Good day everyone and welcome to today's Altera Corporation Conference Call. Today's call is being recorded. At this time I'd like to turn the conference over to Mr. Scott Wylie, Vice President of Investor Relations. Mr. Wylie, please go ahead sir.

Good afternoon. Thank you for joining this conference call, which will be available for replay telephonically and on Altera's website shortly after we conclude this afternoon. To listen to the Webcast replay please visit Altera's Investor Relations webpage where you will find complete instructions. The telephone replay will be available at 719-457-0820. Use code 258712. Before we begin this afternoon's call I want to remind you that as we indicated in our earnings release, we will offer our second quarter update on May 30th. This update will be issued via press release and will be available shortly after the market closes. During today's call we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ from the statements made. For additional information please refer to the Company's Securities and Exchange Commission filings, which are posted on our website or available from the Company without charge. Nathan Sarkisian, Senior Vice President and 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. First quarter revenues of $293 million increased 4% sequentially at the low end of our guidance as manufacturing constraints limited upside against strong demand. We commented in January that lead times on some MAX devices had pushed out in Q4 but that we expected to resolve that issue in the first quarter catching up to demand and getting lead times back in line with our target of two to four weeks. For the most part we did get there but as anticipated it was towards the end of the quarter. Shipments to distribution in the last half of March were very high as evidenced by our high receivables balance. We think we did leave some demand for some of these products unfulfilled, as distributors were unable to get the product programmed and out the door before quarter end. The production throughput limitations were really on our HardCopy, Stratix and Stratix II families for products which we anticipated receiving in the quarter was pushed out by our suppliers. We are not going to be able to get into the specifics of what exactly the constraining factor was because we have very few partners in our supply chain and we don't want to be talking about their business on our call. Estimating the impact of the supply constraints on revenue requires us to make many assumptions and estimates, so please take my projection as the best guess. Our best estimate is that we could have added another 2% to 4% to our topline without the push outs. As we indicated in January, this quarter we revised our product classification scheme with the design win families Stratix II, Stratix II GX, Cyclone II, MAX II and HardCopy constituting the new product category. All of the information presented in our press release is on this basis and the last four quarters of results on this new reporting basis are on our website presently. New products delivered all of the growth with a 28% sequential increase despite the manufacturing limitations on Stratix II. Mainstream and mature products were roughly flat sequentially. Stratix including GX was flat in the quarter, and here we were expecting strong growth off of a sluggish Q4 impacted by program transitions. We would have achieved very solid growth without the supply limitations. CPLDs were flat. FPGAs were up 5% and other was up 8%. Our end market segments results were pretty much in line with our guidance with continued strong communications growth coming from the wireless segment, particularly 3G, good growth in computer and storage after two programs paused in the fourth quarter and seasonal softness in consumer. We had an upside surprise in the industrial coming from military and factory automation. The majority of our largest 18 accounts grew and they grew in aggregate. Orders were strong with orders to resales well above one. Now for some specifics on our operating results. Gross margins were 66.8% GAAP and 67% even non-GAAP at the upper end of our guidance. Relative to guidance, gross margins in Q1 were strong owing more to customer mix than any other factor. The delinquencies did not meaningfully impact margins nor did we incur any meaningful financial consequences as a result of our delinquencies other than the impact to revenue. Note that gross margin improved sequentially while new leading edge products actually increased as a percent of revenue. Note also that consumer declined as a percent of revenue. This quarter is another data point consistent with our observation that the biggest drivers of our margin fluctuations are the end markets and the mix of prototype versus production business. Stock-based compensation included in operating expenses was $18 million, below our guidance of $20 million. Excluding stock-based compensation operating expenses were up significantly on a sequential basis due to higher payroll tax and benefit accrual rates, spending on the ERP replacement project and labor expense. Non-GAAP operating expenses of $120.7 million were on target to our guidance except for $2.3 million of expense associated with our non-qualified deferred compensation plan. Other income excluding the favorable $2.3 million impact of the non-qualified deferred compensation plan was $10 million, also on guidance. The tax rate on a GAAP basis was 15%, excluding the tax benefit associated with stock-based compensation, the tax rate was 17%. Net income for the first quarter was $59 million or $0.16 per diluted share or non-GAAP excluding equity compensation and related tax effects was $73 million or $0.20 per diluted share. Cash and investments held steady at $1.3 billion. Shares repurchased in the quarter were 2.2 million shares at a cost of $43.7 million. Total pipeline inventories decreased by 2/10th to 3.5 months overall, at the center of our targeted range of three to four months. Accounts receivable and DSO increased owing to the high volume of shipments into distribution in the back half of March. Our 8-inch remained consistent with prior periods and we continue to be paid according to terms. In fact, more than 80% of the March balance has been collected. Capital spending was $12.4 million and our forecasted capital purchases for the year are estimated to be approximately $15 million. Q2 guidance, orders to resales in the quarter were substantially above one. We built end customer backlog and quarter-to-date resales and orders have been brisk. Our guidance is for 7% to 10% sequential growth, and we believe we have the demand to support at least the high end of that range. Unfortunately, we are likely to be unable to supply all of our demand. Certain materials and services in the supply chain remain constrained in the near-term. Ultimately the end result will be driven by the product mix of demand and supplier performance. It is likely that we will exit Q2 with a higher than normal amount of delinquent end customer backlog even if we achieve the higher end of the range. Before I provide our turns projections let me provide some background. More and more of our end customers are procuring through distribution without backlog arrangements or at least backlog as it has been traditionally defined, that is a committed purchase order. You are likely familiar with many of these new supply chain arrangements including consigned and vendor managed inventory, demand-pull arrangements billed to forecast agreements etc. Although various distributors record these customer commitments differently, the net of these arrangements is that less and less of their future demand is being reflected as reported backlog. This, of course, drives up our reported turns. Recently, we engaged with some of our distributors to incorporate their demand for these types of programs into our end customer orders and backlog data. Doing so reduces our reported turns requirement as compared to history. At the end of the first quarter the impact is around 7 percentage points. Turns required to achieve guidance is in the mid 50s. Measured as we used to compute end customer backlog, it would be in the low 60s. As you all know, in a period when supply is constrained, customers typically build higher safety stock inventories and there is often some level of double ordering. We believe that our Q1 orders reflect both of these phenomena. Orders to resales were very high. We believe our guidance discounts for the cancellations and push outs we will receive when we catch up to demand. Order and delivery rates for the majority of our products where we have good availability have been in line with our expectations. Gross margins will be in the range of 65% to 67%. We are looking for margins to decline a little bit here in the second quarter, then rise a commensurate amount in Q3 as a result of cost reductions. Guidance is given assuming that non-qualified deferred compensation plan will have neither a gain nor loss, that is no impact. My spending guidance for Q2 excludes the impact of equity compensation, which is projected to be $8 million for R&D and $10 million for SG&A. Excluding the impact of equity compensation, R&D will be approximately $61 million and SG&A will be approximately $64 million. R&D will climb sequentially with the rollout of the Stratix II GX and HardCopy II families. We are guiding to $11 million of interest income and a diluted share count of 370 million shares. This assumes one more Fed tightening and no share repurchases. Total pipeline inventories will be flat to up 0.3 months with the key variable being our ability to turn product into finished goods and get it through the distribution channel to customers. For 2006 we are modifying full-year guidance as follows. We are increasing our gross margin guidance upwards from a range of 64% to 66% to a range of 65% to 67%. In our December Analyst Meeting, we guided to $469 million of operating expense including equity compensation expense -- excluding equity compensation expense, and with the assumption that the non-qualified deferred compensation plan would have no net impact. On this non-GAAP basis and again assuming that the NQDC plan nets to zero for the year I am increasing this estimate to approximately $475 million. The swings are slightly higher labor and fringe and approximately $4 million related to the ERP replacement project. In our January call I indicated we would incur about $5 million in expense for this project and spend another $20 million in capital. As we have gotten deeper into the project we are now estimating more expense and less capital, this swing giving rise to about $3 million more expense in '06. We anticipate declining spending in the second half of the year with a pretty sharp fall off in R&D as we complete the Stratix II GX and HardCopy II rollouts here in the second quarter and early Q3. Also, as we capitalize the spending associated with our ERP replacement project, SG&A will continue to decline. On a GAAP basis including equity compensation expense we guided to $545 million in December and I am holding to that estimate as the aforementioned increases are offset by reduced estimates for equity-based compensation. Our core tax rate is estimated to be 14% to 16% for the year or 16% to 18% excluding the tax benefit resulting from the equity compensation charge. Q1 results and this projection assume that the R&D tax credit does not get reinstated. John?

Thank you, Nate. In Q1 we were disappointed with revenues at the low end of our guidance but supply constraints that developed in the quarter prevented us from fulfilling strong customer demand, in particular demand for our 130 and 90 nanometer FPGAs was very strong. In the new cut of the product classification published this quarter we expect both the new and mainstream categories to grow and mature products to decline. New products grew 28% sequentially and 173% year-over-year. Each of our new product families grew sequentially with Cyclone II up 65%, Stratix II up 26% and MAX II up 88%. HardCopy increased 1% as the growth in storage was largely offset by a decrease in consumer. Mainstream products grew 2% sequentially and 35% year-over-year. Stratix and Stratix GX were flat and Cyclone increased 10%. All of our product categories were impacted by the manufacturing constraints but new and mainstream more so. There are several highlights I would like to expand on. First, we had record design win bookings in Q1, over 25% higher than our previous quarterly record and from numbers that have been steadily increasing for several years. These ASIC and ASSP replacement designs will continue to fuel Altera's growth for many years to come. We shipped the Stratix II GX first device ahead of schedule and the transceiver performance is clearly best in class. Demand for this product is extremely high and based on our first past success we are accelerating the release of the remaining family members. Stratix II was the fourth largest product line by revenue in Q1 and we expect it to move to third this quarter behind Stratix and Cyclone. Stratix II revenue is ahead of Stratix for a similar period of time marking our momentum in high-end FPGAs. We had a number of large design commitments in the quarter on HardCopy II and in particular we are now seeing multiple design wins with our major accounts. The HardCopy II structured ASIC design flow was named a 2006 design vision award winner at DesignCon from the International Engineering Consortium. We announced our C-to-Hardware acceleration or C-to-H compiler, a new Nios II microprocessor productivity tool. The tool automatically converts performance critical C language microprocessor subroutines into hardware accelerators combined with the Nios subsystem to dramatically improve system performance. This enables for the first time software engineers to design hardware and opens a new market opportunity for Altera. Nios is already the industry's most widely used soft microprocessor core with over 15,000 design kits shipped and the world's top 20 OEMs are using our embedded solutions. And finally, demand for our 130 and 90 nanometer FPGAs was very strong in the quarter. Even without the manufacturing constraints we would have had difficulty in keeping up with demand for Stratix and Stratix II. Manufacturing was clearly the low light in the quarter as we are on allocation for the first time in over five years. I attribute the supply constraints not to our methodology or to our systems or to the amount of inventory we carry but to a series of one-time issues in our supply chain that we do not expect to repeat in the near future. We have completed the recovery on the MAX series products and we believe we have secured adequate supply to solve the HardCopy, Stratix and Stratix II constraints given the next two to four months depending on chip package type. In Q2 we expect growth across all of our vertical markets. Consumer will increase with its seasonal pattern. Medical, military, test and measurement, manufacturing systems, security and automotive all should contribute to growth in our industrial category. Computer and storage will continue to increase with the ramp of new programs and we expect strong growth in communications as demand across wireless and wireline is robust. For the second quarter we are projecting a sequential revenue increase of 7% to 10% driven by strong demand from our mainstream and new products. Scott?

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

Operator Instructions. And our first question today will come from Chris Danely with JP Morgan.

Thanks guys and good job on the conservative guidance, turns percentage wise. Can you just go through the, what the issues are on the availability of the HardCopy and the Stratix products? It sounds like the lead times were brought in but then you're saying you're still a little bit capacity constrained and it also sounds like there's packaging issues. Can you just kind of take us through that again? Thanks.

Chris, this is John. At a high level, as Nate mentioned and as we talked about earlier in the quarter when we did our update, we're not going to go into the details of the particular issues behind the constraints. The reason is, as you know, we have just a few manufacturing partners and as a practice we would rather not go into details or particular issues that any one of them might have. However, what did happen in the quarter were a couple of different items. One of them impacted the MAX series of products. We did talk about that in the Q4 conference call going into Q1. That series of issues we expected to recover towards the end of Q1, beginning of Q2. That did happen as Nate talked about. On the area of Stratix, Stratix II and HardCopy there were some items that came up in the quarter. This goes back to Nate's comments about we had expected materials to arrive in the quarter that slipped out or were pushed out, which caused us to push out lead times on those devices. We now at this point expect to get caught up with demand for those products in the next two to four months. But also even if those items had not been pushed out by the suppliers, we still would have some difficulty fulfilling all of the demand that we've seen, in particular for the Stratix and Stratix II series.

Got it, so within two to four months you expect all of the issues to be resolved basically?

Yes and just as a note there is-- on our Web site there is a button that you can go into that shows what our normal lead times are and the extended lead times for various products. Hopefully, that will cut through some of the rumors that have been published in the last few months. You can go and just check on how those products are doing.

Okay, thanks a lot guys.

Thank you Chris.

Thank you Chris.

Thank you. Next we'll hear from Seogju Lee with Goldman Sachs.

Hi, thanks. Just quickly on the turns in the quarter what were they? And then I have a question, actual question as well.

Turns in the quarter were in the mid 70s. Our guidance was for low 70s. That's a little bit counter intuitive given that we got to the low end of our range so let me explain that for just a second. There was some backlog that we had coming in to the quarter that we did not fulfill due to the delinquencies so that was partially offset by higher turns.

Okay and so there was no impact from the change in how you're recognizing the turns or

Not on a historical looking basis. That's an apples to apples number.

Okay and then just a question in terms of HardCopy, with LSI announcing their exit from the rapid chip business just wondering how you're looking at the opportunities for HardCopy and if you've seen any accelerated interest? Thanks. Good luck.

I think we've seen a lot of accelerated interest. I think in general I would say everybody who has been in the structured ASIC category has seen sort of a slower development in than one might otherwise have thought. Nevertheless, I think Altera has been the leader in this category. I'd estimate we probably have over 65% to 75% market share of revenues. I think the concept is absolutely taking off with the engineering base. Most everybody prototypes in and FPGA to begin with as they're doing an ASIC design so the idea of being able to prototype in our FPGAs and automatically have that converted to a structured ASIC for cost reduction is a lot more popular than the idea of having to reinvest in engineering to convert it to another ASIC vendor. And so that's why I said in the script that we have a number of design wins and these are multiple design wins with major accounts and we're really starting to see I think this concept take off with a lot of major companies where I'm not going to do ASICs at all anymore and I want to standardize on structured ASICs and Altera is the company to do it with because they have the design methodology. They have the FPGAs and they have the structured ASIC solution. So we're still investing very heavily in this. We're still 100% committed to it and we expect it to continue to grow to be a very significant part of this Company's revenue.

All right. Thank you.

Thank you.

Thank you. Next from Lehman Brothers, we’ll hear from Tim Luke.

Thanks. I was wondering-- it looks like that's quite a significant ramp in your R&D spend in the second quarter. If you -- obviously there are a number of factors coming into play. If you could clarify some of that and then maybe give us some feel about how we should shape that for the second half of the year and maybe reiterate what you said with respect to the full year? Thanks.

Hi Tim, so the principal factors affecting the -- or giving rise to the increase in the second quarter R&D spending are continued rollout of the HardCopy II and Stratix II GX families so that involves the initial tape out masks and wafers and initial prototype runs on those product families. And then if you -- given that we took guidance for total operating expense up roughly $6 million from the guidance we gave in December so the guidance we gave in December for R&D was 225. That number is still pretty good. That's on a non-GAAP basis so you can see that R&D comes down pretty substantially starting in Q3.

And, Tim, I'd say that the delta probably from quarter-to-quarter is the acceleration of some of the Stratix II GX tape outs from the success that we've had with the first chip coming out and working well and the strong customer demand for the product.

I was also just wondering as a follow if you could just give color on how you perceive the bookings trend and your ability to fulfill that demand in the second quarter? It sound like what you're saying is your demand is likely to remain sufficiently strong that you will not be able to fulfill the higher end of your guidance. Therefore, how should we interpret that looking forward in terms of the bookings?

Tim, we may fulfill the higher end of our guidance. There are certain products that we will remain constrained on through the second quarter.

So, in other words, we have demand from customers for that they would like in Q2 that we know at this point we are not going to be able to fulfill. That was taken into account when we put our guidance together and so that's where Nate said that there's certainly demand to do today the high end of the range and so as the quarter developed it would possibly be that we could go well over that high end of the range but we also know at the same time that we are not going to be able to fulfill all of the demand on some of these products.

Right and that factored into your turns?

Correct.

Which, again, could you just repeat that number for the turns?

So unfortunately there are two numbers for turns. As we would have historically calculated it would be in the low 60s including a broader view of definition of backlog it's in the mid 50s.

Thank you very much guys.

Thank you.

Thank you. Next we’ll hear from David Wu with Global Crown Capital.

Yes, I had just one clarification and one question. The question regards to I understand that you have expanded your supply base in the 130 nanometer products and I was wondering when can we see you coming out of this period of tightness? I assume by Q3 that we shouldn't hear about supply chain constraint anymore. Is that correct? And secondly, Nate, you went through how you calculate the new turns rate and I wasn't quite clear what's the difference between the old and new was.

Let me start with the supply base. We have not changed anything within the front end of our supply base. TSMC remains the sole foundry for almost everything that we do. We've got a very long partnership with them. They have absolutely serviced us good times and bad, and we do not anticipate any shifts, so unfortunately I think there was an inaccurate article put out and it's probably what you're responding to, David, but there hasn't been any shift nor are we working with any other foundry supplier today. At a high level, as I mentioned in the script, we do expect that in the next two to four months we will be completely done with the supply constraints. We do believe that we have access to adequate supply at this point. Some of the one-time issues that happened are we think behind us and depending on the chip package type and depending on demand we think given the next two to four months, we'll be well out of the woods here and we would not expect this to repeat in the near-term because I think we've been an excellent manufacturing company and excellent partner to our customers and we certainly count on getting back there very soon.

Okay so, David, let me try again on old versus new turns and that really comes down to what is old versus new backlog, and the old definition of backlog that we used to employ is a firm committed purchase order from an end customer to a distributor. That view of backlog excluded such things as demand-pull arrangements, consigned inventory and other arrangements that a lot of our larger end customers have in place with some of their distribution partners. Nevertheless, despite the fact there isn't a, in some cases a firm committed P.O. for anticipated take here in the second quarter, there is anticipated volumes that the end customer is going to take. And so the new definition of backlog takes that broader view and that, of course, reduces the turns requirement.

Really that basically would include hub or not hub in that calculation, right?

Whether it includes what?

The hub business, the OEM hubs where they sort of take as they need it basis.

In general, yes. That's an approximate answer to the question.

Yes, so these can be programs, for instance, whereby the customer has put in an agreement where they are going to take X product in the quarter. They are committed to do so. They just will pull it when they need it during the quarter and so we're now incorporating some of these programs where they have committed to take the product and it should look and feel exactly like a committed order.

John, ask you one quick clarification. Where is the great demand that's coming through? I mean, obviously, extended lead times create artificial demand, but let's say if your read is correct about excluding double orders it looks very, very strong and I just wonder where is the demand coming from?

So, David, you're right. I mean we do think absolutely that there are double ordering. Of course no customer is incentivised to tell us as such because in allocation they're all saying that they need the product and we're trying our best, of course, to service their requirements, but in every prior cycle where we've seen strong demand and have been on allocation there has been some double ordering and we're assuming that there is some of this at this point. This quarter we're seeing very strong demand across really all of our market segments. We expect all of our segments to grow. In particular, in the last two quarters communications has been very strong. We expect both wireless and wire line to grow this quarter. Wireless grew very strongly last quarter. We expect consumer to grow again this quarter both in panels and broadcasts. I mentioned a whole host of areas that are growing in the industrial category and then we expect computer and storage to continue to grow this quarter from really what was very strong growth last quarter associated not only in the storage and server areas, but also in the printers and copier areas because we're seeing some strength there. And I'd also tell you that the strength is not just solely tied to the products that are on allocation at this point. We are seeing good growth out of products like Cyclone, Cyclone II, MAX II products as well, so a fairly broad base this quarter, fairly strong demand and I guess that's probably all I could provide you at this point.

Thank you.

Thank you very much David.

Thank you, with Moors & Cabot we'll hear from Hans Mosesmann.

Thank you. Can you explain why it is that your 90 nanometer mix increased fairly dramatically and it actually improved gross margins and if you could explain why it may not be that way with your competitor, which has seen good growth in that area as well, but it seems so be working against them in terms of gross margins?

Well, that's a tough one, Hans, from the standpoint that exactly what they do or how they end up with the results they got I obviously don't have privy to, but I can just reiterate some of the statements that we have made pretty consistently in the past and that is that it's really mix of prototype versus volume production that has a larger impact on our pricing, therefore our margins than it does new versus mainstream mature. And the other factor has to do with the end markets where we see high gross margins in industrial and lower than average gross margins in consumer and in our communications accounts we're about at corporate average, so those are the things that drive our margins more than whether it's new products, mainstream or mature. There are at times, and we've discussed this, where we have secured high volume opportunities on new products and to the extent that those opportunities to go into production and drive a lot of volume, then that does weigh down corporate gross margin. It has an impact on new product margin as well, but that's what drives our gross margins more than anything else, Hans.

Okay, fair enough and a follow-on question regarding just the overall trends in HardCopy. Is the acceleration that you're seeing today a result of companies like LSI that are getting out of the structured ASIC business or are these designs that you had in the pipeline anyway? I'm just tying to get a sense if there's an acceleration as the result of LSI exiting that business.

I think there is both. I think there's an acceleration because LSI is getting out of the business. We have taken on a design as an example that I know of that I visited a couple of weeks ago from a customer that was formerly an LSI design. There is also, and I think more fundamentally, an acceleration in the marketplace right now of customers wanting to move to structured ASICs away from standard cell ASICs. So I think the market is really getting robust and we happen to be one of the few solutions left in a robust marketplace, so I think we're really at the right place at the right time.

Okay, thanks very much.

Thank you, Hans.

Thank you, next we'll hear from Steve Eliscu with UBS.

Yes, this is Steve Eliscu for Tom Thornhill. I have a question regarding your consumer business. You have a good outlook this quarter but the last two quarters have sequentially declined. If you could give some insight as to some of the dynamics going on there, especially as your competitor has shown sequential increases during that same time period.

Well, our consumer business, Steve, has not historically performed as you would expect on a seasonal basis. We've had some quarters where Q1 has been extremely strong in the last three years for instance. Normally with companies that supply to the consumer area Q1 is extremely weak. But we've also said in the past that we figure there will become a day where our business becomes large enough that we are penetrated into some of these markets like flat panel TVs that we will start to see seasonal behavior out of our consumer number. And so if we look at Q4 and we look at Q1, a lot of what we saw really was some programs ramping down, the customers transitioning to new models. Those new models are starting to take-off and we expect consumer to have a really strong growth quarter this quarter. So I wouldn't say it's anything in particular. It's certainly not design losses or program losses to competitors as much as it is I think we're just large enough in that sector in some applications, for instance TVs, where we're now starting to see more seasonal behavior and so, again, we would expect to see strong growth this quarter because of that.

So are you saying TVs are now becoming more important relative to broadcast equipment?

Well, as we've said before, roughly half of the consumer number is in what you would consider to be traditional consumer products. The other half is in things like broadcast equipment. In the traditional consumer area certainly the TV area is by far the largest and so, yeah, I would definitely say that the TVs we're now seeing behave exactly like a seasonal product.

And on a different note here, you've talked about being able to recover from your delinquencies over the next two to four months. Is there the possibility of some demand being lost either to your competitor or just because you can't supply the product, and how significant is it?

I don't expect that. I would note that we've seen one of our competitors have some issues on an annual basis, at least that's never benefited us. We don't anticipate that we're going to have any lost business at this point, certainly I don't know of any. As you know, any of the business that's been designed into any of the older products, it would require redesign of the chip, a redesign of the board. Certainly our recovery is going to be well within the window where it wouldn't be fruitful to try to convert to a competitor's product. Additionally, between Stratix II and Stratix, as we've talked about before, only a few members of Stratix II are on allocation today. Most of the Stratix II members are well within normal lead times. Most of the delinquency today is around the Stratix family, and again that's a product for which there is no any compatible device in the industry and, again, people who have it in production are not about to change their cards. So this is a painful time for our customer base. It is a painful time obviously for us, but it is something that we are working very diligently through. We've been communicating with our customers as to what we can do, and we think we're getting through most of that and are well on our way to recovery at this point.

And as a final question on raising your gross margin guidance. You talked about three dynamics here; working on gross margin, your cost reductions, the end market mix and just the prototype versus production. Can you elaborate more on the dynamics that are driving with regards to those three variables that you talked about?

I would say the number one reason for the improvement in gross margin guidance for the year is the yields on 90 nanometer.

Thank you very much.

Thank you, Steve.

Thank you.

Thank you, we’ll hear from Satya Chillara with American Technology Research.

Yeah, hi good afternoon gentlemen. Can you talk about the communication market? You had 6% growth in Q1. Sounds like you had much bigger growth last Q1, so what is happening in this market? Are you seeing growth going forward?

Yeah, communications segment grew very strongly for us in calendar year 2005. We had I think 16% growth in that category, and that was probably three times what the overall PLD industry grew in communications last year, so I think we've definitely been very strong there in taking market share. We did see a lot of strength last quarter in 3G, as Nate mentioned. Additionally we saw access up, access being for instance, DSL. And this quarter we're seeing growth or strength in all of the wireless standards: fixed, 2G, 2.5G, 3G, as well as Access. Access is very robust right now, and then add into that we expect growth this quarter in networking as well as in the traditional telecom or transmission area. I would say that communications is extremely robust. Obviously communications uses a lot of our high-end FPGAs. It's also an area that last quarter was probably one of the more impacted by the allocation that we had on Stratix and Stratix II. Does that answer the question?

Yes. May I ask one more question, please?

Yes, certainly.

During the call you did mention something about double ordering. At this point do you have an idea based on all the dynamics that happened in Q1, what kind of double ordering is going on at this point? Anything you can quantify or is it more like a qualitative piece?

Well, what we've done is assess demand based upon what we know of the programs that are the major drivers of our business and then look at total backlog and you can kind of see a gap there, and then you can come to an estimate of double ordering on that basis, so that 's what we've done.

I think you can go back to Nate's earlier comments where he said that really the increase in order activity is only on a few products. Generally most of the older products are remaining very steady and stable, so it's been easier to go through the analysis because ultimately we're only seeing a change in behavior on a few products, but again we're also seeing the ramp of-- or continued ramp of Stratix along with a strong ramp of Stratix II, so not all of the increase is necessarily double ordering, and so it does take some work to go through that in order to identify real and increasing demand versus double ordering.

Okay, thank you.

Thank you.

Next from Credit Suisse we'll hear from Michael Masdea.

Thanks a lot. If we take your piece of revenue that basically got pushed into the second quarter, but then first quarter you have kind of a 7% growth and kind of a sub three in 2Q. If that's the right math, the way we think about that is just that you had a seasonal Q1 and 2Q is kind of less than seasonal just because of the constraint so or how do we think about that?

Michael, what was your numbers again?

I took about, I think about 8.5 million and put it in Q1 and I got about 7% growth, just under 7% sequential growth, and then 2Q your guidance taking about 8.5 million out of that and the mid-point you get about two and change in terms of upper twos in terms of sequential if that's the right math?

That doesn't sound right to me if we just moved three from one quarter to the next.

You said upside of 2% to 4% percentage points in 1Q, right?

Right, so if you just took 3 from our 7 to 10 you'd get 4 to 7.

Okay, I'll double check the math, but --

Michael, also remember that we are pushing some of the Q2 demand into Q3 as well.

Right, and that's what I'm trying to getting at. Do you feel like it's pretty seasonal demand out there or what would you say about underlying demand right now?

Say it feels strong to us.

Okay, and then kind of going back over the last year. I mean it does seem like we've had a little more volatility than what we'd normally expect for the normal seasonality. Is there anything, first of all, would you agree with that? And second of all, is there anything that you think is really driving that fundamentally relative to the supply chain, or relative to the competitive landscape or anything in general?

My view, Michael, is that the "semiconductor cycle" always has been a composition of many cycles aggregated together, and those cycles should be viewed as end markets. The industry itself, and I think you see it reflected in the PLD industry, is more diversified in terms of the end markets it serves. We all know that recently handsets and PCs have been strong end markets for the semiconductor industry. It's not an area that Altera plays in or the PLD industry has large presence in either of those markets. So what I think has happened is you've got different end markets driving end demand, and as those patterns, those vague overlay on top of each other, they become less and less synchronous and do you do end up with more volatility. I think the supply chain today feels more rational to me than it did five years ago certainly.

We don't see companies establishing buffer stocks of product generically. Because we're on allocation we enter into a lot of conversations with people and they're still trying to stay on a hand-to-mouth schedule, which is why ultimately I think we've seen, for instance, our backlog in some of our older products not change at all where we go into allocation with some of the newer products. And sometimes you can find both of those products on the same card, so I think customers are reacting only when they need to and no more. Additionally, as you know, we don't recognize revenue until the product is shipped out of distribution, so we don't really see any change in behavior of our distributor partners nor is so if I look at the entire supply chain, distributors, contract manufacturers, customers, they're all telling me that they're today very, very lean on Altera inventory in particular.

Great and then I guess the last question is, do you think back in the history of the industry, think about market shares just in the past versus kind of market shares just more recently or even in the future, is it the same sort of mechanism for driving share shifts or is it changing?

No, I think it's the same mechanism where you have to win the business and you have to service the business and grow, and so it's to win new programs in existing markets and to expand into new markets where you now have the right product set. As I've said before, the biggest opportunity for growth for programmable logic is in replacing ASICs and ASSPs. I mean we started seeing that five years ago and that remains the big opportunity. Simply grabbing a couple of points from one of the other PoP companies is not going to change your growth trajectory for the year very much. We do as a Company continue to expect and we're going to continue to climb with market share. We still are in very strong shape in 130 and 90 nanometer FPGA revenues. Those are both growing nodes. We have much higher market share there than we have in, for instance, FPGAs in general, so as the old stuff falls off and the new stuff grows, we'll continue to take market share. I also would comment back to my script that we're seeing continued design momentum in the marketplace. We've really seen over the last several years continued increases in our design wins, and again this last quarter we had a record quarter in the Company. It was 25% higher than any previous quarterly record, so we feel really good about our position. I think the momentum is very strong.

I appreciate it, thanks.

The one comment I would add, Michael, is this. If you wind the clock back 10 years, and I don't know if that's the kind of perspective you're looking on, much more of the industry was CPLDs and much more of the FPGAs were used as simple blue logic and relatively short design times from design win to volume ramp and I think now all industry participants would say the time from design win to volume ramp, given our penetration into the customer earlier in their design cycle is longer, and that attenuates the rate of share shift, so it takes longer than it used to.

That's helpful, thank you.

Thank you Michael.

Thank you. Next we'll hear from Glen Yeung with Citigroup.

Thanks, is it fair to say that if you were -- you know you're pushing some sales from Q1 into Q2, from Q2 into Q3. Is it fair to say that your visibility for this year is a little better than it might normally be?

Yeah, I mean certainly we have more backlog than you might otherwise, but I would also say, Glen, that we've historically stayed away from forecasting out beyond a quarter simply because our customers have difficulty identifying exactly what their end demand is going to be, much beyond a quarter, so I'd be a little cautious about trying to call Q3 at this point in time even though for Q3 we have more visibility than we would normally.

You've talked about full-year numbers that are relatively high for yourself and for the industry and I've seen the charts where you work through, what you think the industry will do and then some share gain. Is it fair to say that those numbers are still valid or you still have at least the same confidence in those targets?

Yeah, we've presented, Glen, which is what you're referring to, that we believe that the PLD industry can grow at a 17% compound annual rate going forward. Part of the reason that the industry has grown at a lower rate-- I mean there are really several reasons within that. One goes back to what Nate has said is that the CPLD industry has actually gone through an implosion and has been a drag on the FPGA growth numbers that we've seen. We think CPLDs are becoming small enough that they're not going to have the same drag effect. We've seen some cannibalization from our lower-end low cost product lines on the prototyping side of the business. We think certainly for us that is starting to end and, obviously the communications industry going through its changes had a profound effect on programmable logic as well, but if you look at the last few years you've seen FPGAs grow at a 15% compound annual rate. We think that since the cannibalization phase is over, it can stretch up to 17% and feel quite comfortable with that. We think HardCopy gives us access to another $1.8 billion market, which gives us another 1% on top of that to 18% compound annual growth, and then with market share gains we believe we can get to 20 and I still absolutely believe that. Nathan, do you have a comment you wanted to -- okay.

Just one last question is, you've now seen this lengthening in lead times and it sounds like there's some specificity to it, but outside of the fact that you're getting double orders, are there any other changes in the behavior of your customers as a result of this? Are you seeing, for example, longer rolling forecasts that you might otherwise get from them as an example?

We're getting some longer bookings, you're getting a little bit longer forecast information, but generally customers will give you anywhere from a nine month to twelve month forecast anyway. The accuracy of those forecasts the farther out you get is very poor. We still see a lot of customers who even though we are on allocation of some devices will not book orders. They still will go with their forecasts and come in with and ask for the product based on the forecast that they've provided, so we'd say generally the behavior hasn't changed overall. We do have some more visibility on the products that are on allocation. Outside of that things are pretty much normal.

And can you maybe just spend a second on what it is that discount mechanism you employ is, in terms of discounting orders for potential double bookings for example? What's the process you go through to figure out, what's a double order and what's not?

Glen, we don't do it at that fine of basis, but if what we're talking about is a limited number of ordering codes that are impacted by our supply constraints, so for those ordering codes we go through who we know to be the top customers and based upon that understanding as well as trending the broad base, we can come up with an estimate of what we think a normalized demand should be and we compare that with backlog. So you can also look at sequential increases in backlog relative to what we think the organic growth capability of the business is, so it is inherently imprecise, but I think the law of large numbers kind of helps us hone in on a reasonable estimate.

Thanks.

Thanks Glen.

Thank you. Next question from Sumit Dhanda with Banc of America Securities.

Nate, just to follow-up on the double order question, I guess how do you go back to your customer base and some way to inform them of the fact of that the booking or the backlog that they're placing will not be met by Altera, do you believe that to be double booking?

We are obviously having that dialogue with our customers but we don't include the last part of your statement.

Okay, but you encourage them to tell them that there is no quote unquote constrain that they perceive in terms of they shouldn't be ordering as much as they are?

Well, what we're doing is we're providing them details on what we can provide to them really by week, by day for customers. We're also telling them when we expect lead times to come back to normalcy. And so when I mentioned on our website there's a page that has all the normal lead times for these products and what they are currently, again when we expect them to return to normalcy. We provided all that data to our customers, so if, for instance, you have a Stratix product that becomes widely available in June, you would expect customers then to understand that they don't need to order lots of extra product past June. June will have more than enough for everybody and we're hoping that that calms some of the what otherwise would be panic.

Okay, a different question perhaps for you, John. Clearly you're seeing good spend on your communications business, especially in the second quarter. The best you can tell, does this at all feel any different from what you've seen in the communications business too over the past several quarters, meaning are you seeing a significant inflection point across particularly the wireline segment or not really and just that you're seeing some normal expense here as a percentage?

So I think what you're seeing right now is there is strength in wire line, in particular in the access area, something that I've talked to customers directly on. They say their business is strong. North America, Japan is an example where you're seeing a lot of deployment of DSL technology. In particular there's been a very aggressive advertising campaign for DSL from some of the RBOCs and they've got a lot of demand from customers and they're responding to that, so I would say that we see just very strong demand in certain parts of the business. That also helps us filter out what may be double ordering because you're able to see what's going in several of these customers and really get an understanding of what's growing.

And just one final one, your competitor yesterday talked about strong trends within IPTV and Voice over IP. Did you identify those as markets that seem to be turning a corner too or not really from your perspective?

Well, if you look at Fiber-to-the-home, Fiber-to-the-home has been happening in Japan. Fiber to the whatever in the United States depending on the RBOC is starting to happen with some RBOCs where they are starting to spend capital. And other RBOCs you are talking about it. This is the GPON technology. We are getting a lot of strength. I kind of include that when I say Access and DSL, but GPON has been very strong for us and we expect it to be strong and stronger for us moving forward. I do agree that there is going to have to be a deployment by, for instance, the RBOCs in the United States to compete. It's not all going to be overnight. I think it's going to take years to happen and it will depend on the RBOC. We're not necessarily counting on any short-term explosion in any of these particular industries. I think you've seen us always be on the conservative end of when you think things would be deployed. For instance, we consistently said last year we didn't expect any 3G deployment in China. We were absolutely right on that one, so that is an area of strength. We would continue and expect that will grow over the next several years.

Okay thank you guys.

Operator, I think we've got time for one more question, please.

Great and our last question will come from Tim Kellis with the Stanford Financial Group.

Yes, thank you. Last but not least. With your commentary that R&Ds expenses are going to basically peak in the June quarter and then fall off, are you implying that any major R&D expenses for 65 nanometer are going to more of an '07 phenomenon?

We're not talking about 65 nanometer, but your assessment of the shape of our R&D spending curve is correct, Tim.

Okay, so we could imply that it could be this year or whatever. It's just not something that you publicly announce?

Correct.

Yeah, I think as you've seen from us, Tim, we've never done product introductions in one of these conference calls. We always do those separately and then talk about it after the fact, and so we are and have been investing very heavily in 65 nanometer. That development has been going on for quite a long time here. I think if you go back some months and even some quarters you will see TSMC announcing that they delivered working silicon to us on 65 nanometer for FPGA products, but there's nothing that specifically we would care to announce right here on the phone today.

Okay wonderful, and could you characterize your Cyclone revenues on this quarter from last quarter at all?

Yeah, Cyclone was up 10% sequentially and Cyclone II was up 65% sequentially.

Okay and then probably, I didn't catch it. What did you say the inventory was between you and distribution?

3.5 months.

Is that combined?

Combined.

And what was it at distribution?

Let me make sure. It's 1.4 at distribution.

Okay, thanks very much.

Thank you Tim.

Thank you Tim.

Before we end today, we remind you that Altera will appear at several financial conferences this quarter. Next week we'll attend the Merrill Lynch Technology Conference and the Credit Suisse Semiconductor and Capital Equipment Conference in New York. On the 17th of May we will be at the GARP Annual Conference in Baltimore, and on the 22nd we'll speak at the JP Morgan 34th Annual Tech Conference in San Francisco, and finally on May 31st we'll present at the Citigroup Annual Semiconductor Conference in Boston. This concludes Altera's Conference Call. Thank you, for your participation and interest.