that are coming up, especially in the back-end, and the piece parts for packages. And so when our customers hear about shortages, they order with, they put orders in place to make sure they get their parts when they need them. But the orders they put in place for next quarter, obviously they don't need that much turns next quarter. So it is a pretty natural phenomenon. There is nothing specific about it. Typically when we enter a quarter, high backlog turns are slower. When we enter the quarter with low backlog, turns always have to be higher in order to make the numbers. But it's based on hard facts. It is not speculation. It is based on hard facts both from customers and from previous history. The next question, please.

Operator

Question by Seogju Lee.

Q - Seogju Lee

Hi thanks. I just wanted to in terms of the operating expenses for next quarter, you are guiding down 1%. How should I think about that between R&D and SG&A? Because this quarter the SG&A crept up a little bit. And if you could discuss that a little bit, that would be great.

A - Wim Roelandts

Jon, can you handle it?

A - Jon Olson

Sure. We are down 1%, and it is actually pretty evenly spread, with the exception of there was one larger one-time spending item outside of the R&D and SG&A area with respect to a legal contingency reserve. But in general it is a kind of across the board, let's hold the line type of a message we have here.

Operator

Question by Steve Ellis.

Q - Steve Ellis

This is Steve Ellis For Tom Thornhill. Gross margins now they are going up, they went up last quarter, they are going up this quarter. Should we expect this trend to continue where gross margins have the opportunity to drift up, or should we see it going back down towards your longer-term goal? And if you could update, give us an update on your long-term gross margin goal, that would be great.

A - Jon Olson

Sure. Our corporate goal is to be 61 to 63% range. So we are still, we were this quarter, we were last quarter at the low end of that range, and this coming quarter we are projecting to be between 62 and 63, so we are moving up in that range. And the reason for that is the improved yields on 90 nanometer products. The yields we believe will continue to improve in the coming quarters, which should lead to lower cost of sales. Now the mitigating factor in all that is the mix of the product. So mix and yields are the two biggest levers to that. So depending on our mix, could you see, could I see increased margins over the next several quarters? Sure, I can see that, but I'm not ready to forecast that yet.

Operator

Question by Jeff Palmer.

Q - Jeff Palmer

Could you give us a little color on the orders that got pushed into the fourth quarter? Does your guidance encompass that those orders may get pushed began? Is that why the guidance range is so wide? Maybe just a little color on that if you would please.

A - Wim Roelandts

Sure, Jeff. The orders that were pushed into next quarter were like I have mentioned mainly in the Virtex family and in the networking space. You know, obviously at the beginning of the quarter, we always come back to our customers to see how they are doing, what they see happening in the market and so on. So we believe that like I mentioned before that customers are worried about shortages in back-end, and that is why they are putting orders a little bit earlier. But these are solid orders. We did a very careful calculation because the danger that happens is that some of these things could be double bookings or things like that, and we really found nothing of that kind. So we believe that these orders are solid orders. And unless something happens in the general economic sense, I believe that these products will be delivered. I'm very careful because there is clearly uncertainty, you know, with high energy prices and things like that, the Chinese government trying to reduce the growth rate in China. There are uncertainties that are difficult for me to predict. The reason why we have a little bit broader guidance is that the December quarter is always front-end loaded. So the big uncertainties in the month of December. And my experience is that customers are doing well. They work through the December holidays. If they don't do well, they close the factories. And that has a big swing factor, and that is why we are a little bit more cautious of predicting where we will end up in the end of this quarter. That is why we have broadened the guidance, although it's the same as last quarter, 4 points between the low and the high.

Operator

Question by Ruben Roy.

Q - Ruben Roy

A follow-up question on the gross margin commentary you just gave. When you look at some of the, you mentioned product mix as being a component in the gross margin target that you have of 61 to 63%. When you look at a segment like Consumer and Automotive growing as percentage of revenues, does that affect the gross margins, and will that affect that longer-term goal?

A - Jon Olson

Well, at this time I don't think we are going to change the goal. I think we're still pretty comfortable with the mix of products that we have at the high-end and midrange and low-end. The Consumer and Automotive is a little bit bifurcated in terms of the margin in those products. On the consumer space, sure there is always price pressure on consumers, and they may tend to be more towards the lower end of the model or maybe even a little bit below. The automotive space has kind of a broad range depending on the application. So as that segment grows, there will be I would say maybe a very small amount of downward pressure, but I would not call it big enough to change our corporate model at this time.

A - Wim Roelandts

Maybe one additional comment I can make is that these orders are much higher volume, and higher volume allows us to work faster through the learning curve and, in fact, lowers our cost for everybody. So it has to some degree a positive effect on the overall costs of 90 nanometer products.

Operator

Question by David Wong.

Q - David Wong

A question for Jon Olson I guess. Now you have been at Xilinx for a few months. Have you got any views on the long-term financials of the Company, anything that you are going to be particularly focusing on and working. And secondly, I'm not sure if it is Jon or Wim, but what are, although you don't want to quantify it, can you give us an idea of your general attitude to stock options costs? Will you be moving down these expensive over time going forward, or do you expect a first or that they all stay roughly as they are?

A - Jon Olson

First, David, I had my hands full this quarter with the revenue forecast apparently. So maybe I ought to do a little focus or have a little focus on revenue forecasting. That aside, I think there are a couple of areas that I'm putting some focus on. One is in the gross margin area around our cost focus in the Company. So there are some initiatives around that. And the second one is return on investment from our development project. So there are two things that some of which was in motion when I got here, and I'm trying to kick start that even more and try to work through some of the potential ROI options and see if there are some things we ought to do differently. Right now I don't have any hard suggestions to give you on different strategies, but those are the areas that I am focusing on and looking at.

A - Wim Roelandts

Yes, on the stock options, let me give you the kind of direction we're following. At the moment we have not decided to change our plan for our stock option yet. We are giving out a smaller number of shares than we have done in the past, but we keep a broadly based stock option plan in the books. However, we will keep track of what our investors think about this, and we have several options or plans that we are looking at that we can implement when we believe these are better in line with our investor expectations.

Operator

Question by Tim Luke.

Q - Tim Luke

I was just wondering if you can give us any color on how you had seen the areas of comm that weren't wireless perform and how you see them going forward?

A - Wim Roelandts

Yes, this quarter wireless performed, well, it did not grow very much, but there was some growth, low single digit growth in the wireline. Wireline did some work. In the wireless, you know, it is kind of, I think there are several things that came together because it was really very broad-based. You know, when you take up, all the wireless customers declined significantly. So it must be broad-based, so the push-out in China is just one element. There were just some slowdowns also in North America. For instance, Cingular I think pushed out some deployment. You know, it is difficult to say why this happened. It seems to be a one quarter event that people are just either because they are maybe not ready, maybe because, plus, you know, some anxiety around the hurricanes and the energy prices, heating in North America. There are probably different factors around the world that just came together this quarter. Because like I said, every single wireless customer declined significantly, and it was really based just on the wireless side. The wireline was reasonably healthy for a vacation quarter.

Operator

Question by Glen Yeung.

Q - John Quarles

This is John Quarles for Glen Yeung. I was just curious to know under the strength in the automotive sector that we saw this quarter if you guys can describe kind of the dynamics and why you see it being strong next quarter, and that would be kind of helpful.

A - Wim Roelandts

Sure. You know, if you look at the automotive, what we call consumer automotive consists of three parts. Audiovideo broadcasting, which is we classified as consumer is one segment. The second segment is pure consumer, and I have described on an earlier question what that means. And then the third part is automotive. The only segment that was down was the audiovideo and broadcasting. The other two sectors were up quite strongly in this group. The automotive, what is really driving it, is that it is mainly involved in the high-end cars where there is a lot of electronic features like automatic speed control or advanced high-quality audio equipment and so on and so on, and that's where we see the market opportunity. What is happening is that the automotive industry realizes that more and more of the innovations in cars now comes from electronics. These electronics were priorly done by subcontractors, but now they take more of the architecture in their own hands, and they believe that programmable technology is an ideal technology for them because it allows them to very quickly change to new standards. The basis for that really when you look at it is the same as in the consumer space. You know, the additional consumer areas where different industries or separate industries are now coming together. You know, entertainment, networking, computing. Well the same thing happens in the automotive sector. You want your car to have the same things as you have in your home. You know, your connection to the outside world, update of your GPS system, good quality audio and video for the backseat and so on and so on. But each of these areas has different standards, and that makes programs an ideal field for automotive electronics like it does for high-end consumer electronics.

Operator

Question by Seogju Lee.

Q - Seogju Lee

Just two follow-up questions. Can you detail the tax resolution and the income, what those final totals were? And then can you provide details in terms of the outlook on comms in terms of the end market segments, what you expect there?

A - Jon Olson

So with respect to the tax, the tax number, it was $0.03 a share in our $0.24 of GAAP EPS. So that is the basis for it. There are several subparts of this. So part of the benefit came from a release of reserves we built up associated with the Tax Court case that we had with the IRS. Some of the benefits came from an interest coming from in our other income line, interest based on a tax refund that we are entitled to because we had paid the IRS some money in advance to cut off future charges of interest and those kinds of things. And then the third component is that affects the ongoing rate is a reduction in accumulation of any of those additional reserves given the case is now resolved. So in the current period, the first two apply, meaning reversal of reserves, so that is a reduction to the tax provision line. The other income was up a couple million dollars with respect to this interest component from the refund. And then the third component, as I said, had to do with why the forward-looking rate is slightly lower than we previously had been running.

A - Wim Roelandts

So the outlook from communications, if you look at the two components, wireless and wireline, wireless we expect it to be up again, or up after the decline of this quarter, and that is based on actual customer interviews. The wireline business we expect to be flat to slightly up, pretty consistent with where we are in the year. You know, the wireline equipment includes data communications which is driven by companies and, of course, driven by capital spending. And in general we see a very strong capital spending in the first half of the year and then weaker capital spending in the second half of the year when the budgets get depleted. So that is consistent with that thing. So overall we expect communications to be up in this December quarter.

Operator

Question by Steve Ellis.

Q -Steve Ellis

Just some housekeeping questions. What percentage of total revenue was FPGAs?

A - Wim Roelandts

Well, you know, you can say I give you the numbers 51% was Virtex and 24% was Spartan. So 75% is from these product lines, and you add the older product line, it comes down to 55%. So 9% is CPLDs and the rest is software and things like that.

Operator

Question by David Wu.

Q - David Wu

Yes, I was curious about two things. Number one is, when we had a lot of problems with 90 nanometer yields per liter, and now it is miraculously somebody has flipped the switch, suddenly yields are good again. What is this due to and how sustainable is this improvement? And the other one I was wondering is, maybe a question for Jon, is when do we have the foot off the break? Is it a ratio of pre-tax operating margin you're looking for, or it is a revenue level or degree of acceleration in revenue that you're looking for?

A - Wim Roelandts

Let me answer the first one on 90 nanometer yields, and, you know, anytime we introduce a new technology, we are early in the learning curve, and yields are not very good. And then when volume runs up, you work your way down the learning curve and yields improve. We had with 90 nanometer, we had a hiccup like in the transfer from the research part of EMC to their 12 inch production fab that set us back. So we had kind of a double view effect where yields were going down in the research fab, and then we moved to the 12 inch fab, they went back up because new equipment and delays and getting the thing done. And now we're seeing the full impact of the learning curve, and we feel very good that it is sustainable. It has been very consistent moving down and we are at excellent levels, and in fact we are slightly ahead of where we thought we were going to be. That explains why it came a little as a surprise. I think the new equipment in 12 inch fab is providing us with better yields than we even anticipated that we were able to achieve. Also, we made a little progress in technology core design for manufacturability, which allows you to have better yields even with more complex technology. So our belief is that these advanced technologies will get to the same yields as we have achieved on the 130 and 180 and 250 nanometer technology. You know, the same level of defect rate over time. So there is still a way to go, but we have made very good progress, and it is sustainable, and it will continue to improve over time.

A - Jon Olson

The question on spending and revenue and our growth in operating margin, it is not one thing or the other, but in general we are looking for improved revenue growth. We do have a corporate target around operating margin that we are below. Obviously if we got more revenue and we controlled spending, our operating margin will increase. And so we are looking at both things. So if revenue would continue to grow at a reasonable rate, I probably would take my foot off the break a little bit and allow some additional spending. But we still would be muted and focused because we're not at our operating margin percentage goals yet, which is you know roughly 28% plus or minus a couple of percentage.

Operator

Question by Sumit Dhanda.

Q - Sumit Dhanda

I just had a clarification. On the inventory, did you say that heading into December total inventories would be flat or it would be flat on a days basis for your expectations?

A - Jon Olson

Inventory will be flat on a days basis in the December quarter versus the September quarter. That is what I said. That is what I intended to say.

Operator

Question by Jeff Palmer.

Q - Jeff Palmer

Can you give a little bit, you've done some good clarity for us on the $0.03 benefit from the taxes and the other income. How should we be looking at those two line items for longer-term modeling? Should we be taking our tax rates down? Normally you have guided us to about 23%, but it looks like it is below that. And also where do you think other income is going to come in for the next 12 to 18 months, if you would?

A - Jon Olson

Well, I'm not going to give a long-term other income growth rate percentage right now. I think if you look at our history, we have been right around $10 million, you know, plus or minus depending on individual onetime items because it is an other income category. Other than the rise in interest rates, the rest of it is not particularly forecastable down two or three quarters from now. So since its interest and income, interest rates look like they are on the rise. They have been on the rise. So if history repeats itself or continues, you will see a gradual increase of the interest income component of that. With respect to the tax rate, there is a lot of things that are going to go on in the future of the tax rate, not to mention the implementation of 123R stock option expensing. That is going to create some change and variations over time in our long-term rate. Our underlying rate as we forecasted for the next two quarters each at 21 to 22% is a reasonable approximation of where we are. I am today sitting here unaware of anything in the underlying base business that's going to dramatically change that, other than a host of onetime items that are out there that are changing the tax code all the time. So that's why I am not going to say use 21 or 22 beyond this right now with all the rules and regulations.

Operator

Question by Michael Masdea.

Q - Jeff Loff

It is Jeff Loff again. If you look at the December and March quarters, can you talk about what drives typical seasonality from, either in end market or geography perspective? And then is that still in check as you go out to the current environment, or are there certain dynamics that would change that, for example, leadtimes or inventory?

A - Wim Roelandts

Yes, Jeff, there is change happening. I mean really one way of looking at our business is that about 85% of our business goes to capital equipment spending. The other 15% goes to consumer electronics. Both of these are very different seasonality. Now capital spending typically is stronger in the first half of the year and weaker in the second half, and that is why typically we have a very good March quarter. The new budgets get build out and people order equipment. Later in the year the budget gets depleted or business conditions change, and budgets get cut and things like that. The consumer, of course, is totally opposite. The consumer is weak in the first quarter and typically also in the second quarter, but is stronger in the third and fourth quarter when the consumer industries are ramping up for the holiday season. And I think so the dynamics of our business change a little bit. I think in the future you will probably see more a leveling effect, especially where the consumer part of our business continues to grow relative to the other part. You will see more of a leveling I expect, which is one of the reasons that I think that this diversification is good. It will give us more of a stronger back-end second-half and maybe a slightly weaker first-half. But at the moment, 85% of our business is still capital equipment related, so this trend will be very strongly in that sense. Okay?

Operator

Question by Joe Osha.

Q - Joe Osha

I was wondering if I can have an update on how the manufacturing ramp is going at Toshiba and in particular a clarification that it is going to hit volume at 65 nanometers, right, and when should we begin to see those wafers coming out?

A - Wim Roelandts

Yes, you know, the fact that we paid the APA agreement means that Toshiba delivered on all the acceptance criteria. You know, at the moment, they are doing, part of the Virtex-4 family of businesses is manufactured at Toshiba. In the longer-term, we plan to take out our 65 nanometer products on both Toshiba and EMC and cannot divide the business depending on yields and depending on wafer prices that they give us and things like that. Overall the 65 nanometer business will not have a significant impact until I would say the latter part of next year in 2007.

Operator

Pranay Laharia.

Q - Pranay Laharia

Yes, have you said how much of the inventory was at Xilinx and how much was at DSP, and then can you also talk about the composition of the inventory and how concerned you might be about the current levels?

A - Jon Olson

So the days of the components of our 146 days there's approximately 28 days at our distributors and 118 days in Xilinx facilities. And so we are up about $17 million quarter to quarter, and the analysis of what percentage of that was missed revenue and what was better yields. Obviously you can calculate the revenue mess portion if you want. But by and large, we are not overly alarmed, but we are not comfortable either. We would like to get that number of days and the absolute dollar balance down, and if we have typical growth in the second half of the year, we should be just fine.

Operator

Question by Tim Kellis.

Q - Tim Kellis

Usually we get into a longer-term discussion, I know you're a little resonant doing that, but I was wondering if you can just comment on where foresee you past this quarter with a return to some sort of longer-term growth rate where you maybe see that turning out to being? Is it still 20% plus and above the overall semiconductor industry growth rates? Just some thoughts on that qualitatively if you could.

A - Wim Roelandts

Sure. You know, there is several parts to your question, of course. One is the growth is a traditional program logic space, and the other one is the overall growth rate in other new areas of revenue we are investing in. And clearly on the traditional FPGA space, I think that the growth rate has been low in the last couple of years for the double whammy that the 99 nanometer plus the transition to 300 millimeter is created. You know, when you look at growth rates in dollars, it really is growth rates in units times the ASP. ASPs have come down quite rapidly, and it is driven not by price wars, but simply by manufacturing improvements, lower costs per die, and the lower cost per die is driven by I guess the two components, 90 nanometer, and of course, that comes back every two years called Moore's Law. The other one is the transition from 200 millimeter to 300 millimeter wafers, which added another 40% or so cost reduction on top of the 90 nanometer cost reduction, and that comes only about every 10 years. So, you know, when we look at the projection and at the consumption of logic sells very much like the memory business looks at the conception of megabytes, our logical consumption is more than 50%, growth at more than 50% per year. It is pretty stable. It is around 50 to 60%. Except when we have significant downturns like in 2001, it's pretty stable around 50 to 60%. So everything then comes down to cost. Well, this whole transition to 90 nanometer and 300 millimeter wafers is pretty much behind us now. So I think that this drag on growth, this accelerated cost reduction is behind us. At the same time, 90 nanometers makes us much more competitive against ASICs, and you know we see now regularly orders for 50, 100,000 units per month from consumer customers that typically would have gone to ASICs before. So I think that with the transition behind us, we will see some better growth in the pure FPGAs part of our business. And then, of course, you know there are some initiatives to enter additional markets in the area of digital single processing and embedded processors. And our expectation is that that segment, that that part of our business will go much faster because we really are starting from small numbers. So overall or combined and, of course, if you eliminate economic recessions and things like that, I still believe that 20% growth rate is achievable. You know maybe, you know, being driven by I would say the new businesses, which have been very well accepted by our customers, our growth, for interest in base stations, which we are in a very very strong position, is due to our strength in digital single processing, for instance. Okay? So that gives you kind of a view. But on top of that, of course, you have all the economic factors, and that, of course, we cannot control, and then you have traditional cycles in the semiconductor industry of overcapacity undercapacity, which we don't control either. So that is what makes difficult to project exactly where we are at a given point in time. Last question, please.

Operator

Your last question comes from Jeff Palmer.

Q - Jeff Palmer

If we look at 90 nanometer for a second and the yields continue to improve sequentially every quarter and gross margin correspondingly, do you have a sense when in the future we would hit ideal or what we might call the peak yield on 90 nanometer? Then I would assume then peak gross margins?

A - Wim Roelandts

Jeff, probably for, you know, it's a typical learning curve. So you have very strong improvements at the beginning, and that is what we are seeing here. And then, of course, with time, the improvement goes smaller and smaller, and you continue to improve. We used to be improving on 130 and 180 nanometer as we speak. So there is really not a point where it starts to peak. Of course, what we are then doing is there is some new cycle starting with 65 nanometer which will start next year. So next year we will be introducing our first 65 nanometer products, and then the whole thing repeats itself. Here the 90 nanometer has been a little bit more difficult because we had a hiccup in our transition to 12 inch wafers. It got delayed, this phase, and of course, once we got the situation in control, it moved quicker. So I said it's kind of a W effect. We were moving down, and then we moved to the 12 inch fab and moved back up again, and now we're moving down much more rapidly because of all the experience we have gained. I hope that 65 nanometer will be a little smoother, but my experience is that advanced technology is tricky, and it takes time to wring out these problems that we are facing. So my answer to you is that we will see or continue to see good yield improvement, but weaker and weaker by quarter for at least a couple of more years in 90 nanometer.

Maria Quillard, Senior Director, IR

Okay. Thank you, everyone, for joining us today. We have a playback of this call beginning at 5:00 PM Pacific time, 8:00 PM Eastern. The instant replay will run for 48 hours. For a copy of our earnings release, please visit our IR website. To reiterate our guidance update for the December quarter, it will be posted after the market on December 7. Our next earnings release date for the third quarter of FY '06 will be Thursday, January 19 after market close. This quarter Xilinx will be participating in two investments conferences, the Deutsche Bank and Lehman conferences.

This completes our call. Thank you very much for your participation.

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