Executives: Rick Muscha - Senior Director, Investor Relations Moshe Gavrielov - Chief Executive Officer Jon Olson - Chief Financial

Officer
Analysts: John Pitzer - Credit Suisse Vivek Arya - Bank of America Gabriela Borges - Goldman Sachs Ross Seymore - Deutsche Bank Ambrish Srivastava - BMO Tristan Gerra - Baird Will Stein - SunTrust Ryan Goodman - CLSA Ian Ing - MKM Partners Alex Gauna - JMP Securities Suji De Silva - Topeka Capital Markets Earl Hege -

Nomura
Operator: Good afternoon. My name is Lisa and I will be your conference operator today. I would like to welcome everyone to the Xilinx Fourth Quarter Fiscal Year 2015 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Please limit your questions to one to ensure that management has adequate time to speak to everyone. I would now like to turn the call over to Rick Muscha. Thank you. Mr. Muscha, you may begin your conference.

Rick Muscha: Thank you and good afternoon. With me are Moshe Gavrielov, CEO and Jon Olson, CFO. We will provide a financial and business review of the March quarter and then we will open the call for questions. Let me remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and actual results may differ materially.

We refer you to the documents the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This conference call is open to all and is being webcast live. It can be accessed from our Xilinx Investor Relations website. Let me now turn the call over to Jon Olson.

Jon Olson: Thank you, Rick. Fiscal 2015 was another strong year of profitability for the company, with operating income up 31.8%, the highest in four years. Industrial and aerospace and defense category increased 7% for the year, representing a record 39% of total sales. The communications segment declined 5% impacted by lower than expected CapEx spend in many of our sub-applications. The broadcast consumer and automotive category decreased 2%.

However, the automotive sub-segment grew significantly, increasing 30% during the year. For the company as a whole, fiscal year sales were $2.4 billion, flat with the prior year. Gross margin was a record 70% for the fiscal year benefiting from end market mix as well as continued cost reduction and margin expansion initiatives across our product platform portfolio. In fiscal year 2015, we returned over 120% of our operating cash flow to shareholders, which represent about 40% of our revenues. This consisted of a record $306 million in dividend payout and a stock repurchase of 15.3 million shares for $650 million.

The March quarter of fiscal 2015 marked the 10th consecutive year of dividend increases for the company putting Xilinx in a very elite group of technology companies. Cash flow per share has increased at a compound annual rate of 14% in the past 10 years, driven by a combination of gross margin expansion, disciplined expense controls, working capital management and share repurchase. Turning now to a discussion of the March quarter, Xilinx sales were $567 million, down 4% sequentially and within our guidance. 28-nanometer sales exceeded $160 million as forecasted. Sales from communications and datacenter declined 7% sequentially and were weaker than anticipated.

Wired communication was approximately flat as expected, while wireless sales decreased double-digits. The weakness in the wireless segment was primarily due to continued softness in North America and a weakening in China LTE business. Industrial and aerospace and defense business also decreased although not as much as anticipated during the quarter. Expected declines from defense were partially offset by better than expected business from both industrial scientific medical as well as test and measurement. Lastly, broadcast consumer and automotive was better than expected with automotive achieving a record quarter, while broadcast was flat and consumer was down.

Gross margin was 59.9% for the quarter better than anticipated, primarily as a result of product and customer mix although we continue to be focused on driving improvements and profitability. Combined R&D and SG&A expense were $211 million, significantly lower than forecasted, primarily as a result of lower stock-based compensation expense in addition to continued cost efforts. Operating income was $159 million, including amortization of $2.4 million and a $24 million restructuring charge or $0.08 per diluted share. The restructuring charge reflects the impact of streamlining certain internal organizations as well as the impact of a transition from sales reps to a direct sales model for certain customers. Other income was $1 million, higher than guided primarily due to an $8 million gain or $0.03 per diluted share from the sale of land.

Net income for the quarter was $135 million or $0.50 per diluted share. Operating cash flow for the March quarter was $166 million before $6 million in CapEx during the quarter. Diluted shares for the quarter were 270 million, slightly less than forecasted and down 25 million shares from the same quarter a year ago. There was a 5.7 million share dilutive effect from our convertible notes. For questions related to the dilution associated with our convertible debt, please visit our Investor Relations website at www.investor.xilinx.com.

We repurchased 4.4 million shares for $175 million during the quarter and paid $70 million in dividends. Let me now comment on the balance sheet. Cash and investments were flat sequentially at $3.6 billion. We have $600 million in convertible debt and $1 billion in fixed rate debt, resulting in a net cash position of approximately $2 billion. Inventory dollars at Xilinx decreased by $16 million sequentially, but days increased to 136.

Let me now turn to a discussion of guidance for the June quarter of fiscal year ‘16. Our backlog heading into the quarter is up sequentially. Both wired and wireless communications are expected to decline. Wired communications remains sluggish although data center will likely increase. Wireless will be impacted by slowing China LTE builds in the near-term.

We expect the industrial and aerospace and defense segment to be down driven primarily by continued expected decreases from A&D. Lastly, we expect broadcast consumer and automotive to be approximately flat. As a result, we are expecting total sales to be flat to down 4% sequentially. And the midpoint of this guidance is predicated on a turns rate of approximately 47%. The lower turns rate is primarily due to a couple of large customers being more fully booked to expectations and a regional distributor transition.

Gross margin is expected to be approximately 69% to 70%. Operating expenses for the June quarter are expected to be approximately $210 million, including $2 million of amortization of acquisition-related intangibles. The Q1 fiscal ‘16 operating expense level will be at its lowest level for the year due to lower tape-out activity and timing of expenses to ramp up headcount post-restructuring. The headcount additions will largely be driven by hiring in the sales force and to a lesser degree in R&D. For the full year, we are lowering our spending forecast as follows.

R&D is expected to be between $530 million and $540 million. SG&A will be between $340 million and $360 million. Amortization of intangibles will be approximately $8 million. Other income and expense for the June quarter will be a net expense of $12 million, due to lower interest income and anticipated hedging losses. For the full year, other interest and expense will be a net expense of approximately $33 million.

The share count is expected to be approximately 266 million shares. The tax rate for the June quarter is expected to be approximately 13%. Let me now turn the call over to Moshe.

Moshe Gavrielov: Thank you, Jon and good afternoon to you all. We are very pleased with the strength of our 28-nanometer products, which exceeded $160 million.

As expected, we continue to expand the breadth of 28-nanometer sales contributions. The strength of our Virtex-7 high end family and Zynq all programmable SoC was a particular highlight, driving 28-nanometer sales growth in wired comms, industrial and automotive applications. For fiscal year 2015, 28-nanometer revenue reached $580 million driven by broad-based growth from all end-markets and each of the four 28-nanometer product families. 28-nanometer product generation continues to be the most successful node in history and we believe will have longest life of any node. As we discussed our Investor Day last month, we are targeting [Technical Difficulty] of sales to grow approximately 30% in fiscal year 2016.

Gross margin performance was another significant highlight for both the fourth quarter and the year. Gross margin increased 69.9% in the quarter significantly better than forecasted and a record 70.2% for fiscal year 2015. Proven formula for successful execution, establish the 28-nanometer continues to yield excellent results at 20-nanometer with the UltraScale family. Leveraging our world class partnership with TSMC, the undisputed leader in the foundry industry are now delivering the industry’s first and only 20-nanometer FPGAs volume production. Based on key customer feedback, we are more than one year ahead of the competition in terms of product advancement and quality.

Additionally, we are shipping the industry only high performance ASIC class 20-nanometer high-end product offering with Virtex UltraScale. Finally, with our second generation of 3D IC technology, we are shipping the industry’s largest device delivering more than 4x density of competitive devices. We are currently shipping 20-nanometer products to approximately 100 discrete customers, demonstrating the broad-based acceptance of this family. This past quarter, sales from our 20-nanometer node were $5 million and we expect these sales to double in the June quarter. 60-nanometer node, we launched the UltraScale Plus family of FPGAs, 3D ICs and Zynq MP SoCs, combining embedded memory, 3D on 3D, and multiprocessing SoC technologies.

On the system level, the UltraScale Plus family provides 2x to 5x greater system level performance per watt significantly more systems integration and intelligence and the highest level of security and safety. We continue to anticipate the first tape-out of our 60-nanometer FinFET Plus process to be this quarter. During the March quarter, we also strengthened our family of SDX software defined development environment with the launch of the SD SoC product. This environment enables a much larger software and systems development community to program our Zynq SoCs and MP SoCs. Target high growth opportunities, areas such as datacenter acceleration, software defined networking, embedded vision and the industrial Internet of Things.

Despite the near-term revenue growth challenges, I continue to be confident in our strategy to resume top line growth. Additionally, we are driving increased efficiencies in our operating model to improve productivity and appropriately align spending levels for the fiscal year ‘16 sales outlook we have previously provided. Let me now turn the call back to the operator for Q&A.

Operator: The floor is now open for questions. [Operator Instructions] Your first question comes from the line of John Pitzer from Credit Suisse.

Your line is open.

John Pitzer: Yes, good afternoon guys. Moshe, you might have just answered my first question in your prepared comments. But I just want to confirm that as you look at your full year fiscal ‘16 revenue guidance that you gave at the Analyst Day, I think a flat to up 2 that you still think that’s the right range to look at. And I guess given the less than expected start in the June quarter, how do we think about linearity of that growth to get to that full year number?

Moshe Gavrielov: So, John, that continues to be our target and it obviously will start from a low point if we hit our range, but we expect to see it grow during the year and we are confident that as the communications business starts to recover that will be one of the numerous fibers of the growth together with all of the technology elements that I referred to before.

John Pitzer: That’s helpful, Moshe. And then specifically your comments around China, to what extent do you think this is a pause in vacation build-out in China versus perhaps too much inventory with some of the equipment guys that we need to bring there. I am just trying to get a sense of how much of this do you think is a real pause in demand versus perhaps a realignment of kind of inventory within the supply chain?

Jon Olson: Yes, John, this is Jon. Let me kind of take that one. So, it’s always a little of both, right, but meaning in general, the Chinese manufacturers try to get ahead of the awards as much as they can.

But when there is a following demand situation like we have now or delay I would say, particularly from the FD ramp perspective, it is really more about that pause. And one, the ramp starts to build a little more precipitously. We did think all along that our communications business, wireless specifically would build throughout the year. So, that part while it maybe starting off a little weaker than we anticipated, it isn’t really radically scaring as much at this point in time. They are just – China is just going through some overall CapEx modifications and the FD stuff is going to happen.

It’s just going to happen, start a little bit slower, but we do think we have accommodated that in our full year forecast.

John Pitzer: Thanks guys. I appreciate it.

Moshe Gavrielov: Next question. Thank you.

Operator: Your next question comes from the line of Vivek Arya from Bank of America. Your line is open.

Vivek Arya: Thank you for taking my question. Maybe to just continue that discussion, I understand the China impact on wireless. I am just curious why the wired business is not growing? When Broadcom reported yesterday, they thought the datacenter demand or the wired business demand, they see picking up.

So, I am curious is this just lumpiness, is it just the timing of different projects? What will drive wired demand for you?

Jon Olson: Yes. So, we were very pleased with our 28-nanometer growth in the quarter. So, new products are growing, including datacenter this quarter. So, we had good contribution from the new product category. It’s really some of the older stuff that wasn’t quite as strong as we had anticipated in some of the sub-applications.

So, I would say we saw some – and I don’t really know the details of all the sub-segments that Broadcom ran, but we did see strength in these new products. So, as those build throughout the year, meaning the new programs and some of the customer differences, I think we will see good growth in the wired market from new products continue throughout the year.

Vivek Arya: Got it. Very helpful, Jon. And then as my follow-up, I am curious what your views are on this potential combination of Intel and Altera.

Is that – if not were to happen, is that a net positive neutral or does it present any kind of risk for you and if that combination does happen would you also need to take any steps towards consolidation? Thank you.

Moshe Gavrielov: Okay. Well, in the 15 minutes of saying for the programmable world, I am sort of surprised that this was the third question and not the first, but thanks for asking it. And from our perspective, regardless of whether that happens or it doesn’t happen whether it’s rumor, whether it’s true or not, we are very confident. And the reason that we are very confident is that we continue to distance ourselves from the competition and we believe we are poised to now deliver a three-peat.

We have won a 28-nanometer, we believe we have huge leadership at 20-nanometer and we are very confident in our position at 16-nanometer. We have leadership with our ASIC class tools and also the new tools the software defined environments are huge enablers for business expansion. If this rumor does come to pass and this acquisition will happen we believe that will be a net positive for us, because it will give us the additional significant advantage of being the only vendor with this very service-oriented business, with the total focus, the best foundry, strategic relationship with leadership on the roadmap and generally continuity of operations. So, whether it happens or not, we don’t know, but our position is very strong and we are very confident in where we are and we believe that this gap between us and the competition will just grow going forward.

Vivek Arya: Thank you, Moshe.

Moshe Gavrielov: Thank you.

Operator: Your next question comes from the line of Jim Covello from Goldman Sachs. Your line is open.

Gabriela Borges: Great. Thanks for taking my question.

This is Gabriela Borges on behalf of Jim. I know you discussed a little bit on the China dynamic in the communications market, maybe you could also comment on what you are seeing in North America I know you mentioned the softness in the March quarter but maybe there is a little bit of stabilization in June, is there any color on North America and maybe Europe and some of the other geographies as well? Thank you.

Jon Olson: Sure, Gabriela. The North America continues to be weak for us. I think we have had a couple of quarters of relatively weak transitions or weak revenue there.

One of the bigger expansions that have gone on over the last year or so has been the Sprint deployment and they have slowed down substantially. There seems to be some CapEx spend financing things going on here and there, and that’s been slower for us on a relative basis to how strong we are to the ultimate OEMs who won those contracts. We don’t – best as what we can tell we don’t think this is some sort of a permanent thing. Some of those things we are getting worked out as we talk to our customers in that particular area. I mean largely, the AT&T and Verizon businesses is add-ons and capacity extensions.

Nothing significant going on there quite frankly in terms of the CapEx spend, it’s really around Sprint and T-Mobile and we are well-positioned there. But it is definitely, decelerated over the last couple of quarters but we do not expect that to continue for the full year. Europe, while there has been some sales into Europe, it’s still early and we don’t have, I would say a clear view. We are counting on a big percentage of that business to come in until maybe very late in the fiscal year.

Gabriela Borges: That’s helpful.

Thank you. And as a follow-up if I may, could you help us think through the implications of the Alcatel-Lucent and Nokia merger and maybe any context you can provide based on what happened in 2006 which I think is the last time we saw customer consolidation? Thanks very much.

Moshe Gavrielov: So wireless generally is the market where, as you pointed out has been consolidated for some period of time. And we fundamentally believe that the – or at least I believe that the catalyst for all of this is the emergence of the very strong players in China and that is forcing the other non-Chinese players to bulk up and strengthen up. And from our perspective, both of these companies are significant customers of ours and as they merge if they come out strengthened that should improve our business.

And we think that this will provide them with a better market position to compete against the other players who have been pulling ahead recently. So, given our market position with these two players and the potential for growth with both of them, I think as they merge it will provide a growth path for us going forward assuming the combined player will emerge stronger as indeed they should. There does tend to be a little bit of confusion when it starts because these are two very large, very diverse companies with geographic footprints in different spaces. And I do believe that at least as they are doing the merger, there will be a little bit of hiatus, but then it will – as the merger is completed they will probably have renewed growth going forward.

Gabriela Borges: Appreciate all the color.

Thanks very much.

Moshe Gavrielov: Thank you.

Operator: Your next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open.

Ross Seymore: Hi guys.

Thanks for letting me ask the question. I guess first, Moshe one on your side and still on that kind of comm infrastructure side of things. From as close as I can check, whether it was the end of market or Xilinx specifically we have had there quarters in a row of tough results, can you talk a little bit about what gives you the confidence that we are going to see a snapback in the back half of the year, especially on the wireline side where I believe on the last conference call you talked about being relatively puzzled as to why design wins weren’t turning into revenue for Xilinx?

Moshe Gavrielov: So the reason we are confident that this needs to reverse is at some point there is a mismatch between the infrastructure requirements to the drivers which is basically a lot of this is driven by consumer and business demand. And we think that on the wired side that time is approaching and that our very strong product portfolio will enable us to capture that as it happens. There is an incessant need for an investment in the infrastructure.

And I think it has been shortchanged for too long. So you are right in pointing out that we have been disappointed and that this has taken longer. And actually, we have predicted this before, but at this point what we are seeing is a lot of the designs that we reaped at the high end of the 28-nanometer are now moving to production and those got delayed roughly by a year vis-à-vis our initial expectations. So between the market demands and the design wins we have at 28-nanometer, where we do have visibility in them now moving and hence we made the comment on the growth of our Virtex-7 product offering. Those products are now starting to move into production.

And we expect that to be a portion of this snapback. And then of course on the wireless side, there are elements which we expect as Jon elaborated on we expect China to have that need and it’s only a question of when and that needs to start happening soon on the wireless infrastructure too.

Ross Seymore: Great. Thanks for all that detail. I guess as my quick follow-up, one for you Jon, on the OpEx side, great job controlling those expenses in the quarter and the guide.

From your description of what’s going on in lowering the full year by about 3%, it sounds like there is an aspect of tightening the belt overall and then also some timing issues on OpEx. Are you expecting us to exit this year at the same sort of OpEx level that we would have before and therefore fiscal ‘17 would kind of be the same as we would have thought before or is this truly a cut in OpEx levels longer term? Thank you.

Jon Olson: Yes. So I think the whole origin of the restructuring in the first place was around driving efficiency and getting more focused in areas particularly in the sales area to accelerate our wins of customers. And that was really the genesis for doing it.

And we sat there in the March timeframe and Investor Day obviously we knew we were doing restructuring, but we never commented in advance on that for a variety of reasons. And in the guide that we gave in March there were certainly some things that weren’t decided yet through our restructuring efforts even at early in March. And as we got through to really dissecting the sales organization and changing the focus away from reps to direct selling, this is where we have garnered the biggest part of the dollar drop and the change in our guide since March. So it’s really reflective of us figuring out how to put the right resources in the right places. And sometimes that means you actually spend less when you have the right resources and that’s the primary driver of what the reduction – the net reduction that we have going on.

Now on your question around the exit rate, as I said in my remarks, the first quarter is particularly low and that’s because we haven’t ramp headcount back up. I do think that the second quarter, we have a lot of more tape-outs going on and that goes – bounces around throughout the rest of the year. And our exit rate in – out of Q4 will suggest some tick up and would suggest that some tick up in FY ’17. But – by the way, we are not there yet. So I am not signaling that we are going to have a tick up in FY ‘17.

So it will look like the – that Q1 is low and then Q2, Q3, Q4 will be more flattish throughout the year. But we certainly aren’t making a statement yet about FY ‘17 spending.

Ross Seymore: Great. Thank you.

Operator: Your next question comes from the line of Ambrish Srivastava from BMO.

Your line is open.

Ambrish Srivastava: Hi. Thank you, Moshe. And I am sorry because actually we disappointed you with that question not being number one. I did have a follow-up on that and which is when you heard and if it’s true that whatever price was offered and what was asked, did you fall off your chair or you said okay, Intel gets it.

The Street doesn’t get it that there is this huge opportunity for PLDs in the datacenter and I think Altera has quantified it as $1 billion in 2020. So, any thoughts around that would be very helpful? Thank you.

Moshe Gavrielov: Well, it’s a rumor and the prices are a rumor and whether it’s happening or not happening is a rumor too. We are delighted with the attention this gets and we think that obviously there is potential for growth. With regards to prices and all of that, it shows the perceived value of programmable logic, which I am a big believer in.

So, I am delighted with that general trend. Hopefully, the entire world will see the light, but…

Ambrish Srivastava: Okay, Moshe. Thank you. Good luck.

Moshe Gavrielov: Thank you.

Operator: Your next question comes from the line of Tristan Gerra from Baird. Your line is open.

Tristan Gerra: Hi, good afternoon. Could you quantify the headwind from end-of-life products embedded in the June quarter guidance and is that headwind done by the end of the quarter?

Jon Olson: Yes. So, as we said in Investor Day, there would be some residual shipments into some of these major programs at the very beginning of the fiscal year ‘16, but at a much diminished rate.

So, by the time we get to through the first half of our fiscal year which is end of the September, I would say a great deal that will be away and the biggest piece of it will be in June. So, I would say by the end of June it’s largely gone, with some residual going on in the following quarters.

Tristan Gerra: Okay, thank you.

Jon Olson: Next question please.

Operator: Your next question comes from the line of Will Stein from SunTrust.

Your line is open.

Will Stein: Thanks for taking my question. First, just a housekeeping one, you have reset guidance on OpEx, I just want to confirm you are keeping the gross margin guidance that you have offered previously for the full year?

Jon Olson: Yes, we are.

Will Stein: Great. And then the more substantial question I had is in the press release you talked about and I think at the Analyst Day, you talked about this as well these new software development tools that are targeted at datacenter and SDN and industrial IoT.

I am wondering if you can help us understand whether that’s expected to accelerate your growth through perhaps share gains versus Altera or is it versus some of the other maybe the other SoC vendors or is it to grow the market? Any color on the expected effect from these tools will be helpful?

Moshe Gavrielov: So, the expected – let me pose the challenge that we have. And if you look at our products, they, in numerous applications, enable our customers to achieve very attractive parameters in terms of performance per watt or price performance per watt. In other words, they can achieve a – they can implement differentiated highly competitive system. In order to do that, they need to go through a design cycle, which requires a certain set of skills. And in order to increase the population or universe of the users of our products, what we have done is we have developed these tools.

These tools tend to be somewhat application-specific or it’s not one size fits all. They tend to have different targets, but once you use these tools, you can enable usage by a broader set of customers and in particular, engineers with more of the software background and there are lot more software engineers then there are hardware engineers. And the reason we are doing it is in order to expand the SAM and the intention here is to provide a alternative – an attractive alternative to ASSP standard product. So, that’s what this is. This is SAM expansion and this enables us to target markets, which today are serviced by ASSPs, because the engineers at some of these companies and datacenter is a very good example typically do not have hardware design skills and we are developing these tools to facilitate that expansion.

Will Stein: Great, that’s helpful. Thank you.

Moshe Gavrielov: Sure, thank you.

Operator: Your next question comes from the line of Srini Pajjuri from CLSA. Your line is open.

Ryan Goodman: Hey, thank you. It’s Ryan Goodman in for Srini. So, I had another question on China LTEs. We have the FDD licensing now behind us, but it seems like the near-term trends are still softening a bit. So, I am just trying to understand how much of visibility you have here.

We all know it’s going to happen at some point, but are you starting to see some of these FDD orders coming in for the back half of the year or if not just what are your expectations there? And then also are you seeing any impact from potential tower sharing going on in China at this point?

Jon Olson: Sure. Ryan, the China – FD on the China LTE as we have already seen builds going on by the OEMs and we get more of our information through the OEMs than anywhere else. And so there already have been some builds and some shipments on the FD. So, this is more of a timing issue as best as we can tell and what our customers are telling us versus they are changing their longer term forecast for us, they don’t. There is certainly no orders booked for the second half of the year at this point in time, because our lead times are generally pretty short.

So, there is not a whole lot of impetus on the part of the OEMs to commit through a PO early even though they do provide us some guidance on forecast. And we don’t see an overall lower number than we had anticipated maybe even in early March. So, really it’s more of a temporary slowness the best as we can tell as anything else. On the tower sharing, no, we really haven’t seen any impact whatsoever of the tower sharing. It doesn’t even come up in our conversations.

The issue there is really more about new towers, not old towers, so that’s really not a factor.

Ryan Goodman: Okay, great. And then just different question on the cash side, so cash return was great this year, you forgot the history of it, it’s been pretty consistent. Just any thoughts on where – I don’t know if you have a formal target on it for the coming year or just maybe an idea of how you are thinking about it for the year versus operating cash flow?

Jon Olson: Yes. We don’t have a formal target, but if we look at our – look at the history over the last 10 years, we have returned 100% of our operating cash.

We did 120% last year. We have increased our dividend for the 10th year in a row. We will continue a share repurchase program on an opportunistic level. And we have stated as long as we don’t have an acquisition target or something that is using any of the excess cash. At a bigger level, we will return cash to shareholders.

So, I think you can count on us continuing to do that, but again, I am not going to make a commitment on a percentage.

Ryan Goodman: Okay, great. Thank you.

Operator: Your next question comes from the line of Ian Ing from MKM Partners. Your line is open.

Ian Ing: Yes, thank you. First question, could you talk about any sort of price increases you think your international distributor customers are seeing, whether it’s based on currency or pricing more to reflect value and would there be any impact on demand or is demand pretty inelastic?

Jon Olson: Yes, we are not really seeing anything that’s significant in the price increase area. I was concerned on the second part of your question about the demand impact, particularly at smaller customers and we have seen we had strong channel sales in this last quarter and we are forecasting strong channel sales again, including European, which I assume is the biggest source of your question, including on the European side. So, it’s really not at this point has been a big of a deal as I was fearful of, but because while we had maybe a soft quarter a quarter or two ago, things have come back pretty nicely.

Ian Ing: Great.

And then do you have any thoughts on the trends on the size of the FPGA design community, is it still growing and is it largely driven by Zynq? Do you have any sort of metrics to support that whether its design kits shipped or design kits installed?

Moshe Gavrielov: Well, the Zynq product offering was a breakthrough offering. It was the generally the last part of the rollout. And as such, there was a large number of design wins. Now, those design wins, which were targeted at somewhat slower moving markets like industrial and automotive, those design wins are moving to production. So, it’s a unique product.

The number of design wins is phenomenal. We are learning because of its nature that in some cases it takes longer. It’s also a more sophisticated product, hence it takes a little longer. To do the design it requires both software and hardware. It has a high performance embedded processor system.

The number of design wins is just huge and the overall magnitude of the design win value on Zynq is very encouraging. It’s very significant. And now, it is finally starting to grow a very healthy clip. So until last year, it was relatively negligible in terms of the portion of revenue, but now it's growing at a fast rate and as these applications in automotive, wireless and aero and industrial control are starting to hit production.

Jon Olson: I think you also – just you asked specific about design kits and our design board environment.

I mean in terms of numbers of kits and boards, I mean it’s just totally swamped in terms of numbers, all previous FPGA boards, because of the nature of the cost point or price point that many of these applications are going after, more of the $700 million versus the $800 or $900 kind of an ASP. And so both our distributor and Xilinx have a number of inexpensive boards and kits. And those numbers – the numbers of those that have been shipped out over the last couple of years is just really phenomenal. So we really think we are seeding the industry really well with these capabilities.

Ian Ing: Okay.

Thanks Jon. Thanks Moshe.

Moshe Gavrielov: Thank you.

Operator: Your next question comes from the line of Christopher Rolland from FBR Capital Markets. Your line is open.

Unidentified Analyst: Hey guys. It’s Joe on for Chris. Thanks for letting me ask you question. So this past quarter, we had noticed a small bump in lead times for both you and your competitor, first, is that true. And then, in terms of responding to increasing customer demand, how long are the cycle times coming out of TSMC?

Jon Olson: Yes, so Joe, we really haven’t had any, I would say, any appreciable lead time increase on a broad perspective.

There is a class of products that we have had a little bit of – we have had some lead time increase, but I wouldn’t say it’s going to be that material of an impact to anything on our logistics. So I don’t think that’s been a particularly and if there is anything there that to concern anybody from a logistic supply perspective. What was the second part of your question again?

Unidentified Analyst: Fab cycle time?

Jon Olson: Fab cycle time, no we see no push out or lengthening of any fab cycle time. We are getting all the wafers we order and when we order them there is no – nothing going on there either for us.

Unidentified Analyst: Okay, great.

And then we had also heard about possible consolidation in your distributor network, could you elaborate there if that’s true?

Jon Olson: No, not really, it was our rep network where we are – as we terminated a variety of reps. In Japan, we are transitioning. We have a number of reps in Japan and the nature of that business is a little different than the rest of the world. And we are transitioning one of the reps to – into our other rep network. That’s the only really transition that we have – excuse me, distributor in China, excuse me distributor in China, one distributor moving into our other distributors in terms of the business, but nothing other than those two things.

So reps in the U.S. and Europe generally we are transitioning to direct sales. And then in Japan, there is a distributor that we are terminating and moving that business to other distributors that we already have.

Unidentified Analyst: Great. Thanks guys.

Operator: Your next question comes from the line of Alex Gauna from JMP Securities. Your line is open.

Alex Gauna: Good afternoon everybody. Thanks for taking my question. Moshe, I know you have already touched on this twice, but coming back to the implications of a potential Intel-Altera merger and Altera’s optimism around data center acceleration through the massively parallel architectures of programmable logic.

I am just wondering are you in fact involved, I know you aren’t heavily exposed to the data center, but are you involved in using the FPGA architecture to accelerate workload, is this tens of million, hundreds of millions of opportunity for you. And then if you think about what’s obviously happening with co-packaged FPGA and CPUs, how far in the future does it make sense in the workload acceleration sense to think about convergence wherein the processing and the FPGA are a single die? Thanks.

Moshe Gavrielov: Okay. There is a lot of questions there. So we think there is an opportunity there, that's why we have the SDX product which now we are releasing completely [ph] to our customers.

And we strongly believe that, that together with a stronger focus on this market should enable us to reap the benefits of it. We think it’s a significant market. There is – whether it’s tens of millions or several hundreds of millions of dollars, we think it’s going to take time to grow to those larger numbers and it takes quite a long time. And we are committed to having the best solution with regards to acceleration which addresses those markets. And whether its X86-based or ARM-based or whatever approach then we are going to pursue solutions for that market.

So now I think we are well positioned and the key to our leadership is now in the software which enables achieving or getting at that acceleration in the most efficient way. And that’s how we view it. It’s a big market, but maybe not quite as huge in the short-term as maybe others have positioned it.

Alex Gauna: Okay. And then just to clarify on that, obviously you said it will take some time but from a convergence sense, is this one of those situations where the nature of the architectures and the workloads mean that for the foreseeable future we can think of it as a co-loaded – co-located FPGA and processing solution or are there clear benefits to convergence where we think about single die FPGA and CPU being really important in terms of accelerating that market?

Moshe Gavrielov: Well, single die helps, but comes with the cost and the cost that you get typically is flexibility.

The nature of these applications is they are very, very fragmented. And every one of them tends to have the different payload and actually, that payload is dynamic. So if you are using it to accelerate some sort of algorithm, the algorithm that you are accelerating changes all the time. And so if you do too much integration and you tend to have a very inflexible solution, you might end up losing, right. So when we talk to the customers and these tend to be a different class of companies, their – and their approach is they want to retain as much controls over their acceleration path and they would rather not give that to anyone else.

And if you look at the way their approach has been, typically they do not buy from the traditional server companies. They actually build their own and they try to come up with a very specific solution, which is the most valuable for them. So there is a case to be made for integration, but what you lose when you do the integration is a lot of the flexibility, which is inherently important for this market. And so I would say it’s great. In some cases it might go towards integration and others actually having a separate solution and being able to maintain the flexibility there is a huge benefit.

Alex Gauna: Alright, that’s great. Thanks so much. One more quick point of clarification, you mentioned seeing and it’s intuitive maybe a little bit of pauses as Nokia and Alcatel try to combine operations, is that factored into your upcoming quarterly guidance or would that pause be further out and would it be a few percent or would it be a fraction of a percent? What kind of exposure would we talk about to a potential slowing there or pause?

Jon Olson: We have not seen a pause as a result of whatever has been in the newspaper and their stated position on this. Moshe was only I think talking in general about when two companies get together what can happen in terms of how their organizations melt altogether. At this point in time, as best as we can tell, this is not going to be consummated at the earliest later this calendar year maybe in next calendar year.

We are not seeing any sort of pause with our business with either company at this point in time.

Alex Gauna: Okay, thank you.

Moshe Gavrielov: Thank you. Next question.

Operator: Your next question comes from the line of Suji De Silva from Topeka Capital Markets.

Your line is open. Suji

De Silva: Hi, guys. So, I think I heard you guys saying you were trying to beef up the direct sales effort versus the key reps. I am curious which end markets do you feel like that’s most important for, if any? And if it is the datacenter and try and target the cloud guys, is that somewhere you feel like you have to catch up versus competition or is that purchased – I mean, is that the wrong weight on this?

Moshe Gavrielov: We have now restructured our sales force to be tiered with two direct elements and the third element, which goes through this deep. We are managing that a little more closely than we have before.

With the largest accounts primarily in communications and datacenter, we believe that we would benefit from a more direct interaction, because fundamentally, several of engagement needs to be deeper than it was before. And are we doing this later than ideally we should have? We probably are. In retrospect, this would probably have benefited from making this transition a year or two ago.

Jon Olson: Yes, I think also I mean it’s just not – this is only focused at one end market. There is going to be some transitions going on even in our aerospace and defense market coverage to more direct sales.

And I know some of these kinds of wins don’t turn into immediate revenue. They are slower, but it does have both industrial, aerospace and defense, test and measurement as well as the communication segments impacted. And we – I don’t think it’s a net positive for us. Suji

De Silva: Okay, great. That explanation helps.

And then also I know the China LTE carrier pause question has been asked a lot. But I just want to ask one out of the way, anecdotally, what are your customers and your customers telling you about why this group of buyers is pausing at this juncture. Is it macro, is it concerns about LTE sub-brand or is it technical reasons in terms of cloud ran architecture feature? What do you think anecdotally?

Jon Olson: As best as we can tell, this is more about a CapEx China macro. I mean, I don’t want to say macro, but China macro-related CapEx spend in the pace that they are getting funded internally to do things. And I don’t know what else.

Some of it there is always the politics between the FD standard and the TD standard and it’s hard to tell whether that’s still causing delays in FD as a result of TD being – trying to be in China Mobile trying to be more dominant, but I don’t know that I am qualified to comment on whether how much of that is true or not. Suji

De Silva: Okay, great. Thanks guys.

Operator: Your last question comes from Earl Hege from Nomura. Your line is open.

Earl Hege: Hey, guys. Thanks for taking my question. I am calling for Romit Shah. I guess, when we look at your gross margin, you guys are maintaining the guidance there. How do we look at the volatility of that moving through the year as China LTE improves as you expect?

Jon Olson: Well, definitely in China – the wireless business, because of the volume and concentration of customers tends to have a drag on our gross margin.

So, we would expect and we have modeled this that the second half would be lower than the first half as a result of that. I am not going to get into the real specifics, but the second half will be lower than the first half, but we are still confident in delivering our stated goal from Investor Day.

Earl Hege: Alright, great. And just a quick follow-up, just regarding your guys’ own appetite for acquisitions, where do you stand in terms of looking at opportunities to strengthen and/or diversify your business currently?

Moshe Gavrielov: So, this is a topic which is very sensitive. We have the capacity.

You can tell by our track record that we do this very, very cautiously. The nature of our business is such that it has a unique element to it. So doing acquisitions for acquisitions sake is not trivial for us. And so the answer is we can do it. We know how to do it.

At this point, if you look at where we are and what we have done, it’s primarily been technology acquisitions as opposed to acquiring other companies that have a totally different business model and modus operandi.

Rick Muscha: Okay. Thanks, for joining us today. We have a playback of this call beginning

at 5:00 PM Pacific Time, 8:00 PM Eastern Time today. For a copy or our earnings release, please visit our IR website.

With regards to conference participation this quarter, we will be attending the Baird Growth Stock Conference in Chicago on May 6 and the JPMorgan TMT Conference in Boston on May 19. This completes our call. Thank you, all very much for your participation.

Operator: This concludes today’s conference call. You may now disconnect.