Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Xilinx, Inc. (NASDAQ:XLNX)

Q3 2008 Earnings Call

January 17, 2008 5:00 pm ET

Executives

[Maria Quillard] – IR

Willem P. Roelandts - Chairman

Moshe Gavrielov - CEO

Jon A. Olson - CFO

Analysts

Glen Yeung - Citigroup

Uche Orji - UBS

James Schneider – Goldman Sachs

Christopher Danely – J.P. Morgan

Tim Luke – Lehman Brothers

Arnab Chanda – Deutsche Bank

[Mark Liposis] – Morgan Stanley

Sumit Dhanda – Banc of America Securities

[Danny Quo] – Bear Stearns

Sidney Ho – Merrill Lynch

Operator

Good afternoon. I would like to welcome everyone to the Xilinx third quarter fiscal year 2008 earnings release conference call. (Operator Instructions) I would now like to turn the call over to [Maria Quillard]. Thank you, Ms. [Quillard] you may begin your conference.

[Maria Quillard]

Thank you and good afternoon everyone. With me are Wim Roelandts, Chairman, Moche Gavrielov, CEO and Jon Olson, CFO. We will provide a financial and business of the December quarter and 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, we are discontinuing the practice of issuing scheduled mid quarter business updates. As a result no fourth quarter business update press releases will be issued during the March quarter. Let me remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents the company filed with the SEC including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important factors that could cause the actual results to differ material from those contained in our projections or forward-looking statements. This conference 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 Jon Olson.

Jon Olson

Thank you Maria. We executed on many fronts during the quarter. Revenues in fiscal Q3 were $475 million up 7% sequentially from the prior quarter and better than expected due primarily due to strength from defense and consumer applications. Gross margin of 63.3% was also above our guidance and the highest we’ve reported in over three years as we benefited from manufacturing efficiencies and continued yield improvement on 90-nm and 65-nm process technologies. Operating income of $115.3 million was up 22% sequentially and up 40% versus the same quarter of the prior year. As a result we achieved our operating margin target of 24% one quarter earlier than anticipated. Operating margin for the December quarter was 24.3% up from 21.2% in the prior quarter and up from 18.2% in the same quarter a year ago. Reaching a 24% operating margin has been our chief objective for the past year and is reflective of the progress we have made in reducing the cost of our products as well as disciplined expense management. This is the highest operating margin we have reported in nearly two years during which time we implemented stock option expensing.

Let me stress that we are not finished with focusing on operating efficiencies. I believe there is continued opportunity to drive shareholder value through improved operating efficiencies and this will remain a priority for the company. Operating expenses were higher than anticipated during the quarter due primarily to higher sales commissions, bonuses associated with higher revenue and profit levels and the adverse affect of foreign exchange putting pressure on our operating expenses.

Other income was $14.4 million higher than the $12 million we forecasted mainly due to higher interest income and a foreign currency hedging gain. Net income was 21.8% up from 20.2% in the prior quarter and up from 19.4% in the same quarter a year ago. Finally earnings per share were $0.35 a share up from $0.30 a share in the prior quarter. Free cash flow during the quarter was $197 million after $11 million in CapEx and we paid a dividend of $0.12 per share during the quarter. We increased our buy back during the quarter repurchasing 8.2 million shares for $200 million and we paid $34 million in dividends. During the calendar year we generated $482 million in free cash flow. Our dividend yield is currently 2.5% higher than the S&P average and among the highest in the technology sector.

Lastly the tax rate for the quarter was 20.1% lower than the forecasted 21% rate primarily due to a higher distribution of earnings in lower tax jurisdictions and a change in the R&D credit methodology. Let me now comment on the balance sheet.

The cash balance decreased $18 million during the quarter to $1.9 billion. Factoring in the $1 billion convertible, our net cash position is now approximately $900 million. Day sales outstanding decreased four days to 44 days. Combined inventory at Xilinx and distribution decreased by one day to 91 days with 69 days at Xilinx and 22 days at distribution. This is well within our target of 90-100 days and remains the lowest in nearly four years. Stability in inventory levels is indicative of balance in the overall supply chain. Quite simply our customers are taking the product when they need it. This is also reflective in our turns for the quarter which were 59% consistent with the levels we’ve seen for the past several quarters. I will now turn the call over to Wim to comment on our business and products.

Willem Roelandts

Thank you Jon and let me first give you my own comments on the December quarter. The December quarter was an outstanding quarter for Xilinx. We exceeded the top end of our revenue guidance and we are poised to capture [inaudible] market segment share this quarter. Once again our last OEM customers [inaudible] very well. The difference this quarter was that our smaller channel customers grew at nearly the same rate as our large OEMs. This was not the case in the prior two quarters. Our channel customer design and momentum is strong with significant wins for Virtex-5, [inaudible] a variety of end markets. Our large OEM customers are well diversified across all our various end markets and are not just communications driven companies. In fact, of our top 50 accounts only about a third are communications customers.

On the product front, our new product category grew an impressive 23% sequentially and now represents 35% of total revenues up from 26% in the prior year quarter. Virtex-5 revenues doubled as we had forecast and are now a meaningful number of just shy of 5% of total revenues. Virtex-4 and Spartan-3 both grew at healthy double-digit sequential rates. Total Virtex revenue increased to 55% of our overall revenues. Spartan revenues were at 25% of our total revenues while CPLDs fell to 9% of overall revenues.

From a geographic perspective all geographies, except Asia Pacific posted strong sequential growth. North American revenues were up 14% on the strength of defense orders. Europe grew 8% sequentially driven by strength in the industrial and consumer and automotive sectors. In Japan we saw improvement in communications and in particular wireless, after many quarters of softness. Asia Pacific took a breather this quarter after reaching a record 30% of total sales last quarter, it declined to 27% of total revenues primarily due to the lower communications revenues.

In terms of end markets, industrial and other grew to 33% of revenues driven by the strength of our defense business. After wired communications, defense is the second largest end market segment of 15% of total revenues. However even excluding our growth in defense, we still would have shown sequential revenue growth this quarter. Consumer and automotive [inaudible] stand out growing 9% quarter to quarter. The other [inaudible] surprise was data processing which was up 17% and ceased being a drag on our revenues. We were not expecting much from communications this quarter and as predicted, communications was down 2%. Wireless fell flat and wired communications was down.

Let me know turn to our recent announcement about my successor. On January 7 began a new chapter in Xilinx history. It is my real pleasure to introduce Moshe Gavrielov as the new CEO of Xilinx. He immediately takes on all CEO level responsibilities and decisions. We had many good candidates but in Moshe, we found an excellent match for the continued success of Xilinx. Doing his 30 year career, he has proven himself to be an effective, result driven leader who understands how to grow businesses by building strong teams and developing excellent relationships with customers. His experience in both the silicon and software side of the business has provided him with the necessary background to drive Xilinx forward. Lastly his collaborative team focus management style provides and excellent fit. Here is Moshe.

Moshe Gavrielov

Thank you Wim and good afternoon everyone. I just wanted to say a few words of introduction. First of all I want you all to know that I am absolutely delighted to have the opportunity to lead Xilinx. This is definitely my dream job, one that builds upon my 30 years of very relevant experience in the high complexity end of the [inaudible] world. Xilinx is a very sophisticated business. Consequently I have a lot of ground to cover in the near term and planning to spend the next few months in accelerated immersion meeting with as many customers, partners and employees as possible. I see many possibilities ahead of Xilinx given the programmable platform and our customers’ needs for complete solutions. One of my top priorities will be to accelerate growth but in parallel I am committed to improving operating efficiencies across the company and driving increased shareholder return. I absolutely have a very direct interest in enhancing the company’s performance and relish the opportunity to address this challenge. Undoubtedly there will be changes made to achieve these goals. With that in mind, I appreciate your patience as I fully formulate our strategy and vision for the company going forward. I very much look forward to working with all of you. With that, let me turn it back to Wim.

Willem Roelandts

Thank you Moshe. So let me now give the guidance for our December quarter. And our guidance for the December quarter is for sales to be up 3% to down 1% sequentially. We are being prudent with the guidance due to the macro economic conditions. We are expecting all geographies to be up sequentially with the exception of North America which we are expecting to decrease due to the decline in the defense sales which tend to be seasonally soft in the March quarter. From an end market perspective we are expecting consumer and automotive to increase given some specific visual TV design wins that will continue ramping into volume production during the March quarter, as well as strength from audio, video and broadcasting. Industrial and [inaudible] expect to be down driven by the defense seasonality that I have mentioned before. Communications continues to be the most challenging end market to forecast. We believe it will be up modestly in both wireless and wire line given the preliminary forecast data from our key end customers. After posting strong growth in December quarter, data processing expected to be down slightly due to seasonality. From a product standpoint we are expecting new product category to be healthy again this quarter with the strong ramp of our 90-nm and 65-nm products.

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

Jon Olson

Thank you Wim. Our gross margin is expected to be approximately 63% as it continues to benefit from improving yields on advance process [nodes]. Combined operating expenses including about $1.5 million of amortization are expected to be approximately $185 million. Other income including the impact of interest expense is expected to be approximately $10 million. This lower level is reflective of lower investment market rates and a modest impact from foreign exchange rate contracts. Share count is expected to be approximately at 286 million shares. And the tax rate is expected to be 20%. Let me now open the lines for questions.

Question-and-Answer Session

Operator

Your first question comes from Glen Yeung – Citigroup

Glen Yeung – Citigroup

Thanks very much, your commentary about being prudent with regard to macro looking into the March quarter when you broke it down by end market, it looked like you were actually looking largely for seasonality, I wonder if you could be specific about which of your end markets you think you’re being the most prudent and then maybe address any signs of macro weakness you may be seeing in your order book or anything else.

Willem Roelandts

Well Glen first of all the big part of our business except for the consumer of course is related to capital goods spending and so although the feedback from our customers is quite optimistic for the quarter, our experience shows that when the economy goes sideways or down, CEOs start delaying purchases and that’s what we are worried about. So we are a little bit in a difficult situation here because like I said the feedback from our customers is quite optimistic, we have polled them over and over again because of the economic uncertainty but it’s more our own caution that will hold us back a little bit. And if we see a weakness it will be in the capital goods area. In other words, in the major part of our businesses which is the communication space, the whole computing area and then industrial and others. Of course we know that defense is going to be weaker, December is always the strongest quarter for defense spending so we have already figured that in our numbers [inaudible] we are a little bit cautious because I think if the economy continues to deteriorate, CEOs will start delaying purchases of capital goods and that will impact our own business.

Operator

Your next question comes from Uche Orji – UBS

Uche Orji – UBS

Coming to your gross margin they were up handsomely this quarter and you’re guiding for 63% next quarter and traditionally March has been an up part of your gross margin so should we expect an upside to the March gross margin quarter, I mean going forward, is there a more upside in longer time as well?

Jon Olson

We forecasted 63% as a mid point of our range and obviously it could be a little higher and also could be a little lower and what’s happening to us here as we talked about the defense business being so strong in the fourth quarter typically that comes with margins that are higher than our business model and with that becoming softer, in our mind, the improved yields are more or less offsetting the mix issue that’s surrounding the fact that defense business comes with slightly higher margins.

Operator

Your next question comes from James Schneider - Goldman Sachs

James Schneider - Goldman Sachs

Hi thanks and welcome Moshe, just a question on the industrial market, if you were to exclude the defense business and you looked forward into the next quarter, are you seeing any kind of slowdown in that segment of the business because of the macro environment or not?

Willem Roelandts

Well the forecast that we receive from our customers is quite positive. If you look at the components of industrial and [inaudible] is really three segments. One is defense and aerospace, which like I said we will expect it to be down. The other component is industrial, scientific and medical and there in fact we expect, or the feedback from our customers is that will be up. And then the third one is tested measurement which we expect to be flat to slightly down and that’s where I think probably the biggest danger is for economic slowdown. Even if economic slowdown happens again this is capital equipment, these are things that people tend to postpone or delay if they are not confident in the economy.

Operator

Your next question comes from Christopher Danely - J.P. Morgan

Christopher Danely - J.P. Morgan

Hi good afternoon. I have a question about your long term outlook for growth in the semiconductor market. Can you comment based on the macro economic weakness do you see a substantial slowdown in the field [inaudible] space or do you expect it to be at the same levels as the last three or four years?

Willem Roelandts

Well there is multiple components to your question so let me just site a few one. First of all like I mentioned before a big chunk of our business, 85%, everything except consumer automotive is really capital goods related and like I mentioned before if there is an economic slowdown that will impact that business. If you look beyond the pure [inaudible] economic concerns that exist, I believe that the [inaudible] market will continue to expand at a faster rate than the overall semiconductor market and there are several reasons for that. I think that first of all in the communication space sooner or later will have to expand the internet infrastructure simply because you know with all the additional bandwidth that is being required from a video transmission for instance like with systems like YouTube, voice over IP, there is…studies have shown that the internet infrastructure is reaching capacity and so companies will have to expand that and that of course will benefit us because we are a major supplier to the communication infrastructure building wireless and wire line.

In the other areas and especially in the audio, video, broadcast but also military, industrial, electronics areas, the trend is quite positive for us over the longer term in a sense that more and more of these customers because of the cost of doing [inaudible] are using [inaudible] and the trend will continue. Our biggest opportunity for growth however is in the consumer space, consumer automotive which we are really a very small player and so we really have opportunity there to grow. You know we are seeing more and more design activities which for us means high volume I think for a consumer industry it’s probably more medium volume. What I mean by that is a million units or more per year per socket. But we see more and more activity of that every quarter and I believe that with programmables going to the next generation technology, the 45-nm technology, I think that we can get our average selling price lower and therefore expand our market opportunity in these high volume markets and I think that’s where the biggest growth opportunity for the PLD industries and for Xilinx specifically.

But for Xilinx, I think we are in a very strong product position, in the high end, with our Virtex-5 family. We virtually have no competition. Our competitors have barely a product out in that area. We have several families that are in volume production. We see tremendous amount of design activity going on and I think that we are gaining market share certainly in the high end. In the high volume side we are holding up very well. We have a broad portfolio of products that really are fit to specific applications and they also are doing well. And of course like I said with the newer generations coming in the more advanced technologies we will continue to expand the opportunities for Xilinx going forward. And I think both in the short term from Xilinx specifically and in the longer term I think we have great opportunities. The only kind of caution of course is the current economic conditions and that is once that is behind us I think we’ll do very well.

Operator

Your next question comes from Tim Luke - Lehman Brothers

Tim Luke - Lehman Brothers

I just wanted to see if you could speak a little bit more about the competitive positioning of Virtex-5 against [Stratex-3]?

Willem Roelandts

Sure, like I mentioned the Virtex-5 we introduced our first 65-nm products in May of 2006, so it’s a family that was first introduced almost 18 months ago. We have since then rolled out three sub families that are all in volume production now all doing very well. If you look at our competition, they just introduced their first product literally their first product, and they only have one product in 65-nm in the Stratex family on the market today. It’s an engineering sampling so that means that they have very limited production. Against that we have about I think 17 or 18 family members that are holding volume production. We are starting sampling our last sub family, the [Effex D] family and that will be announced somewhere early this year so I think we are in a [inaudible] position. Our competition’s product doesn’t have [inaudible] they don’t have processors, they don’t have all the other features we have and all the input that I receive both from our sales people but also from independent sources indicate that we are gaining at least 80% of all of the sockets in the high end of the market and that is a very, very strong position to be in. I don’t see any change in that happening over the next year, this calendar year as I think we’re basically are in a position that there is no competition for us for another six to 12 months. So that is the situation and that’s why our business in Virtex-5 is doing so well and now is really becoming a substantial part of our overall revenues.

Operator

Your next question comes from Arnab Chanda - Deutsche Bank

Arnab Chanda - Deutsche Bank

Thank you, congratulations Moshe. Question about your data processing business, it seemed like for the first time it actually came back into pretty strong growth, could you explain what is happening there, is it a regaining of share, are there some new [inaudible] ramping and is that, do you think that’s sustainable for the next 12 months or so?

Willem Roelandts

You know the data processing business is really a very a business that is [inaudible] accounting innovation so you know programmables are always very attractive when things keep changing or there is new innovation happening. I think that data processing is a much more mature business. It doesn’t mean that there are no opportunities but this quarter was more, like last quarter was weaker than we expected, this quarter is a little bit stronger than we expected so this is kind of where we believe the business will be over the next several quarters. We don’t expect that there is going to be a lot of design activities in that space. So I think the roughly 8%, now 6% to 8% of our business and I expect that it will stay around that level for the foreseeable future.

Operator

Your next question comes from [Mark Liposis] - Morgan Stanley

[Mark Liposis] - Morgan Stanley

Hi good afternoon, hey Moshe congratulations on the new position and look forward to working with you. The question I has was in regards to the consumer strength this past quarter, you know if you could provide a little bit more color into that as well as do you think it’s the same type of customer base that’s going to show strength in the current quarter as well? Thank you.

Willem Roelandts

Yes John indeed what is happening we have in fact during last year mainly since the beginning of 2007 we really have made a major effort to gain more business in the consumer space and I think what you are seeing now is the first successes it takes. You know the nice thing about consumer is that they from a design win to production typically is only six to nine months so that’s what you’re seeing here. We expect what we are happening what is happening more specifically several design wins in very large panel TVs area mainly in preparation for the summer Olympics in Beijing. So these are relatively expensive devices but the volume is very high I mean certainly for Xilinx standards and these are the areas where we have done very well multiple design wins and where traditionally September and December are the strong quarters for consumer electronics we are a little bit in a different pattern here and I think it’s driven by the summer Olympics where multiple of the consumer companies are preparing offerings for the winter Olympics and that’s where we are have won several design wins. So we expect that the strength in consumer will in fact last for several quarters and then of course after the Olympics we’ll go into the Christmas shopping season for 2008. So I think that you’ll see quite some good business in that area for the next three or four quarters.

Operator

Your next question comes from Sumit Dhanda - Banc of America Securities

Sumit Dhanda - Banc of America Securities

Could you guys maybe talk a little bit about the backlog heading into the March quarter and the change from the most recent quarter? And maybe if you saw any of the softness you’re worried about towards the end of the quarter. Thanks.

Willem Roelandts

Well Sumit December is always the soft quarter at the end because you know with the Christmas and New Year holidays so it’s difficult to compare the end of the December quarter with the end of the September let’s say. Our backlog is down just a little bit pretty much I would say insignificant very, very low single-digits and I think part of it is driven by the holiday seasons that people basically close their factories and don’t order so much and now they’re starting to ramp up again. So basically I think we are in a good position to see some growth this quarter if it was not for potential economic weakness in the industry.

Operator

Your next question comes from [Danny Quo] - Bear Stearns

[Danny Quo] - Bear Stearns

Can you comment on the networking market and whether the trends you’re seeing there if you’re expecting growth this quarter?

Willem Roelandts

Yes well the networking, in the networking space like I mentioned in my prepared remarks you know wireless was flattish, the wired count was down a little bit, overall the whole sector was down 2% which is kind of not that much but and we kind of expect it and the reason is typical end of the year weakness. You know network equipment is capital equipment. It’s really driven by budgets. Most of the companies that our customers sold to are on yearly cycles so typically people run out of budget by the end of the year and that is always a little bit of a weaker period for networking. We expect that to rebound because companies will get new budgets at the beginning of their fiscal year and then will start ordering equipment. In the longer term I’m very optimistic about networking after pretty much kind of a seven year flatness although declined first and then flattened as in that industry because I really believe that triple play is moving on and that network capacity is being used up, capacity that was put in place in 1999 and 2000 to an extreme is now being used up very rapidly and I think that most customers we talk to, these are the equipment companies who sell to the service providers of course and most of these customers are working on the much higher speed routers and networking gear because they see the demand from their customers. So I expect that in the longer term the telecommunication industry will see some growth in the next several years due to kind of an upgrade of the infrastructure in the internet. At the same time, in the wireless space a lot of changes are happening there and clearly again all of these are in our favor. There is, when people deployed the third generation wireless you know there was some question about why do you need data, is it are people going to use it, but clearly now data in wireless is becoming more and more used. Again for the same things you know watching movie clips, things like that, transmitting pictures whatever it is and so again that will increase the demand for wireless infrastructure and again that plays very strong in our favor because pretty much in the networking space most customers with a few exceptions are using programmables in the core of their design and we are the leading supplier to these customers.

Operator

Your next question comes from Sidney Ho - Merrill Lynch

Sidney Ho - Merrill Lynch

Thanks for taking my questions and welcome aboard Moshe. On the product front, I understand that Virtex-4 started shipping in early ’04 and Virtex-5 starting shipping in ’06, first what is the relative revenue size of the two product family last quarter then how does Virtex-5 ramp compared to Virtex-4 ramp during the same period and do you see end market exposure with different members of the product families change that [inaudible] materially and finally as for Virtex-4 is it premature to predict when revenue [inaudible]?

Willem Roelandts

Well you know our cycle is typically consists of two years of design win activity so the initial two years of a product you really sell engineering samples for so people can build their prototypes and it typically lasts for about two years that we see the production starting and that’s when we see the growth taking off. So Virtex-5 clearly still in this early stage of engineering samples and is much, much smaller than Virtex-4 at this time. Virtex-4 of course there we are in volume production. We still win some new designs in Virtex-4 but mainly the revenue we get now is for volume production business. Typically it takes about five to six years after introduction before we see a peaking in revenue so we still, Virtex-4 had very healthy growth this quarter, will continue to grow for at least several more years before it will reach the peak in volume which typically happens I’d say about five, six, sometimes seven years after a product was introduced so we are still, we still see big growth in Virtex-4 and of course these numbers are much, much bigger on the Virtex-5 numbers which really are just starting up with the business. The same thing for Virtex-5 if you compare Virtex-5 and Virtex-4 ramp up they were pretty much on the same level you know plus or minus a few percent so its pretty much the same pattern that we have seen. However, I believe that Virtex-5 because of additional capabilities over the longer term will be bigger than Virtex-4. You know during ramp up these ramp ups are typically similar because you’re talking about selling a few parts to literally hundred or thousands of customers who do their design so the, initially you don’t see much difference its really when the product gets in production that I think we’ll see a much bigger ramp for Virtex-5 than we have seen for Virtex-4.

Operator

Your next question is a follow-up from Uche Orji – UBS

Uche Orji - UBS

Just a question on your 45-nm strategy. Typically you have led your competition in [inaudible], do you plan to continue that with 45-nm as well and if you could provide any update on your 45-nm products?

Willem Roelandts

Well clearly our strategy is to be on the leading edge of technology. Whenever new theme of technology is available we will have a product ready for that and that is our strategy going forward. So we are not really changing our strategy in that matter so as soon as the 45-nm high performance process will be available we will within literally a couple of months we will tape out our products using that technology and that is what we plan to do for the 45-nm node. You have to realize that the foundries really have two processes; you know they have a 45-nm low power process which has been introduced to the market by most of the foundries. This 45-nm low power is mainly used by the cell phone maker, chips for cell phones and other portable devices. The high performance process typically comes out about six months or so after six to nine months after the low power process so we are expecting that to come out somewhere in the second half of this year and we expect to tape out our first products shortly thereafter. I cannot give you more details at this moment but as soon as we are ready with more information we’ll certainly make that public.

Operator

Your next question is a follow-up from Glen Yeung – Citigroup

Glen Yeung - Citigroup

Thanks, maybe for Jon, if you guys hit the mid point of your revenue guidance for the first quarter what do you anticipate inventories will do on a quarter by quarter basis?

Jon Olson

I don’t expect a great deal of change on inventory. We’ve been living pretty steadily here for the last few quarters in the 90 to 100 range. The supply chain is really stable for us right now. Even though there’s been ups and downs in terms of loadings of the fab even if it’s been pretty fully loaded or even over subscribed, we’ve been able to get the wafers that we require and the lay time in terms of a cycle time has not been very significant. So we haven’t had to buffer that with extra die bank. So we’ve been able to maintain that and we don’t anything in the next quarter anything that will make it any different than that so again there could be some timing of when wafers hit us that might drive us above 91 to 98 for example, but we’re still really confident we can stay in that level and I would expect on a dollar basis to be, net inventory dollar basis to be approximately flat with where we are today.

Operator

Your next question is a follow-up from Tim Luke - Lehman Brothers

Tim Luke - Lehman Brothers

Thanks a couple of quick things. First could you just sort of remind us again what the [inaudible] for the coming quarter and also if you could give us some sense of how the usual March linearity proceeds and how you’ve seen the general trend of business at the outset of this calendar first quarter and then with respect to the segments, I think you said that the com wireless business might be up a little sequentially, how do you see the networking and wire line side is that flattish or might we expect that to be seasonally up a little bit. And it looks like in consumer that it’s really the audio visual industrial business that’s up, is that what you’re expecting to be higher again in the calendar first quarter? Thank you.

Jon Olson

Well Tim you now hit the record for a single topic question, you got four in there so let me see, I hope you’re still able to be on the line in case I forgot something along the way. So let’s talk about turns for a second in our backlog position and in our trends. Okay so the turns, expectation of our turns are to be approximately flat with where we’ve been at the high end in the 50s. We’ve been around 59% pretty consistently for the last couple of quarters and again because the lead times are low the supply chain is good we don’t see a different pattern unfolding with respect to that. When talking a little bit about the linearity throughout the quarter, this quarter is relative to any other we’re in is more stable, there are more days, shipment days because of fewer holidays. There’s also typically an acceleration towards the March time period for turns business so it’s typically March is a stronger third month than many of the other of our quarters. And if you think back to what our pattern is in the December quarter, we went into the quarter with a lot of backlog relative to what we have had. We had a strong two months of turns and then a drop off in December. This quarter is typified more by a little slowness entering into it and then acceleration throughout the quarter. As we sit here today, as Wim said, we’re flat to a little bit down on a sequential trend. We still feel like we’re in pretty good shape. Wim is going to take the other comments on the segment.

Willem Roelandts

So let me talk about telecom and what we’re expecting. Our expectation is based on feedback from our customers so we did quite an extensive interview with our customers to see what their patterns are, what they see happening, how much for example are they going to order, and both the wire line and the wireless segment we are expecting slightly to be up this quarter slightly up. Of course again you have to put the overall economic situation on top of that so like I said if the economic situation were to deteriorate CEOs will delay purchasing but our current view is that both of these segments will be up for the quarter. In the consumer and automotive sector it really consists of three parts like you know, there is automotive, there is consumer and then there is audio video broadcast and we expect both the consumer and the audio video broadcast to be up this quarter. Audio video broadcast always has a strong quarter because again its capital equipment related, companies get new budgets, they buy more stuff. The consumer is [inaudible] non typical because like I said we won several design wins in the flat panel area, flat panel TV area in anticipation of the Olympic games in Beijing. And so this is a little bit different from normal seasonality that we expect consumer to be up this quarter based on design wins and the parts that we have to deliver in during this quarter to these consumer companies.

Operator

Your next question is a follow-up from [Mark Liposis] - Morgan Stanley

[Mark Liposis] - Morgan Stanley

Hi Jon, how should we think about stock buy backs going forward?

Jon Olson

I think throughout the year we’ve been relatively aggressive on stock buy backs starting with the convertible debt that we did that we ended up buying back a significant amount of the company at that point and we’ve demonstrated a kind of an increasing pattern here and that’s really been driven by the fact that we’ve improved our financial model quite a bit, the balance sheet, the P&L, we’re generating more cash, we’re following our overall plan to return cash to shareholders and keep our net cash balance within a range. So this last quarter we bought back $200 million worth and I’m not forecasting what we’re doing in the future but we certainly will continue to live with our current cash policy statement of returning cash to shareholders through dividend and buy backs.

Operator

Your next question is a follow-up from James Schneider - Goldman Sachs

James Schneider - Goldman Sachs

Hi Jon just real quick, on the gross margin upside could you perhaps quantify for us how much was mix and how much was operational?

Jon Olson

Actually that’s not an easy thing to do I mean if you just look segment out the pure industrial, excuse me the defense part of things I think we’re talking about a few tenths of impact so its definitely even less than half a point for sure. And that’s why we think every quarter has yields depending on the mix and the growth of new products which is really where the largest impact of yields improvement is in terms of change, in terms of the percentages that’s why through our models it appears that that’s the kind of number we pick up each quarter and then it depends on whether more older products are sold or new products have [inaudible] and those are kind of the dynamics on a quarter to quarter basis. So again we’re talking about maybe a few tenths of impact because of mix to the aerospace and defense side this quarter.

Operator

Your next question is a follow-up from Christopher Danely - J.P. Morgan

Christopher Danely - J.P. Morgan

In your prepared remarks you talked about continuing to focus on improving your operational efficiency, do you have any specific operating margin target going forward that you can share with us?

Jon Olson

Sure, our operating margin target is to operate between 24% and 26% of revenue. We’ve had that target for some time and we’ve operating below it for the last couple of years so in our analyst meeting last March we talked about a concerted effort around efficiencies in OpEx and product costs and other areas of cost of sales in order to improve that in whatever revenue environment we’ve had, we would have this year. And we had a pretty flat revenue environment up until this last quarter. We’ve continued to improve our cost profile across the board throughout this time period and we got to our 24% target a quarter earlier than we had planned and we had talked about last year in the analyst meeting. Our current posture going forward is to continue to manage the business and be above 24% and be within our model of 24% to 26%.

Operator

Your next question is a follow-up from [Danny Quo] - Bear Stearns

[Danny Quo] - Bear Stearns

Can you comment on the trends in your [inaudible] products, it looks like that business has been [inaudible] in the last six quarters? Do you think that business will come back or do we see a stabilization soon?

Willem Roelandts

You know that part of our business is really driven by the sales of our end customers. These are products that are in production that tend to be in some cases five, six years old so they’re starting to mature and so this is a category that depends very much on the economic activity and pretty much in the last year this has been a flattish to slightly down business. I think my forecast for next quarter will be very much of the same, flat to slightly down. If the economy improves I think then you’ll see some growth in this activity and that’s typically what happens.

Operator

Your next question is a follow-up from Uche Orji – UBS

Uche Orji - UBS

In your prepared remarks you said that there was some recovery in Japan, some [inaudible], I was just wondering if you could provide some color on that and also do you think it is likely to continue in near term?

Willem Roelandts

Sure, the situation in Japan, we are very strong supplier to the communications industry in Japan, and you’re probably aware that the Japanese, the NDT industry in Japan has been delaying deploying of new equipment for a couple of quarters. All the input that I have received is that they finally are starting to deploy new equipment both in the wire line and the wireless side, but especially in the wireless side they have been delaying, and so that’s why we see the recovery in Japan. On top of that of course are [inaudible] the consumer space also helped because a lot of the consumer companies are in Japan but we are dealing with, and so both the consumer and the communication, improvement in communication has really helped our business in Japan. And I believe that this will continue to go forward in both areas. I think that NDT and [inaudible] having delayed the deployment of new equipment are now starting to deploy it and so that will continue to benefit us in the communication space and on the other side, like I said, a lot of the high end consumer products are being developed in Japan and that’s where we have done very well and so these people are gearing up for the summer Olympic in Beijing and so we expect that our business in Japan will continue to grow over the next several quarters.

Operator

Your next question is from Glen Yeung – Citigroup

Glen Yeung – Citigroup

Wim, just in that same vain, any thoughts on China and how business looks in that part of the world, particularly in China mobile and if you see any [inaudible] coming there?

Willem Roelandts

Absolutely, you know it’s kind of one of these areas that we believe could potentially grow. You know the situation in China is that the Chinese government has delayed the deployment of 3G because they were developing their own standard called TDSCDMA. We have been very extensively used in TDSCDMA base stations and now their TSDCDMA standard is kind of stable, we’ll see quite some deployment and of course they want to be ready also for the Olympic games so there again I believe that the telecom business in China will continue to do better than the rest of the world for these circumstances and we are in a good position to take advantage of that.

Operator

There are no further questions in queue and I would like to hand the conference back over to Ms. [Quillard] for any closing remarks.

[Maria Quillard]

Thank you everyone for participating today. We have a playback of this call beginning at 5:00 Pacific, 8:00 Eastern. For a copy of our earnings release please visit our IR website. To reiterate, we will not be issuing a mid quarter business update for the March quarter. Our next earnings release date for the fourth quarter of FY08 will be Wednesday, April 23rd after the market close. This quarter we will be participating in the Goldman Sachs Technology Conference in Las Vegas on February 28th. This completes our call, thank you very much for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Xilinx F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
This Transcript
All Transcripts