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Xilinx Inc. (XLNX)

Q3 2006 Earnings Conference Call

January 19th 2006, 5:00 PM.

Executives:

Lori Owen, Investor Relations

Jon Olson, Vice President and Chief Financial Officer

Willem Roelandts, Chairman of the Board, President and Chief Executive Officer

Analysts:

John Lau

Chris Danely

Ruben Roy

Michael Masdea

David Wu

Katherine Bergart

Satya Chillara

Ben Lynch

Ambrish Srivastava.

Steve Eliscu

Seogju Lee

Tim Kellis

Mark Edelstone

Glen Yeung

Sumit Dhanda

Tristan Gerra

Operator

Good afternoon. My name is Corey and I will be your conference facilitator today. I would like to welcome everyone to the Xilinx Third Quarter 2006 Fiscal Year Earnings Conference Call. All lines have been place on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask a question at this time, press the “*” and then the “1” on your telephone keypad, if you would like to withdraw your question, press “*” then number the “2”. Please limit your question to one and refrain for multipart questions to ensure that management has adequate time to speak for everyone. After each participants 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 Lori Owen. Thank you. Ms. Owen, you may begin your conference.

Lori Owen, Investor Relations

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

During today’s call we may make projections or forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are predictions based on information that is currently available. Actual results may differ materially. We refer you to our SEC filings which are posted on our website. These documents identify important risk factors that could cause actual results to differ materially from statements made today. This conference call is open to all and is being webcast live. It can be accessed from our Xilinx Investor Relations website. Let me now turn the call over to Jon.

Jon Olson, Vice President and Chief Financial Officer

Thank you, Lori. Revenues in fiscal Q3 increased 13% from last year to $450 million. Compared to the same quarter a year ago, revenues were up 27%. Third quarter net income was $81 million or 23 cents per diluted share compared to net income of $86 million or 24 cents per diluted share in the prior quarter.

The tax provision for the third quarter fiscal 2006 includes a $25 million charge related to the planned repatriation of $500 million in foreign earnings pursuant to the provisions of the American Jobs Creation Act of 2004.

In addition, the company recorded a tax benefit of $9.5 million primarily related to the ability to use certain credits that were previously accounted for as usable. The net impact of these items added $15.8 million to the company’s third quarter tax provision.

Gross margin of 63% increased from last quarter’s 61.4% and was at the high end of our guidance as we continued to benefit from improving yields from new products. Mix was also a factor as mainstream products grew faster than originally anticipated.

Operating expenses were up 0.4% sequentially. This is slightly higher than our previous guidance of down 1% sequentially mostly due to higher sales commissions on higher revenues. The tax rate for the quarter was 38%, impacted by the repatriation and other discreet items previously mentioned.

Let me now comment on the balance sheet. Cash and long-term investments increased $30 million to approximately $1.7 billion. We generated $190 million in operating cash flow and 176 million in free cash flow after CapEx of $14 million. In the last four quarters we generated $479 million in operating cash flow and spent $62 million on capital expenditures. In the quarter we repurchased approximately 5 million shares for $125 million, an increase of 50% over the prior quarter and we paid a quarterly cash dividend of $24 million.

Days sales outstanding decreased 15 days to 29 days. While this may not be intuitive given our strong sales in December, let me point out that day’s sale outstanding calculation is based on shipments and not revenues. A stronger than normal shipping profile in the first two months of the quarter coupled with higher than normal collections in the month of December contributed to a much lower DSO.

Combined inventory at Xilinx and distribution decreased by two days to 144 days in the quarter. Days would have decreased more but we made the decision to shift some product from die bank to finished goods in order to address the continued back end capacity constraints. In addition we expedited wafers on select devices to meet demand for this quarter and to prepare for next quarter’s backlog. I will now turn the call over to Wim to comment on our business and products.

Willem Roelandts, Chairman of the Board, President and Chief Executive Officer

Thank you, Jon. So first let me give my own comments on the December quarter. Sales growth in the December quarter was better than expected increasing 13% sequentially and nearly reaching our record sales of $450.1 million set in the December quarter of 2000. Turns bookings percentage was 54%, higher than our original forecast of around 50% as bookings momentum throughout the quarter was stronger than anticipated, especially in the months of October and December.

When you look at the quarter in more detail what really stands out is the broad based strength not only across end markets but across products and geographies. Sales from the communications end market segment increased 11% sequentially driven by a rebound in our wireless business, which was weak last quarter as well as an increase in wired communications.

Sales from the industrial and other category were the strongest during the quarter increasing 26% sequentially and representing a record 27% of sales, up from 22% in the same quarter a year ago. Strength in this category was driven by test and measurement as well as defense. In defense we received a couple of particularly large orders driven by specific customer programs. We do not expect, however, to see similar strength in the March quarter. Consumer and automotive sales increased 9% sequentially during the quarter fueled by audio-video broadcast and consumer sales. Sales from the storage and server category as expected were down.

New products were really the highlight of the quarter. New product sales increased 24% sequentially in the December quarter, representing 33% of total revenues, up from 30% in the prior quarter and up from 20% in the same quarter a year ago. Virtex-4, Virtex-II Pro, Spartan-3, Spartan-3E and CoolRunner-II all experienced strong growth during the quarter and are all at record revenue levels. We continue to lead the industry in 90nm sales and we continue to see healthy design win activity. Last quarter I told you that we expected our 90nm products along with our 130nm Virtex-II Pro families to drive revenues of over $100 million in the December quarter. We easily surpassed this target during the quarter.

Virtex-4 sales increased significantly during the quarter as revenues from all three domain families increased in strong double digits sequentially. We are encouraged by the strong design win momentum we are seeing with this family and we expect to see similar sales growth in the March quarter.

Virtex-II Pro sales after decreasing slightly last quarter increased significantly during the December quarter with strength from wireline and wireless communications and test and measurement. The Spartan-3 family continued to drive broad based adoption in broadband access, display technologies and low cost servers. Sales for this family increased in solid double digits sequentially.

During the quarter Xilinx completed the rollout of the Spartan-3E family. The logic intensive Spartan-3E family delivers the lowest cost per logic cell in the FPGA industry and complements the IO intensive Spartan-3 family. Just nine months after introduction all five family members of this family are now in production. Customer acceptance of this family is promising. We are experiencing strong design win activity, not only in the price sensitive consumer market, but also in brand new applications in the low cost networking space.

Last but not least, CoolRunner sales increased substantially during the quarter. For the first time CoolRunner’s largest customer was a handset manufacturer. With its low power and advanced feature set, CoolRunner is uniquely positioned to address the handset market as well as other similar portable consumer applications such as media players and GPS navigation system.

There is no doubt that Xilinx has recaptured the design win momentum of 90nm. Our strong new product portfolio positions us solidly to gain traction in the next generation of consumer products. In addition to strong new product growth, mainstream products were also stronger than expected increasing 11% sequentially driven mostly by applications in wireless and defense. Sales from every Virtex product grew during the quarter, driving strength in both the new and mainstream product categories. Total Virtex sales increased by nearly 20% sequentially representing 54% of total sales.

Spartan and CPLD sales also increased during the quarter. Spartan sales increased nearly 10% sequentially representing 24% of revenues and CPLD increased 8% sequentially representing 9% of total sales.

Let me now briefly discuss the revenue by geography. Sales from North America, Europe and Asia Pacific were all stronger than expected during the quarter posting double digit sales growth. Japan sales were down slightly after increasing 15% sequentially in the September quarter.

Now I would like to compare and contrast our quarter with the only other quarter in our history that we have reached $450 million in sales, the December quarter of 2000. First let me do a comparison by end market.

If you look at the industrial and other end market segment, which also included consumer and automotive applications it represented 8% of our total sales or approximately $36 million in December of 2000. Today if you look at the equivalent end market segments, consumer plus industrial and other, these categories represent 41% of our total sales or $185 million. Sales into these applications have quintupled, representing a five year compound annual growth rate of nearly 40%. Unfortunately this growth rate has been masked by a decline in sales of our traditional areas of communications and storage and servers which represented 77% and 15% respectively in December of 2000 and today represent 48% and 11% respectively.

Secondly, if you look at our customer concentration, our top 15 customers represented approximately 50% of our business in 2000, whereas they represent 34% of our business today. We serve a much broader base of customers today than we did in 2000 and are less dependent on the large OEMs.

Finally let’s take a look at our product composition. In December 2000 Spartan and CPLD products represented only 16% of total sales. Now they represent 33% of sales. This is a reflection of our entry into the consumer and automotive markets as well as our CPLD share gains.

In summary, I’m extremely pleased with our diversification efforts and I believe the success of these efforts can be seen in the broader composition of sales by end market, by customer and by product.

Next I would like to make some remarks about our digital signal processing strategy. Last quarter we unveiled an aggressive roadmap aimed at capturing market segment share of the $2 billion high performance digital signal processing market. One key part of that roadmap was related to making it easier for system engineers and DSP algorithm developers to design our FPGA based reconfigurable DSPs.

To this end we are pleased to announce the recent acquisition of AccelChip. AccelChip’s DSP design tools will enable thousands of new DSP designers, in particular, algorithm developers, to automatically generate hardware from their MATLAB algorithms. This is an important strategic acquisition for Xilinx. Almost every electrical engineer coming out of the university these days knows how to write some MATLAB algorithms and now Xilinx will make it easier for these engineers to use FPGAs.

Now let me turn to guidance for the March quarter. We start out the March quarter with backlog that is up slightly from last quarter. Business for the first two weeks of January has been good. As a result we are expecting sales to increase 1 to 5% sequentially. This is somewhat lower than a typical March quarter. The reason is that we are not expecting to see the same level of business from the defense sector that we did in the December quarter as we expect these customers to move to more normal ordering pattern.

In terms of end markets we are expecting communications to be up slightly driven by wireless infrastructure sales. We expect consumer and automotive to be up driven by increases in audio-video broadcast and consumer. And we expect industrial and other to be down, as declines in defense will offset continued strength in test and measurement. Finally we expect the storage and server category to be slightly down driven mostly by seasonal weakness in this sector.

By geography, we expect sales from Japan, Asia Pacific, and Europe to grow sequentially and North America to decline. The decline in North America will be driven primarily by sales declines in defense and to a lesser extent, Storage. Now let me turn back the call to Jon for some final remarks.

Jon Olson, Vice President and Chief Financial Officer

To achieve the midpoint of our revenue guidance we will require turns of approximately 55%. Gross margin is expected to be approximately 63%. Our mix in the March quarter is forecasted to be skewed more towards new products than the previous quarter. While yields from our new products are improving they are on average below the margins of mainstream products.

Overall expenses will increase approximately 7% as compared to the December quarter. SG&A will be up slightly but most of the increase will be driven by R&D. Half of the R&D increase is related to one time charges associated with the AccelChip acquisition. The other half is related to increased investment in 65nm development, embedded computing and digital signal processing.

Other income will be approximately $10 million. Amortization of acquisition related intangibles, which has been running around $1.5 million per quarter, will increase to approximately $2.3 million per quarter as a result of our recent acquisition of AccelChip. The forecasted tax rate for the March quarter is 23% plus or minus one percentage point. Fully diluted share count is expected to decrease by 2 million shares to approximately 351 million shares. Inventory days will decrease to approximately 139 days from 144 days.

Let me also say a quick word on options expense. As you know we are not required by the Financial Accounting Standards Board to begin expensing options until our June quarter and our March quarter GAAP results will not include compensation expense. Because so many of you have asked about this, though, I will tell you that we are expecting this figure to be in the neighborhood of $18 million after tax for the March quarter. Again, this is for comparison purposes only and our March quarter GAAP results will not include options expense. Let me now open the lines up for questions. Operator, back to you.

Question-and-Answer Session

Operator

The floor is now open for questions. If you do have a question, please press the “*” and the number “1” on your telephone keypad. Once again, that is the “*” followed by the number “1” on your telephone keypad. Please limit your questions to one and refrain from multipart 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 queue. If time permits additional questions will be taken.

Your first question comes from the line of John Lau.

Q - John Lau

Great, thank you very much. I was wondering if you could give a little bit more detail with regards to what you were seeing in the com infrastructure market. You had commented that it had been strong. Going out for the rest of the year what are the things that you should be looking for in terms of what the growth rate would be? Thank you.

A - Willem Roelandts

Sorry I missed your first part of your question, John. Could you repeat that?

Operator

John, will you please press "*" 1 again.

A - Willem Roelandts

Sorry, your question was about the growth rate in communication infrastructure and although I cannot give numbers for the year, our expectation is that this market in general will trend upwards, driven by strength first of all in wireless which with the deployment of 3G will continue quite strong I believe for the year. It doesn’t mean that there can’t be weak quarters hear and there, but the general trend will be upwards. The second thing is really the strength in wireline. Since several quarters now we have seen increased new developments in wireline. New applications are being readied for deployment in the areas like Voice-over-IP and especially fiber to the home. And of course that will drive strength in the infrastructure side of the telecommunication business. So overall I’m quite optimistic for the communications sector for the next year or so. Next question, please.

Operator

Your next question comes from the line of Chris Danely.

Q - Chris Danely

Thanks guys. Thanks for that comparison between now and back in 2000. My question centers around that. Back in 2000 when you were close to the same level of revenue your OpEx or, excuse me; your operating margin back then was in the low 30s. And it’s in the high 20s right now. Can you just detail your plans to get back to the low 30s and what your sorts of goals are on the operating margin side eventually?

A - Willem Roelandts

Yes, Chris, happy to do so. You know, our stated goal, our, what we call our corporate model is for gross margins for operating margins to be in the 27, 28% category. Now, obviously when we see a very strong growth like we had in 2000, there is no way that our expenses can keep up with the growth and then if it moves to a higher level, but our goal is to keep it in the 28% around 28% operating margin. Depending on how fast the growth rate goes it could move higher. But in general that is what the growth, the target is for our company. Next question, please.

Operator

Your next question comes from the line of Ruben Roy.

Q - Ruben Roy

Hi. Thanks. Wim, you talked about CPLD products a couple of times in this call which doesn’t usually happen. I was wondering if you could give us the mix. You said Spartan CPLDs make up about 33%. Are CPLDs still around 10% of overall revenue? And also when you mentioned CoolRunner products having its largest customer being a handset customer, can you talk about the volumes you’re seeing for that product? Is that higher than your normal PLD volumes? And also do you expect to have, is it one customer or do you expect to have additional handset customers? Thank you.

A - Willem Roelandts

Very happy to do so, Ruben. First of all our, the CPLDs are 9% of our total revenues so they remain around the area, maybe slowed down a little bit mainly because of the growth in Virtex and Spartan of course. The reason why I talked specifically about CoolRunner-II is that it was a product that was designed for low power and it took a while to get traction but now we see quite strong traction in the handset markets and there, unit volumes are in the millions of units per year type of thing. They are very often used for the more advanced feature phones where, you know, our customers want to interface with the specific new devices, better displays, video cameras, you name it. And we have more than one customer. In fact we have several customers are using CoolRunner-II now in their high-end feature phones for the portable market. So it was kind of significant. It took a little bit longer to capture that market but now we are very heavily used in these phones especially in Taiwan. Next question, please.

Operator

Your next question comes from the line of Michael Masdea.

Q - Michael Masdea

Thanks a lot. Can you just, Wim, can you walk us through the dynamics of your customers that led to what turned out to be it looks like 3 surprises, obviously positive, but what was going on? Was it a forecast issue, was it believing their forecasts or just demand surprises or what?

A - Willem Roelandts

I think that Michael, there’s always several elements. You have the underlying growth rate that we see happening and then you have one deal, one time only big orders especially in the area of the defense which tend to be ordering everything they need and then you don’t hear from them for several quarters, then they order next batch. So a couple of these big defense orders came in this quarter and although we had foreseen that, it was planned to have, you always say, “Well, one of them can slip,” because sometimes forecasts are for this quarter but then it actually happens next quarter. So a little bit cautious in forecasting that. The real I think the real good news is the underlying strength of the business. And if you really look at the December quarter and the March quarter we believe that the underlying growth rate is in the 7 to 8% range. What happened in December is we got some extra pops through defense. There was also if you remember in the September quarter we believe that some customers pushed orders out of the September quarter into December because of the run up in energy prices in September. And so that was an extra order for this quarter. Of course in the March quarter these defense orders won’t repeat so we have to make up for them. That’s why we are forecasting a little bit lower. We believe the underlying trend is very solid for, at least for these two quarters and driven really by communications and the industrial area, the measurement, test and measurement area and then by consumer spending, consumer markets sorry. Next question, please.

Operator

Your next question comes from the line of David Wu.

Q - David Wu

Yes. Can you elaborate a little bit on your gross margin? Was the mix towards, it looks like that next quarter is going to be primarily revenue growth comes from new products, yet the gross margin remains at 63%, but that is, I assume that that’s because of yield improvement on 90nm. How much further can we go on that?

A - Jon Olson

Yeah David let me answer that one for you. You got it right. It’s really the continuation of yield improvements. The biggest impact again is still on our new products versus the mainstream products and that is offsetting the, what we believe is the mix factor that’s going on. So given where we are on the curve, I’ve show this a few times when I have had the opportunity, we’re continuing to move down the curve and we’re I would say past the midpoint of the decline where we start to reach the flattening out point on many of our 90nm products so I would say there’s a few more quarters of yield improvement ahead of us but the percentage of improvement will start to decline now.

A - Willem Roelandts

Next question, please.

Operator

Your next question comes from the line of Katherine Bergart.

Q - Katherine Bergart

Yeah, on the inventory side, I guess I’m calculating inventory is at about 117 internally and you talked about a target of 90 days. Could you talk about that target? I guess the timeframe over which you’d look to still achieve that if that’s viable? And when you see the back end capacity constraints perhaps alleviated?

A - Jon Olson

Yes, Katherine. I’ll take that one. So our stated target is 90 days from a long term perspective but we have been going through a period of a couple of interesting things going on here. First off, the fact that our new products, our 90nm products have been so widely adopted and that growth is so strong the cost per unit on those is higher than the average of our other products. So that has driven up the dollar content of our inventory to be a higher percentage of new products than the 90 day target would have indicated. In other words, an average. So we’re going through this period that while yields are still coming down, that tends to drive days up. The second factor is this shorter term phenomenon that I described around the back end tightness that’s caused us to want to build a few more units out to finished goods where it made sense. As we sit right now, we still see things very tight out in both assembly test and the substrate area, particularly for the capability we need for our most advanced products. That’s where the tightest area is. That would be flip-chip technology. So I think we see that ahead, at least for another quarter or two. And we’re doing everything we can to make sure that we enough product and capacity in order to be able to meet our customer demands.

A - Willem Roelandts

I think there was a third factor which is underlying that is that the days are backward looking, but when you have new products they grow very rapidly you have to put in more inventory to be able to serve next quarter and that is, we have two product families that are ramping at the same time at pretty high rates so that also increases our backward looking inventory simply because we want to make sure we can deliver these products. Next question, please.

Operator

Your next question comes from the line of Satya Chillara.

Q - Satya Chillara

Hi. Good afternoon. Wim, can you talk about that CoolRunner-II product that’s meant for the handsets? What kind of gross margin profile you would have compared to your traditional CPLD products?

A - Willem Roelandts

Yes, certainly. You know, we, our target gross margin for all our products is around the 60% range. The real difference is really volume. You know we have pretty hefty volume discounts, and of course these handset sales tend to be very high volume so they tend to be at the lower gross margin percentage than the average and of course you make it up with either some of the older products or products sold in lower volumes where they have higher gross margin products. CoolRunner is at the moment a little bit below 60% but not that far below in average including hefty sales into the consumer space. Next question, please.

Operator

Your next question comes from the line of Ben Lynch.

Q - Ben Lynch

Yeah, hi guys. I don’t know if you want to help quantify a little bit the, that chunky defense order. Wim, you sort of said that you felt the underlying March growth was 7 to 8% versus the 3% you guided. Is that sort of some help in thinking how much the defense contribution was in December? So are you expecting all of that to drop back down again or just partially drop down in the March quarter?

A - Willem Roelandts

Ben, we have, our defense business is a, has a regular pattern so there is customers who buy more on a quarterly basis but sometimes there is this pop that comes up and these extra pops were a big chunk of the difference between the 3% and the 7 to 8 that I mentioned. The other one is that we’re always a little bit cautious at the beginning of the quarter. You know, the last quarter we also, I think we guided 1 to 5% also and we obviously did better than that because a lot of our turns, a lot of our revenue is turns based and you never know how the quarter is going to develop and if any action will, any things will result from the higher energy prices that we’re seeing today for instance and so on. So really we’re on the cautious side in the beginning but a chunk of that caution is also because of these defense orders that we’re not going to repeat. It’s good business to have, it’s very profitable business, we love to have it but it tends to be a little bit chunky and that’s one of these things why last quarter was better than expected and the March quarter will be a little lower than expected.

A - Jon Olson

And Ben, maybe think about it, Wim’s 7 to 8, think of a couple of points from the defense and then a couple of points from the September effect into October as kind of the way to think about it I think.

A - Willem Roelandts

Next question, please.

Operator

Your next question comes from the line of Ambrish Srivastava.

Q - William Tao

Good afternoon, it’s William Tao for Ambrish. On the last earnings call you talked about lead times stretching out. I was just wondering has that deteriorated or improved during this quarter and do you see any potential double booking related to the lead time and the back end capacity constraint? Thank you.

A - Willem Roelandts

That’s a very good question because you always worry about these things. Indeed, lead times have moved out a little bit. Or continue to move out, I would say because there is clearly a shortage in the back end. But they are still in the, most of our lead times are still within six weeks. You know, two quarters ago or a quarter ago they were below four weeks for the majority. Now they’re around, they’re below six weeks. So they have moved out a little bit but there is no sign of improvement yet so we expect that not to be a factor. The question that you can ask is if lead times push out, people are ordering more so when they will be pushed in we’ll lose business. That is not happening because like I said there is a trend to push it out a little bit further but we’re talking here about maybe one week or two weeks maximum. Double booking is something that we watch for very carefully. We do a lot of tests, and at the moment we cannot see any double booking taking place because lead times are still reasonable. I think that if they are below 8 weeks, people in general are not too much panicked yet about these things. So it’s only when they get above 8 weeks or 10 weeks that people start to consider double booking. But it’s something that we verify. We have not found any instances that there are double bookings taking place at this time. Next question, please.

Operator

Your next question comes from the line of Steve Eliscu.

Q - Stephen Eliscu

Yes. The last couple of years the expenditures on wireless infrastructure by the carriers tended to be front end loaded. What gives you confidence this year that wireless strength is going to continue throughout the whole year? Thank you.

A - Willem Roelandts

Yes. Steve, the main reason is the deployment of 3G. 3G both in Wideband CDMA or in CDMA2000, I mix these two together, and that’s what we’re seeing. Every month there are new contracts being signed by the equipment vendors. Now the danger is, there is always the danger that two companies or three companies are vying for the same contract and all 3 put in their forecast and of course only one happens, one receives it, but it’s an area that we’re very close, we try to be very close to customers and discount for that. But overall the growth, we see the growth continuing. It’s also driven of course by the growth in handset markets, which we believe is estimated for this year to be somewhere around a billion units for the first time in history. So both of these factors we believe will continue to see growth in the wireless area. The third area is the acceptance of data transmission over the wireless networks which is also happening even by installing upgrades to the existing, the second generation networks to provide more and more this data capability. So all of this I think will provide a pretty healthy environment for the wireless infrastructure segment. Again, it is a market that sometimes can be chunky. So it doesn’t mean that every quarter we’ll see growth. There could be some quarters that things get delayed or some contracts get pushed out. But in general we expect that market to be quite healthy for the year. Next question, please.

Operator

Your next question comes from the line of Seogju Lee.

Q - Seogju Lee

Thank you. Sorry if I missed this but first on the turns business required for the current quarter?

A - Willem Roelandts

The turns are around 55%. About the same as we did last quarter. Last quarter we did 54% turns. Next question, please.

Operator

Your next question comes from the line of Mark Edelstone. Mark, your line is open. Okay. Your next question comes from the line of Tim Kellis.

Q - Timothy Kellis

Yes. Thank you. Quick question about the FX family of the Virtex-4 product line. I understand you guys were ramping a few of the members this quarter. I was wondering if you’re shipping all six members of the family and if not, could you maybe elaborate on some of the issues or timeframe on getting all those members in production?

A - Willem Roelandts

Yes, sure, Tim, we are shipping at the moment. I think it’s 4 members out of 6 that we are shipping. We have had some yield issues. The demand has been much stronger than we anticipated because we didn’t expect people to do a lot of designs in gigabit transceivers but it’s clearly exceeded our expectation and that, coupled with some yield issues meant that we were, supply was limited. We have fixed the yield issues and we expect the, all the deliveries to take place in the next two quarters of all 6 families. Next question, please.

Operator

Your next question comes from the line of Mark Edelstone.

Q - Mark Edelstone

Okay. Can you hear me this time?

A - Willem Roelandts

Yes.

A - Jon Olson

Sure, Mark.

Q - Mark Edelstone

Thanks a lot. Nice quarter first off. Jon, I just wonder if you had a specific dollar amount that you expect for the in-process R&D charge in the quarter and will you call that out specifically when you actually report the quarter?

A - Jon Olson

So, yeah, we have an estimate. I hesitate to give you more than what I already gave you which is about half of our 7%. I think you can get pretty close by using that number. And assuming we have the valuation done, you know, we would consider adding some clarity to our disclosure but it’s not clear that we’ll have that done by the time we do the Q filing. It depends.

A - Willem Roelandts

Next question, please.

Operator

Your next question comes from the line of Glen Yeung.

Q - John Grols

Hi guys. This is John Grols for Glen Yeung. Just a quick question on 65nm, can you guys give us a sense for timing on that? I think you previously said kind of latter part of 2007 and as a follow up to that if you can just give a little bit of maybe color around how we’d expect R&D expenses to scale with that? That would be helpful. Thank you.

A - Willem Roelandts

Yes. The timeline for the 65, the first 65nm products are planned in roughly around the middle of this year for introduction with the volume production in 2007. The big problem of course with advanced technology is the increasing cost of mask sets, and that is really the factor that will impact us most over the next several quarters. Our belief is that we can, our goal is to get the R&D spending back into the 17% range. And we think to be able to do so within the next two quarters even with increased spending in R&D, mainly driven because of higher sales, higher revenue for these quarters. Next question, please.

Operator

We have now reached the time for allotted, the allotted time for questions.

Lori Owen, Investor Relations

No, we have got time for a few more.

Operator

We do have a second question from the line of John Lau.

Q - John Lau

Great, thank you very much, and sorry for the technical difficulty before. You mentioned with regards to the expense optioning, the cost for the current quarter, what was it for the last quarter if you could give that to us also?

A - Jon Olson

That was about, it was about the same amount. Net of taxes it was approximately $18 million.

A - Willem Roelandts

Next question, please.

Operator

Your next question comes from the line of Chris Danely.

Q - Christopher Danely

Thanks guys. Just to follow up on Mark’s question; can you just go through your expectations for gross margins and OpEx throughout the year or first few months?

A - Jon Olson

So we’re not going to be forecasting anything at this point into next year at this point. We’ll try to give you a better look for that at the next conference call but at this point we’re, given our fiscal year is still in process, we’re not going talking about our next fiscal year at this point in time.

A - Willem Roelandts

We would love to do it however next quarter which will be the beginning of our fiscal year and then we’ll give you our forecast for next fiscal year. Next question, please.

Operator

Your next question comes from the line of Satya Chillara.

Q - Satya Chillara

Yeah hi. Just wondering on the design win momentum with your Virtex-4 and Spartan-3, is there a way you can quantify the first half of 2005, what was second half 2005 calendar year? How is that momentum going into calendar ‘06 at this point?

A - Willem Roelandts

Well, it’s difficult to specify that and I certainly don’t want to have comparisons with what our competition is doing. But clearly when we are in a competing design win we should, of course, not all design wins. We are winning the majority of these designs in the Virtex family. Virtex-4 I believe and customers believe also is a superior family from the point of view of power consumption and signal integrity, which are very serious problems for high performance design. In the Spartan range we have a much broader family of Spartan products with a family focused on IO intensive and a family focused on logic intensive. There again, we can position our products better and win sockets against our competition because when you have more products to offer you can target or find the exact product for the customers’ needs at a lower price than our competition can. So overall I think these are the two major reasons why we are doing so well in both of these families. Next question, please.

Operator

Your next question comes from the line of Ben Lynch.

Q - Ben Lynch

Hi. I have a question on AccelChip. From the guidance I thought I understood that half of the increase was one off. Does this mean there is no sort of ongoing of any sort of size R&D contribution from AccelChip and also could you confirm what sort of revenue contribution you would expect from AccelChip in the March quarter assuming it’s recognized for the full quarter please?

A - Jon Olson

So Ben, let me go back over the expenses again. I said expenses were going to increase approximately 7%; about half is one-time charges. The remaining half was related to investments in 65nm, embedded computing and DSP. The “and DSP” part was the recognition that there will be ongoing expenses for the employee base and expenses that we’ve taken on from AccelChip. I’m not going to go down to fine granularity, but you can kind of think of it as 1/3:1/3:1/3 of those three things for that remaining 50%. And then the second part of the question was…?

A - Willem Roelandts

The revenue.

A - Jon Olson

Was the revenue. The revenue contribution is I would say relatively minor. And that’s while the product is of tremendous value when combined with ours, I don’t think there’s really anything meaningful to tell you to put in here. It’s hundreds of, hundreds of thousands of dollars versus millions.

A - Willem Roelandts

This is a software product and you know that because we are a chip company in general it’s difficult to get much revenue from software, software is really an enabler that allows customers to use our chips and that’s how we positioned this. So there’s very little revenue associated with that. When we do acquisitions in general we acquire companies because of technology and because of the expertise of the people. That is the biggest value that we get out of these. Next question, please.

Operator

Your next question comes from the line of Tim Kellis

Q - Timothy Kellis

Thank you. Just as a follow up regarding the tax rate. Unless I’m doing my calculations wrong when you take out the one-time taxes, the tax rate for the December quarter was 26% versus what I thought was guidance of 23%. Can you tell me if I’m off on my calculations or where the discrepancy lies in the tax rate?

A - Jon Olson

Sure, Tim. Back when we did the update in the quarter we talked about the tax rate change from 21 to 23%. That delta that you’re seeing when you do the actual mathematic calculation is the catch up from the previous quarters to realign the tax provision to a full year 23% underlying.

A - Willem Roelandts

Next question, please.

Operator

Your next question comes from the line of Sumit Dhanda.

Q - Sumit Dhanda

Yes, hi. Good afternoon guys. Wim, I had a question for you. I understand the caution around the guidance and the impact of the loss of the defense based orders, but historically March seems to be a good quarter for burn, you know wireless infrastructure business tends to do really well. Any reason why you may not match your normal seasonal pattern which tends to be high single digits or is it just that your caution that you Inaudible?

A - Willem Roelandts

Yes, Sumit. First of all it’s not a loss. It’s a one-time business but of course we have to make up for it in this quarter. The other reason is that I tend to be a little bit nervous about the ongoing energy prices. You know if you really look at it, the December quarter, energy continued to decline and move from about $3 at the beginning of the quarter for gas prices to about $2 at the end of the quarter, now what we have seen of course is since the beginning of January we’ve seen the inverse and we are now back to $2.40 almost. And that makes me a little bit nervous. That’s why I’m a little bit more cautious in predicting the March quarter. Some people believe that gasoline prices doesn’t, or oil prices doesn’t have a big impact, but 85% of our business is in capital goods sector. So I think that the decision makers in these companies when they decide to invest in new equipment, they tend to be more cautious when gas and oil prices go up. That’s what we see reflected in our business sometimes. And since our products are on the shelf products, we see immediate reaction. So the price goes up and we see orders slow down pretty quickly after that. That’s why I’m a little bit nervous for the quarter. Up to now things are going well and we will see what happens during the quarter. I feel pretty solid about the forecast we have given but clearly we will update you in a couple of months how it actually is going. Next question, please.

Operator

Your next question comes from the line of Tristan Gerra.

Q - Tristan Gerra

Good afternoon. How should we look at the price crossover from 90nm versus the larger dies, so specifically Virtex-4? And how should we look also at gross margin for Spartan-3 versus the company average at this point?

A - Willem Roelandts

Very good, Tristan. First of all the price movement, I think that when you look at the design, the price for, per logic cell that the step-over has already happened. You know, with Virtex, with 90nm yields now approaching, or are getting better and better. And of course the fact that 90nm die are smaller than their 130nm equivalent. We have seen the number of design wins in 130nm going down very rapidly and most of our design wins today are taking place in 90nm because the transition is taking place already. And we have seen certainly in Spartan-3 but now also in Virtex-4 the first production runs starting to happen. So that will continue the growth in these two families. As far as the gross margin is concerned, our goal is to have around 60% gross margin for all of our families. Now what is really the biggest, there’s two impacts on that. First of all, when a family is new, yields are not as good and then the gross margins tend to be lower. And then when yields continue to improve and the technology gets more mature, the equipment get more amortized, of course our gross margins start to rise. The second thing is the volume. Now clearly we make much more money on people who buy 10 or 100 parts than people who buy a million parts so it’s these mix factors that play a role in this but today Spartan-3 is not yet at our corporate margin level because it is still a relatively new product but it is starting to move there. And I don’t have the exact number available here but and I don’t know if I would tell you anyway but it is getting closer and closer to our corporate goals. Next question, please.

Operator

Your next question comes from the line of David Wu.

Q - David Wu

I just wanted to get perspective on, Wim, on the communications end market. You illustrated between 2000 and 2005 that the quarters, what lack of growth there is. Do you think that at least we can count on those traditional markets growing at just barely 10% from here on out for the next several years? And on the defense business, if I just assume they all came from mainstream the last quarter am I approximately correct?

A - Willem Roelandts

Yes, David. First of all on the defense these are, you know, the defense designs take a long time. So the, most of the defense business came from mainstream or even in some cases from even older products than that because of the long design cycles that happened in defense and also their need for quality and stability. For the telecommunication industry, like you pointed out, our business over the last five years is declined quite dramatically in communications. We expect that is I believe is changing now. We’re seeing in the last several quarters a more stabilizing effect and even some growth happening. How much is going to be difficult to forecast but I think that 10% is a pretty good first guess at this time. It could be higher because what we’re seeing, you know, if you look back over the different components on the defense side, on the communications side, the wireline business was the worst hit because at some point there was all this new business there and now we’re seeing a growing set of investments in the area of video on demand, video servers, bigger, higher bandwidth, metropolitan area switches and things like that in preparation of higher broadband consumption thanks to fiber to the home. So I believe that we’re going to see growth in the traditional telecommunication, the wireline communications side. The wireless I think is being, has been doing stronger mainly because of the deployment in 3G or, and 2.5G for adding data to the existing GSM networks. And I think that that like I mentioned earlier will continue to grow over the years to come. Next question, please.

Operator

And there are no further questions at this time.

Lori Owen, Investor Relations

Okay. Thanks for joining us today. We have a playback of this call beginning at 5:00 PM Pacific Time, 8:00 PM Eastern Time today. The instant replay will run for 48 hours. For a copy of our earnings release please visit our Xilinx IR website.

Our business update for the March quarter will be posted after the market on March 6th. Our earnings release date for the March quarter of FY ‘06 will be Wednesday, April 26th after market close. This quarter Xilinx will be appearing at the Goldman Sachs and Morgan Stanley investment conferences. Thank you for your participation.

Operator

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

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Source: Xilinx, Inc. F3Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (XLNX)
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