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Executives

Scott Wylie - Vice President of Investor Relations

Ronald J. Pasek - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

John P. Daane - Chairman, Chief Executive Officer and President

Analysts

Ambrish Srivastava - BMO Capital Markets U.S.

James Schneider - Goldman Sachs Group Inc., Research Division

David Wu

Adeline Lee

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Aashish Rao - BofA Merrill Lynch, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Ryan Goodman - CLSA Asia-Pacific Markets, Research Division

Deepon Nag - Macquarie Research

Shawn R. Webster - Macquarie Research

Steven Eliscu - UBS Investment Bank, Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Jason Jones - ISI Group Inc., Research Division

Christopher J. Muse - Barclays Capital, Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Altera (ALTR) Q2 2012 Earnings Call July 24, 2012 4:45 PM ET

Operator

Good day, everyone, and welcome to the Altera Second Quarter 2012 Earnings Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Scott Wylie, Vice President, Investor Relations. Please go ahead.

Scott Wylie

Good afternoon. Thank you for joining this conference call which will be available for replay telephonically and on Altera's website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Altera's Investor Relations webpage where you will find complete instructions. The telephone replay will be available at area code (719) 457-0820 and use code 258712.

During today's prepared remarks, we'll be making some forward-looking statements. In addition, management may make additional forward-looking statements in response to questions. In light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ from the statements made. For additional information, please refer to the company's Securities Exchange Commission filings, which are posted on our website or available from the company without charge.

With me today are John Daane, our CEO; and Ron Pasek, Chief Financial Officer. Ron will open the call with a few brief remarks before turning the call over to John. After John concludes his remarks, we will take your questions. Prior to the Q&A session, the operator will be giving instructions on how you can access the conference call with your questions.

I would now like to turn the call over to Ron.

Ronald J. Pasek

Thank you, Scott. In Q2, we returned to sequential quarterly growth following 3 quarters of customer inventory drawdown. There are a few observations I'd like to make in addition to the many pieces of good news embedded in this quarter's results. Both 28- and 40-nanometer did extremely well. On the back of the 166% 28-nanometer sequential growth, we now have cumulative revenue of $16.6 million at the 28-nanometer node. This result establishes Altera as the 28-nanometer market share leader. We see 28-nanometer revenue growing to over $20 million in Q3 '12.

40-nanometer also performed extremely well, increasing 42% sequentially. The 40-nanometer node at 28% of revenue was the single largest revenue node in Q2.

As anticipated, our lead time shortened in the quarter. As often happens when customer orders don't need to cover longer lead times, book-to-bill dropped slightly below 1 for the quarter. Having said this, we are off to a very strong start this quarter, and therefore don't think the book-to-bill ratio carries a great deal of meaning.

SG&A for the quarter was $72 million and the guidance for Q3 is $72 million to $74 million. We are reducing our previous full year SG&A guidance from $293 million to $288 million mainly as a result of a reduction in variable compensation.

With respect to income taxes, during the quarter, we recognized a net tax benefit of $24.4 million relating to the release of federal tax liabilities and interest. This amount relates primarily to the close of federal statutes for 2002 and 2003, and as a discrete benefit in the quarter.

Moving to the balance sheet. Accounts receivable increased, as there were significant shipments to distributors in the final weeks of the quarter. Given this timing, these shipments were not yet due to be collected when we completed the quarter, which is why our AR aging is unchanged from prior quarters. If the size of the increase is surprising to you, remember that our distributors purchase product at list price, which amplifies the AR swing. In addition, we had several -- we had a large sequential revenue increase which exacerbates the list price dynamic.

Inventory for the quarter ended at 3.7 months supply on hand, and the guidance for Q3 is approximately 4 months supply on hand. As you will recall, we intentionally increased inventory in Q2 in order to secure 40-nanometer supply and to support the 28-nanometer product ramp. At this point, we do not see a need to have inventory of higher than 4 months supply on hand.

Next, you can see we have completed a substantial share repurchase in the quarter, 3.5 million shares. In addition, since the end of Q2, we have repurchased an additional 1.6 million shares. We continue to view share repurchase opportunistically. And as much as we would wish for a higher share price, we are very happy to take advantage of this great opportunity.

Additionally, our Board of Directors has approved a 10 million increase to the number of shares authorized for repurchase, which brings our new authorization to 14.6 million shares.

We have increased the quarterly dividend by $0.25 or $0.02 per share. This is the third year in a row we have increased the dividend, and it has now doubled in just over 2 years. As we have consistently demonstrated, we will continue to increase the dividend over time.

Finally, beginning with the first quarter of 2013, we will discontinue the practice of giving a mid-quarter update. Over time, scheduled mid-quarter updates have become less and less the norm in our industry. So we'll give a mid-quarter update in Q3 and Q4 2012, but not beyond this fiscal year.

Now, let me turn the call over to John.

John P. Daane

Thank you, Ron. Second quarter revenue increased sharply over Q1, as inventory destocking programs ended and customers across a broad spectrum of end markets return to their normal purchase levels. Nine of our 11 submarkets grew in the quarter. As expected, telecom, wireless, networking, and computer storage each had double-digit sequential growth. Industrial growth was just under 10%, with Europe slightly softer than expected.

For our third quarter, we are forecasting a 2% to 6% sequential increase in revenue, which we believe is prudently conservative in this macro environment. Four specific items are worth highlighting on how this is conservative. First, our forecast is below distribution and customer backlog and forecast. Second, we have not seen an increase in cancellations or pushouts. Third, the terms rate for the quarter is in the mid-30s percent below last quarter's level. And finally, sales quarter-to-date are running ahead of the linear run rate to the midpoint of guidance.

We are seeing great success for our products in the 28-nanometer node. The Altera opportunity pipe for 28-nanometer is larger than any prior node, as we continue to open larger sections of the ASIC and ASSP markets for PLD displacement, and we are continuing to win a majority of the designs.

Revenue in Q2 was $8.2 million, and over $16 million cumulative lifetime. Unfortunately, we were capacity-constrained in the quarter.

The 2 largest PLD companies have very different 28-nanometer revenue profiles. Our competitor has a majority of their revenue from prototyping programs that deliver early revenue that does not repeat. From our experience in 40-nanometer, the prototyping market has an annual size of about $75 million. Altera's $28 million revenue is from production designs which fuel our $5 billion-a-year industry. Additionally, almost all of our revenue is from the high end, which both companies agree is 50% or more of the total market.

Our competitor has very little. Since we are winning a vast majority of the high end and doing very well of the midrange and low end, we see strong correlation between our data, which shows we are closing a majority of the 28-nanometer designs and the announced revenue profile of the 2 companies.

We expect 28-nanometer revenue to exceed $20 million in the third quarter and for 40-nanometer to grow again, sequentially.

Now let me turn the call back to Scott.

Scott Wylie

We would now like to take questions. Please limit your questions to one at a time, so that we can give as many callers as possible the opportunity to ask questions during the call. Operator, would you please provide instructions and poll for questions?

Question-and-Answer Session

Operator

[Operator Instructions] We will go to our first question from Ambrish Srivastava with BMO Capital Markets.

Ambrish Srivastava - BMO Capital Markets U.S.

Guys, 2 questions. One for you, John. Can you just give us a little more granularity in terms of the guidance, kind of what's working and what's not working in the subsegments and comp, particularly? And then a quick follow-up for you, Ron. Nice job on returning cash back, but your payout ratios, if I remember correctly, less than half of your main rivals. So kind of help us understand if you put it all together, priorities for cash and you guys have a ton of ability to generate cash.

John P. Daane

So Ambrish, this is John. We are forecasting for this quarter for communications to grow both Telecom and Wireless, probably slightly sequentially; for industrial to be up -- excuse me, industrial slightly up, the military and automotive, up sequentially in the quarter. Again, all this stuff is in the press release. And for the computer networking storage business to both be down. And then in the Other category, which is sort of a catchall for the other markets for that general category to be up. Within the communications market, we have seen overall an improvement within the environment. There have been several carriers that did increase their spending in the second calendar quarter on CapEx, which did flow through. We've got for instance Telecom has been strong in China. We've seen an improvement in wireless in North America, as well as our wireless in Japan. And so, we're not expecting that there's going to be a huge uptick in our forecast from this. But we are expecting going from the second to third calendar quarters that our communications business will be up slightly, both in Wireless as well as Telecom.

Ronald J. Pasek

So Ambrish, with regard to your question to returning cash to shareholders. So we use a combination of dividends and buybacks. We did over $200 million in buybacks last summer, and about $170 million so far this year, to date. And as I indicated, we have doubled the dividends in the last 2 years. Keep in mind that only about 35% of the companies in semiconductor pay a dividend, so we're certainly in the right category there. And I think you'll see that over time, we will continue to increase the dividend.

Operator

And we'll go to our next question from James Schneider from Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

John, I was wondering if we could start off. In the communications market, you gave some color there by geography, which is appreciated. But some of your rivals and also some of your other peers in the analog space, for example, have talked about some customers reducing inventory over the next couple of quarters in the communications space. So can you maybe square that observation from others with what you're seeing? Is it just a customer-specific thing? And maybe talk about what you think your customer inventory levels look like in the comp space, in particular.

John P. Daane

So we're coming out of a period of inventory destocking, and so we think that inventory is extremely low on Altera product and really don't see any customers that this quarter are going through an inventory depletion phase. I can't comment on why others may be seeing that. But ultimately, we've already gone through that ending in really the first calendar quarter and through the second calendar quarter. So we see inventory being very, very low in the customer base. Again, we're not seeing any pushouts or cancellations at this point. We're still seeing good bookings and strong forecast in backlog for communications in a number of the other markets as well.

James Schneider - Goldman Sachs Group Inc., Research Division

That's helpful. And then as a follow-up, on the military market, that's an area that's kind of lagged for some time now. I was wondering if you see any programs on the horizon that would give you confidence that, that can start to pick up again as we get into the end of the year? Or do you think with all the budget issues going on, we're going to see continued weakness in that space for some time?

John P. Daane

Actually, if you think of the way that most governments work, they do an annual budget and then they procure to that budget. So we haven't seen the discussion of changes in future years' budgets having an impact yet from that perspective. I think ultimately, the 2 biggest opportunities that we see in communications are probably the 3 include radar, electronic warfare and secured communications. I think there are several countries that are going to go through a radar upgrade, both for a commercial as well as military reasons. And so I think that will continue to be a good market. And I think for secured communications, just because of all of the cyber espionage that's going on, we do expect that military will be up for us sequentially in the third calendar quarter.

Operator

Our next question is from Mr. David Wu with Innova Global Research.

David Wu

I've got 2 quick questions. Number one, you said something about TSMC's 28-nanometer availability was limited in the June quarter. I guess that I was wondering whether there's going to be any more bottlenecks in Q3. And particularly, in the view of the fact that they're forecasting for them a decline in Q4 results and increasing in supply of 28-nanometer capacity, that's the first question. And the other one I want to follow-up on, a number of companies have seen the month of June order pause for delivery later in the quarter for Q3. Apparently, June is an okay month for you. How linear were orders during the second quarter for you?

John P. Daane

So to take the first part, David, on 28-nanometer capacity, we were constrained in the second calendar quarter. We had more orders than we could ship. We are getting a significant amount of product in this quarter, which is why we expect our revenues to grow from $8 million-plus to over $20 million this quarter. And hopefully, we will continue to be able to work with our partner to make sure that we can get adequate capacity going forward. One of the benefits that we have that is unique to Altera is within TSMC, there are 2 fabs that are running 28-nanometer, Fab 12 and Fab 15. Because we are on mainstream process technologies with TSMC, we are the only PLD company that has qualified, production qualified at Fab 15. Fab 15 is expected to produce over 70% of the 28-nanometer output by the end of the year. So because we're a production qualified with that Fab, and by the way, also production qualified with our customers, which is important. So we don't have to go through re-qual [requalification], we believe that we're going to have better access to capacity than perhaps our competitor going forward. And again, simply because the first processes that were qualified at Fab 15 were the LP and HP processes, which are the 2 processes that we're on. I would expect probably for the remainder of this year, we'll still be the only company qualified at Fab 15. So I think that is a benefit to us.

Ronald J. Pasek

So as far as orders for June, I think the order rates for the quarter was pretty linear. We're pretty transparent about the fact that we're going to be a little backend-loaded shipments, which we were, which is to some extent what caused the ballooning of AR. But other than that, I mean, the order rate was very consistent throughout the quarter.

John P. Daane

And then this quarter, as we mentioned, earlier we are running ahead of the midpoint of guidance.

Operator

Our next question comes from Glen Yeung with Citi.

Adeline Lee

This is Adeline Lee calling in for Glenn. Just a quick question on your market share, where do you see that going?

John P. Daane

Well, our market share overall in FPGAs against our major competitor is only about 45%. So in reality anything over 50% continues to drive market share gains for us. I think within 40%, we're probably close to around 60% right now. We think within 28-nanometer, as it plays out, we'll be at least in the same range, roughly at 2/3 of the marketplace. And so we would expect to take market share for many years to come. I think this year was a minor discursion from that. I think the discursion, as we had talked about a couple of quarters ago, was really caused by a price increase in an obsolescence program that our competitors ran on some older products has the temporary benefit for those companies of pulling in a lot of future revenue into a short period of time. As that program unwinds, one would expect just simply on the math, that Altera will continue to gain market share for years to come.

Adeline Lee

Thank you. And a quick follow-up, how confident are you in Chinese spending, carrier-wise?

John P. Daane

I think as with any of our markets, we're taking it one quarter at a time. And we'll just have to see how it goes. Again, as I mentioned, we have seen some strength over the last quarter, particularly in the telecommunications side within the China deployments. But again we'll have to see how the rest of the year plays out. Because again, with any market, there are changes that do happen and can happen. So for this quarter overall, across the globe, we expect our communications business, particularly Telecom and wireless to be up slightly sequentially. Thank you very much, Adeline.

Operator

[Operator Instructions] Our next question comes from Christopher Danely with JP Morgan.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Can you just kind of give us a rundown or a timeline on what the lead times have done over the last 3 or 4 months at 28, 40 and 65, and maybe when they started to come in and where they are now versus where you'd like to see them and when do you expect them to get back to normal?

John P. Daane

So for the most part, our products returned to normal lead time probably about 5 weeks ago. I would say early to mid-June. There are always in any quarter, a couple of specific die package combinations which will have longer lead times. But if you look at it, almost everything that we have was really returned to its normalcy at that period of time. We're delinquent on 28-nanometer, we're getting more product and we'll see how the quarter works. But hopefully, we'll start getting caught up with that delinquency towards the tail end of this quarter. But again, the strength there has been very strong, so we might just be chasing something here and we'll just have to keep working on it.

Ronald J. Pasek

So Chris, for 40 and 65, we're essentially at standard lead times. But remember, we started Q1 at normal lead times, particularly over 40, and then through the quarter, lead times essentially doubled. In Q2, we really recovered in 40, which is why it became the strongest node for us in the quarter from a revenue standpoint.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Great. And as my follow-up, hopefully now that things are back to normal, what should we be thinking of as a typical Q4 in terms of sequential growth?

John P. Daane

It's a great question, Chris. It's 2 things I'd probably give you. As we look back at history, it's hard to find any seasonal pattern for any quarter because there's so much aberration. We supply into so many different markets, and we've seen different trends in each through the years that is hard to come up with any figure that's fairly accurate in terms of a directional call or a percentage call. The second thing I'd tell you is, as many companies are saying visibility is probably lower, based on those companies' comments, we will sort of take a cautious outlook and just stay with our one-quarter forecast. Thank you, Chris.

Operator

Our next question comes from Vivek Arya from Bank of America Merrill Lynch.

Aashish Rao - BofA Merrill Lynch, Research Division

This is Aashish Rao in place of Vivek. A couple of questions on cost, one on R&D spending for John, and one on SG&A for Ron. In your fixed R&D costs, they have increased on 28-nanometers. I mean you have 3 existing PLD families. You've added a fourth embedded line. 20-nanometer is going to cost you even more. I'm curious regarding what some of the strategies you're exploring to control cost on 20-nanometers? And could you explore something like shrinking from set 3 families to 2?

John P. Daane

So we have not announced our 20-nanometer product lineup or product strategy and has been our normal practice for a dozen years now, until we put out a press release, we just don't feel comfortable talking about it in these conference calls. So you'll have to wait and see. I do think, if you look at what's happened over many, many years is, as I point out the cost to implement a design goes up with each node. That is actually a huge benefit for the PLD industry, because what happens is ASICs and ASSPs become more and more expensive to implement. They can't stay in older process technologies because they can't implement the features. They won't have the performance or power required. Or in many cases, will not have the ongoing cost reduction capability. So as we're able to move forward with new process nodes and the competing industries' ASICs and ASSPs stay behind, we're able to open up more of those markets for a replacement and continue to meet our goal, which is to grow at least twice as fast as the semiconductor industry on average. So I can't disclose what our plans are, I do think we've got a really good product lineup that we're working on very aggressively right now. But I do think the overall cost issue is going to significantly benefit the programmable logic industry as it has over these last many years.

Aashish Rao - BofA Merrill Lynch, Research Division

Okay, cool. And then a second one on small cells, the microcells and picocells and then TI talked about how they expect that to be a growth driver with the U.S. deployments later this year. The unit opportunity with these small cells is obviously significantly higher versus macrocells. And several competitors like Broadcom, Qualcomm and TI all seem to have like custom SoCs and ASICs. And some of them are suggesting that their chips could begin to displace PLDs and these small cells. Could you walk us through the puts and takes of the shift and how it could impact your wireless growth prospects?

John P. Daane

Yes. I think what's kind of fascinating about this whole discussion is, I think, no one actually went and spent any time with any other carriers to really understand what's going to happen. We've actually spent time with Verizon, AT&T, DOCOMO, China Mobile, as well as Vodafone to understand what the long-term trends are. What comes back is the following. First of all, if small cells do get deployed, they will not displace the macro base stations. In other words, what the carriers are going to do is put a broad macro overlay first for LTE, and then if they get hotspots to look at dealing with those in a number of different ways. Ultimately, the PLD content has been in the radios and macro base stations. And ultimately, since neither of those numbers is going to get affected, small cell potential deployment does not impact us in any way going forward. Number 2, what the operators have found is if you just deploy more small cells in an area where you have congestion, it actually -- they create interference with one another and they degrade the performance of your network, they don't improve it. So what would be required going forward is a new type of architecture to be developed for small cells, which has been called, for instance, heterogeneous networks, where the small cells communicate and coordinate, of which none of the existing products are capable of doing and therefore, they're not really going to be deployed. So I think it's going to be many years before we see that deployment. And there are a couple other things that could impact it. Number one, several of the carriers are planning to recover existing spectrum from 2G and that will give them more capacity for LTE long term, which means they may not need to deploy small cells. Number two, Wi-Fi is still very interesting for a lot of the carriers, because it's an ability for them to offload some of the data. Some of the carriers have actually invested a lot in WiFi hotspots in your local city. And so what is being developed and contemplated is roaming WiFi, so that you can use these hotspots that exist in restaurants and coffee shops in cities in order to offload the spectrum. So I don't see anything happening this year, in small cells of anything meaningful. I think it will take quite a few years because the technology needs to be developed. If it does, it's not really an area for which we're in. But even if it does, it doesn't take away from our existing business, because it doesn't change the overall deployment schedule or quantity of macros or the radios.

Ronald J. Pasek

Aashish, did you have an SG&A question?

Aashish Rao - BofA Merrill Lynch, Research Division

Yes, I did. But if I could sneak one in, just wondering -- I mean, you've noted that you were lowering your SG&A spending outlook. But just wondering, if you could also just help put in context why SG&A spending has outpaced sales growth last year and it's probably going to do so again this year?

Ronald J. Pasek

Yes, I think you have to take a broader view. SG&A as a part of OpEx has grown over the last 3 years much, much less than revenue. Whereas the last 2 years, R&D has grown quite a bit more than revenue. So I think it's the perspective you take.

John P. Daane

Our goal is to get SG&A spending down as a percentage of revenue, down to about 11% or 12% of our overall revenue. And we believe with revenue growth and continuing work that we're doing. I think we'll be able to achieve that over time. Thank you very much.

Operator

Our next question is from Ian Ing with Lazard Capital Markets.

Ian Ing - Lazard Capital Markets LLC, Research Division

Could you help me parse the statement that you've secured a majority of the 28-nanometer design win value? Does that differ from previous statements on percentage of ratio design wins?

John P. Daane

No, it's a -- oh, I'm sorry. Go ahead, please.

Ian Ing - Lazard Capital Markets LLC, Research Division

The overall length of product cycles, as you get 28-nanometer sockets, is that changing at all?

John P. Daane

We're still -- if we look at 28-nanometer, and again we do it based on value, because if you just look at the numbers of sockets, you can win a lot of sockets but none of which really matter in terms of revenue. So for many, many years, we focused on what is the value. And really, focus on winning the things that are going to go to production, which is part of the reason we've been able to take market share. If we look at the market, when we add in ASICs, ASSPs, microprocessors, FPGAs, we're winning a majority of the designs of 28-nanometer, a majority of the opportunities that we see over 2/3. While we measure it just against Xilinx, we're winning far more than 2/3 of the business. So we did say a majority in the press release, but in reality we're still winning at least 2/3 of the overall opportunities.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. And then my second question, looking at the LP process at TSMC, do you expect to be constrained there as Arria and Cyclone ramp? And then looking a little further, does -- do you think a truly fabless model remains intact at leading nodes? I mean, we've got headlines on big companies making more commitments to secure some upstream assets, whether it's test equipment or writing big checks from Intel and Qualcomm, et cetera?

John P. Daane

So, I would say, if I look at LP process technology or for that matter, HP, I think as we get later into the year and perhaps into next year, I would expect the capacity to be in place, such that we'll be okay. So I'm not anticipating that's are going to be -- there may be issues but I don't think that they'll be significant in our ramp for 28-nanometer. In terms of overall capacity at this point, we don't see a need to invest either in our substrates, our package assembly or our foundries. They have not asked for that. I think in all cases, their business -- with their business models, they are profitable. We do own our own testers and even with that, our capital expenditures as you see with our balance sheet, have been very, very low for many years. So we don't see a change in terms of, I guess, our overall capital outlay going forward. Thank you.

Operator

Our next question is from Hans Mosesmann with Raymond James.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

John, if you could provide perhaps some thoughts regarding 28- and 40-nanometer yields and performance relative to expectations, the HP, the LP. There is some commentary out there before that maybe the LP was not as high performance. What are the issues and challenges, if any, that you are seeing as you go into 28?

John P. Daane

So LP is not a high-performance process. It's meant to be a lower-cost wafer, low-power family, which works perfect for Cyclone as an example where people are focused on cost and power. It's the last of the silicon -- or silicon oxynitride process technologies. Or to put it in another way, it doesn't have high-K. Since it doesn't have high-K, the wafer cost is cheaper. It's ramped very strongly. I think it's probably the highest volume node in our foundry and is doing quite well, I think, in the industry at this point. HP is the other process technology we're on. It has both high-K and a silicon germanium stress layer. It's optimized for performance, but performance with reasonable power. And that's what we do with Stratix, where we need the highest performance and that's done as very well to capture nearly all of the high-end of the overall marketplace. In terms of yields, yields in 28-nanometer are ahead, 40-nanometer at this point in time for a similar node, and it's doing okay. So I don't see any significant issues right now. Thank you, Hans.

Operator

Our next question is from Srini Pajjuri with CLSA.

Ryan Goodman - CLSA Asia-Pacific Markets, Research Division

This is Ryan for Srini. I just wanted to know if you could talk a little bit more about the strength you're seeing in wireless, maybe in terms of how much of the strength is coming from 3G versus early strength in LTE. And if you could talk about the different geographies, what you're seeing there in this market as well.

John P. Daane

So the strength that we're seeing in wireless is predominantly from 3G and 4G, or as you put it, LTE. So we did see 2G drop off probably about 2 quarters ago, and that's where we've seen the overall strength in wireless. And I think if you'd look at some of the carrier announcements, AT&T for instance, had a pretty significant increase in sequential CapEx spend. And again, still 60% of their spend is focused on wireless. So I think it kind of correlates with what you're seeing from some of the carriers.

Ryan Goodman - CLSA Asia-Pacific Markets, Research Division

Okay. And then for a follow-on, a while ago you had mentioned some risk maybe of reallocation at the suppliers from 40-nanometer to 28-nanometer, just a possibility of that to deal with some of the constraints. Has that played out at all? Have you seen any of that, or do you still view that as a risk going forward?

John P. Daane

So what we're seeing now, and this has, I think, it has been announced by TSMC is we're seeing that open up and more capacity be available. And so we do not at this time see that, as we get into Q4, that 40-nanometer is going to continue to be a constraint for us or for anybody else. So I think that node is starting to open up now. Thank you very much.

Operator

Our next question is from Shawn Webster with Macquarie.

Deepon Nag - Macquarie Research

This is Deepon for Shawn. I have a question on the inventory build. Could you talk about what constitutes that? Is that mostly 40-nanometer products? And as you expect to build on the next quarter, is that also predominantly 40-nanometer products? And if you're not capacity-constrained, could you kind of just go over why you're thinking that you'd build more inventory?

Ronald J. Pasek

Yes, so this is Ron. We started this last quarter when we were seeing extension of lead times, particularly around 40. And when we looked at our inventory over the last year, we were running in the low end of our range, which we typically say is 3 to 4 months supply in hand. And as you saw in Q1, we had some issues with product mix. In that there were a number of factors in them, including late orders in the quarter. But the other factor was that inventory levels in absolute dollars were pretty low. So in addition to going and securing 40-nanometer supply, which is most of the increase, we did take a slightly higher amount of 65 and 90 as well.

John P. Daane

I think the other thing to remember is our forecast that we provided is below that of our customers and our distributors. And so if they end up really needing the product, in other words if our forecast is too conservative, we need to have a little bit more inventory in place. So the reason that the inventory dollars and as the month supply in hand are growing in the quarter is because we're being at this point conservative with our forecast.

Shawn R. Webster - Macquarie Research

Great. Okay, and if I could sneak 2 quick ones. And so the first, if you could talk about the network storage computing business being down in what is usually seasonally a strong quarter? And if you could give us your actual turns as well for the quarter, that would be great.

John P. Daane

So our actual turns for last quarter were in the high 30s. Turns expected for this quarter are in the mid-30s. So that's why we said that turns are actually lower for the quarter. Computer [ph], there's nothing really going on specifically, just a couple of customers that bought last quarter that don't buy on a quarterly basis. Sometimes, they buy on a half-year basis. So it's going away. I think overall, if you look at our business, computer and storage is a great story. It's actually a market, which is up very significantly year-on-year. And we continue to expect that we're going to have good strong growth prospects, both in the storage side as well within the server side. So nothing that I'd read into it, as much as it is just program timing. Thank you, Shawn.

Operator

Our next question is from Uche Orji with UBS.

Steven Eliscu - UBS Investment Bank, Research Division

This is Steve Eliscu for Uche. Our first question is around the industrial markets. We've seen a peak-to-trough decline that's fairly similar to what we've seen in communications. Yet we've yet to see a real significant recovery. Has there been anything that's structurally changed in that business? And can you give us a sense of how we should think about the recovery of the industrial -- of your industrial business?

John P. Daane

We think that industrial is actually going to continue to be one of our strongest growth potential areas for the corporation going forward. We are seeing a lot of traction for our products, both with the SoC, where we've won a number of major sockets as well as with our MAX series and our Cyclone series. And we expect that we're going to see those flow into production over the next several years to continue to build that business base up. We do expect -- industrial had, again, fairly strong growth, really driven out of Asia and Japan last quarter. We do expect that it's going to grow again this quarter, sequentially. So I think while it's still down year-over-year, it is showing signs of continuing to grow. And again, we still think because it is underrepresented or underpenetrated for programmable logic, that it remains a great market opportunity for us.

Steven Eliscu - UBS Investment Bank, Research Division

Just within that, is there something within military that has been significantly down in terms of some of the programs that may have driven strength last year?

John P. Daane

Yes. There were a number of programs that were down both in the first calendar quarter and second calendar quarter. It wasn't any one program. It was through quite a few different areas. Again, with the military sector, they tend to do program purchases. So they may buy a lot of material in 1 or 2 quarters for the program, and then not return to purchases again for several more quarters. And so it tends to, I think, have more peaks and valleys as an end market than certainly any of our other markets do. It was down last quarter, but we do expect strong growth within the military segment this quarter.

Steven Eliscu - UBS Investment Bank, Research Division

And one final question here on HardCopy, it had a pretty big sequential drop in Q2. I'm just wondering is this reflecting any deemphasis of that? And if so, are you reallocating the R&D dollars that had been to HardCopy elsewhere?

John P. Daane

It's actually expected to grow again this quarter, Steve. So, it's doing fairly well. I think the reason that you see HardCopy a little, as a product line, a little bit more choppy than some of the other products. As you remember, it requires a certain volume in order to move from an FPGA to the ASIC equivalent. And as such, there are fewer customers there. And so as you get customers that may come in and buy and then maybe go away for a little period of time, and there are fewer customers than you see in FPGA category, it tends to be a little bit more choppy. FPGAs, I think, are far more steady just because of the breadth of customers and breadth of market usage. Thank you very much, Steve.

Operator

Our next question is from Brendan Furlong with Miller Tabak.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

I had to jump off, so excuse me if this was asked already. But last quarter, you had a pretty volatile quarter. You -- mid-quarter update was okay and then you missed giving guidance, and this quarter you're kind of beat and now you're raising again. I'm just wondering what is causing the variance over the last several quarters? Is it -- is there something structurally changing in your business that is causing that happened?

John P. Daane

Well in Q1, we had customers still moving through an inventory destocking phase. Combined with the fact that towards the tail end of the quarter, 2 phenomena happened. Number one, some of the larger communications accounts didn't pull their forecasts from the VMI or hub programs that they had, which is fairly unusual. And that, obviously, communications being a fairly large market segment for us did have an impact. Second thing is, we were just as, as Ron pointed out earlier, because we were very low on inventory dollars, we ended up with turns orders that we just could not fill because we didn't have the right product. Going into the second calendar quarter, which you have, is Altera really being able to catch up with the demand because we had the right inventory. But mostly, what you saw is customers ended their inventory destocking, return to normal take rates and our business did substantially improve. I think the reason that it's going up this quarter is we've seen end markets be somewhat more healthy. And again we're getting the growth from our new products, 40-nanometer and 28-nanometer, where we've done very well in the industry. I don't know Ron if you have any other comments?

Ronald J. Pasek

I mean, I think that really sums it up well. But you're right, Brendan. I think it is a little more volatile than I would like to see, both on the upside and downside and we are working internally to tighten that up. Thank you.

Operator

Our next question is from Sumit Danda with ISI Group.

Jason Jones - ISI Group Inc., Research Division

This is Jason Jones for Sumit. Just a quick question on your guidance. Given the kind of stability in your order patterns and where you are in the quarter so far, I'm curious why your turns are guided lower sequentially?

John P. Daane

Well, basically, what we've seen is our business is actually strong quarter-to-date. We are ahead of linear on our forecast. What we've done is we've just taken a look at what other companies are seeing and announcing, and we're hedging it and saying that our business will be based on the macro environment, our business may slow down. So that's why the turns rate is lower on that sort of assumption. We're taking what is, again, a very conservative forecast to this quarter.

Jason Jones - ISI Group Inc., Research Division

But you haven't seen any dynamic in your own business that reflects that yet?

John P. Daane

We have not. Our orders have remained good. Quarter-to-date, business is again running ahead of linear. We haven't seen any significant change in cancellations or pushouts. As Ron said, the book-to-bill is below 1, but really that's just a factor and the fact that our lead times normalized in early June. And so, so far, our business has been good. But again, since others are saying different things, it's worth it for us to take notice of that and be conservative in this forecast.

Jason Jones - ISI Group Inc., Research Division

Okay, great. The second question is on deferred revenue. The jump there, is that a similar dynamic to what happened with your receivables or is there something else going on? I mean, is that product destined to customers or is it a build by distributors at this point?

Ronald J. Pasek

No. To your point, it's the inverse of what happened on the AR side. So it's revenue that's temporarily stuck until this quarter. So whenever you see a large increase in AR, that's due to this list price dynamic, you'll see an increase in deferred revenue as well. Thank you very much.

Operator

[Operator Instructions] Our next question comes from C.J. Muse with Barclays.

Christopher J. Muse - Barclays Capital, Research Division

I guess I wanted to take a step back and discuss the FPGA versus ASIC debate. And I guess the point here is, historically, we've talked about rising asset costs, et cetera. But it looks like we're entering a new era of rising capital intensity, large fabless guys are considering dedicated capacity. And so I guess the question is, given how important, how scale is of critical importance, along with those fixed costs for each design, what are your thoughts in terms of that being an added inflection point for FPGAs to outperforming ASICs in the next 1- to 2-year time frame?

John P. Daane

I think it just adds to it. For us, I think what's happening is there's more of an acknowledgment of the rising costs. And it's become, I think, talked about more and more over time. But for us, we were talking about this years ago. So I think there is just a broad acknowledgment through the semiconductor industry through executives talking about the fact that their business models may be under pressure because of the rising costs. Their R&D is being pressured to increase at a time when they are not seeing commensurate returns, and it's deteriorating potentially their business models moving forward. We see this as continuing to fuel our growth because we can make a generic product, sell it to lots of customers across lots of markets, and aggregating that volume be able to justify the R&D. And again, because they're under pressure and may not develop solutions, we can move in and take that existing space which allows us to grow at a faster rate than our end customers and allows us to grow at a faster rate than the semiconductor industry. And I think if you look at the data over the last 4 years as an example, we grew 15% compound annual. The ASIC industry grew less than 1% compound annual. So the ASIC industry undergrew its customer base and undergrew semiconductors. And I think that's evidence. I think this rising cost acknowledgment is just going to help fuel us because they're going to be fewer ASICs and fewer ASSPs developed.

Christopher J. Muse - Barclays Capital, Research Division

That's very helpful. And if I could just ask a quick follow-up, and I apologize if you've addressed this. But on the inventory side, can you talk about where you are on die wafer bank as well as, I guess, final package? Anything we should be thinking about there in terms of builds and concerns and impact to gross margins, et cetera?

Ronald J. Pasek

No. I mean, I think we keep the majority of our product in die bank. To a lesser extent, you'll see finished goods and have them packaged out. So it is a way to have a little more flexibility and deal with orders that come in late in the quarter because you can take a couple of weeks and get it into the right package.

John P. Daane

I think to your -- one thing you may be sort of implying which I think is important to point out in programmables is we have a lot of customers that buy product across all of these families. And so, if you kind of look back in history, there's really never been a lot of danger of having inventory write-offs or other concerns because you're out of mix. Just may mean that it will take longer for that inventory to ship out. Ultimately, if you look at Altera, we had a write-off in 2001, but we ended up selling most of that product and disclosing it over the next several years. And so, the lesson you have there is just because you have more than you need at one point, keep it. Because it's going to sell out over the next few months, the next 6 months. So you're never really in danger of having the wrong mix or having inventory write-offs in our business. Thank you very much.

Operator

Our next question is from Sujeeva De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

On the 28-nanometer product, I think you guided to $20 million level just similar to your competitor for the September quarter. When did that start to gap up, perhaps? And maybe you could you give us a mix where you think you'll be -- a percent of revenues it will be 8 to 12 months out?

John P. Daane

It's hard to forecast exactly where it's going to be. I think there are some ramps that you can look at in terms of prior generations or products which give you a pretty good indication as to how these technologies will build. Again, we're really pleased with our makeup of the 28-nanometer revenue. Our makeup is from designs that are going into production. I think the makeup of our competitor is from a lot of prototype designs. As an example, if you're pricing a product family over $10,000 a unit, there's no customer that's going to take that product into volume production. And so, I guess if you look at the -- maybe if I could ask you to put your phone on mute or hang up, if you could? What we'll see is, again, there'll be companies, semiconductor companies in particular, that will buy those units in order to prototype their designs, because of the high mass costs they want to be able to take a design and prototype it. Perhaps on a sea of FPGAs, they're willing to spend $10,000 a unit because it allows them to save potentially millions of dollars if they find bugs ahead of time. But they're not going to take it to volume production. What the prototyping industry does is it gives you a lot of revenue very early on because of the high ASPs, but it fades very quickly because it's a very limited market, so if you get about a $75 million total for a particular node. So we think when we look at our revenue, it's the production revenue that you want. Based on the comments that our competitor made last week, most of their revenue was from the prototyping industry. So we, again, take a step back, and for many other reasons, we really see that we're still winning 2/3 of the overall 28-nanometer node. Thank you.

Operator

And at this time, we have no further questions in the queue.

Scott Wylie

All right. Thank you, operator. And why don't we wrap up the call at this point. A final word, as to conferences this quarter, on August 13, we will speak at the Pacific Crest Global Technology Leadership Forum in Vail. In September, we'll present at the City Technology Conference at September 5. This concludes Altera's earnings conference call. Thanks for your interest and participation.

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