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Executives

John East - President and Chief Executive Officer

Jon Anderson - Vice President of Finance and Chief Financial Officer

Analysts

Gary Mobley - Piper Jaffray

David Cohen - Skygate Capital

Thomas Clogus - Graham Partners

Justin Hibbard - Quidnunc

Richard Shannon - Northland Securities

Shawn Boyd - Westcliffe Capital

Actel Corporation, Inc. (ACTL) Q1 2008 Earnings Call April 29, 2008 12:00 PM ET

Operator

Welcome to the Actel Corporation's conference call regarding its Financial Results for the First Quarter of 2008. A replay of this call will be available for one week at 1800-642-1687, Conference ID number 31168306. You can also access this call on Thomson CCBN through a link on Actel's website at www.actel.com. This call is being recorded.

To ensure that the question-and-answer session proceeds in an orderly manner, participants will be returned to queue after one question and one follow-up question.

All forward-looking statements during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning risk these factors that could cause actual results to differ materially from those projected in the forward-looking statements are contained in Actel's most recent Forms 10-K, and 10-Q, which are available on Actel's website and will be provided to you free of charge upon request. At this time, all parties have been placed on a listen-only mode. The floor will be opened for question and comments following the presentation.

It is my pleasure to hand the floor to your host, Mr. John East, President of Actel.

John East - President and Chief Executive Officer

Thanks, Abigail. Good afternoon. I'm John East, the President and CEO of Actel. With me is Jon Anderson, our Vice President of Finance and CFO. After Jon reviews the results for the quarter, I'll talk briefly about our current business environment and give you an update of our new product offerings.

Thanks. And now I'd like to turn the call over to Jon. Jon?

Jon Anderson - Vice President of Finance and Chief Financial Officer

Thanks, John. Before I talk about the financial details for the first quarter, let me tell you how we'll provide financial information regarding the second quarter. We'll give guidance on the call today. The guidance will be the Company's targets for the second quarter on sales, gross margin, operating spending, other income, tax rate, and share count. Next we expect to provide a financial update in early June. In the absence of a material change, this will be the only financial guidance the Company will give during the quarter. A replay of this call will be made available. Please access the Company website for the replay information.

Now to the financials. First quarter sales were 54.8 million, an increase of 7% sequentially when compared to our reported number in our last conference call and press release, and 6% sequential growth when compared with our final revenue number reported for the fourth quarter on Form 10-K for 2007. The difference between our reported revenue at our last call and the final 10-K revenue for the fourth quarter was an increase of 0.7 million due to the favorable resolution of a terminated distributor that was finalized prior to the filing of the 10-K.

First quarter revenues represented increase of 13% in comparison with the same quarter one year ago. Revenue from Flash technology based products was 23% compared to 22% last quarter. We have broken out our Flash technology revenue by quarter from the first quarter of 2006 to-date. Please refer to the company website for the detailed information in the Investor Relations section under GAAP quarterly analysis. By market segment, 9% of revenue was in communications compared with 14% last quarter. Aerospace and military was 37% flat with the previous quarter. Industry was 39% compared with 36% last quarter. And consumer was 15% of revenue compared with 13% last quarter.

Market segment numbers are based on our estimate of end uses by our customers. Geographically, 47% of the revenue was in North America compared with 50% last quarter. 29% in Europe compared to 27% in the previous quarter. And 24% in Pan-Asia compared with 23% last quarter.

By channel, 79% of the revenue was through distribution compared with 76% last quarter, and 21% through OEM compared with 24% in the previous quarter.

Overall, ASP fell 40% compared with last quarter, and unit shipments increased by 24% sequentially. Net end customer bookings increased compared with the previous quarter. Overall book-to-bill was substantially greater than one. Total backlog is higher entering the second quarter than it was entering the first.

Gross margin in the first quarter was 58.5% compared with 55% in the fourth quarter. Our midst to the guidance of around 61% was due to the timing of some Mil/Aero products that was pushed into the second quarter.

Now I will talk about operating spending, net income and earnings per share on a non-GAAP basis. Non-GAAP calculations exclude stock based compensation charges and other non-recurring items. A reconciliation of non-GAAP to GAAP statement of operations is included in our earnings release which is posted in the press room of the company's website.

Operating spending for the quarter was 29.9 million or 55% of revenue as compared with 29.2 million or 57% of revenue in the fourth quarter. The spending does not include the stock based compensation charge in the first quarter of 2.1 million and stock option restatement cost of 1.6 million.

R&D spending was 15.7 million or 29% of revenue compared with 14.7 million or 28% of revenue in the fourth quarter. SG&A was 14.2 million or 26% of revenue compared with 14.6 million or 28% of revenue in the fourth quarter. Other increment expense was 1.9 million, down from 2.2 million last quarter.

Net income was 2.9 million compared with 2.6 million last quarter. Diluted share count was 26.7 million. This all resulted in earnings per share on a non-GAAP basis of $0.11 compared with $0.10 last quarter.

Cash, cash equivalents and investments were 162.7 million at the end of the quarter, a decrease of 26.5 million from the end of the previous quarter. The company repurchased 1.9 million shares of its own stock during the quarter using 24.8 million in cash.

Accounts receivable increased sequentially by 8.2 million to 26.3 million. DSO increased by 12 days to 44 days. Net inventory increased sequentially by 1.7 million. Net days of inventory increased by 11 days to 150 compared with the fourth quarter. Capital expenditures were 5.4 million during the quarter and we recorded 2.6 million depreciation. Headcount increased sequentially by 3 heads to 587.

Now I will give the financial outlook for the second quarter. Taking into consideration all the information currently known by us, we are projecting revenue to increase sequentially 5 to 9%. Gross margin is expected to be around 58 or 59%. Operating spending is anticipated to come in at about 31.1 million which does not include a non-cash charge for equity compensation of 1.9 million. Other income will be around 1.7 million. The tax rate for the quarter is expected to be approximately 30%. Fully diluted share count is expected to be 25.9 million shares.

Thanks and now I would like to turn the call back to John.

John East - President and Chief Executive Officer

Thanks Jon. Before I get started Abigail there is an echo that comes and goes and so it’s a little disconcerting. So if you could figure any easy way to make that go away that would great. Don't do anything now.

Okay, I am going to get started by talking about Q1. Q1 was a good quarter for us. Comparing Q1 of 2008 to Q3 of 2007, you will see that we grew 14% over the two quarters of about 7% per quarter. Jon also told you that we have a pretty good shot of growing by another 7% this quarter and he told that the bookings had been great last quarter and in fact Q1 bookings were a record high for us eclipsing anything we have ever done including the telecom boom years.

The upside was driven by the products we have been telling you about for quite sometime namely Flash and RT and I don't need to tell you how good that feels.

Profiling the Q1 bookings, January was quite strong, February tailed off to what I term just okay and then March was huge. Overall as I have said it was the best bookings quarter in our history.

Quickly addressing our long time last time buy topic in Q1 about $2 million of our billings were for the last time buy XL and DX products. This quarter we expect it to be pretty close to zero and it will be nice to get that behind us.

Now let's move on to Q2. We'll begin in Q2 with a very solid backlog. April bookings so far have been very, very strong, although a big chunk of the April bookings has come from a single customer. So we're optimistic that Q2 will be a good quarter for us. But neither are we asking are there are any worries and of course there are always worries. Today's worries though are different from the ones we had a year ago but there are always major challenges and here is some of the challenges we are facing today as I see them.

I will give you a quick listing and then I will go back and hit each one in detail. First, capacity, second, inventories, third, product cost, and fourth forecasting. Let's start with capacity. The ASP for the bulk of our incremental units will be relatively low, that means we will be trying to ship many more units than in the past. From the standpoint of fab capacity we don't think we will be limited. However, given that our fab's cycle timings are on the order of four months we could run into mix problems unless our forecasts are exactly correct and unfortunately there is no way our forecasts will be exactly correct.

With respect to assembly, we think the capacity will be there. So we are not particularly worried about assembly. Test however is a concern. Since our products are different from industry norms we will need test equipment that may not be generally available. So we've committed some CapEx to lay in the capacity we need. Obviously if we don't have enough capacity that’s a problem, but if we have too much that’s bad too.

Moving on to inventory. Given the long lead times of fabs and the difficulties in forecasting we are going to lay in a healthy inventory of electrical. There is little doubt that you will see our inventories building particularly in the Q3 timeframe.

Moving on to costs. As you know our new product margins are generally lower than our traditional margins. The Flash products that we see growing rapidly are definitely no exception. This is compounded by the fact that the volume ramp rates on some of these new products are considerably steeper than they have been in the past.

Now I mentioned in our last conference call that we had embarked on an aggressive cost reduction program and there is no doubt in my mind that our product cost a year from now will be substantially lower than they are today. Obviously that’s good news. There are a couple of caveats though.

First, sometimes when you embark on a cost reduction program you can run into start up problems that make cost go down before rather make costs go up before they go down. And second, even though I expect Flash margins to improve dramatically over the next year, I don't expect them to reach the level of our older and if used products for long time. That means there is a possible scenario in which our Flash margins are improving rapidly, but our overall gross margin percentage is trickling down because the fraction of Flash shipments as a percentage of total shipments is growing.

Of course in my view that would be very good news because it would prove that we are right on the mark with respect to our new product strategies.

Finally, let's talk about forecasting. We believe that we are having success across the board with our design win efforts. We are seeing lucrative opportunities and/or wins in all of our target segments, that is to say in industrial, medical, transportation high rail and the consumer. As is typically the case for us the fastest segment to turn opportunities into dollars is the consumer segment and that’s definitely what we are seeing right now big, big interest from the consumer segment particularly in Asia.

Now, forecasting is tough under the best of conditions, but forecasting consumer business is tougher. Consumer customers rarely have a good grasp of what their needs will be. So often they will put a product into the market which might sell million of units or might sell practically none. The only way to know for sure is to put the product into the market, cross their fingers and wait to see what happens. If they happen to hit it big they will need to do a lots of units and they will need them right away. They won't be able to tolerate long lead times. So we think we have a tiger by the tail, but the probability of running under complications because our forecast were off or our inventories were out of mix is significant.

So let me give you a quick summary of what we said so far. We are booking like crazy. The bookings are coming from everywhere, but there is an emphasis towards the consumer market and in particular we are seeing very, very strong bookings from one particular consumer segment customer. There is a potential downside to this and the consumer business is known to be fickle, lumpy and tough to forecast. The upside though is obvious. The backlog we have in place makes us feel very good about Q2 and in fact Q3 is already shaping up to be a very nice quarter and that only makes sense because consumer segment orders typically are very strong in a summer quarter, now you shouldn't take this as being negative about Q4. Q4 is just is just too far away for us to have any visibility.

Now a quick discussion about products. Once again I'll focus on Flash. You probably saw our recent announcement introducing our new IGLOO PLUS family. We've observed that there are often needs for products which have a relatively high I/O count but a relatively low gate count. IGLOO PLUS addresses those needs. It's a very low power, small form factor FPGA family with a very high I/O to gate ratio as well as with some extra features aimed at the low power market. IGLOO PLUS is our seventh family based on Flash technology. The first six families were A500, and that was our original Flash offering which never really sold well, APA, our quarter micron FPGA family, A3P our first 0.13 micron FPGA family, Fusion, our programmable mixed signal family, IGLOO, our super low power family and A3PL which achieves low power without sacrificing speed.

Now, as Jon told you, Flash bookings in Q1 were about $13 million. This quarter we expect very solid growth on that number. In fact, in general we expect growth in our Flash sales over a period of many years. However, at our size, the growth doesn't always come monotonically. Over the long run, there will usually be some down quarters mixed in with good ones and the temptation will be for you to read too much into the local ups and downs, to get too excited about the ups and too worried about the downs. Don't do it. In fact, I'm going to save this statement and re-read it whenever someone asks me if a one quarter fluctuation represents some kind of a sea-change or mega-trend. So the bottom line? We have plenty of challenges ahead of us but they are the kind of challenges we look forward to having and right now we're feeling pretty good about life. So that concludes my formal remarks. Abigail, would you please open the lines for questions?

Question-And-Answer Session

Operator

(Operator instruction). Your first question comes from Gary Mobley of Piper Jaffray. Your line is open.

Gary Mobley

Hi, guys.

John East

Hi Gary.

Gary Mobley

In your prepared remarks you discussed a bottleneck on the testing side of your manufacturing capacity. I'm just curious, what could your Q2 revenue have been or your guidance have been if you didn't have this bottleneck?

John East

Very good question Gary I don't know the answer to that. If I knew the exact answer I'd probably be tempted to not give it to you anyway but it clearly could be higher. We think we're going to exit the quarter somewhat delinquent in Flash. Well, you'll always have some delinquency but we expect it to be higher going out of Q2 than it would normally have been. But I don't want to give you a number, Gary It would only end up being a wrong number. I'll give you follow-on though

Gary Mobley

Alright. How diversified is the growth you're seeing? I think you alluded to a little bit, maybe there's some customer concentration but is it one specific customer or is it one specific end application and is it IGLOO that is primarily driving the results right now?

Jon Anderson

Okay super compound question. I should have written all that down. First of all, with respect to, "Is it IGLOO that is driving it?" Remember a couple quarters ago when I said we're going to start reporting Flash I told you that I'll report the total Flash but I will not break it into product family. And the reason is that I don't care to give a roadmap to any of our competitors. So we have seven families out there, six of them I'm really happy with. But I don't want to tell you which are the ones that are taking off, although actually I feel pretty good about all of them. I would say, however, that you have listened to us and you know that I'm hammering on power every time that I get a chance. So the thing that I'm proudest about with respect to our offerings is power and most of our offerings to one degree or another, in fact all of our offerings to one degree or another, offer a power benefit over the competition. So I'll give you some generalities but I'm just not going to pin it down to IGLOO or Fusion or any of that sort of stuff.

Now I got to talk -- okay you asked what segments, is it diversified growth or one specific customer? In Q1 we had bookings that I've termed, inside the Company anyway shockingly good bookings. It was really a nice quarter for us bookings wise. There was one customer who was far bigger than the others, but he still amounted to less than 10% of the bookings. So had he gone away, had he not even bend there the bookings would have still been really, really, really, really good.

If you look so far this quarter, over the first three weeks of the quarter, the bookings aside from this one customer, it has only been I do not know I would characterize in social, but this customer has gone berserk. He has placed a huge orders, berserk is a very bad term to use refer to our customer and that the customer, customer, if you’re listening, I did not mean that. He is obviously experiencing good business opportunities, so his orders are very, very, very large. So if you look at it 16 weeks and one day year-to-date the one customer is probably more than 10% of the orders, but in Q1 it was less than 10, in this quarter they are clearly over 10. Now, even if you put that one customer side, there is a slanting towards consumer. It's interesting that I have been telling you guys for many years that I believe we are going to start having some success in consumer and a number of year or two we’re getting some questions with respect to where is a John. He have been talking about for quite a while and it does not seemed to coming and I will tell you what on my drive own some times, I was questioning my own sanity thinking that what I thought I understood, but may be I did not, but I am back today feeling like that I had the right vision, because right now there is definitely a lot of interest in our offerings from the consumer segment in general and from this one customer in particular. So, good is that I pick up all of that. Let me assume, I did not put you back in the queue and you can come back for another shot later Gary. Next question please.

Operator

Your next question comes from David Cohen with Skygate Capital. Your line is open.

John East

Hi David.

David Cohen

Hi John, how you are doing?

John East

Good.

David Cohen

A quick question, in the prepared remarks, I forgot whether it was you or the other John spoke about a Mil/Aero product that was pushed over Q2. Can you give me any color on that (multiple speakers) sort of disappointed because something was pushed over to Q2.

John East

David the color I give you is grey. There is no color. Our satellite business is lumpy and we do our forecast and we were early here right on the money we’re couple up or couple down and to me that’s all that happened this time. So I'd really hate to see you read anything into that.

Jon Anderson

Yeah Dave, this is Jon Anderson. Yeah, it was just a timing of it again, this was not because we lost this as a Q1, it was a matter of timing of getting the actually the order book what’s going to happen. We thought a quarter ago it was going to happen during the quarter. It pushed into early Q2. So it's in the timing issue.

David Cohen

Yeah, I am not worried about the timing, I just, it seemed to be you hit the high end of your guidance even without a product that you thought you would had in Q1.

Jon Anderson

Yeah, I think it is right. Yeah.

David Cohen

Okay and followup to that. The R&D costs continue to seem stubbornly high as a percentage of revenue. Is there any comment you want to make on that or can we expect that to comedown as a percentage of revenue, come down obviously on an absolute basis, but as a percentage of revenue any time in the near year.

Jon Anderson

Yeah on a percent revenue, it will Dave. A couple of things, one was our last quarter, we had expected to have some real pretty tall growth in the R&D spending and we actually came under this quarter, in the first quarter to that guidance. I think I have given guidance for $31.4 million overall of that, we came in at 29.9, and that was really again we had a real lot of math and profit development cost that would occur in first quarter. And again kind of like the Mil/Aero, some of those cost cuts pushed into the second quarter. So the second quarter is higher than I thought it would be during the first quarter, but if we add up the first half of the year, we are pretty much on target what we thought we are going to be. So we knew we are going to be front end loaded this year because of the math and profit development cost in the second half of the year. You know, as John just said, we’ve given pretty good guidance for the second quarter, it would be in a 5 to 9, third quarter is seems to be pretty strong as well. And certainly as percentage of revenue spending is going down, we do have the model we want to keep spending the half the rate of top line growth and we are certainly committed to that.

Operator

The next question comes from Thomas Clogus with Graham Partners. Your line is open.

John East

How are you?

Thomas Clogus

No great. I wanted to do a jig man.

John East

Me too.

Thomas Clogus

I don’t know why you spend all that money on R&D all the time. There are two things. One is your book to bill, you’ve never said what it is, how big was it, are you guys going to quantify it?

Jon Anderson

Yeah, we don’t do that, but when we say significantly greater than one that’s obviously a pretty large number. It certainly was good than it was last quarter and as John said you know this quarter actually is off to pretty start too.

Thomas Clogus

In the bookings that you used for book the bill, how long does it take for them to ship. I mean, when you guys we booked the ex for next quarter delivery or is it for two quarters out, three quarters out?

John East

You know, it depends on the type of order, and I would say that it is Mil/Aero sometimes they can be a longer than it does to save the consumer. With that said, I think we would safely say majority is in within a quarter, but certainly within a six month window.

Thomas Clogus

And on the product side, I know John that you said that you don’t like to say I mean, I have heard a lot of interest i, but as you know you always commented and both you guys always commented, how long it takes for the product finally to ramp. So, you know I am wondering it was going to ramp faster than historical product lines potentially. So, can you just give any color on that, just a little bit?

John East

Sure. First of all you’re right. I do always hop on how long it takes family to monetize themselves. But with respect to IGLOO, you are right on the mark. IGLOO is pin for pin compatible with ProASIC 3, which we introduced coming up on four years ago. So it would have been easy for people to prototype with ProASIC 3, have the board totally ready and then just drop on IGLOO part into it and have the power to be lower, that have to re-simulate the timing. But that makes it a lot easier for them to get the market and also it’s true with IGLOO that the gate counts of FPGA families where we’re really doing well tend to be low gate count once and those are once where the design is little easier to do, it’s done a little faster, pretty well understood how to do it. So, these are all the arguments that IGLOO might come a little faster than on average. If I were going to answer the same question with respect to Fusion I would say the arguments are why it would come more slowly than our average because Fusion is very complex and there was nothing to prototype with or what have you. So, the generalities of your arguments are right on the mark. Do you have a follow on.

Operator

Your next question comes from Justin Hibbard with Quidnunc. Your line is open.

Justin Hibbard

Yes, I had a just kind of high level strategic question, I guess long-term sort of related to the comments about R&D spending and also the comments about some of the challenges posed by needing to increase CapEx spending. Basically, what I am wondering is if you could just comment on what the strategy is if Actel is moving a little towards using non-standard manufacturing processes and if that might reduce some of the need for R&D spending and CapEx spending going forward.

John East

Yeah okay. The answer is – the second half of the question is no, but let's answer the first half to try to understand why. The two theories of try to planning our pipeline is may be one level below, I would talk about two, two levels of – two different types of philosophy we can use to try to figure out we wanted to be when you go up. One is to say, I am going to invent my own market and then I am going to be the king in the market, and the other is to say Jee, there is some market out there that I see developed already and I am going to put a product into those markets and trying to get 10% of them. I hate the second argument. There are other people that you see they use it, but I don’t like it. So since our inception, we have been trying to create our own market, that has always caused us to need at least somewhat non-standard processes. So our antifuse process was always non-standard, even today and you can you say, what do you on Flash that standard, well I am not really, Flash memory processes are standard. The flash memory processes have two or three layers of metal they do not have particularly fast transistors in general. We use what we call an embedded flash process, which means it has got the capability to making flash memory is into a very high-speed logic process and we usually are the pioneer in whatever foundry we are working on getting that developed.

Our architecture calls for testing issues, which we would normally run into, and if you are testing just memories, so we are sorted to pioneer there as well, so we are different and we have always been different in our technology and then the processes as we use and what have you, and there is not much of a change there. If any change, we are getting lots of different, but we are still pretty different. Now, if anything that acts in the direction of causing more R&D spending. Typically when you work with the fab, when you go to a fab and say I want you to bring up this custom process, we will say well how much will you pay me or as if you are using a standard process, they just say, tell me how many wafers do you want and if your test problems are different from one of the two would run into an absolute standard process then typically you have to go buy some of your own equipment or modify equipment or make inventions to do your own testing and then obviously that cause more than just going to some test house saying hey, here are some units test them. So I o answer to question A, we are trending towards being more different than actually we have always been different. Question B, would that minimize our spending? No, it is one of the reasons that our spending has been always been a bit higher than you guys would have liked. If so one of the curses that goes along with my choice of the two philosophies. Got a follow on. I think he has gone, so let’s do the next question. Abigail.

Operator

Your next question comes from Richard Shannon with Northland Securities. Your line is open.

Richard Shannon

Hi guys how are you.

John East

Richard, we are good and how are you.

Richard Shannon

Doing well, thank you. First quickly for Jon Anderson in terms for guidance for the year of second quarter what the percentage do you require in terms of hit that number in the mid point I guess?

Jon Anderson

Well, we usually, Richard in a normal quarter, I would say we too were up 40% and we are less than that this quarter. So we feel pretty comfortable with the guidance being given.

Richard Shannon

Okay. Is there a reason why you are looking for lower turn requirement, is there anything in particular or its just being more conservative?

John East

I have already talked about the possible delinquencies at the end of the quarter. You remember the story about the king who promised a guy one grain of sand or one grain of rice for the first square with chess board and two for the second square and four for the third square.

Richard Shannon

Yes.

Jon Anderson

Well that is the game we are playing in manufacturing right now. So, it is quite easy for me to write down some big numbers and run over to manufacturing guys and say ship all of this, but it is a daunting task to make the increases in production that you need to make the good stuff done. So we’re trying to be cautious there.

Richard Shannon

Okay a quick follow on for you John East. You talked about some flash products and you talked about gross margins for the second quarter being 58% to 59% and then discussing your cost reduction programs just out there might be, you might fall back temporarily before you see some progress from that. I mean, in terms of investors you are looking at the story and worried about what gross margins could decline to. What do you think is the worst case scenario here?

John East

Well, first of all, I think I alluded to the fact that a fallback would be possible, but I do not really think we are going to have that. I think our margins are going to move up every quarter, that’s what I think. I tend to be a conservative guy and I like to put on the table all the possibilities. Secondly, Jon Anderson did give you his shot or our shot what we think the margins are going to be now or this quarter, and I don’t think you viewed that as a problem, moving into Q3 it is harder to make a judgment in Q3 than it is now, but what would I say the possibilities, I would say there is some possibility the margin actually goes up in Q3. I am not looking at these things you know my guidance is exact, some possibility we get better. Some possibility we stay the same, some possibility it goes down, but if we are going to go down, I would say a point or two here and there you know, I would not be looking for some mega trend, obviously, the two most important factors there would be, the very most important factor is how many orders that we get for these new Flash units, and if we get shockingly high unit demands for the flash units that’s more of a pressure on margin, but it is in the pressure on EPS if we're you know, I believe that would make our earnings go up and may be sharply not down.

So what you would see would be a sharply increased sales and minimally or minorly reduced margins but better EPS, I think is what you'd see, if that were the scenario. I said there were two things that were super important. The other thing that's super important is making progress on our cost reduction objectives and to some degree we have to wait and see. But to some degree I know we're going to make progress because part of cost reduction is a Boston Consulting Company learning curve kind of thing. They once said that semiconductor is on a 30% learning curve and that means that every time you double the cumulative volume to date, the costs come down by 30% and that's because you make more units and when you make units you learn things, you learn how to shorten the test time, you learn this, you learn that, you learn the other. So some of the cost reductions that we're going to make are learning curve kinds of reductions, figuring out how to make shorter test times and that sort of thing.

But part of cost is not really a learning curve kind of thing. Part of cost is just the run rate thing. The more wafers you're buying from a foundry, the lower price he'll give you on those wafers; and the more product you buy from an assembly house the lower price you'll get on that assembly. It doesn't really have anything really volume; it's just how many am I buying this quarter? And since our volume is clearly going up, I have essentially no doubt that we'll certainly make good progress in those areas, wafer prices and assembly prices. So man again a long answer to a short question. I like to put all the possibilities on the table, so you guys are in the same worry both that I am, but I don’t want to have you more worried than I am, I am feeling pretty good about life right now. Did you get your follow-on already, did I bore you to death, I think I bored him to death, he want to have a beer. So Abigail you can take the next question please.

Operator

Your next question comes from Shawn Boyd with Westcliffe Capital. Your line is open.

John East

Shawn.

Shawn Boyd

Thanks for taking the question I just want to come back on -- we seem to have fully covered the gross margin area and that’s really helpful. And I'm trying to look at this 14% drop on the ASP decline quarter-to-quarter, and I'm wondering if there's -- I'm thinking that about a mix shift toward Flash but quarter-to-quarter we really didn't have that. We had, kind of, 20, 22% each of the quarters. So is that just seasonality or help me on that 14% job on the pricing versus shipments up 24?

Jon Anderson

Well, yeah, it certainly is -- when you look at that in the comments that Jon has made about the volume considerations between the first Flash and the lower volume or I mean lower ASP in the future. If you look at our volume shipments in the last couple of quarters from Q3 to Q4, we're up 17%; from Q4 to Q1 we're up 24%. And with that you've also seen a decline in ASP and you'll see that to continue. As we get into especially the Consumer product mix, as you see Consumer segment growing, that's going to be drive lower ASP but again, that's being made up by volume and that’s what to you know what a lot of the calls we've been talking about how we address less volume concerns, especially in the second half of the year.

John East

There's something that I'd add to that. For starters, our Flash shipments did go up. It was, what about 15%. And secondly, if you look at our revenue by market segment, communication, which even in the commercial market tends to be a higher gig count, higher ASP product, fell from 14% down to 9%. And Consumer and that is our lowest ASP segment rose from 13% to 15%. So between Jon and I, we've given you a handful of items, each one of which would push it somewhat in that direction.

Shaun Boyd

That's helpful. That's a lot of color and then just one quick follow-up, if I may. On the operating expenses, Jon Anderson, when you mentioned combining first and second quarter we were at roughly $61 million in the first half on non-GAAP kind of total operating expense level. Is that -- I assume that will creep up a little but is that a fair number to be thinking about into the back half of the year?

Jon Anderson

Yeah it is. Because what I said is that really we were a little more loaded in the first half of the year because of R&D. We want to limit, keep the CapEx spending as much as we can to drive op margin but, obviously too with increased revenues there will be more -- some G&A costs sales expenses and things we associated with it so, yes, I think it's very much in the ballpark with the second half of the year.

John East

Next question please.

Operator

We have another question from David Cohen with Skygate Capital. Your line is open.

David Cohen

Hi John thanks for taking my second set of questions.

Jon Anderson

Sure.

David Cohen

You mentioned during your prepared remarks that you think Flash margins will get much better this year but will not get to where you're Antifuse margins are for a long time. What you consider a long time?

John East

First of all, our corporate attorney always sit in here and he is glowing at me right now so I need to be careful about this one. We haven't been successful in wining Antifuse designs in commercial sockets for somewhere between 5 and 10 years. What does that mean? It means all the Antifuse shipments that are going out today are the huge preponderance of them, are for military, industrial or really long life applications like medical or what have you. We are at the point in product life cycles where we are raising prices on those a little bit every year. In fact sometimes we raise prices every a couple times a year. And the margins therefore on those Antifuse families are getting to be really nice. So for Flash to get into that mode while I just described it is somewhere between 5 and 10 years. And I don't if these designs are all 5 or 10 years or older or more. Flash is a point where they are making the same margins, I would say we have to do roughly the same thing. We would have to take Flash to the point where all those designs were 5 or 10 years old or more. So it’s a long time I think in the foreseeable future in the timeframe of interest we just have to have the view that Flash is – where we're winning the design today that means it's price competitive that means the margins are going to be slower.

Would we ever get to the point where the margins are the same? Probably, but it’s just a long time from now, a matter of years not quarters.

David Cohen

It's like an -- I mean when do you think Flash margins will be – if operating margins will be significantly positive? I mean, I am assuming they are indeed pretty much takes away any of the gross profit you are making on Flash especially given how profitable Antifuse is?

John East

Well we don't do P&L's by product line and there is a really good reason for that. If we did, we would have to board up the company tomorrow morning, because classically you have to spend like a drunk for about five years on a new product before it starts to pay back. So you would always lose the faith and shoot all the employees and close up the company three years after you noticed you are losing money every year. Is that what we would find today in Flash. Don’t know. Again we don't do it that way and I would discourage you from looking at it that way actually. That is kind of a crummy answer to the question. But you can't get there from here if you do it that way. You can't get to an Antifuse family that earns huge margins without losing money for five years on the way to getting there and losing the faith and having people say why are you saying that money cut it all. You end up doing the wrong thing if you look at that way. Bad answer I know what you are looking for but I will give you a follow on okay.

David Cohen

I think I guess all of them not getting more revenue which is a problem but I guess a good problem to have given that you’re doing whatever you can with the capacity you have. Are the bottlenecks having any other negative effects like strange relations with customers? And other negatives we can point to from the bottlenecks?

Jon Anderson

Well delinquencies are never a good thing and delinquencies in the consumer market are particularly nasty because most of those guys have really precise demand. So when they think they need this stuff. It's not quite as bad as it used to be. We used to always aim at the Christmas market in the States. And I don't think that’s necessarily the case any more. In Asia, you have TAT and you have Chinese New Year and that comes until the February or whatever. So there's all more of a spread there but customers don't like it when you are delinquent to them. Boy, the older I get the more I tell you that there is really – the only two things in that are in this business. One is customers and the other is products. Id you make your customers bad you pay the price for a long, long time if not forever. So yeah that’s a worry and we are working like crazy, trying to make sure its not much of a worry, and as I mentioned already our production capacity round figures are doubling every quarter, and it's getting to the place where it’s high and up already, that is hard to double every quarter, but we think we can land on our feet there, but our sales guys are concerned that we’re going to felt behind the mark. And you’re right that’s absolutely worry.

Then the other words David I try to put on the table on my script, we’ve got to worry of the consumer customers sometimes can forecast and they maybe over-forecasting so I might get all this inventory built and not need the units, and by the way then I would have already bought the test capacity and I feels its too good, my depreciation will go up or they could be under-forecasting which actually has been the case so far, they have been forecasting enough and then the customer needs the unit and we cant ship them. So making a production ramp need a sales ramp, a demand ramp is always tricky and when the ramp does speak, it’s really tricky. I already talked about the cost issue and talked about the fact, consumer market is always tricky. I think the big worries I have on the table here, you put the delinquency worry on the table for me, thank you, that’ a worry. So, yeah, the whole bunch of things I go worried about, but 10 years ago I use go home worried that nobody wants our product. Now that’s a real worry. When you have the ones we are having today, they are more fun to have.

John East

Yeah, David just as you said, when Jon is going through the stuff, he is listing out what you have worried about not what actually is the fact that was implied. So when you are saying well, we are limiting volume, I think we are doing things right down Shawn to disable every quarter, we are looking at the second half of the year, but we really going to have some higher volumes and wanting to be in a position to be meet those needs. So I mean it’s not like the second quarter we’re just strangling our customers out there, that’s not the case at all, we are having park there. But the concern is that the unit volume is increasing and it will continue to increase each quarter this year and we want to be ready to meet that demand.

Jon Anderson

I am known to be world’s biggest worry. So you could count on John coming and saying not that bad.

David Cohen

We are working to messages.

John East

Right. Next question please.

Operator

Your next question comes from Gary Mobley with Piper Jaffray. Your line is open.

John East

Hi Gary.

Gary Mobley

I had another concern for you. And I am just curios given the nature of this consumer design win that you have in this particular customer and the product that you’re selling to this customer, what is the risk of that customer cutting over to an ASIC based on some better than expected volumes of the products?

Jon Anderson

Okay, good question. Let me just put on the table, if you are asking – I would tell you what, I would tell you this about the customer, it’s a consumer customer, they are Asian and right now they are buying three different product types from two different family. That’s all I would like to tell you about the customers you know, we have a new version that given details of our customers, they typically found on it, not only to make customers mad. So I will tell you that but any other follow on questions you might have about the customer in particular I would decline to answer, but your question was little more smooth in that, you said what’s the probability when switching over to an ASIC, there is always that risk and the more volume you are running the higher that risk is, I think the fact they are buying several different part type speaks to the fact that it’s a little hard to convert because you would need to do more conversion. I think that the fact that some early big orders came in yesterday and some the day before, it says that they don’t really have plans to convert now anyway. I think there is consumers these things that you’re not to be pretty short lifecycle, so it can be a little bit hard to get an ASIC turn. So I will just give you some arguments that you shouldn’t worry about the conversion. But, and rightly so you are always worry somewhat about the conversion. So, good question and I have given you a little bit of the argument on both sides and if you want to push me harder, Gary feel free on your followup call, so always you don’t push me more about who is the customer.

Gary Mobley

Sure, sure. I actually had a different question on a different topic. How does the gross margins for the RTAX and ASICs product compared to the RH products. And the kind of interest I am trying to get here, can we ever see if the Aerospace business picks up again, gross margins in that business similar to what we saw past?

John East

Well, the RT margins are actually better than the old RH margins for a variety of reasons, the dominant one being the fact that we bought them out of. So when we phased out of RH we were phasing out of a family that had good margins; we weren't going to complain. But we phased into a family that had even better margins. Now Military, I don't think there's a trend downward. I'm just pulling out our little cheat sheet to look at it but 37, 35, 32, back up to 37, yeah, I would tell you that we're in a channel in Mil/Aero that goes from the high 30s down to the low 30s and then back up. And I don't think there has been really that much of a trend in any direction; although if you want to look at that last year's it has been up. We don't break out the satellite but I'm definitely not displeased with the way satellite is going. I think there is a little trend for us that we're doing a little more satellite and a little less kind of standard Military over the years. But any trend towards more Satellite products, in my view is a good trend. Got a follow-on? I think Gary dropped back off the line, Abigail so you could take our next question please?

Operator

You have another question from Justin Hibbard with Quidnunc. Your line is open.

John East

Justin?

Justin Hibbard

Yeah hi, just another – I think maybe some people are getting their follow-on questions cut off. But, anyway, just wanted to follow-up with you on Satellite. There are actually a couple of big satellite contracts out there that some of your major customers are competing on. I'm thinking here particularly the transformational satellite program that DOD has and the GPS3 program also, and just wondering if you anticipate those producing some big orders for Actel in the near term?

John East

Well, Satellite business, just like any other business I refrain from talking about customers or projects, generalize that it's really a rarity today to have a satellite going up without some Actel parts on it. So, without mentioning any specific customer or any specific program, my bet is that whatever you would like to ask about will have some Actel parts on it. So then we can get into some of them have more Actel products than others. By the way, some of these projects are blacker than others where we don't even get to know what we are talking about. But anytime I hear or read that the government believes they are going to put up more satellites, I'm a happy man. It is true, however, that we have pretty much of worldwide business. I think every major power country today that we are allowed to ship to in fact buys satellite products from us. There are some countries that we're embargoed; we're not allowed to ship satellite parts to, so we can't. And what that means is that the US projects have a little less leverage than you would think because we sell a lot to Europe and we sell a lot to India and we sell a lot to Japan. And there are plenty of places that we sell them to so that in some ways waters down what you read about the US market. Well, okay I've answered the question as well as I can. I decline to talk about anything in specific but in general we're in all of these projects. Follow-on David? Abigail, I think what David said, was it Justin, I forgot who, that was Justin, sorry, I think what he said, Abigail was that you are cutting them off after they ask the first question and then when I ask for a follow-on, I think they are trying to ask it and I can't hear them. So, Abigail, if you could factor that in to how you're handling it that would be good and then take the next question, please?

Justin Hibbard

It's Justin. Can you still hear me?

John East

Yes Justin, I can hear you now.

Justin Hibbard

Okay, great yeah. Thanks. I guess then the only follow-up I'll ask is I know you don't want to get into who the customers are in the Consumer Electronics space. On a higher level I'm just wondering if there are certain segments of Consumer Electronics right now where you're seeing the most demands and where you see the most opportunity.

John East

The answer is, yes. Your follow-on then has to be what segment? But remember since I've told you we've one customer and that I didn't want to tell you anything more about the customer than already had I decline to answer which segment. But the huge array of orders that we have received in the last few days have obviously come from one specific customer which means one specific segment. Generality though when I look at my opportunities and wins I see a pretty good spectrum across to all of consumer and it appears though that just one of them hit before the others or one of them had a particularly big hit. But I am going to China twice a year now. Japan twice a year Taiwan once a year. And I talked to a lot of guys that are doing consumer things and it’s pretty much across the board interest in consumer that’s not yet translated to across the board huge orders. I hope it to translate but it hasn't yet. Okay Justin I think you got your follow on so Abigail the next question please.

Operator

Your next question comes from Richard Shannon with North Land Securities. Your line is open.

Richard Shannon

Thank you. Question for Jon Anderson in terms of the guidance for the quarter couple of items that you're baking into I am wondering how think about those. You've told us about your expectations for shares outstanding, does that include the supposition you want be buying any anymore shares so far this quarter such that if you do the share count will be lower? And also what is your implied growth or change in the Mil/Aero business this quarter?

Jon Anderson

Richard what we have left in the buyback program we still have about 700,000 shares that were authorized from the Board of Directors to do buyback. I can't comment in the current quarter what we are doing. You know a report that we did last quarter and it’s certainly something that we look at as a strategic thing to do. So I can’t really go in further with that. Certainly that share count reflects what we have done in the first quarter.

Then as far as the segments it's next to impossible to figure out what segments do in the real time let alone to project what they do. That being said, I will try a little bit I do think we will probably have some uptick in the Mil/Aero segment. We said some more has got pushed. But again the timing of those are such that they do slip in and out. But it will still continue to be string at least. But isn't really hard for me to pinpoint any more further than that.

Richard Shannon

Okay a quick follow on. And I think this might have been asked last quarter but I would be interested to hear your update of thoughts on this. We've talked a little bit about the large demand you are seeing for the ProASIC 3 family of products. Kind of curious as to general thoughts on how fast that might be ramping such that the revenues from that might exceed the ProASIC PLUS. Is that going to happen this year just kind of general thoughts?

John East

First thing I have to think about is how much of that do I want to disclose because they have the policy of I don't want tell you where the big orders are coming from. Yeah, I am just going to give you really general answer. And the general answer is I am going to be shocked if PA3 and its derivative families of which most of the several we have out there are derivatives from PA3. I am going to be shocked if that doesn't eclipse APA by far sometime during the year. But I haven't given too much of a road map to our competition because of the seven families that I named five of them are PA3 or derivatives of PA3. So I still haven't given people a road map for where to go and that’s what I am trying to avoid doing. The PA3 fundamental design has been pretty much the backbone of the success we are having.

Richard Shannon

Okay great thanks a lot.

John East

You bet. Next question please.

Operator

There are no further questions in queue at this time.

John East

Well, that was a lively question and answer period. I appreciate the fact that you guys are putting good reasonable questions on the table. I think you helped us both by doing that. I look forward to seeing all of you same time same place next quarter. Have a good day.

Operator

This concludes your conference call for today. You may now disconnect.

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Source: Actel Corporation, Inc. Q1 2008 Earnings Call Transcript
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