Altera Earnings Call Insights: Wireless Expectations and the ASIC Conversion

Altera Corp. (NASDAQ:ALTR) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Wireless Expectations

James Schneider – Goldman Sachs: I was wondering if you could dig into the wireless business a little bit; specifically, first of all, the decline you’re expecting in Q1 is that driven by just one customer, or two customers or is it kind of across the board in wireless? Then as a follow-up, can you maybe talk about the expectations you have for the wireless business as we head through 2013? What might be the drivers would that just be the U.S. or will you expect it to pick up from Europe or China as well?

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John P. Daane – Chairman, President and CEO: Jim, why don’t I go back and start with maybe Q3 and then kind of go through time with wireless, because there are different phenomena happening. First of all, if you go back to the third calendar quarter of 2012, we grew sequentially in wireless with both TD-SCDMA deployments in China and LTE prototyping, as well as LTE trials. We have projected a decrease for the fourth calendar quarter because of the ASIC conversion at one of our larger customers. While wireless was down sequentially in Q4 much of the loss that we had from the ASIC conversion was actually filled in by continuing strength in TD-SCDMA and also shipments in the W-CDMA or 3G and in particular what we were experiencing in the quarter was shipments for the 6.1 phase of TD-SCDMA for China Mobile. So while again wireless was down in Q4 it was down a little bit and far less than we had originally projected, so business was actually fairly robust in the calendar quarter Q4. It will be down this quarter for two reasons. One is the major customer that Ron pointed out with the VMI transition. We effectively take one of our two largest accounts and we lose one month of sales to the account as we transition it to a VMI program and because that’s in the communications area including wireless, it obviously affects our wireless number. The second reason is we are between the phase 6.1 and what is expected to be the 6.2 phase of TD-SCDMA, so both of those reasons are leading to the decrease. Now the reason that we are projecting wireless to go up in the second calendar quarter from the first is again based on our customer forecast. We are seeing an increase for TD-SCDMA for the 6.2 ramp and then also China Mobile is doing what they are calling Phase 3 of LTE which is a fairly aggressive rollout of the equipment and we should see a really good ramp of that towards the end of the second calendar quarter and then continuing strongly into the third. So that’s based on what we know and again if we were to take the one customer that was transitioning to a VMI program out. Wireless might be down just a little bit but not a lot this calendar quarter.

James Schneider – Goldman Sachs: Then just a quick follow-up, can you quantify about how many points of sequential decline is due to that VMI transition you mentioned?

Ronald J. Pasek – SVP, Finance and CFO: So Jim, this quarter, it’s about a third of the decline.

The ASIC Conversion

Ambrish Srivastava – BMO Capital Markets: My question is on your comments about growth beyond the first quarter. The PLD industry, we all know notoriously low visibility, high turns. Besides wireless, what gives you the confidence that you will see a return and Q1 is the bottom for your business? My follow-up is, John and Ron, if you could please update us on the ASIC conversion. Is there any other conversion that you have visibility into, any other major program that could potentially blindside us again over the next few quarters?

John P. Daane – Chairman, President and CEO: So to answer that backwards, there is no ASIC conversion that we are aware of that’s either going to happen in the short run or over the long-term. We are not aware of any other programs that are currently in transition that account for any significant revenue.

Ronald J. Pasek – SVP, Finance and CFO: Ambrish, the reason we feel the way we do about Q2 and if you remember last year, we did the same thing, we guided Q1 and we gave just one view directionally of Q2. We do, do a rolling six-month forecast. But obviously the visibility in that second quarter is not as good as it is the first quarter. So we were convinced that it is directionally up. I am going to give no color or detail about where or what markets, et cetera, but directionally we do see Q2 being up similar to last year. The other thing I might add is book-to-bill for the quarter as I said was – is right now negative, but when you adjust for this VMI arrangement, it actually is positive. If we had been in apples to apples we would be positive for book-to-bill at this point this quarter.

Ambrish Srivastava – BMO Capital Markets: Ron, you said similar to last year, last year was a huge guide down in…

Ronald J. Pasek – SVP, Finance and CFO: I only meant similar in the fact, that it’s directionally up, don’t assume I’m suggesting it’s going to be up to that same magnitude. Again, when we gave directional guidance last year, we didn’t give any magnitude at all.

John P. Daane – Chairman, President and CEO: Again, part of the reason that we’re also saying some of these markets are at a bottom is if you kind of go back in time, remember we talked about in 2011 due to the tsunami in Japan. There were some factories that were impacted; we had a customer that was doing some high-volume ASICs at one of those plants. They needed to continue to ship their products; they migrated their designs over FPGAs and basically took product for about a quarter and a half. We did call that out. But obviously on a year-over-year basis, it challenges the networking business. So while networking grew without that, with it included 2012 versus 2011 networking declined. Military, as we mentioned also was an area that was impacted by some programs that purchased heavily in 2011, didn’t repeat or repeated at a lower level in 2012. Some of that was because of the winding down of military operations overseas, some of that is just program timing. Ultimately, we look at military now is being a bottom for us as well. Again, we’re getting some good buy signals out of communications from orders and forecast from our major customers both for LTE, as well as some of the continuing third-generation deployments. So, that’s kind of leads you to where we get with some of the markets. Some of the others, harder to call, we’ll have to see how industrial performs in 2012, obviously that’s tied more closely to the macroeconomic environment, very difficult for us to project at this time. For some of them we do or can see absolutely a bottom for program timing reasons, others just in the short run based on what we’re seeing from order and forecast activity out of our customer base.