Thank you for standing by, good day everyone and welcome to today’s Altera Corporation’s Conference Call. Today’s call is being recorded. At this time I would like to turn the call over to Mr. Scott Wylie, Vice President of Investor Relations for Altera Corporation. Mr. Wylie, please go ahead sir.

Good afternoon. Thank you for joining us conference call which will be available for replay telephonically and on Alters’s website shortly after we conclude this afternoon. So listen to the webcast replay, please visit Altera’s Investor Relations web page where you will find complete instructions. The telephone replay will be available on 719-057-0820, US code 258-712. Before we begin this afternoon’s call, I want to remind you that as we indicated in our earnings release we will offer our first quarter update on March 6 after the market closes. This update will be, it should be a press release, it will be available shortly after the market closes. During today’s call we will be making some forward looking statements and in light of the Private Securities Litigation Reform Act. I would like to remind you that these statements must be considered in conjunction with the cautionary warnings which appear in our SEC filings. Investors or cautions of all forward-looking statements in this call evolve risks and uncertainty and the future events may differ from the statement made. For additional information please refer to the company Securities and Exchange Commission Filings which are posted on our website or available from the company without charge. Nathan Sarkisian Senior Vice President, CFO will begin today’s call and John Daane, Altera’s CEO will then offer some brief remarks before we open up the call to your questions. Prior to the Q&A session the operator will be giving instructions on how you can access the conference call with your questions. I would now like to turn the call over to Mr. Sarkisian. Nathan M. Sarkisian: Thank you, Scott. Fourth quarter revenues of $281.9 million decreased 3% sequentially, slightly below the lower end of our guidance. New products decreased 5% sequentially with transitions in major programs offsetting the strong 43% new product growth we experienced last quarter. The Mainstream and Mature product categories also declined, both were down a little bit more than 1% sequentially. CPLDs increased 4%, FPGAs declined 3%, and other was down 16%. We indicated in our original guidance that due to several programs transitioning and some taking a pause after an initial ramp, that this would be a challenging quarter at the top line. We came in slightly under the lower end of our guidance mostly due to the magnitude of the anticipated shift. Communication was relatively strong, growing 4% sequentially. Wireline was flat and wireless was up. As anticipated, computer and storage was down sharply, 20%. Consumer fell 11% sequentially, more than we had anticipated. The real swing for us relative to our guidance was industrial where we had anticipated growth, but instead it declined 3%. Five of our top ten accounts grew in the quarter and they grew in aggregate, with the growth coming from communications accounts, as you might expect given the results of the quarter and the comm-centric nature of our top accounts. However, not all comm accounts in our top ten increased. Going forward, we will give top customer statistics for our top 18 accounts because we think this will give you a more accurate overall picture and a broader sampling. On this basis, the majority of accounts declined, and they declined overall. Now for some specifics on our operating results. Gross margins were strong at 66.7% and slightly ahead of our mid-quarter guidance. Included in this result is $1.5 million of benefit relating to the sale of inventory written off in 2001, which was down from our original guidance of $2.5 million of benefit. As predicted, some of the high margin programs that were soft in Q3 came back in Q4. Also, product cost reductions and softness in some high volume programs at aggressive pricing contributed to improvement in our gross margins. These factors more than offset higher than normal provisioning for excess inventory. Our non-qualified deferred compensation plan experienced a net investment gain, unfavorably impacting R&D by $400,000 and SG&A by $500,000 and benefiting other income by $900,000. Operating expenses came in at $112 million, including the $900,000 relating to the deferred compensation plan. Research and development spending was $53.6 million, taking a large jump from Q3 as we continued development on the Stratix II GX and HardCopy II families. SG&A was $58.3 million. Other income was $11 million, better than guidance due to the deferred compensation plan and also the favorable rate environment. Tax rate was on guidance at 20%. Net income for Q4 was $69.7 million or $0.19 per diluted share. Cash and investments held steady at $1.3 billion, even after share repurchases of $195 million for 11 million shares, testaments to outstanding cash generation in the quarter. Total share repurchases for the year were 20 million shares at a cost of $370 million. Total pipeline inventories increased by 3/10ths to 3.7 months overall within our targeted range of three to four months. Distribution inventories accounted for the majority of the increase Now, turning to guidance. John will highlight in further detail some of the program pauses and transitions that unfavorably impacted Q4 revenues. Most of these programs will resume growth and this puts us in much better shape as we enter first quarter. Our guidance is for a 4% to 7% sequential increase in sales. We will see continued strength in communications, particularly wireless. Computer and storage will grow, industrial will be about flat, and consumer will be seasonally soft. Orders to re-sales were below parity in Q4, turns required to achieve our Q1 guidance as of the beginning of the quarter is in the low-70s. Gross margins will be in the range of 65.5% to 67.5%. Guidance on spending is given assuming that the non-qualified deferred compensation plan will have neither a gain nor loss; that is, no impact. I’m going to give spending guidance including the impact of equity compensation or share-based payments, but I will also note the estimated equity compensation expense Before I jump into the specific numbers, I’m going to note a few items relative to our equity compensation plans for 2006. We grant equity to existing employees either in February or August depending on the organization and classification of the employees. Most officer grants are made in February. Grants to new employees are awarded shortly after they begin employment. In 2006, nearly all grants to continuing employees will be in the form of restricted stock units or RSUs. The notable exceptions to this will be John, who will receive only options, and myself, and I will receive a mix of options and RSUs. We believe that the shift to RSUs strikes a better balance between shareholder dilution and employee motivation and retention, at least in the present environment. Note that since we still have RSUs to grant in the quarter, that the estimate for impact to Q1 operating expense is subject to particular volatility. I also want to alert you to a major program that will also impact spending, particularly SG&A in 2006. We have just launched a program to replace our ERP system in first half of 2007. In the early phases of this program, lasting into second quarter, we will be engaging consultants to help us do some process reengineering and design the implementation. These costs will be expensed. In the back half of the year as we move into the actual coding and development phases, the external consulting cost as well as some of our own internal labor spending will be capitalized as part of the cost of the new system. These capitalized costs will then be depreciated as the system is placed into service in 2007. Our estimated cost for the program is approximately $5 million in expense and $20 million in capital. Given those assumptions, R&D will be approximately $62 million, including $8 million of equity compensation. SG&A will be approximately $76 million, including $12 million of equity compensation. We are guiding to $10 million of interest income and a diluted share count of 364 million shares. Total months of the inventory, including both distribution and Altera are expected to be in the range of 3.5 months to 3.8 months. For 2006, we are reiterating our prior gross margin guidance of 64% to 66%, and for our full-year operating expenses to be in the range of $545 million, including about $80 million of equity compensation. You will note that these full-year figures are very close to first quarter spending annualized. Let me explain. First our payroll taxes and certain employee benefits, such as 401(k) matching, take a large jump of approximately $5 million in the first quarter as the year starts anew and all the employees earnings are below the maximum withholding amount. Then these cost diminish through the year as employees hit the various ceilings. You have the same effect for the expenses associated with our ERP replacement project. High spending in the first and second quarter, and then that spending is capitalized in the back half. Finally, with the roll outs of Stratix II GX and the HardCopy II completing in the first half, our mask and prototype wafer expenditures are going to be front-end loaded. Offsetting these front loaded expenses is a hiring ramp in R&D as we add staff to support the development and roll out of 65 nanometer and other future products. Our core tax rate is estimated to be 14% to 16% for the year. The reduction from 2005 is primarily the result of two factors, first, we are earning a higher percentage of our income in lower tax jurisdictions, and secondly, the impact of expensing equity grants to employees on our statement of income has a favorable tax rate impact of 200 basis points to 300 basis points. Under the old accounting for equity compensation, APB 25, the corporation’s tax benefit of equity compensation expense was booked straight to shareholder’s equity. In the new regime, that tax deduction, essentially equal to the employees gain, is included in the effective tax rate. One last note before I turn the call over to John. Effective in first quarter, we will be recomposing our product categories. New products will consist of Stratix II, Stratix II GX, Cyclone II, MAX II, and HardCopy. The Mainstream products will consist of Stratix, Stratix GX, Cyclone, and MAX 3000A. All products previously included in Mainstream will be added to Mature. With our Q1 call, we will present four quarters of data on this basis to enable you to do apples-to-apples comparisons through time. John. John P. Daane: Thank you, Wylie. As predicted in third quarter conference call, the fourth quarter was a temporary pause in our growth, driven by several customer program transitions. The Mainstream and Mature product categories each declined just over 1% sequentially, which is about what we would expect based on the product classification. Our new products declined 5%, or about $7.5 million. Nine customers declined in total over $17 million sequentially in new product purchases. Two of these customers drove most of the reduction in the computer and storage sector, one due to a production ramp pause, and the other due to inventory. Three of the customers were in communications, one had inventory and the other two paused because of the delay in purchases by an operator. The consumer segment declined due to cyclicality, but two specific customers drove a large majority, one due to inventory, the second due to a program end and note that we do have the chip in the new system which ramps this quarter. The final two of the nine customers were in industrial, one in military due to buying patterns and one in industrial due to inventory. By end market, the growth in communications and a decline in consumer and in computer and storage were forecasted; however, the decline in industrial was not and accounted for the miss-to-mid point of our guidance. The revenue decline from these nine accounts primarily impacted the Stratix and HardCopy product families, and secondarily Cyclone. Stratix and Stratix GX declined 11%, Cyclone 4% and HardCopy 42%. Removing these nine accounts from our 130 nanometer, removing these nine accounts, our 130-nanometer products grew sequentially and we believe that peak for this node is still well into the future. In Q4, our newest products grew sequentially with Stratix II up 30%, Cyclone II 69%, and MAX II 15% as we continued to add new prototyping customers and transition some to production. Of the nine accounts mentioned, we expect six of them to grow sequentially in Q1. Combined with the growth amongst our broad customer base in 130 nanometer products, and the continued strong ramp of our 90-nanometer products, we expect our new product category, as well as the company to resume growth in Q1. More on Q1 forecast in just a moment. Our success in 130 nanometer and 90 nanometer products is the result of our change in strategy five years ago. The decline in the communications industry in 2001 reduced the number of start-ups, which in turn eliminated a portion of the PLD prototyping market. Additionally, the shift in focus from time-to-market to that of cost reduction in the general electronics industry eliminated much of the production business for programmable as our chips were costly. PLDs correspondingly under performed the semiconductor industry in 2001 and 2002. Compounding this, Altera had mis-executed in the mid-to-late 1990s and was losing market share in FPGAs and CPLDs. To renew Altera and to achieve sustained long-term PLD growth, we had to regain competitiveness in the FPGA prototyping market and offer cost effective volume products to match our customer’s requirements. Starting in 2002, we introduced a revamped product line with Stratix for prototyping and low-volume production, plus Cyclone and a redesigned HardCopy for volume production Strategy wasn’t the only change. We needed to focus, execute and involve the customer. Engineering and manufacturing execution has been stellar. We’ve focused our R&D return on investment over the last five years has been the highest in the programmable industry. Issued US patents, a measure of innovation, were 172 in 2005, bringing our total to over 1,100 patents. We have three times the number of total patents we had in the year 2000 and we expect our patent issue rates to continue to climb. The strategy change is paying dividends. For the third straight year, Altera was the fastest growing PLD company and by a wide margin in 2005. We added 2% PLD market share driven by FPGAs, which grew 13% year-over-year. Our new product category increased 73%, driving all of our growth in the year as Mainstream and Mature product categories declined 12% and 14% respectively. Year-over-year, Stratix and Stratix GX combined grew 40%, Cyclone 77%, HardCopy 167%, and we ramped Stratix II, Cyclone II, and MAX II. Products introduced since the year 2002 accounted for over 37% of revenues in 2005 and over 41% of revenues exiting the year. Moving forward, we have growth opportunities in each vertical market that we estimate from 2006 through 2010 total 17% compound annual growth rate for programmables, 18% with the addition of HardCopy, and 20% with market share gains. As our market share in the 130 nanometer and 90-nanometer nodes, the current growth engine of PLDs is significantly higher than our overall market share. I expected for the year 2006 and onwards Altera will continue to gain market share. For Q1, we are forecasting a 4% to 7% sequential increase in revenues with resumed new product category growth. We expect communications across wireless, telecom and enterprise and computer and storage to increase in the quarter. Industrial should be flat to slightly up, and consumer should decline due to cyclicality. Scott.

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

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the “*” followed by the “1” on your touchtone telephone. If you are using a speaker phone please make sure that your mute function is turned off to sure that your signal reaches our equipment. If you successively press “*”, “1” please do so again at this time to ensure that you are in the queue. Please note that you will ask a any tone indicating that you are in the queue. We will proceed in the order of your signal and take as many questions as time permits. If at any time you wish to remove yourself from the queue you may disconnect pressing “*” “2”, once again it’s “*” “1” at this time for question. We will pause for just a moment to similar raster. We go first to Chris Danely of JP Morgan.

Okay thanks guys and thanks a lot for all of the clarity on the numbers. It seems as though your results and your main competitor’s results have been a little volatile in Q3 and Q4 and now you are guiding up stronger than they are in Q1. Can you just go through on, I guess what you think is going on out there, because it seems like this volatility quarter-to-quarter is little bit unprecedented in PLDs?

Sure, Chris. I can’t really comment on Xilinx specifically and probably direct you to them to get their guidance, or their numbers for Q3, Q4 and guidance for Q1. I would say we did see a very strong new product growth in calendar quarter Q3. We did guide going into Q4 that we were going to have some customer program transitions within our new product category that would result in a slowdown in our growth. That did occur. We do expect that our new category will resume to growth in calendar quarter Q1. If I look at Q4 in total, our Mainstream and New products declined, sequentially just slightly over 1%. That’s generally based on the classification that we have, which you should expect. Remember going back into the year 2004, we had strong Mainstream product growth in the first half only to find that that was inventory accumulation and have that leave in the second half of the year. So I think what we have seen is sort of a normal growth of our New products in Q3, maybe a little bit too strongly. I would say that the inventory accumulation in the accounts that I did mention, roughly half of the accounts that I mentioned, or did decline in Q4 because of inventory, those were not because of lead-time changes or anything resulting from Altera. They were all cases of the customer expecting that their product was going to have more success than it did, and ultimately they created an inventory position on their own. So from my perspective, we had a very strong Q3, a slight pause in Q4, and we resumed to growth again in Q1 and onwards with our new product growth.

Great. And as my follow up, can you just clarify, you expect I guess flattish gross margins in Q1 and then 65% for the rest of the year; can you just go through those reasons again?

Chris, this is Nate. We gave, as you’ve seen, our October call guidance for 2006 gross margins in the 64% to 66%. I am clearly guiding to a number slightly outside of that range here in the first quarter. I want to signal that I anticipate volatility around the mean. The mean is 65, but I think we can see quarters at the lower end of the range and upper end of the range, and I will give you my best look as we start each quarter.

That’s fine thanks for your guidance.

Thanks Chris.

And we go next to Tim Luke of Lehman Brothers.

Thanks, John. Could you just clarify the issue with respect to the industrial area where it was lower and you thought it was going to be flat or better? And also, just clarify in sizing product transitions; could you give us some sense of how that played out in the quarter and how it will play out going forward? And then lastly, just for Nate or maybe John, on the inventory, what is your expectation both in the channel and in Disti as you go forward through this first quarter? Thank you.

A lot of questions in there Tim, so let me start with the industrial sector. We had expected the military and medical industries to increase. Generally, we have seen some very strong growth for several quarters in particular out of medical. They did not, were slightly down other than the military customer that I mentioned that was one of the nine accounts that was down in the quarter. Nothing specific in that as much as it, probably was just more timing of purchases, and so we would expect for instance the medical sector to up this quarter. So while industrial as a group was down, other than the two companies that I mentioned, we really didn’t see any particular pattern. And again, we would expect to see things like military and industrial start to grow for us again.

With respect to this product transition, you said that it was going to be quarter of product transition, what did you mean exactly, with the New being down?

Yes. So, what I highlighted in Q3 call going into Q4 is, we did see some customers for instance in the consumer segment that had or had signaled that they had inventory. We had some customers in the computer and storage sector which had started their product ramp in calendar quarter Q3, had expected to slow down in Q4 before they resumed again in Q1. We also had a couple, for instance, a consumer company who ended one product in Q4. So they ramped that down and then they start, start ramping a new product in Q1. So naturally, you see one program end and a new program start over the course of two quarters. So that’s what I meant in terms of program transitions.

On the inventory and if you could give us what turns were this quarter? I think you were saying low-70s coming quarter?

Yes, Tim, this is Nate. The turns were just above 70% this quarter, very close to 70% and you are correct, we are guiding to low-70s for this quarter. And I think your question with respect to inventories, how do I see that mix playing out between distribution and Altera? And we quit giving that breakout a few quarters ago and the reason is just because really that’s the strategy that we play out over the course of the quarter depending on where we are seeing end customer activity and trying to position inventories between ourselves and distribution to keep high service levels with minimal inventory. So, that’s something that’s hard for us to give guidance.

What was your guide with respect to overall inventory then?

We are at 3.7 as we exit Q4 and I’m at 3.5 to 3.8 ending Q1.

Okay, very helpful. Thank you, guys.

Thank you, Tim.

We take our next question from Michael Masdea with Credit Suisse.

I guess given your comments about feeling pretty comfortable on the market share side, when I look at, I guess 3Q, 4Q and then 1Q. Look at the end markets fairly seasonal and I look at your growth and you had a slightly below seasonal third quarter, below seasonal fourth quarter and then off the Q4 below seasonal, is that just an artifact of kind of the bubble or how do you explain that, and is that a secular issue for the industry or how do you read that?

Well, so, I think in the last two years, you’ve seen a pattern within programmables of perhaps a stronger first half and a lighter second half the calendar year. We would state looking at the last two years plus, even looking back further, that there really is no strong correlation between any quarter’s performance and how we’ve done in history. So in other words, you go back to 2004, we had a strong first half. Some of that was inventory accumulation. We had a very weak second half. That was the inventory flush combined with a very significant slowdown in the communications industry in Q4. We didn’t see any of those factors in 2005. So, it would be hard for me to say that there is much correlation to history as to how we do in a particular quarter. We are very happy that we outgrew the programmable industry in the year. We are very happy that we also outgrew the semiconductor industry for the year. So we would say on a whole, we feel very, very strong, very solid about our overall results. Nate, I don’t know if you have any other comments. Okay, thank you very much, Michael.

Sure.

We go next to Mark Edelstone, Morgan Stanley.

Hi guys, one very quick one and then the main question. Nate, did I hear you right, the tax rate for this year is 14 to 16%?

Correct, on a GAAP basis. But I want to make clear that everyone understands that included in that is about 2 basis points to 300 basis points relating to the expense of equity compensation.

Okay. Understood, thanks. A question I guess for you John is, you profiled the top customers and what was happening with them individually. So, the first question is what percentage of revenues to those top nine guys account for? And then I know it’s difficult as you have got a lot of different customers, but when you are guys are looking at planning, I am just trying to get a sense for how indicative you think what’s going on at those top nine or 20 type of customers is about what’s going on in the end-markets as a whole for you?

So the nine customers that I highlighted Mark were not necessarily the top customers in total for the company. They happen to be the top customers who declined in New product purchases. So if you looked at our New product category, it declined sequentially about 5% or $7.5 million. The group of the nine customers that I highlighted declined $17 million sequentially in new product purchases. If you take them out, actually our new products would have grown sequentially quarter-on-quarter. But the reason I was highlighting that is many of those were customers that we were highlighting coming out of Q3 that were customers that were going to go through some sort of program transition either because of inventory timing of their product ramp down as they ramped into a new sort of product line. And it was important that we highlighted what happened and where we were right and where we missed.

So, I think, Mark, this is Nate. Sort of what I sense, reading between the lines of your question, is how do we plan, given that kind of volatility in that environment? I think that the short answer, at least from a production build perspective is that rather than trying to anticipate and build inventories based upon forecasted demand, we keep a die bank. We have done a lot of work over the course of the last couple of years to shorten our back-end cycle times, and so we are more in a mode of responding to demand rather than trying to anticipate demand. I don’t know if that was helpful or not.

Yes, fully understand. And I guess just for the record just to try to put those nine customers into perspective, what percentage of new product revenues and/or total revenues did they represent in Q3?

I don’t have the details, Mark, I apologize. They declined $17 million sequentially. They were still purchasing some of the customers’ product in Q4. But, and some of the customers by the way are buying other product from us. I just separated out the new product. But I don’t have an analysis of Q3.

Okay.

It’s the diff, the $17 million is the difference between Q3 and Q4, but I don’t have in total what they purchased in Q3.

Okay. I was trying to get at some sense of scale. Okay, thanks a lot guys.

Thank you.

I’ll just also add to Mark’s question is that we have no 10% customers. We have a handful of customers in the 5% range. Then the question please.

Next we go to Glen Yeung of Citigroup.

You painted a pretty interesting growth profile. I think you said starting in 2006, I wasn’t sure if I caught that correctly. In light of that, I wonder if you could talk about what I guess, end-markets of growth that you think are most likely to contribute to those relatively high numbers?

So, Glen, if you go back to the analyst presentation that we did in December, what we did by vertical market is give you a bottoms-up approach on each of the markets as to how much we thought that they would grow in programmables, how much we thought that they could grow in structured ASICs, which is our HardCopy product, which get to those numbers. And so what we can do is, all of that is public material, and we can forward on a chart that shows you that. I would say in general the growth is fairly balanced. Some markets are a little stronger than others. But we continue to see a very strong opportunity at this point of replacing ASICs. The ASIC market is still well over three times larger than the overall programmable market. We also see a very strong opportunity moving forward, replacing ASSPs. As costs of semiconductor design continue to rise, there are fewer products, fewer flavors of products being developed. We have the advantage of being able to take one chip, customize it, add soft IP cores and ultimately make a replacement for an ASSP, and so we see a big opportunity there as well as in things like micro-controllers with Nios and DSPs, ultimately doing DSP functionality on our chips. So, gain a very broad opportunity and a very strong growth opportunity. I would say in general, if you go back at look at the last several years, of Altera specifically, the last three years, we have been growing in excess of the 17% that we mentioned that we think programmables can grow in the next three or four years going forward. So I think there is very strong correlation, strong evidence to the numbers that we cite.

And if you look into, I guess more the near-term, thinking maybe the next quarter-over-quarter or two and look at where the opportunities are specifically for you to gain share, are there any specific end markets or geographies where you think you are better positioned to gain share?

Well, the results that you see in any given period of time were from design wins that came anywhere from one to four years ago, that are going into production at this point. And so there is very little one that can do in the programmable industry to impact market share in the short-term. As I mentioned, going into Q1, you would expect at this point now that we have a larger business base and consumer that that is going to act more like a cyclical industry for us and that it will grow in calendar quarters Q2, Q3, start to decline in Q4 and Q1. And that’s what we are seeing this year. We would expect communications to continue to grow. As I mentioned, we see growth in communications for Q1 across the board in everything from networking, which we said I think about a year-and-a-half ago that we would start seeing growth in the back half of 2005. We did see that. We do expect that to continue this year as well as in wireless and the telecom side of the business. And then we expect to computer and storage to have very strong growth, particularly in storage as well as lot of opportunities that we have, they are going into production in the server and blade server area and so that’s what we see for Q1. Q2 is a little bit too early to call for us at this point.

Okay. And just one last question, which is your foundry partner, had talked about having some manufacturing glitches in Q4 and some distributors have suggested that there had been some temporary shortage of parts. Wondered if there was any impact that you saw in your reported revenues and if there is still any residual impact in Q1?

There was no impact for us in Q4 due to any supply constraints. In general, between Q3 and Q4 our lead times have remained very short. There was a particular product issue on some older product for Q1. We think based on the recovery that all of the shortage actually will be contained in Q1. So, I would not expect that there will be any shortages of products or any impact on our revenues for Q1.

That’s very helpful. Thank you.

Thank you, Glen.

We will get our next question from Sumit Dhanda with Banc of America Securities.

yes I have couple of questions first, could you comment on, what the bookings spends have been so far this quarter, especially compared to the same point in last quarter? And then one for you John, Xilinx on their conference call talked about the opportunity within cell phones and via their CoolRunner products. I wanted to get your take on the viability of FPGAs in general in that end market and what efforts if any Altera has in that direction?

Sumit this is Nate. Book-to-build this far, thus far in the quarter and then looking at end customer orders versus retail is positive and total orders are ahead of where we are at it in the corresponding period of Q3.

Sumit, on the CPLD side, we have done a low-power product. That really has zero standby current which is what most battery-operated applications would be interested in. We have looked at this as to whether we would develop a specific product and we have not seen a return on investment. In other words, let’s say, you are in cell phones and you are shipping 1 million or 2 million units in some of the higher-end platforms, you are selling chips at $0.50. It just isn’t adding up to enough revenue to justify the development of a specific program or specific family at this point. We do, still continue to investigate low-power products for the future with both FPGAs and CPLDs but have not done anything nor announced anything upcoming from Altera at this point.

Okay thank you very much.

Thank you.

We go next to David Wu with Global Crown Capital.

Hi, this is Hun Lee for Wu. Thank you for taking my question. I have two questions. First, I have heard that a long time Japanese distributor has picked up, has been stocking your competitors’ product. So, are they, are they providing both part, both products for both you and your competitor or they have been stocking, stocking all your products?

Hun, this is John. We did announce that we are going through a transition with a distributor; we did last year add two new distributors in Japan. We are transitioning away from one of our current distributors there. They announced today that they have signed an agreement with, I believe Xilinx to distribute their products, but the timing is such I believe is when they are through shipping ours they will pick up shipping theirs. This was something that Altera initiated. So, we don’t see any down side in this transition at all.

Okay. And another question is, you mentioned that the revenue down side is due to new programs transitioning from some of your customers, and is that, well, at mid-quarter guidance you haven’t called that. So, is that pretty late on the radar for you guys, or can you guys be more, provide a little bit more details on that?

No. Generally, Hun, I would say that the new program transitions that we did highlight, we did say in Q3 conference call. So, I think we were very upfront in knowing most of those programs and alerting people to the fact that we were going to see a slowdown in the company’s growth in Q4 because of that. The one area that we were off was in the industrial segment, and again as I mentioned there were some other customers that were beyond the nine that I mentioned, particularly in medical and military that were a little slow in the quarter, that did cause us to miss to the mid-point of our guidance. However, there is nothing directional there, in other words we expect that those customers will return to growth with us this quarter, in calendar quarter Q1.

Okay. So, I can safely assume that for the new, for the customers with transitioning programs they are going back to your products?

Yes. And as I mentioned six of the nine returned to growth this quarter and the other three we would expect to see back in future quarters, in fact of the nine that I mentioned there were no products that were transitioning to competitors that I am aware of.

Okay thank you very much

Next question please.

We go next to Bob Fujivardi with Deutsche Bank.

Hi. Thanks for taking my question. I am here, I am presenting, but for Ben Lynch. But, did you see any back end tightness or any substrate price increases from third-party assembly test vendors or anything along that line?

Hi. This is John. The back end has been tight I would say for well over six months both in substrates and in assembly capacity. That has not impacted Altera in any way. Generally our lead times has remained very, very stable and very short. In fact the shortest in the industry and we are operating with, I believe, the leanest inventory in the industry as well. So, really hats off to our manufacturing organization, and hats off to our partners who are really working very diligently to make sure that Altera is able to supply what it needs to the customer base. We continue to see tightness. We do not think at this point that that is going to impact Altera. But we do have to play these things a quarter at a time.

Okay. And just to get back to tax rate, I mean, I understand 200 basis points and 300 basis points is coming from tax advantage for the DSOs, but could you talk about some of the kind of operational things you are doing here? Your tax rate compared to your competitors is substantially lower, and could you also comment if you are factoring in renewment of the R&D tax credit? A couple of companies have guided slightly higher tax rates, specifically TI, just because they are not sure about renewing of that legislation?

We do not have the R&D tax credit factored into our tax rate guidance at least at the higher end of the range I provided.

Okay.

Certainly, as we go through the quarter’s booking, our actual tax rate, we will book the tax rate that’s consistent with the law in effect of the time. In terms of relative comparisons between our tax rate and others in the industry, I am hesitant to go there. I think in general terms, we are benefited by the fact that a large portion of our revenue base is outside of the US and that has in many cases a favorable tax rate impact. I think many of others in the industry also have that characteristic. So, and beyond that, it is difficult for me to speculate as to what we might be doing differently vis-à-vis them. Thanks Bob, next question please.

We go next to Jeffrey Palmer of Friedman Billings Ramsey.

Yeah, hi guys, a quick question for you. At the recent analyst’s meeting, Nate, you presented a picture that basically describe the overhang that Mainstream and Mature products still represented in the overall product portfolio and that how New products were going to accelerate the overall growth of the company. Can you quantify for us how much further decline we should expect to see in Mainstream, and when we would see that troughing, so that we could kind of say hey, this is the bottom and we can see from that point forward the New products and the New product portfolio is really accelerating the growth of the company?

Well, Jeff that, I can answer your question. I think it’s going to be tough for other people, who did not see that presentation to put that into context. There is, it is difficult to say exactly when we think that that transition from legacy products to our newer cost reduced products has completed. The chart is still there, accessible on our website. You can kind of look at the curve yourself and draw the line from there. I think on the basis of a linear extrapolation at the rate we have progressing, it is sort of a year out, and that’s in reference to the sort of what we regard as a one-time ASP decline as customers transition from as I said legacy products to new products.

And then I would add that that is a specific comment to Altera, not necessarily a specific comment to the industry or our competitors because those charts were looking at how fast are legacy products were declining, were an Altera specific look. I think it will take a little bit longer for the industry to work through that.

Yes, absolutely. And then, one housekeeping question if may. John, you have made comments twice on the call today about how lead times are stable and short, and best in the industry. Can you actually quantify what lead times are in Q4, were in Q4, and what they are heading into Q1 if you see any shifts in that, those expectations?

Yes. Generally, Jeff, the product lead times that we have on the distributors’ websites are anywhere from two to four weeks, for supply if it’s not in stock on various products as you know they may change one to two weeks in or out depending on particular mix in any given quarter. If I were to look between Q3 and Q4, there wasn’t really any significant change in lead-time between any of the products. And really this quarter, we don’t expect based on what we have seen that there is going to be any impact one way or the other in terms of lead times. As we did mention, we do have an issue on some of our older products, lead times temporarily, this quarter pushed out. We expect them to come back in as we are able to satisfy all the demand in the quarter. So, really I would say in general not much of an overall shift this quarter in lead times. Then we will just have to see as the year goes on.

Great. And lastly if I may, are you seeing any changes or do you anticipate any changes in ASPs going forward. Any, do you see the tightness in the market allowing you to raise any prices, or is it the consistent long-term contracts you have from larger OEM?

So as you know generally when we quote a chip, we give several years of pricing on that quote. So, specifically we will honor that and provide customers the price decreases. So, whether it is a strong year for semiconductors or weak year for semiconductors, the PLD industry has generally given cost reductions year-in, year-out to customers and they would expect that trend to continue going forward.

Great, best-of-luck thanks guys.

Thank you very much Jeffrey.

Thanks Jeff.

We would like to remind everyone that it is “*”, “1” to ask a questions. We will take our next question Tristan Gerra of Baird Financial.

Hi, could you talk about your market share position in wireless infrastructure and how this has progressed since the Stratix was introduced and also specifically in developing countries?

Yes, Tristan, this is John. I think Altera had a very strong position within the 2G on space, specifically things like TDMA and GSM. I think we started to see some of that base erode in 2.5G although we still had a strong position there. By the time we got to 3G, I think our competition really was at the peak of their product cycle and that is when we were weakest with our product cycle and I would say generally the competition won a good bulk of the designs and early revenue in 3G. With the introduction of Stratix, we included multiply-accumulate structures. This was the first time anybody in the industry had done those. They work exceptionally for DSPs. We started to win back a significant portion of those designs. Today, if we look at the revenue that we have in wireless, we estimate that well over two-thirds of that revenue is in 3G systems and we believe that today, exiting the year, we have higher revenue than our competition. In other words, we are number one in market share within wireless overall, and we would expect to continue to gain market share in the year 2006.

And then just as a quick follow-up, any insight you can give us in terms of wireless activity in developing countries?

So, I think you are going to see the third-generation systems continue to ramp. China has announced that they are actually going to do licenses. I think that will help 3G shipments in 2006, 2007. I think you will see continued slow deployment in Europe and the US. Developing countries, you still see 2.5G deployed as well as discussing some 3G. We will see, there is a possibility that people will choose to go with 2G plus WiMAX as a cheaper platform rather than doing 3G, but I think that will take some time to see. So, in general, I think we are going to continue to see slow solid growth in that industry. We are growing faster than our end-customers in that specific industry as we are in more industries, in fact, I would say almost all industries, which shows that we are continuing to take market share from other products like ASSPs and ASICs. And we think the growth will be solid this year, although we are not anticipating in our years that there is going to be some explosion in the third-generation shipments.

Great, thanks a lot.

Thank you very much, Tristan.

And I will go back to Chris Danely with JP Morgan for a follow up.

Hi, very thanks guys. just a couple of the question, hey John can you just run through those quarterly and yearly statistics you gave for all the different product families and I have just a brief follow-up.

The yearly statistics Chris?

The sequential and the yearly that you talked about, I think you talked about MAX II was up 15% sequentially, and Stratix and Stratix GX, you kind of blazed through that. Please go through it again.

So, for Q4, Stratix and Stratix GX declined 11% sequentially. Cyclone declined 4% and HardCopy declined 42%. And again, as I mentioned, if we remove those nine accounts, we would have seen 130-nanometer products actually grow sequentially. Then also in Q4, Stratix II was up 30% sequentially, Cyclone II up 69% and MAX II up 15%. And then for the year, Stratix and Stratix GX grew 40%, Cyclone was up 77%, HardCopy 167%, and then of course all of the Stratix II, Cyclone II, and MAX II revenue was new. So, there is no specific year-over-year number that we can cite there. In total, I also said that all of the products that we have introduced since the year 2002 accounted for 37% of revenues in 2005 and were 41% exiting the year. So, we are continuing to see very strong growth within the new product category.

Great. And then just as a follow-up, can you talk about your expectations for relative growth in HardCopy, Stratix and Cyclone for 2006?

We are not providing, Chris, any breakdowns of products or specifically what we would expect for products. We do expect HardCopy to have a very strong rebound in the next couple of quarters, as we have some of those programs that were going through transitioning start to ramp again and we continue to add new products. We would also expect of course Stratix and Cyclone to continue to grow as we feel the peak of the 130-nanometer node is still a few years out. So, we are expecting still to get very strong growth there.

Okay, thanks guys.

Thank you, Chris

We will go next to a follow up from Jeff Palmer with Friedman Billings Ramsey.

John, I would like to take you back on Chris’ question if I could. Would you mind breaking out your in your comm revenue, roughly what percentage is wireless, what percentage is Wireline and what percentage is telecom. You may have mentioned that, I just didn’t catch it, I apologize?

No, it’s okay. We did not break it out, Jeff. Generally, what we have seen for the year is roughly wireless is about 40% of the communications number, telecom is about 40% and then our networking or enterprise number is about 20%. And for the year, we had, I would say fairly similar growth between all three of those segments.

Do you see any shifts in that on a go-forward basis here in ‘06 and ‘07, do you think?

I would say that we expect all of the segments to actually do very well this year. We are continuing to grow. Enterprise, as you know, that was the market that we lost a lot of business in. And we said about a year-and-a-half ago we expected that we start seeing growth in that in the back half of 2005, as number of our design wins that took market share started to go in the production. That happened. We would expect that to continue. We always been very strong in telecom and we would expect to continue to grow our market share from ASICs in that space and grow. And then in wireless, as we have mentioned, we have come back very, very strong and we would expect that that segment will continue to grow for us as well.

Great. So, in the wireless segment, the source of your growth has been primarily the 130 and 90 nanometer family, is that fair to assume?

Yes.

Great, thank you very much again.

Operator we have permit our time for one more question.

Okay and next question will come from David Wong with AG Edwards.

Thank you very much. Just to clarify the 20% growth that I think that you are expecting for 2006, you said. Are you looking at a relatively normal seasonal pattern for that? The reason I am asking is if one ends up in some slowish growth in September that really needs something like double-digit growth in those June and the December quarters, or is there something that makes the pattern of growth this year different from previous years?

So, let me answer that. The numbers that I cited with the 20%, which consisted of a 17% compound annual growth rate for programmables, another 1% when you add on the opportunity for structured ASICs and then with the ability to continue to take market share, a 20% overall number is really our compound annual figure that we see from 2006 through 2010, as the opportunity. In any particular year, some years we may be lower, some years we may be higher. And in the semiconductor industry, it is very difficult to predict. If you look at the last three years, for instance in 2004, we were well above 20%. Last year, we were in the teens. So, it does depend on the year. And at this point, we are not providing any annual guidance. So, in other words, I am not giving any specific figure for 2006. We will treat each quarter as an individual one and just give guidance on a quarter-by-quarter basis.

Great thank you.

Thank you.

Before, we end today, a reminder. Altera will present at the Goldman Sachs Technology Investor Symposium in Phoenix on February 28, and on March 7, we will presenting at the Morgan Stanley Semiconductor & Systems Conference at Laguna Niguel. This concludes our today’s conference call. Thank you for your participation and interest.