Good day and welcome to the Altera Fourth Quarter 2008 Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to your host and moderator Mr. Scott Wylie, Vice President of Investor Relations for Altera Corporation. Mr. Wiley, please go ahead, sir.

Thank you. Good afternoon. We appreciate you joining this conference call this afternoon, 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 web page, where you will find complete instructions. The telephone replay will be available at 719-457-0820, and use code 258712. During today's call, we’ll 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. With me today are John Daane, our CEO and Tim Morse, CFO. Tim will open the call with a financial overview, before turning the call over to John. After John concludes his remarks, we will take 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 Tim Morse.

Thank Scott. My commentary today will cover fourth quarter and total year 2008 results; first quarter 2009 guidance; and an updated view of 2009 operating expenses. Beginning with our typical headline metrics; revenue in the fourth quarter declined 12% sequentially and 3% from prior year. Largely as a result of lost volume leverage on the lower revenue base, operating margin was down roughly three points sequentially to 27%, but still increased seven points from 4Q '07. For the full year 2008, revenue advanced 8% falling short of the double-digit pace earlier in the year. Operating margins on the other hand, expanded to roughly 30% or seven points above 2007. Although still shy of our greater than 30% goal, we are proud of the improvements so far. Finally, return on equity rose to 45% in 2008, more than doubling 2007 and exceeding our long-term target of greater than 30%. Taken in total, these metrics signify an important year of progress for Altera. Going forward however, we remain no less committed to transforming the company to maximize competitiveness and shareholder value. Looking ahead to 2009, we possess a strong cash flow model and $1.2 billion in the bank; a tangible improving cost and capital structure; and a tremendous market opportunity with our new 40-nanometer products. Despite these strengths, Altera is certainly not immune to the volatile external climate. Nonetheless, we continue to manage the company for the long-term, by preserving our 2009 R&D agenda, while also stepping up the intensity of our short-term cost out efforts. More on that last point in a few moments. Turning to a detailed review of fourth quarter financial results; the 12% sequential revenue decline fell at the bottom of our revised guidance range. Although demand improved each consecutive month, December began very slowly, and only picked up speed in the last couple of weeks. In customer terms, for the full quarter, both our large and smaller categories were down nearly identically. 69.3% gross margin finished at the upper end of our revised guidance range. Market segment mix was essentially neutral. However, the fixed dollar cost favorability we generated in 3Q, ended up being amortized over a lower revenue base in 4Q, thereby lifting the GM rate above our more representative 67% to 68% range. Operating expenses totaled roughly $132 million in the quarter, representing favorability versus both, original and updated guidance. $68.8million of R&D; under ran our original $73 million to $75 million expectation, primarily as a result of labor and other discretionary cost savings, but favorable foreign exchange also played a role. Our development agenda was largely on schedule with shipments of Stratix IV occurring in December as planned. SG&A finished at $62.8 million, nearly $2 million lower than the midpoint of our $64 million to $65 million range. Most of the favorability was generated by the volume sensitivity aspects of our cost structure but labor savings and foreign exchange also contributed. For the full year, operating expenses totaled $513 million, with R&D at roughly $258 million, down 2% from 2007, and SG&A at roughly $255 million, down 6% versus 2007. For the second straight year, our operating expenses have declined in total year-over-year. 2007 was down 3% from 2006, and 2008 was down 4% from 2007. Within that total, SG&A has declined 16% over the two year period, while R&D is up 5%. Please note, that I’m quoting these numbers on an NQDC-neutral basis, in conformance with the new presentation of our financial statements in today's earning release, and soon in our SEC filings. In short, the distorting effects of earnings neutral swings in NQDC have been removed from our OpEx numbers, and are now presented on separate offsetting lines of our income statement. The new format provides a more meaningful representation of our ongoing operating performance. For ease of transition and comparison to prior periods, today's earnings release contains an extra exhibit of eight historical quarters on this new OpEx basis. Our 2008 10-K filing will do likewise, but for years extending back to 2004. Returning to the fourth quarter income statement. Other income was $1.7 million, significantly below the $3 million to $4 million original guidance. The shortfall was attributable to lesser returns on our money market funds and higher LIBOR driven borrowing costs earlier in the quarter. For the year we suffered no impairments or write downs on our investment portfolio. Our effective tax rate finished at 14.2% for the year, fractionally below the anticipated 14.5%. Net income for the quarter was $83 million or $0.28 per share. Versus 4Q '07 net rose 27% in dollar terms and 42% in EPS. 2008 full year net income results were similar. $360 million or $1.18 per share improved by 24% in dollar terms and 43% in EPS versus 2007. As previously noted, ROE more than doubled to 45%. On the balance sheet, cash and investments finished the year at a little more than $1.2 billion. Over the course of 2008, we generated $449 million of cash flow from operations, up 65% from prior year; drew the final $250 million as planned from our credit facility; and repurchased $473 million of our stock, for a total 26.6 million shares. For the fourth quarter alone, our buyback totaled $154 million and 9 million shares. Within working capital, accounts receivable finished the year at $83 million, down $138 million from 3Q, as December gross billings to distributors dropped dramatically relative to September levels. We finished 2008 with minimal greater than 60 day balances and no past dues. Altera-owned inventory rose roughly $10 million to $85 million in 4Q, equivalent to 2.6 month's supply on hand up from 1.9 months in the prior quarter. Within the total inventory balance, finished goods actually declined by $1 million from 3Q. The increase was entirely attributable to higher die bank inventory, with the majority composed of Stratix III and Stratix IV. In the channel, distributor inventories drop from 1.1 million month's supply in 3Q to one month supply at year end. This effect along with the decline in December distributor billings drove in $94 million reduction in deferred income on sales to distributors. Moving to our first quarter 2009 outlook, we expect revenue to decline in the range of 15% to 25%. We entered 1Q off a book-to-bill ratio well below one in mid-50s turns performance in 4Q. The midpoint of our range implies the turns requirement in the high 50s; a level we have achieved or exceeded in all but one quarter over the past two years. In the last few weeks, bookings have accelerated in our two-month turns requirement is now actually lower than what we have typically experienced. Given the widespread external uncertainty, we remain cautious nonetheless. Proceeding down the income statement; we expect gross margin to be in the 67% range, plus or minus half a point. This quarter, the unnatural 4Q returns to more normalized levels, and we are additionally cautious on business mix, given the wide revenue range. 2Q '09 continues to look like 67% to 68%, but visibility is still extremely low for second half. Turning to operating expenses; R&D should be $62 million to $64 million and SG&A should be $58 million to $60 million. We also expect other income to be roughly $3 million, tax rate to be 13% to 15%, and share count to be approximately 295 million to 300 million shares. On the balance sheet, given the uncertainty surrounding demand, our total pipeline MSOH will likely remain in the upper end of our three to four month range. Finally, I will conclude with updated guidance for full year 2009 operating expenses. In keeping with the muted external demand environment, we now expect $510 million to $520 million of total OpEx, with a midpoint expectation of $515 million. Within that total, we see R&D in the $270 million to $275 million range, and SG&A at $240 million to $245 million. From the October guidance midpoint of roughly $547 million, this $32 million decline for 2009 is split fairly evenly between volume-related impacts and cost out, the latter being slightly larger. These results are not dependent on across-the-board workforce reductions, but our ongoing efforts to prioritize, streamline and simplify Altera, may result in targeted actions in 2009 and beyond, as they have in the past. It's worth repeating, however, that our R&D agenda has not changed for 2009. The masks, wafers and prototypes related to product rollouts in our 65-nanometer and 40-nanometer families still represent a substantial dollar increase on our cost structure from 2008. Over the past few months, we have therefore been actively engaged in resizing our underlying spend to offset that upward pressure. As a result, we are now able to hold our 2009 OpEx midpoint case flat year-over-year, despite an ambitious product rollout schedule. With that I will turn the call over to John.

Thank you, Tim. Q4 revenues decreased 12% sequentially, a larger drop than in our initial forecast, but within updated guidance range and better than the semiconductor industry average. The decrease was a result of broad end market slowdown, coupled with inventory reduction. By vertical market for Q4, we had initially forecast computer, industrial and consumer to be flat and communications to decrease. All of our markets, however, declined. Communications was down 11%, Consumer 11%, Industrial 13%, and computers 16%. Broadcast, networking, military and medical performed better than overall company results and were down approximately 5% or less. Conversely storage test and consumer declined approximately 20% or more. In Q4, all product categories declined. Our new products were down 8% sequentially. Stratix III declined 6%, Stratix II and Stratix II GX 17%, Cyclone II 10%, HardCopy 2% and MAX II 11%. Cyclone III grew 53% and Arria GX 22%. As a note, at 48% of total company revenue, our new products have a significant production component, which is susceptible to the inventory correction and lower market demand we are currently witnessing. Shifting to full year 2008 results; Altera's revenue increased 8%. By vertical market, computer declined 15% and consumer declined 3%. Communications revenue grew 16%, with networking up 21%, telecom up 3% and wireless up 35%. Industrial grew 11%, with automotive increasing 60% and military up 31%. By product category for 2008, our new products dominated by 90-nanometer and 65-nanometer FPGAs grew 51% and ended the year at 48% of revenue. FPGAs increased 13% and CPLDs increased 2%. HardCopy decreased 14% due to expected program transitions we highlighted in 2007. We estimate our FPGA market share increased over 1% in 2008 and our CPLD market share increased over 2%. For several years, we have been focused on improving the cost structure and efficiency of our operation, to generate greater shareholder returns, while also introducing advanced and innovative products to continue industry leading topline growth. Our 2008 financial result were exceptional across the broad. Revenues increased 8%, higher than the PLD and semiconductor industries, and marked our sixth straight year of PLD market share gains. Our net income increased 24% over 2007, three times the topline growth. On the product front, in 2008, we shipped on schedule the Stratix IV 40-nanometer FPGA family Production Software in May and first samples in December. We benefit from being first to market and either of the 40-nanometer or 45-nanometer node, having the highest density, highest performance, and lower power FPGAs, with industry leading transceivers performing above 8 gigabits per second. As we expected, Stratix IV is expanding our servable market for ASIC and ASSP replacement and opening broad engagements with new customers and new divisions of existing customers. Cumulative design win value of Stratix IV is one year ahead of any prior Stratix family, measured at a point since introduction, a result of wide adoption of the product line. We expect Stratix IV revenues will be over $1 million in Q1. Additional 40-nanometer announcements from Altera are imminent. Moving to our Q1 forecast; we expect a further decline in all of our end markets and are forecasting a total decline of 15% to 25%. It is important to emphasize that we are not counting on higher turns to make this range. Our sales and marketing forecast rolls to a figure at the more favorable end of the range, and bookings thus far in the quarter have been very strong. However, we would prefer to be as conservative as possible in this environment. A significant portion of the order acceleration we have seen in the last two weeks is for 2G and 3G system deployment for China. China Telecom is increasing CDMA coverage and with China Unicom building out GSM coverage, while also awarding contracts for wide band CDMA with delivery in Q2. China Mobile's TD-SCDMA deployment has been planned in cycles. The second round of deployment was completed in Q4 and the third round awards were planned for Q3. But have now been accelerated for late Q1, early Q2. We are the number one PLD vendor to both wideway and ZTE for wireless and wireline, and expect to uniquely benefit from the China deployments. For 2009, we expect our revenues to decrease, but with results better than the semiconductor industry because of our low exposure to consumer. I expect our military business to increase double-digits, for wireless to have a shot to be flat with strength in Asia, but the remainder of our markets should decline. Our industry, like many others is searching from a bottom from which we will resume growth. I am not expecting a V shaped recovery, rather a few years of sluggish global economy. In such an environment, I expect Altera to grow 5% to 9% off the 2009 bottom for the near term compared to a semiconductor group that will be in the low single-digits. We remain focused on the items within our control, continuing to simplify the corporate structure and systems to improve operating efficiency; investing in R&D to expand our servable market opportunity; executing our engineering programs on time; reducing product costs and controlling pricing to maintain industry leading gross margins; and replacing ASICs and ASSPs in existing markets to fuel industry leading top line growth. These items are not new, and over the last few years have produced tangible financial results for Altera. Our advantage is we are still in early in an ASIC replacement cycle at a time when even fewer companies can afford ASIC design. And Altera has the strongest PLD product line out, we’ve had in the last 10 years. Now let me turn the call back to Scott.

We would now like to take your 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.

Thank you, Sir. (Operator Instructions) And we take our first question from James Schneider with Goldman Sachs. Please go ahead, sir.

Good afternoon. John, just starting out on the wireline and wireless market. If you look at some of the data points recently – commentary, for example of Verizon this morning, they sort of indicate that they are expecting CapEx budgets to kind of start off the year slow and then gradually increase as they kind of see how things go along. Is that consistent with order patterns that you have been seeing from customers so far?

Jim, I'm going to take one quarter at a time. This quarter we do expect communications to be down. For instance, we do expect networking to be sluggish, for telecom to be slow. I think PON deployments and DSL deployments will be slow in the near term. More of the CapEx dollars are being spent on wireless right now. We do see obviously Nortel going through bankruptcy. Nortel is a top 20 customer of Altera. We do expect that to be slower in business terms for us. So, all-in-all, communications to be down most likely in Q1. Nevertheless we are seeing a lot of short-term strength certainly in bookings in the last two weeks, associated with wireless for China. In terms of visibility for the rest of the year, we will just simply have to take one quarter at a time. But as I mentioned, we do have a shot this year to have wireless stay flat with last year. And again, wireless grew 35% last year. So, I think that's a pretty good result if we can achieve that.

Got it. And then just a follow up on gross margins. Tim, can you help us think about what the profile of gross margin looks like, especially into the back half of '09? Any benefits from better wafer pricing or headwinds from fixed costs you expect?

There is really no change to what we talked about back in October, Jim. There is extremely low visibility for the second half, as I noted in my script. But we will still maintain this kind of 65% to 68% range for the year, by all appearances being in the top half of the range here for the first half as we expected. We still do not have wafer price downs factored into that back half of the year, and we will continue to work on all manner of different cost out products as John noted, with our basic product costs, with our logistics and general efficiency.

Thank you, Jim. Next question, please.

And we take our next question from Sumit Dhanda with Banc of America, Merrill Lynch. Please go ahead.

Yes, hi, John; hi, Tim. A couple of questions. When you indicated that for the remaining two months of the quarter, you need less turns than typical. Are you referring to the typical mid-60s number for a quarter you've seen historically or less than the full quarter run rates you've alluded to for this quarter which is the high 50s?

From this point on in the quarter. So in other words for the last two months, we typically get, if you do the calculation, in the mid-40s for turns. And our requirement midpoint is actually above that at this point. And seven of the last eight quarters we've experienced higher than mid-40s turns, here for the last two months.

I see. Okay.

And that's again associated with the fact that we've seen recently some very strong bookings. We are not necessarily anticipating that that booking trend will continue, which is why our guidance I think is conservative. And there have been several other companies that have said, they expect to get higher turns, we’re just going to be on the conservative end and say that we do not expect our turns number to go up. And our total for the quarter, that would mean that our returns would stay in the high 50s as they have historically for the last several years.

Okay. On the wireless front, you indicated that you have a shot at Asia wireless being flat this year after a 35% increase for wireless last year. I'm just curious, last year was an impressive performance and so flat on top of that is nothing to sneeze at in this environment. But it seems like the equipment spending allocated, given that we just don't have one carrier but all three essentially ramping equipments spend would suggest continued and pretty significant growth in 2009. Anything you're hearing back on the deployment front that leads you to believe that flat is the more accurate number?

Well, Sumit what I'm referencing is flat for total wireless worldwide. So, we’re certainly seeing strength out of Asia as you're seeing several of the actual systems manufacturers report as well. It looks like China, based on what they’ve talked about, we'll have a strong year. We’ll have to see how that develops. I think the strength in Asia can have us make up for a weakness that we could see in developed countries such as North America and Europe to get an overall flattish wireless number for 2009.

And what percentage of your wireless is China or Asia? Could you share that with us?

We haven't broken that down. It's less significant than I've seen people report. Nevertheless, with China talking about a $40 billion plus spend in the communications area for the three carriers in the next several years, China obviously is a very significant market to us. And as I mentioned, we’re sort of uniquely positioned with some of the local Chinese wireless or for that matter wireline equipment manufacturers.

Thank you. Next question, please.

Thank you. And our next question comes from Tim Luke with Barclays Capital. Please go ahead.

Thanks so much. Just with respect to the OpEx numbers, it looks like you are looking for a substantial move lower in the R&D number sequentially. And then could you just help us think through some of the elements that are contributing to that lower R&D number, and Tim maybe give us how you see the shape of the R&D spend through the year to get to your new level of 270, 275. And John, just in terms of framing that the broader revenue guide, you're saying that you have seen a very strong start to the quarter, but you're guiding for a very significant revenue decline. Can you just sort of help us through that in terms of the elements that are going to be solid in terms of segments and the elements where you think there are incremental weakness? Thank you.

Do you want me to go first?

Sure.

Okay. So, Tim, hi. The R&D mid point is coming down about $20 million and the majority of that is what I call either cost out or cost avoidance. Cost avoidance being defined as changing some of the spending plans, headcount levels, etcetera, then we had planned on back in October, in light of what's happened in the interim few months here, why to resize our discretionary spending especially. A lot of things they go across the company certainly have a big impact in R&D. R&D as you would have noted back in October was the one that was increasing the most and now as a result there is also kind of the flip side of that coin is the most to avoid in terms of increase. But I'll note again that, none of this 20 drop is related to the change in our tape-out agenda. We are absolutely committed to getting the products out the door and are on track to do so, so far. So the majority of it's cost out and then there is a minority impact here in R&D of volume-related impacts of our cost structure, the bonuses, etcetera. In terms of the shape of the pattern here for R&D, I would say, 1Q and 4Q look to be relatively the low quarters and 2Q and 3Q the more active quarters. So, I think if you split it along half lines, it's probably relatively equal first half, second half, but kind of the middle of the year you'll see more and then in the end points of the year a little bit less.

Let me try to frame, Tim, the revenue guidance a little bit differently. So hopefully, it will be clear. Our book-to-bill was under one in Q4. So naturally we are entering into the quarter with a lower backlog, where the sales and marketing forecast calls for a number closer to a minus 15 this quarter. When Tim and I took a look at the turns rate required to meet that, obviously with a starting lower backlog that would require higher turns, neither of us felt comfortable given this environment that would be the right forecast to provide, so we came up with a minus 15 to a minus 25. We have seen strong bookings in the last couple of weeks, which would certainly help fill in what we need to do for this quarter, but bookings could just as easily slow down in the next few weeks as well. Remember that this is Chinese New Year; there is a lot of manufacturing in Asia. Clearly that's going to have an effect into the builds and orders in this overall quarter. So we did come out with a range that we felt comfortable with, based on historical returns. We hope that based on the current bookings, the business maybe a little bit better, but it’s far too early to call and again we would rather be conservative on the quarter. So I hope that helps frame the guidance a little bit.

That's very helpful. If I could just squeeze in something on the inventory, John. It looks like it went up, but do you think it goes flat or what do you think happens there now?

So it will ultimately depend on revenue ultimately going into Q2 which is too early to call. I think our operations group did a great job of pulling down the starts quite significantly in Q4 for Q1 delivery. We will continue to try to thin out the inventory. Overall I would expect it to roughly, this quarter stay within the band that we’ve talked about and hopefully go down next quarter to something in the 3.5, maybe lower depending on the overall revenue level. I would say in general the operations group did a really good job of managing to minimize the inventory, and again if you look at it staying well within our historical norms of operation of three to four months, total pipeline supply on hand and do note also that the distributor inventory did go down last quarter.

Yes, I'll just add to that. The operational team not only did a great job of bringing it down and keeping it within the band but also mixing the inventory type toward die bank. So we mixed toward the fungible stuff that can be used everywhere. The last thing you want to do is get caught with excessive finished goods. Our finished goods actually went down. Our finished goods went down, die bank went up again mostly for Stratix III and Stratix IV, where you would expect it to be. And then the really good news to me is, not only did the inventory MSOH come down from 1.1 to 1.0 months, the actual dollars, cost of inventory in the channels dropped by 22%. So sales came down, inventory of the channel, finished goods inventory came down even more. So really a terrific job on the guys who work on this so diligently here.

Thank you.

Thank you Tim. Next question please.

Our next question comes from Mahesh Sanganeria with RBC Capital Markets. Please go ahead.

Thank you, John. I would like to get some more color on the comments you made on your outlook. You said 5% to 9% PLD growth; that too you're looking for two, three years down the road or five years?

It's 5% to 9% for Altera. I do expect us to grow a little bit faster than the overall PLD industries we have for last six years as we continue to take market share. I do think it's in the next few years, there is the possibility perhaps as we get beyond this current global slowdown that we could see some acceleration of our overall growth, particularly since I think we have a very strong product line up. The ASIC industry seems to be under extreme pressure right now, which opens up a lot more market opportunity for us. But in the near-term, I would say the next few years, 5% to 9% is probably a good bet. And again, it's because I'm a bear in this environment. I don't expect a V-shaped recovery. I don't expect that going into 2010, you are going to see the semiconductor industry have double-digit growth. So I think we find our bottom this year. I think the overall semiconductor industry for the next several years, hence has a single-digit growth and we are in the 5% to 9% space.

Okay. One more question on product. Since with your lead in 40-nanometer transceiver product, do you think you have a chance to capture market share in the prototype emulation market, and if you can give us the size of that market. How does it help you? Because I think Xilinx has a majority of that share, because they have always had the lead. So more color on that would be helpful.

Yeah. Having the largest density parts is really the key for opening up the prototype market. I have estimated it's a couple hundred million dollars of business on an annual basis. We really have participated in very little of that. Having the largest units in the industry opens up a lot of business for us. And the reason is because, a lot of ASIC, high-end ASIC or for that matter, ASSP companies will use several FPGAs in order to emulate or prototype one chip. And so having higher density parts makes the partitioning of the design much simpler and much easier. And so having a chip that's twice the density of our competitor for probably what will be a while, really opens up a couple of hundred dollars of additional markets to Altera, which we are pursuing very diligently. I would say the bigger opportunity is ultimately in just replacing ASICs and ASSPs. And again having a much higher density, higher performance device allows us just to take on that much more of the ASIC industry. And in a down market we typically see companies rationalize their R&D budgets, cut spending, naturally they can afford fewer ASIC programs. To still do the innovation, they need a solution and PLDs are a great choice. So we have the opportunity once again to accelerate PLD design wins in the slowdown.

Thank you very much. Next question, please.

And our next question comes from Hans Mosesmann with Raymond James. Please go ahead.

Thanks. Just a question on the early shipments of your 40-nanometer Stratix cores. What feedback are you getting specifically from your customers? You mentioned earlier that you are penetrating other programs with existing customers, and you are starting to do business with some others that have never done business with you. What specifically can you tell us that you've learned over the past several months now, that you started shipping that is leading to perhaps a disruption in the PLD and ASIC battle that we've seen over the past couple of decades?

Yeah, I think there a couple of important things, Hans. Number one is we shipped over $100,000 of revenue in a few days in December, and we expect to do $1 million this quarter at a minimum. This is the fastest ramp we’ve seen for an FPGA in terms of revenue. The backlog is extremely strong and continues to grow. And quite honestly I think if you look at the industry, this is the fastest ramp from initial availability or even announced initial availability to this sort of revenue level. So we are very pleased with the success that we have with the product. It's opening up new customers for us that either perhaps used our competitor historically and are now looking to Altera as the technology leader. It's also opening up a number of new applications or perhaps or ASIC or perhaps customers who need very high performance transceivers and things like fiber channel or 10 gig, 100 gig systems within communications that perhaps would have used ASICs as their only solution in order to get the true performance that they require. So, this product is doing exactly what we had hoped and planned for, which is opening up a much larger servable market, opening up accounts perhaps that we haven't done business with or even engineering groups that perhaps we haven't done business with. And I think the success so far speaks to the execution from our engineering organizations on a product and speaks to the overall success

Thanks.

Thank you, Hans. Next question, please.

And we take our next question from Glen Yeung with Citi. Please go ahead.

Thanks, John and Tim. Can you actually tell us how much China Wireless was of your fourth quarter revenues? And is it something you would actually expect to increase in the first quarter?

Glen, this is John. I expect the China revenues actually to increase this quarter. Remember that our overall wireless business was down in Q4 over Q3. So we had strong growth in Q3 was then down in Q4. I would expect the China portion to grow this quarter. Part of the reason it was down last quarter is we mentioned that our portion of the TD-SCDMA purchases were more Q3 loaded than Q4. So we did see a decrease in obviously China related business. GSM and CDMA has been strong, obviously in China that's accelerating right now, and you add the wideband CDMA business in the potential new bid round on TD-SCDMA, and I would expect it to be stronger. Caution, people; we are not dependent on China. You'll still see shipments around the world. You'll still see business around the world. And the reason behind that is, China is new to 3G, and as we mentioned in the past, we have two extra dollar content in a 3G system over 2G. So while we have been doing a good business in China as it transitions to 3G, obviously it can grow much faster. But it also speaks to the fact that the rest of the world which has been more 3G based has been buying more Altera content over India or China which has been historically more 2G focused.

Okay. I'm sorry, and did you mention what the percentage was of sales?

No. We haven't broken it out nor will we.

Okay. So my second question is. Tim, I think in your prepared remarks you had mentioned that you expect second quarter gross margins to between 67% and 68%. So I want to clarify if that’s true and then two, what gives you that visibility to be able to make that statement?

Glenn, hi. The 67% to 68% is true. I did mention that. What gives me a little bit more visibility on that is we definitely see a few cost related items getting a little bit better from 1Q to 2Q, in terms of all the things I talked about earlier when I was answering Tim Luke's question. In addition, we got such a wide range of revenue this quarter, and a potential for some very high volume customers to perhaps do very well in the broad base, to perhaps be a little retrenched, that would naturally be a little bit of a downward mix. That to me is a very transitory thing. So it's exaggerated at a lower revenue level. Going into 2Q, I think that effect abates to a good degree. As I look at things, we finished 69.3% in fourth quarter, and as I observed, that was kind of unnaturally high. The thing you got to remember there is, when you talk about cost-of-goods sold, improvements take a little bit of time to work themselves through inventory. So the impacts aren't felt in the quarter you generate them. They are more amortized into the following quarter. That's because we are on a FIFO basis of inventory evaluation. So when third quarter was a pretty big quarter for us in both volume (inaudible) and then cost out projects, you had a lot of dollars associated, a lot of good favorable manufacturing variances associated with those effects that would have amortized into 4Q and hit our P&L against that lower revenue. That effect, if you normalize it out, is worth almost two points. So roughly in the 67.5ish range is probably the more representative going forward. And again, all the bottoms up that we do for 2Q '09 kind of support that as well. Things are changing rapidly so we'll keep right on top of it and I'll be able to explain any deltas. But that feels pretty good to me. It's just one step too far for me to talk about second half, especially with so many things up in the air like, wafer pricing, etcetera.

That's helpful. Thanks a lot.

No problem.

And we'll take our next question from Adam Benjamin with Jefferies. Please go ahead.

Yeah, first question for Tim. On the OpEx side you've made some decent reductions there. How should we be thinking about that going forward? Have you gotten basically as far down as you can get without doing layoffs at these levels that you're laying out today?

Hi Adam. We don’t plan any widespread layoff actions, but targeted actions have been going on for years, and they will continue to go on for years. We’re going to evolve with the business, we’re going to evolve with the state of technology, we are going to involve with the state of other opportunities we see. And it’s about shifting priorities around, it’s about shifting from high cost geographies to low cost geographies. It’s about deciding some things were important to do in the past and are no longer important to do. It’s about making sure that everything you spend has the right return on investment to it. So there is much more of this to go. I've said in the past that, I can't guarantee, none of us can guarantee more than two consecutive years of total OpEx down, despite the fact that R&D is gone up a little bit. I can’t guarantee there are many more years like that in our future. But what we do have is now, as I've said, kind of a machine in place here that will at the very least help us to make these trade-offs so that we can keep the costs from growing. As John said if the revenue off whatever bottom this is grows at 5% to 9%, we have a tremendous opportunity to limit our costs to below that range. So that we can expand operating margin, expand earnings greater than the sales growth.

Yeah, just, if I could add to that. We are not planning to cut R&D. So we’re going to execute these programs. Obviously as Tim outlined, the R&D spend for this year is going to be lower, but we’re not cutting any of the planned tape-outs or any of the product families. We will continue to spend for R&D. And I think the figures that Tim is giving at this point are a lot of hard work and are a pretty good number to use for this year. If we could beat that, great, but I think, Tim, along with the rest of the executive group has done a lot of hard work to arrive at these numbers, and I think they are good to use for now.

Got you. That's helpful. On the revenue side, you talked about military being up double-digits and then wireless being flat for the year. You didn't talk about some of the other segments. So I'm just curious what you're seeing there in terms of them going forward?

We expect all of the other segments to be down. How much, I don't exactly know. We will have to see during the year. But there is enough evidence out there from all of the various segments, either the rate of deceleration in the back half of the year through the first half makes it, so that you'd have to have V-shaped recovery even if be flat, which doesn't seem realistic or just from what we know of these industries it's pretty easy to say that the rest of them will be down. And so that includes areas like consumer, which I think is pretty obvious. The computer sector which went down for us last year isn't going to have a strong growth this year to obviously make up for that. So that's down. And then wireline we do expect to be down. You've heard carriers talk about the fact that they are remixing their CapEx spend more towards wireless than wireline. Those are some great examples where it's just pretty easy at this point to say that those industries will decrease

Got you. And then just one last question on the wireless side. You talked about the bookings being stronger and business picking up the last couple of weeks. Historically between holidays you see and before Chinese New Year you do see a pickup. Obviously this year is a little bit different than prior years. But I'm just curious if that pickup that you saw was something similar to historical periods and may be somewhat of a head fake as you exit Chinese New Year and your expectations for that business from here?

It absolutely could be a situation where our bookings slow in the rest of the quarter, which is why, Tim and I have provided the minus 15% to minus 25% guidance. I think, if we just simply base it on the sales forecast which is predominantly just simply customer input, coupled with the bookings that we are seeing, we would come out with a range which was more at the top end of the minus 15% to minus 25%. So we are anticipating that bookings will slow and that again turns will be consistent with what we have seen over the last several years. I should note, however, that even though it's Chinese New Year this week, bookings continue to be pretty good in the two days so far. So, we will have to see how the rest of the quarter goes. Again, we are trying to be conservative in light of the overall macroeconomic environment. Thank you very much. Next question please.

Alright, guys. Thanks.

Next question please.

And our next question comes from Chris Danely with JPMorgan. Please go ahead.

Thanks, guys. Just a quick question on the OpEx. John and Tim you both said that your R&D number this year is pretty much set in stone. I'm just wondering if you think OpEx could be down in dollars for 2010. Because if I plug in the OpEx this year, with a decent recovery in the second half of the year, and then plug in the 5% to 9% growth for 2010, I still get like a mid-teens operating margin by the end of 2010. So I guess, I am just curious as to why you wouldn't be a little more aggressive in the OpEx.

We haven't given out, obviously, any 2010 numbers. Don't misinterpret the comment on R&D. We are protecting our R&D rollout agenda – the advancement of our products. We will continue to work on the underlying costs as we have been doing. As I observed earlier, with the midpoint of R&D coming from 293 down to 273, down $20 million, most of that cost-out work, none of it being related to tape-outs and products. You would expect certainly, then, that there is a lot going on there and we continue to find different ways to keep making that better. As far as what OpEx does for 2010, we’ll just have to see. Again we are going to take advantage of all opportunities we can in R&D and SG&A, and R&D going up big has a big upward pressure for these related to the 65-nanometer rollouts, 65 and 40-nanometer rollouts and we’ll just have to see what the rollout schedule is for 2010. To see whether that's a nice tailwind for us in terms of reducing costs or flat or up. It is way too early to tell what that will be.

Chris, if I could add a couple of things. At a macro level, number one, we are committed to growing our expenses at a much slower pace than revenue growth as a Corporation. So that we can grow the bottom line faster than the top line. Number two, if we can achieve more efficiency inside of the Corporation, we’re going to be focused on that. I mean we’re a couple years into this, we feel we’ve got many, many years to go continuing to simplify, streamline the Corporation approve efficiencies. So we’re in early cycles. There are a ton of projects left to do. Quite simply we can't get to all of them that we want to do. So we have to do a few each year that are big programs, and so our backlogs are going to last for a while. We’ll just continue to work on our cost structure and get it done. The last thing I would leave you with is Altera as a corporation has obviously reduced our expenses over the last several years. So I think we were earlier than most on working on a cost structure. Therefore today we are not talking about broad-based layoffs as many other companies are, because we have been simplifying and streamlining this cost structure for years, and are in much better shape than most, and so we don't have to do an across the board cut. I'm not a fan of across the board cuts, because I think you end up then taking away from some important operations during a period of time that you need those individuals. I'd rather much prefer getting in and working on targeted reductions in areas that you've improved efficiency. It's something that we have done for years and so we will continue to focus on.

Okay, thanks. That's really helpful. And then as my follow-up. It looks like the 40-nanometer products are launching and ramping a lot faster than everybody thought. When do you think we hit critical mass on your 40-nanometer product revenue to where you can start outgrowing the competition again?

Well, I think if you look at 2008, Chris, we outgrew the competition. We took 1% market share, and since 90% of the industry is between us and Xilinx the 1% came from Xilinx. I think they had a great Q4, they typically do outgrow Altera in calendar quarter Q4. Then historically what you see is Altera turnaround and outgrow the competition in Q1 and Q2. With the guidance that both the companies have provided, obviously it's very early and things could change. The range is the same for Q1. They are counting on higher turns, we are counting on turns that are consistent with history. So one would say at a macro level, you're not seeing an overall shift of market share away from Altera. I would say generally what you are going to see is Altera continue to capture market share. The reason for that is simple. While our competition had a 65-nanometer product Altera was able to sell our other products quite well. When we introduced Stratex III, for that matter Cyclone III, we've had very good traction in those products plus obviously the traction that we have had in Stratex IV. If you look at .13-micron and forward, the market share that Altera has in those FPGA nodes is higher than the overall 37% market share that we have in the total industry. So as the older nodes, .15 and micron continue to roll off, and more of the business rolls in to .13-micron and forward, we naturally continue to take market share. So I don't think there has been a shift. I think it will continue in Altera's favor. And actually with our 40-nanometer move we expect an acceleration over the next several years.

Great. Thanks.

Thank you, Chris. Next question please.

Next question comes from Uche Orji with UBS. Please go ahead.

Let me just follow on a little bit on Chris' question. If we look at Stratix IV, is there any point as to how we should measure the success of this business through 2009? Should we be looking at it to be what percentage of revenue by the end of '09?

I think the best way to answer that, and again I apologize for not filling in all of Chris' questions. I can't provide exactly what this product is going to do by quarter four to give you a specific number for '09. What I can tell you is, consistently we see our products peak about four to five years after introduction. So you should see very strong growth out of Stratix IV for many years to come. Overall, if I were to compare Stratix IV to any previous product launch, I expect this to ramp faster even in a slower macroeconomic environment. So this year what I am anticipating today is that we will have a stronger ramp out of this product than we've seen in any previous Stratix products, and most of the other Stratix products were in obviously a much better semiconductor environment. How it shapes next year and the year beyond, how it shapes by quarter is just simply too early too call.

Right. Assuming this (inaudible) will this have any implications for margins assuming the ramp continues the way you are seeing it right now, positive or negative?

No, we don't see any changes in margins. As we've said in the past, margins for us are more dependent on end customer mix than they are on the product line themselves. And so, in this environment where consumer is soft and some of our other segments are stronger, like communications and military, we would expect our margins will continue to do fine. Obviously, we will have to wait and see how they go over the year, but again, this contributes to the guidance that Tim has said, where we expect our margins obviously to be over what we've said is our long-term goal of 65% gross margin for the Corporation.

Right. And then a follow-up question for me, it's on HardCopy. What's been the trend within that business? Earlier on I think Xilinx made a comment about taking share from ASIC during this recession; something to that effect. But is there any likelihood that if we start to see it move more away from ASIC, HardCopy should see a slightly better outlook through 2009?

Yeah. Under normal circumstances we would expect HardCopy to have a strong growth this year. What we did see in 2008 is exactly what we said would happen when we were in 2007. And that is we had program transitions from the original HardCopy that were going away, our HardCopy two product line was ramping overall those in the first half netted to a lower business. It grew generally in the second half of the year. We would have expected strong growth for HardCopy this year, with a more muted outlook for our end businesses. We’ll have to see exactly how HardCopy performs, but the trend line is much more positive. We’re getting multiple tape-outs with very large customers. Its penetrating a lot of business that we wouldn't historically be able to address with just programmable logic products, and its really getting repeat business at all of the large key accounts that you would want to see us engage with across areas like communications in military, industrial, a lot of strong markets for us. So, we’ll have to see how this goes this year, but again HardCopy remains a key component for us, a product we continue to drive, and a product that we expect to count on for good strong growth in the future.

Okay. Thank you.

Thank you. Next question, please?

And our next question comes from David Wu, Global Crown Capital. Please go ahead.

Yes, I just want some clarification. John, you talked about military and wireless infrastructure. If you look at it on a global basis, what percentage of the business do those two end markets account for?

So as a percentage of Altera's business in last quarter the military business was rounded to 10%. So it was nine point something that rounds to 10%. Obviously I think that's the highest level we've had probably in the last 10 years if not longer. So, a good continued strong growth out of that. It’s being growing at a clip of probably 30% compound annual for just three years or more. So a very strong growth. And I would comment that a lot of it is still in prototype and early production. So that's why we expect it to grow in strong double-digits even in a slow semiconductor year, predominantly because the US government has already locked in its spending budget for 2009 and electronic spending for military is up 10% year-on-year. As far as wireless. Wireless is still 40% of our communications number. So it's roughly 17% of total corporate revenues.

Okay. John, in the environment that you are describing, which is the 5% to 9% topline growth hopefully in 2010 and onwards, I guess you haven't changed your goal of hitting something like 33% GAAP operating margin sometime out there, right?

No, we haven't changed that goal at all.

That's still the goal over the long-term. It's greater than 30%. Again as John said we will find a bottom and we will grow off that bottom and grow costs less than sales so that operating margin expands. When it gets to the 30 who knows, but everyone's going to reset here. And even at the relatively low levels a lot of people might see in 2009. I think we are going to look pretty well against that and then expand and often continue trying to get above 30% and we will do it as quickly certainly as we can and take advantage of all the different tools we have the toolset we have to do that.

Operator, we have time for one more question, please.

And we will take our final question from Tristan Gerra with Robert Baird. Please go ahead.

Hi, Good afternoon. Just quick question on Stratix IV, obviously, ramping pretty strongly and reaching the same revenue rate just about fourth quarters after Stratix III which is an unusual short time frame. Could this impact the ramp of Stratix III going forward, given the fast product cycle, and we have seen Stratix III on the [top] I guess not really outperforming the overall top line in Q4 or is that not going to change the dynamics for Stratix III this year?

I think overall, Tristan, Stratix III will continue its ramp very consistently with what we've seen out of prior FPGAs from Altera. So, I don't expect the ramp to change. I do expect the peak to be perhaps lower than what we have seen with other families. The reason for that is the accelerated move that Altera made to 40-nanometer has really truncated the design win window for all 65-nanometer products, whether from Altera or from the competition. So I expect the 65-nanometer node to have a lower peak than perhaps you saw in 0.13 micron and 90-nanometer from both us and the competition, simply because we've moved more of the business towards 40. I think it was the right choice for us to do. Obviously puts us in a very strong position to win designs and accelerate market share gains, not only against the competition, but most importantly against ASSPs and ASICs which really is the key to future growth.

Great, thank you.

Thank you very much, Tristan.

Tristan, thanks again. A final note before we sign off this afternoon. During the first quarter on March 4th, we will attend the Morgan Stanley Technology Conference in San Francisco. This concludes Altera's conference call. Thank you for your participation and interest.