Good day, everyone, and welcome to the Altera Third Quarter 2012 Earnings Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Scott Wylie, Vice President, Investor Relations. 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 and use code 258712. During today's prepared remarks, we'll be making some forward-looking statements. In addition, management may make additional forward-looking statements in response to questions. In light of the Private Securities Litigation Reform Act of 1995, 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 uncertainties and that future events may differ from the statements made. For additional info, 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 Ron Pasek, Chief Financial Officer. Ron will open the call with a few brief remarks 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 Ron. Ronald J. Pasek: Thank you, Scott. Revenue for the third quarter grew 6% sequentially, and at the high-end of guidance. We saw healthy growth in both new and mainstream product categories, which grew 8% and 13% respectively. 40-nanometer revenue increased 8%, and for the second quarter in a row, was our single largest revenue node. Revenue for 28-nanometer more than doubled to $18.1 million for the quarter. Although this was slightly below our guidance of $20 million, we had over $4 million of 28-nanometer demand, which we could not ship due to product mix. And may I remind you that 100% of our 28-nanometer revenue is from designs that will ultimately transition to production. Additionally, in Q3, we achieved an important milestone as we are shipping production qualified devices in all 3 of our 28-nanometer product families. Gross margin was somewhat below guidance at 69.3%, mostly the results of customer mix within the wireless and wireline vertical. R&D for the quarter was $4 million below the midpoint of guidance. In addition, the midpoint of guidance for Q4, in the case that R&D for the full year will be $8 million below the previous guidance of $368 million or $360 million. This is due to cost-saving efforts and to a lesser extent, variable compensation. As noted in the earnings release, we will issue our Q4 update on December 4. At the same time, we will issue our 2013 guidance followed by a conference call, where John and I will elaborate on our vision for next year. We'll issue call details when we're closer to the date. With that, let me turn the call over to John. John P. Daane: Thank you, Ron. Third quarter revenue increased 6% sequentially. Automotive, broadcast, military and networking all increased double-digits on a percentage basis. For our fourth quarter, we are forecasting a 6% to 10% sequential revenue decrease. Two customers are driving over half of the amount. One customer converted a high-volume design last year to an ASIC, as still happens from time to time in our industry but recently discovered a technical limitation in the device, which required them to fill the gap with product from Altera in the third quarter. This was about 1% of revenue in the third quarter, will be 0 in the fourth quarter and is one of our mainstream category products. The second customer has converted 2 high-volume designs, one in networking and one in wireless, both mainstream products from Altera to ASICs. This was approximately 4% of revenue in Q3, which reduces to 0 in Q4. I am not aware of any other significant ASIC conversions planned or underway. Without these, our forecast for Q4 revenue would be a sequential decline of 1% to 5%, with general softness in all of our major market segments as a result of the lackluster global economic environment. The loss of 2 designs to ASICs at our largest customer is partially offset by market share gains with other accounts. We expect that in Q4 or Q1, we will report that 2 customers represent greater than 10% of our revenue: Our existing customer in Asia, along with the communications customer in Europe. We continue to see great success with our 28-nanometer products. The opportunity pipe for 28-nanometer is larger than our prior record with 40-nanometer, and we continue to win a majority of the designs. In Q3, we secured major embedded ARM-based SoC designs with several wireless and industrial customers. In 28-nanometer, we have performance leadership in the high end, the largest product segment in the industry, and have power advantage in the mid range and low end. Additionally, our embedded SoC products have architectural and performance advantages over the competition and our Quartus design tools suite maintain industry leadership in features and performance. Over decade ago, we predicted the rising cost of design implementation with each new process node would benefit programmable products over fixed function ASICs and ASSPs. Programmable products have the advantage of leveraging one design investment over a large number of customers and applications and achieve a solid return on investment. This prediction came to pass with the tipping point where Altera significantly outgrew the semiconductor industry. A new trend has emerged in our industry. Wafer costs are now increasing with each node due to new material additions and manufacturing productivity challenges. Smaller die and designs with significant analog content cannot achieve cost reductions in advanced nodes because the die size reduction is minimal and the savings from this is outweighed by the significant increase in wafer cost. Our programmable products, however, have larger die, are dominated by digital content and still achieve a unit cost reduction in new nodes. We recently announced our 20-nanometer product innovations and are on track to introduce 20-nanometer products on our normal cadence. This industry wide issue of rising design implementation cost and wafer cost in advanced nodes will further accelerate ASIC and ASSP replacement by programmable logic. Now let me turn the call back to Scott.

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

[Operator Instructions] We'll take our first question from Romit Shah with Nomura. Romit J. Shah: On the second customer that's moving from a PLD to an ASIC, I was wondering if you could give a little bit more color as to which vertical and why specifically they made the conversion? John P. Daane: So the customer is in communications. One of the designs was in wireless, one of the designs was in networking. The design that was in wireless was a Cyclone class product from Altera that we're shipping in the low millions of units per year, economically makes sense with that volume to convert to ASICs. The other design was a Stratix class design. It was in the hundreds of thousands of units per year. Again, economically at that point, makes sense to convert to ASICs. We do see this still with high volume as we've talked about many, many times where, on occasion, we will see conversions. Both of those products were in our mainstream product category. Romit J. Shah: John, I just wanted to ask you I guess, a broader question on CapEx trend. You had a good quarter in telecom, but looking at it on a year-over-year basis, it's only up 2%. I guess just given the strong growth we're seeing in mobile Internet devices, particularly LTE, why aren't we seeing that flow back to you in a more significant way? One would think that carriers would have to spend more to support the higher data usage? John P. Daane: I think what we're seeing is, first of all, last year, in the first half of last year, particularly in North America, was an aggressive spend in wireless. It since has slowed to an extent in the U.S. We've also seen, really, no activity out of India. China has ultimately slowed, particularly for GSM deployments. And where telecom has done okay for us, I think, its spend in telecom has been slower as CapEx has been shifted overall to the wireless space. I would say in general though, the good news is longer term, one will expect that carriers in multiple geographies will have to spend simply because their networks will be saturated both from viewers at home, downloading movies, which is clogging the wireline segment, our telecom segment, as well as the upgrades to LTE devices in North America, Japan, Korea and ultimately we will see that, I think, in China as well as, at some point, India really starting to spend on 3G. We're just not seeing it this year. So good news is I think it's in the future. Obviously, we believe we're going to benefit very well from that because our programmable content on a dollar's basis is much higher than the newer generations of equipment. We just need to see the spending actually go forward from the carriers.

We'll take our next question from James Schneider of Goldman Sachs.

John, I was wondering if you could comment, in terms of the communications customers, your largest customers, could you talk about where their inventories are today? Are they still lean as you mentioned they were last quarter or are they destocking further from the levels you saw last quarter? Maybe just talk about inventory broadly beyond comps as well. John P. Daane: So I think, we have a couple of customers that are working down inventory. It is not broad; I would say it's limited to probably about a couple of customers and I think mostly in those cases, it's because the -- their direction of their business has slowed and therefore, they ended up with inventory because they expected their business was going to be stronger. Ultimately, I would expect those few customers to adjust fairly quickly. I, again, do not see a broad amount of inventory out there, particularly since we went through a heavy destocking period of Altera product in the first half of this year. So we think it's fairly lean at this point. And the business direction will really be dependent on the overall economy and how these end markets and customers do, as well as the growth of our new products, obviously.

Thanks. And as a follow-up, can maybe talk a little bit more about the European communications customer where you talked about gaining share? You talked about there being a 10% customer either in Q4 or Q1. Maybe give us some color on how long the customer has already been ramping up until this point? And then once it reaches 10%, could it go significantly higher there or would it kind of reach a plateau as of that Q4, Q1 point? John P. Daane: Well, I think what's happening in the communications industry is there is a few companies that have much higher market share today than there were 5 years ago. And there's -- so based on the fact that telecom and wireless is about half of the company's revenue -- it's about 45% -- based on the fact that there's very heavy account concentration in that area, I think it's very natural to see a couple of accounts be over 10%. This is something that we talked about a while ago. Last quarter, that customer was just under 10%, so it's been growing over a period of time. They've told us we'll be the #1 vendor next year and we're very happy to see that growth and continued success within telecom and wireless. That is a segment that overall, in the PLD industry today, we are the #1 vendor.

Next, we'll go next to Steven Eliscu of UBS.

With regards to the new 4G systems that are rolling out, one of the things that we've heard is at least, with regards to some of the systems being deployed in China, if you look at the latest, some of the Phase 4, Phase 5 of the TD rollouts as an example, that at least some of those systems or some parts of those systems are software upgradable. I'm trying to understand with regards to where Altera is well placed in terms of the baseband and digital front end. How much needs to be replaced as those systems get converted to TD-LTE, and otherwise outside of China? And how much is potentially where you don't see necessarily the type of growth that you saw in 3G? John P. Daane: So Steve, the question I think is very specific to one carrier in China. There are 3 carriers in the third-generation. Each carrier has a different standard. I think specifically, you're talking about China Mobile. The other 2 carriers which have CDMA and W-CDMA, those current base stations will not be upgradable to LTE. So those will have to be replaced. In China Mobile's case, they're deploying TD-SCDMA, which has also been called a homegrown Chinese standard. In that case, they're currently in deployment of the sixth phase. We did get revenue last quarter and we'll have some revenue this quarter associated with the sixth phase. That sixth phase equipment is capable of being upgraded in the baseband area to LTE, but based on the specification changes that have happened over time, all of the equipment for the most part from the first 5 phases will need to be thrown away and replaced for LTE. So continue to see a good strong replenishment cycle, upgrade cycle. The 4G licenses have not been let by the Chinese government yet. So what you're going to see is the sixth round -- or it's called 6.0 currently. Because again, a 6.1 is being discussed for mid-next year in terms of deployment. But for 6.0, it will be deployed as TD-SCDMA. Potentially, if the Chinese government allows, it will do LTE trial as well. Note that China Mobile, interestingly enough, is doing a lot of advertising currently in China for LTE, even though it doesn't have a license yet. So I guess the base answer of your question is, specific to China Mobile, the current equipment, which is Phase 6 is capable of software upgrade; the prior generations is not. Then when you get into the radios, it really depends on the spectrum that is allowed to be used. I think you're probably going to see a lot of the radios get replaced over time anyway as well. There's a lot of volume in the radio side.

And if I can ask a quick follow-up on your largest customer, what was the percent of sales? John P. Daane: Last quarter, it was 16% of sales.

We'll go to Tristan Gerra of Baird.

Based on your current design win pipeline, where do you think LTE revenue could be as a percent of your wireless infrastructure revenue by the end of next year? Obviously, somewhat speculative question, but if we could get somewhat of a range would help. John P. Daane: I do not have a breakout of our LTE versus -- or basically, if you were to say 4G versus 3G versus 2G versus backhaul for microwave which is also in wireless. What I can tell you is that wireless did grow for us in the third calendar quarter and that growth was really driven by LTE purchases. So we are seeing some deployment in terms of geographies. There have been really, 3 geographies that had been doing deployment, U.S., Korea and South Korea and Japan. Those deployments in general have gone, I think, a little bit slower than people would have anticipated, but to a degree, you've seen that kind of with every generation I think with communications equipment.

Okay. And then quick follow-up. If you could elaborate on the 28-nanometer mix issues you faced in the quarter, whether you believe you're going to fully catch up this quarter and what type of ramp of 28-nanometer should we be expecting over the next couple of quarters? Ronald J. Pasek: Tristan, this is Ron. Yes, we will definitely ship that product this quarter. There's no question about it. And you should see a very similar ramp to 28 on what you saw the 40. You'll see a slow steady ramp as the product matures.

And we'll go to Vivek Arya with Bank of America Merrill Lynch.

Hi this is Aashish Rao for Vivek. John, you talked about increasing cost pressures in the industry; we've heard from various established players the 28-nanometer cost were up on a per transistor basis as opposed to the typical linear decrease. 20 nanometers could see another step function increase. So just wondering what your strategy for controlling 20-nanometer costs are. I mean, could you have your tape outs or combined product lines or better yet, could you actually pass on your cost increases to customers, which could result in faster sales growth as these advanced nodes become a larger part of the mix? John P. Daane: So there are 2 -- I think there are 2 different phenomenon that are going on, and they're important to point out as separate things that are happening. One is, design costs or design implementation costs have been going up with every node for a long period of time. And we've talked about this for over a decade and we pointed out that programmable logic products would have an advantage. We take one design that we invest, one chip and we'll sell that chip to military communications, automotive customers. And through that aggregation, we get very high volume for that one chip. And so even while the overall cost implement or chip are going up and obviously, that impacts us as well, fewer people can afford to implement ASICs, because that cost is increasing. Fewer ASSPs will get developed because the ASSP companies can't achieve the return of investment. They vacate the space by moving forward to that next generation. We cost reduce our chip. Yes, the investment is higher, but because we get more revenue by replacing these other functions that are gone from the industry, we're able to get more revenue and continue to achieve a very strong return on investment. And you rarely see that from us; we have significantly outgrown industry in the last 4 years because of the tipping point, replaced a lot of ASICs and ASSPs. Those markets are still many times larger than the overall PLD industry. And so, as the costs continue to increase for the implementation, even though that increase is on us as well, because we're outgoing the industry, because we're taking share from other products, we can continue to afford those investments. So that's #1, it's been going on for a long period of time. Second thing is wafer costs. The cost to implement a wafer or to manufacture a wafer are going up. And so, if you have a chip that's a fairly small die, if you have a chip that has a lot of analog content -- because analog will not scale -- it doesn't shrink going to the next process geometry, you end up with a phenomena where the cost to -- per transistor or the die cost going into the next node can actually be higher. And this started really in 28-nanometer and it gets worse in 20 and into 14 beyond that. The advantage we have, however, is we have larger die. And if you've ever looked at the cost curve in semiconductors, you'll note there's an exponential curve based on die size. Because we have larger die, we still have the benefit of shrinking that die significantly going into the next node, which trumps the wafer cost increase and allows us still to get a die cost decrease going to the next-generation. So we now actually benefit from 2 phenomena. We've been benefiting for a long time on the overall implementation costs going up, hurting ASICs and ASSPs, driving more business to PLDs. Now, we're helped by the fact that the wafer costs are going up, which again helps PLDs, hurts a lot of ASICs and ASSPs, and should accelerate the tipping point more towards our product. So we've got several generations ahead of us where we see an ability to get unit price decreases out of our products. I think this challenge is now being discussed and quite honestly is a very significant challenge for a lot of other semiconductor companies.

Got it. Then perhaps, I mean, you could -- I mean, provide some more color on them. I mean, you mentioned you lost 2 designs which convert the opposite way from PLDs to ASICs. Do you have any other products that are a significant portion of your sales that are shipping in like the thousand -- tens -- hundreds of thousands of units per year that could potentially switch the other way? John P. Daane: We do get some conversions from time to time. So if you run through the math and ultimately, we can provide you the data. If you're in application that's in the millions of units per year, you will see people shift from our type of technology to an ASIC because the return on investment today is there to do that. Now again, if you go back a decade ago, that conversion point may have been 10,000 units a year. So by moving more advanced nodes, reducing our cost of products, we've been able to extend into much higher volume. We typically may see 1 to 2 designs per year convert on us, sometimes more, sometimes less. I think that phenomena will continue. At this point, we do not see or know of any other significant designs that are being discussed to convert. So I don't see any other potential business who would move away from our product. The other thing, it's hard to predict, even with the customers that are discussing with us, that they intend to move to an ASIC, exactly when that will happen. The reason behind that is the average ASIC design goes through between 1 to 2 respins before they get the design correct. And if you think of each respin taking 6 to 9 months to do, it's very difficult for our customers and even ourselves to predict exactly when the customer is going to get the conversion right. Sometimes they never get it to work, sometimes like the design I talked about, they get it to work and then find that they have issues and come back and buy from us. We actually had that phenomena with a different customer last year. And then sometimes, they get it to work and the business moves away. So it's a little bit dynamic, but again, we don't see any other significant designs changing on us in the near future.

Could I ask one more question for Ron, if I may? Could you talk a bit about your domestic versus international cash generation split? It's been shifting more towards the international side for the last few years, with U.S. about 15% currently. Do you see the need to change this to enable a dividend increase or wider scale buy back? Ronald J. Pasek: No. We have a sufficiently large cash balance to continue to increase dividend over time and to continue to keep doing opportunistic buybacks. So, no. I mean, I think the other source of cash generation that happened quite extensively a couple of years ago was stock option exercise as well. Not so significant this year or last year, but in FY '10, it was rather significant, given the large increase in stock price. So I don't see any need to repatriate or borrow. We've got plenty of cash for returning cash to shareholders needs.

Next we will go to Christopher Danely with JPMorgan. Christopher B. Danely: Just a follow-up, I think on Tristan's question. Just to clarify, did you say there 40, 4-0 million of 28-nanometer revenue that could not be shipped, and can you just tell us why that was a bit of a mix issue? Was it yields? And also if you could provide us with the 28-nanometer revenue target for Q4? Ronald J. Pasek: So Chris, it was 4, not 4-0. So of the $18 million, we would've shipped $22 million in 28-nanometer revenue. And again, our guidance for the quarter for Q3 for the September quarter was $20 million, so we're just about there and would've been there if we could ship everything. We typically have mix issues. We have mix issues with product in Q1 timeframe, if you remember, and this was mature product as well. It's not uncommon, especially early in the node. I'm not going to give a forecast for 28 in Q4, though as I've said earlier, I think what you should expect is a very similar ramp-up to any node we've had previously at this stage of the maturity. Christopher B. Danely: And for my follow-up, I guess the question for John on the ASICs conversion of your biggest customer. Is this the first time or one of the first big, I guess, ASIC conversions you guys have seen at your largest customer? Is there any sort of metric you could give us that -- what percentage of their revenue or of their orders do you think are sort of PLD versus ASIC versus like a typical customer? In other words, do you see them shifting to using more ASICs, I guess, is the real question. John P. Daane: So Chris, I'm a little bit cautious because I don't want to talk about -- at the end of the day, I think everybody knows who our largest customers is, and I hate to talk about customer-specific activities. I do think the ASIC conversions happen because of a customer achieving a volume -- in our case, where it's economically viable for them to go do this. I think this is probably, to answer your question, probably the first ASIC conversions that have happened at this particular account. As I mentioned over time, we tend to see 1 to 2, maybe perhaps, on average, a year. We don't know of any others that are going on and again have, in the account base, particularly with the larger accounts, a lot of visibility into what they're doing both on new projects as well as the existing projects. I would say that accounts also who have a high market share in a particular area also concentrate on ASIC conversion of ASSPs because they essentially want to disable the competition. If they convert an ASSP to an ASIC, then the ASSP vendor may no longer have the ability to develop that ASSP because they don't have a large enough customer base. And so, I think if you look at some of the ASIC programs at some of the large companies that exist, I think they use it for 2 things. One is, economically cost reduce if it makes sense, which again is a volume proposition for PLDs. And then the other is if they have high market share in the segment, convert ASSPs to, perhaps, challenge some of their smaller competitors who don't have the wherewithal to develop the IP to replace the ASSPs. And so again at the end of the day, I think probably, I'd sum it up by just saying we don't see any other significant designs that are being discussed in conversion of Altera-specific product at this point. So I don't see anything coming out further from our revenue next year due to ASIC conversion.

And we'll go to Ambrish Srivastava of BMO Capital Markets.

I just want to continue on the ASICs here, John. You said 1 to 2 designs per year. Could quantify for us in terms of revenue? And then a follow-up for you, Ron, on the margin front. You guys have been above the target and you guys have done a great job. 69.5% last quarter; just clarify for us what the mix comment was. And then having now come down to 69.5%, and is that what we should be expecting going forward, so we have, i.e. have the reset the lower? John P. Daane: Well I guess, the first part first is, it's really driven by volume and the conversion. The revenue from us can be all over the map. If you go back to some of the consumer products many years ago, you saw PLDs heavily used in flat panel television sets. Because that market is fairly mature at this point, a lot of that design were converted over the last 4 or 5 years, those were designs that were in high-volume, maybe low million of units per year. But the ASSPs were also very low. So you're talking about a few million dollars converting from us. You can get all the way up to, as we disclose, 2 designs being 4% of revenue last quarter. So I think that kind of gives you a range. It can be in the millions of dollars, it could be in the tens of millions of dollars, perhaps, but it's never higher. I would say, it would be extremely rare for us to ever have one design that would have that high a revenue that it would really hurt the overall business mode. And I think that's one of the advantages of programmable logic because we have a broad customer base, a lot of designs and fairly broad revenue. So we can absorb the few ASIC conversions that happened generally without much of an issue and continue this to grow strongly and maybe Ron... Ronald J. Pasek: Yes. So Ambrish, as you know, most of the time when we have margin fluctuations, it's something we usually attribute to a vertical mix, just the percent of the telecom wireless in a given quarter or a percent of government business or military or industrial. This last quarter, if you compare it to the prior quarter, Q2, telcom wireless business grew. Well, it was roughly the same percent of the total it was in the June quarter, but then when you look deeper into the mix of customers we sold within that segment, it was a different mix of customers. And what I don't want you to read into it is that since we now are doing a significant amount of business with a European equipment maker, that has itself margin pressure. There was a lot of different customers in that segment, and what you see is, given the nature of the mix of customers, it's actually causing a little bit of a decline. In no way does that mean -- and for the September quarter, in no way does that mean necessarily that it's a reflection on what happens in the future. As you see, we're guiding Q4 as still between 69% and 70% and then on December 4, when we give you the outlook for the plan next year, we'll give you an outlook then as well for the full year.

We'll go now to Srini Pajjuri of CLSA.

Hi, this is Ryan Goodman for Srini. I wanted to know within 28 nanometers, could you talk a little bit about which markets you're seeing the early traction in and where you think the biggest opportunities are? And then also on that $4 million shortfall that was attributed to product mix, is there any capacity constraints at this point that are also a factor or is that pretty much behind? John P. Daane: So the applications in 28-nanometer, a lot of customers that'll make up that amount, Stratix is currently dominating the overall shipment. A lot of business into communications sector, wireless, wireline, networking, some in military and also in test and measurement than you're seeing some of the other products grow in some of the other segments. In terms of supply, generally, we're able to get supplies. So from a supply chain perspective, I think there is adequate capacity at this point. It's just the lead times are extremely long. And so when we run into upside orders in a particular area that perhaps we didn't prepare for, it does cause us to not have the product available for that quarter. And so I think that's most of what happened to us and in particular to the shipments. Now we do release in the press release the growth of each product quarter-to-quarter. As soon as we get one of the products to $1 million, we give you that figure of what it was and then we give you the percentage growth from that. I would expect that in this quarter, Arria will get above $1 million and so we'll start showing you the growth factors for that. Note that because we haven't been showing Arria and Cyclone growth factors, the percentages overall, just for Stratix alone, are under representing actual growth from the raw dollars perspective that we're getting on 28, which is why Ron has been giving that figure in total as well.

And then just for a follow up, kind of along those lines there. Can you talk a bit about what you are seeing in that midrange and low-end? So it seems like it's taking a little bit longer to take off there. I know you're kind of a generation behind in terms of nodes at the line and sort of new to the midrange with Arria. So what is the plan there? When should we expect that to really get material? It sounds like maybe within the next quarter or 2, you're saying. And then also if you could comment on the SoC opportunity too and early trends you're seeing with the embedded ARM processor products? John P. Daane: So, a little surprised at your comments. If you look at it, we've been first to market with a low-end product in 28-nanometer. It's doing quite well in a number of markets. Just remember that at the end of the day, the ASPs on the low-end are much lower than the ASP's in the high-end. So when you're in a prototyping environment where customers are buying for prototype systems or for initial builds or initial production, it takes a while longer to get the low end and midrange to a high revenue figure, simply because the ASPs are a lot lower. But we were first in the low end. Midrange, we were a little later than the competition but doing quite well in that space. High-end, we were much earlier than the competition and really haven't seen them a lot, quite honestly, and doing extremely well there. Again, because the ASPs in Stratix are higher, the revenue is growing faster in that space. I think you'll see the Arria and Cyclone start to do very well from a revenue figure very quickly. SoC is also picking up from a design win perspective. SoC is predominantly aimed at wireless and industrial and automotive but does have a play also in networking as well as military accounts. We have some distinct feature advantages. Quite honestly, we think the competition, while early, has done some things not well. And so we're finding a lot of customers are moving to us even though that we were later than the competition in that space because we have some things that they require and that the competition doesn't. So we won major programs, honestly, in the last 6 months in both wireless and industrial, that really lock up a big portion of some of the big accounts. So we're quite pleased with what we're doing in SoC. So overall, I think if you look at the revenue, we're quite pleased. Stratix, the high-end, very early, that's over half the market, better product from a performance perspective, which is what the high-end wants, and so doing extremely well there. Mid-range and low-end, again, doing very well for those spaces and now with SoC with a better product, we're really winning a lot of the major sockets. So we're very pleased with what we're doing right now in 28-nanometer.

We'll go to John Pitzer of Crédit Suisse.

Hi, this is Patrick Walsh for John Pitzer. I just had a quick question on the gross margins. I know that you guys have been targeting kind of 65% to 67% and you've been operating well above that range. I'm just kind of wondering what time frame you think we'd get back to that range and how that plays out going forward? John P. Daane: Yes. So Patrick, we actually gave a long-term model out to 2015, which said that margins could go as low as 67%. But in an investor meeting we had last November, what we gave in guidance this year was around 70%. And what we said was, if we can still grow faster than the semiconductor industry, 2x the semiconductor industry, we will manage to achieve a 70% gross margin. If we feel like we're pushing away business because it's not meeting that bar, we would actually let margin erode to make sure that we keep that growth rate. So we're not running really above what I guided for this year. We're pretty much spot on, on a full year basis, to what I guided for the full year. John P. Daane: And then I think we'll update next year when we get to the December conference call.

My follow-on question was just on design cost. I know, like you guys said the design cost kind of going up as we move down Moore's law. This year, I mean, R&D is kind of a little bit higher as a percentage of sales than normal. How do you think that plays out over time? I mean, I would imagine 20-nanometer design cost are going to be even higher, so how do you kind of, I guess, balance that? John P. Daane: Yes, I mean, I think what you see this year is remember what -- going back to 2010, we ended 2010 at R&D only 14% of revenue. It's clearly something that we felt we were very under-invested. And we consciously said that we would grow R&D faster than revenue for a couple of years, 2 to 3 years. Again, this year, you got a double whammy. You've got an increase in R&D cost while revenue has declined. So again, I think when you look at John's earlier point on the increase on engineering cost side, what's also happening ultimately when doing that is your available market is also increasing as well. So although your current R&D cost looks like they're escalating, the ultimate true cost when you look at the available market that product is available for, it still has roughly the same relationship for each node. John P. Daane: I think if you take a step back, the costs that have been increasing for the design implementation since the start of the industry. With every new node, the cost to implement a design goes up, mass costs go up, EDA tool costs go up, the number of engineers required to verify the design goes up because the productivity simply has not significantly increased for a long period of time from a design perspective. And so what you see from Altera's business model, which I think is more unique to the semiconductor industry, is while we've had to invest more in each node, both for the base products or because we're doing more products -- if you kind of go back to the comment earlier about the midrange -- until this generation, Altera has been the only one who's been doing a mid-range. So we've been doing 3 generations of PLDs; 10 years ago, we only had 1. We've been able to invest in these products that show a really strong return, which has managed our overall investment of R&D as a percentage to sales to a really reasonable number, compared to the overall semiconductor industry and is again because we get the growth from the tipping point. So overall, I would say that the cost increase is not a new phenomena. We've been dealing with it because the cost increase benefits programmables. We take one product and sell it to lots of people. And as others exit the market, we sweep in and take that business and allows us to grow more, and that model continues to go forward. We don't see it's challenging us in any way, in the next several nodes.

We'll go to CJ Muse at Barclays.

This is Mark Kelley on for CJ. I was wondering if you guys can provide a little bit of color by geography for, I guess, in particular, your industrial and auto business? John P. Daane: I think, overall, if you look at Industrial business, it was actually flat to slightly up in Q3, flat to slightly down in Q4. So we're doing better than the overall, I think, industrial industry and market because we have a lot of new designs that are ramping. So I think we've been doing better overall. I would say, from a geographical perspective, probably the one geography that is softest for us has been overall was Japan. Europe was also soft in industrial. We made up in Europe with growth from a communications business. And then in North America, the strength last quarter was in both communications as well as in military. So I would say industrial has been soft in Europe and soft in Japan but our numbers are doing better than the overall Industrial business and probably some of the analog companies. But that's more of a factor of having new designs ramping to productions so you're taking market share.

And then just a follow-up. In terms of OpEx, how should we be thinking about seasonality, I guess, as we exit Q4 into Q1? Ronald J. Pasek: Without getting into it, I'll guide you to some OpEx numbers on the call on December 4. We don't have an approved plan by our board yet, so I really hesitate to give guidance out to next year.

And now we'll go to Sumit Dhanda of ISI Group.

First question. As you think about the outlook for the first -- sorry, for the fourth quarter here, guiding for implicitly higher turns, I guess the question is, is that supported by the trajectory of bookings you're seeing entering the quarter? Could you talk at all qualitatively about your backlog into the fourth quarter, which is there to support the higher turns? Ronald J. Pasek: Yes. It's a marginally higher turns number than what we saw this quarter, even last quarter. And candidly, it's actually quite a bit lower than historically where it has been. If you remember through all of 2011, we saw a slow steady increase in the turns number and I fully expect it to get up to the mid to high 50s or even low 60s. But what would happened this year is a little bit of a concern about capacity earlier in the year. And that brought a bunch of orders in the first quarter, the March quarter, that served to reduce our turns number that quarter -- the June quarter to September quarter, and candidly, the December quarter. So it's absolutely supported by history, recent history, and backlog at this point.

I guess for my follow-up, any color you could provide, because I think last quarter, you mentioned that as your lead times normalized towards the end of the quarter, the pace of bookings, the book to bill ratio fell below 1. Could you talk about the pace of bookings as you exited the quarter and how it's looked initially here into the fourth quarter, given that you have almost a month of data here? Ronald J. Pasek: Yes, I mean again, what shows in the press release is we're currently slightly below 1 as well. That's not surprising, again, given the fact that we are at some [ph] lead times and we do have a robust enough backlog to support it. John P. Daane: Lead times for us are, if the product is forecasted 0 weeks, if the product's unforecasted 4 to 12 weeks, just depending on the ability to service that out of the supply chain, I think, again, this capacity is generally okay in the supply chain.

Do you mind if I ask a quick follow-up? Ron, I know you said that, historically, turns run at a higher level, there's no reason you won't get back up there. But as I rewind back to late last year and to early this year, I think the expectation was the same, but the reality turned out to be different. Why do think it's going to be different this time around? Ronald J. Pasek: As I've said earlier, the reality this year turned out to be a little different because in Q1, there were some issues, concerns around capacity. What happens from a customer's standpoint is they tend to slide their orders in, not just in the current quarter but out several quarters, because they want to get a place in line. And so, it was steadily increasing, the turns there were all last year and in fact in Q1, it was as high as it's been. And again, once we hit that concern about capacity, you saw a bunch of orders take that turns number down significantly. John P. Daane: Just to remind you, Sumit, the issue earlier this year was the 28-nanometer supply constraint meant that 40-nanometer also became constrained because the equipment was identical. So once that happened, with 40-nanometer being as large as it is as a business, and we went out and talked to customers, they just placed more backlog to provide more coverage so we could get the visibility to supply or secure the supply for the customer base. And that's what created the strong bookings, as Ron mentioned in the first half of this year.

And next, we will go to Brendan Furlong of Miller Tabak.

Just a quick question on your internal inventories, 95 days and obviously, looking a little bit worse than that as we -- on the down December quarter. Just wondering if you have plans to try and take down those internal inventories into the new year or what's your thought process around that? Ronald J. Pasek: Yes, again, I'll give you guidance on inventory levels on December 4. But historically, what we've said consistently is we'd like to see inventory between 3 and 4 months' supply in hand. And most of last year and the year before candidly, we ran toward the low end of that level. But given the concerns about product, we didn't feel it was a bad thing to run at the high-end of that level, given you're not earning anything on the cash anyway. You might as well support your customers. So through this year, you saw us consciously increase inventory, particularly in 40-nanometer and 65 and 90; that was a very conscious decision. Again, I'll give you guidance on inventory levels for next year a little later, on December 4. John P. Daane: Just on inventory in general, because we have a very broad customer base, we do not really have any problems with inventory write-offs or throwing away dollars if we get the mix wrong. It will sell. And so we've looked at the inventory as we're very comfortable with the numbers that we have. As Ron mentioned earlier, the visibility is very low from the customer base right now. It's good to have a little bit more inventory towards the higher end of the 3 to 4 months' supply in hand, because we're able to service orders as they come in and forecast it. And I think we're on the other end of it, we just might put some customers in a bind, simply because their visibility as well. So we're very comfortable with where we are right now on an inventory basis.

Point taken, but I'm just assuming that we're in the low growth or no growth environment for a couple of quarters, 2 or 3 quarters here. At some stage, do you have to maybe lower your utilization rate or what have you to -- or your orders from Taiwan Semi just to get your inventories down? John P. Daane: So would we change our inventory model? The answer is no. We have to operate between 3 to 4 months. If our revenue fluctuates up or down, obviously, if you translate the 3 to 4 months back on the dollars of inventory that we would have, that does change and so therefore, our orders into the supply chain would fluctuate every quarter. But generally, no, we're not planning to change at this point the overall model that we have. We've run this for probably 8 years now and I can't think of, in the last 8 years, any significant inventory write-off. So it's a very, very comfortable model for us.

Got you. And then just a quick follow-up on the European customer that you said you're gaining share from. Did you say that was from the wireless side? John P. Daane: It's in the communications sector. We haven't broken down wireless or wireline. So I'd just probably leave it at that, since there's really only a couple of guys left in Europe and I'm just very sensitive to giving out any particulars to drive people to identify an account because most of these accounts are very concerned with our disclosure about them. So I'll just leave it where we left off.

We'll go to Hans Mosesmann of Raymond James. Hans C. Mosesmann: My questions has been answered but a little more detail at 20-nanometer, if you can. When do you expect first production silicon, the 20, and is the current software quarter's package, does it support 20-nanometer today? John P. Daane: Hans, the current software package does not support 20-nanometer. What we announced earlier was some of the innovations that we're doing to enhance the performance and add some new capabilities to go after some new markets. As soon as we do a product announcement, we'll release the schedule for the software as well as the device engineering silicon schedules and also the production schedules. But as yet, we haven't done that. Generally, if you take a step back, 20-nanometer is being executed at roughly the same cadence as you've seen us execute other products. So if you kind of go back and look at what we've done and kind of work that forward, I think you'll see very similar schedules from Altera moving forward.

We'll go to David Wu with Indaba Global Research.

I've got 2 quick questions. Number one is, in terms of the current run rate, roughly what percentage of your business is really PLD versus competitors win versus displacing ASIC and ASSP. Has the latter be closer half of your business currently or not? John P. Daane: Could you rephrase that question? I'm not sure I understand what you are asking.

If you look at your current run rate and revenues, I was wondering roughly between competing with earnings and replacing classical ASICs and ASSP, are we at half-and-half or still predominantly a PLD competition at this point? John P. Daane: I know now exactly what you're asking and unfortunately between the 3 of us, we don't have that data set. We know what you're asking is to look at basically how much of this is replacing the competition versus how much is in PLDs, swapping market share versus how much is growing into replacing ASICs and ASSPs. We have the loss-win data of how much we win, how much the PLD competition wins, how much we see the ASIC and ASSP wins. I don't think we've sliced our data by how much that prior generation was ASICs, ASSPs and PLDs. But it's a good exercise to do, so we'll go back and see if we can reslice the data to come up with something. Because we have shown that, I think, in the past.

Well especially, compare 40-nanometers versus 65, I think that's the breakpoint, right? John P. Daane: Yes. So it's a good question. We just haven't sliced the data that way. So I think we'll try to go back and see if we can do that version and perhaps publish it.

Perhaps a simpler one. What about the 40-nanometer node? I assume next quarter, the decline is primarily on mainstream and mature, and I was wondering, would 40 nanometers still be a positive contribution on the sequential basis in Q4? Ronald J. Pasek: It's difficult. I can't tell you I know for sure and we don't guide at that level. Again, the last 2 quarters, it was our single largest node. It is hitting -- getting close in the next year, 1.5 years, the steepest -- the single highest point. So it should continue to ramp. I can't tell you for sure it's going to grow next quarter, given the 6% to 10% sequential decline. John P. Daane: Generally, 40 should continue to grow. It's not close to its peak yet, so we should see continued growth there, continued growth at the 28-nanometer obviously, because that's newer. And then the mainstream products generally will behave with how the market is going. If customers are growing, you'll see some growth there. If they're decreasing, you'll see some decrease. And then mature will definitely decline every quarter. And that's, I think, just a rough high-level, that's what we would expect every quarter.

Because I was looking at the 2 guys that were responsible for the big delta. Those did not involve 40-nanometer products. John P. Daane: Right. Exactly.

So that's why I ask whether it's going to be up or not. John P. Daane: I mean, ultimately, we would expect the mainstream category to, particularly this quarter, have some hits because of those conversions. I would expect again the mature category will be down; it normally is. And even if you take a step back at say, "Well, in Q3, we had growth in the mainstream category." On a year-over-year basis, it was down but generally, we expect to see that so I think all of that was fine.

We'll take our final question from Ian Ing with Lazard Capital Markets.

This is actually Tyler Radke. I just wanted to follow-up with you on -- you guys mentioned that the wireless was pretty healthy, just wondering how you kind of view, I guess, 100-gig telecom applications, given that they're still in trial and maybe give us a sense of where the 28 gigabit per second rates are being used in production volume deployments? John P. Daane: I think you see 2 things for the higher transceivers: One is back plane usage, where customers are designing, using PLDs to drive the interconnect between boards within an existing chassis, which is heavily utilized in the higher performance systems like 100-gig, 40-gig systems. Then the second thing you see is obviously those deployments in the industry. I think within telecom, we're been the best positioned because we've had transceiver strength for a long period of time. Plus we acquired a company that was doing OTN technology a few years ago, which is really advantaged us over the competition in many of those applications. And so we think it's going well, I would say 100-gig slow and probably will be slow for a while. Overall though, if you take a step back and you say how did transmission do? Transmission actually did very well for us last quarter. We saw sequential growth in the transmission area, which included these higher end switches such as 40-gig or even 100-gig prototypes that are being developed today. And I would expect that to continue, simply because the core is getting saturated with the usage of video. As people are downloading more video to PCs or tablets, you're seeing the need to upgrade the core and obviously, that's a big beneficiary for PLDs because most of the core semiconductor technology is really, from a data path perspective, being implemented been in FPGAs.

And then just one quick follow-up, if I may. During last kind of, in the quarter, you made some comments in the Street. You were seeing real demand, and obviously that was evident on the top line. Just trying to understand, I guess, what's changed, if anything, or if it's just seasonality, weak macro, as you're guiding all segments to decline sequentially? John P. Daane: Yes. It's not that all segments will be down; there'll be some that are sort of flat, some that are down. It will be a mix. Obviously, we have a couple of ASIC conversions. I think, at this point, what we've really seen is a slowdown within the enterprise areas. I think companies are being more cautious with their capital purchase. I think within the telecommunications space, we have seen some slowdown on some of the CapEx overall, and then I think industrial has just been a very slow segment in particular. So overall, I would say it's really the macro environment that is having an impact on corporations and it is slowing spending. Good news is, many of those companies will have to spend eventually, either for productivity or for performance increases. It's just a matter of when. And right now, I think as you're seeing from many semi companies, we're sort of in a trough period. So thank you very much. With that, I'll turn it to Scott.

As to conferences this quarter, on November 14, we will be at the UBS Global Technology Conference in New York and on November 27, we'll present at the Crédit Suisse Annual Technology Conference in Phoenix. This concludes Altera's Earnings Conference Call. Thanks for your interest and participation.