Good day and welcome to the Altera First Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Scott Wylie. Please go ahead, sir.

Good afternoon. Thank you for joining this conference call, which will be available for replay telephonically and on Altera's website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Altera's Investor Relations 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 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, 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 Ron Pasek, Chief Financial Officer. After Ron and John's initial 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. Q1 revenue of $461 million generated sequential growth of 1% and was well above the minus 4% midpoint of guidance. Most of the additional revenue came from much stronger than planned wireless growth. The strength in Wireless contributed to most of the gross margin pressure we experienced. While weaker than anticipated sales into Military and Computer and Storage contributed the remainder. Tight OpEx control allowed us to come in at the bottom end of our guidance range, which yielded an EPS considerably higher than consensus. 28-nanometer revenue for the quarter was in the mid-$50 million range. New products grew 4% in the quarter and were 49% of revenue. We saw lead times extend during the latter part of the quarter for some new and mainstream products. These extended lead times will likely persist into Q2, and in some cases, Q3. In Q2, we see revenue growing 2% to 6% fueled by continued strength in Wireless. This will lead to continued pressure on gross margin, which will likely stay flat to Q1. We see 28-nanometer revenue growing greater than 30% from Q1 to Q2. Assuming the midpoint of Q2 guidance, we see growth of 13% first half 2014 over first half 2013, which is higher than what we had initially forecasted. Stepping back, on a full-year basis, given the higher than forecasted revenue growth in the first half, mainly in one end market with our largest customers, the original guidance for the 2013 gross margin rate of 69% is most likely not achievable. My best estimate is gross margin for the year will be between 67% and 67.5%. Additionally, due to cost savings, a better full year estimate for OpEx is $740 million versus the prior $750 million. The likely split is $428 million for R&D and $312 million for SG&A, with R&D a tad more back end loaded and SG&A fairly even throughout the year. Now let me hand the call over to John. John P. Daane: Thank you, Ron. We are seeing an improvement in infrastructure spending, and correspondingly revenue growth is starting to outperform the semiconductor industry as would be expected. First quarter revenue increased 12% year-over-year. The ongoing China Mobile LTE deployment resulted in 20% sequential wireless growth. Also, as expected, Industrial grew for the fourth straight quarter and Automotive increased double digits sequentially. The growth in these markets was partially offset by Computer, which declined more than expected. The midpoint of our second quarter forecast range has revenues increasing 14% year-over-year. On a sequential basis, the Telecom and Wireless category is expected to grow with both Wireless and Telecom up. The Auto, Industrial and Military categories should decline. The Computer and Networking categories should grow. The Other category, we expect to be flat. Since we receive a large number of questions on Wireless, I would like to comment on the outlook as we know it today. Because deployments in China can be large and fast, our resulted quarterly revenue can be choppy. However, we are in the early innings of LTE deployments in China and the U.S., and are just starting to see signs of LTE activity in Europe. Additionally, 3G business in India and a few other developing countries has picked up. In the near term, we expect our Wireless business to grow in Q2 and stay roughly flat in Q3. The fourth quarter is simply too far away to predict at this point. Our next-generation product portfolio of software, IP and a comprehensive lineup of FPGAs is coming together well. Significant algorithm improvements in 2013 brought our Quartus II software design platform back into industry lead in compile times and performance. We are sampling our 20-nanometer Arria 10 family to customers, and as can be seen by website videos, our transceiver outperforms the competition. Based on customer feedback, we are about 2 months behind the competition in silicon availability, but many months ahead in software. We are well into the design of our MAX 10 low-end product and we'll announce the introduction schedule later this year. And we're working on Stratix 10, with test chips on Intel's advanced 14-nanometer Tri-Gate technology already back. The 14-nanometer Tri-Gate technology is 1 generation of process technology ahead of the industry. In summary, we believe that our expanded product portfolio includes industry-leading software -- including industry leading software, will enable Altera to secure a market-leading position in next-generation products. On the financial side, we plan to slow expense growth in the years to come to allow our earnings to grow faster than our revenues. Now let me turn the call back to Ron. Ronald J. Pasek: Thanks, John. Just to reiterate what we have said since mid-2013 about our cash return goals. We are committed to returning 60% to 80% of cash flow from operations to shareholders through a combination of dividends and share repurchases, in line with what we returned in 2013 and 2012. For 2014, we'll far exceed that goal with dividends of approximately $200 million and share repurchases that will approach $700 million. Now let me turn the call over to Scott.

We would now like to take questions. [Operator Instructions] Operator, would you please provide instructions and poll for questions?

[Operator Instructions] And we'll first go to Jim Covello from Goldman Sachs.

This is Gabriela Borges on behalf of Jim. I want to dig into the Wireless business, in particular, the China LTE ramp. I appreciate the visibility into 3Q being about flat. Maybe you could talk about the level of comfort that you have around that guidance at this point in time? And if you could share with us any detail on what's shaping that view, whether it's [indiscernible] backlog or customer forecast or any other factors that you could talk about, that would be great. John P. Daane: What's giving us the confidence is we have a significant amount of backlog already from the customer base in Wireless, as they're trying to book out into the third calendar quarter. What we're seeing right now is really China Mobile in particular. They have an advantage, I would say, in 4G in that both China Telecom and China Unicom have not been given a license to operate their FTD network, which is where they plan to invest. And so China Mobile is aggressively building to take market share in doing so with a 4G technology. It is expected, at this point, that the FTD licenses will be granted in Q4 of this year. In which case, Unicom -- but more particularly Telecom, would actually start building. So the way to think of this right now is neither Unicom or Telecom is really doing anything in 4G. Unicom is buying still on 3G, but Telecom's basically not procuring anything. So we could see a pickup from the other 2 carriers in late -- in the year, but we'll have to see as those licenses are granted. And then I commented on the fact that we're seeing pick up in some of the other geographies around the world as well. And again, in summary, we have visibility that goes through Q3 at this point. And that's what gives us the confidence that business will be roughly flat.

We will now go to Ambrish Srivastava from BMO.

John and Ron, as old grizzles and grizzlings in the analysts. When we hear lead time stretching out and -- you mentioned, John, that backlog has built, what gives you the confidence that this is not double ordering going on and this backlog can be canceled? So any help you can provide us in allaying our fears to some extent that they can be. John P. Daane: Okay. Well, backlogs certainly can be canceled at any time, after 30 days or up to 30 days. And certainly, things could change. But ultimately, if you think of ourselves and Wireless, as well as our particular competitors, we're not dual-sourced. So we have a particular sockets. Our competitors might have others. In which case, there's no incentive to order from us and also order separately for the same socket from our competitors because we are sole source for these applications. And that's number one. Number two, these really are -- orders from major customers. So it's not a broad-based issue. And the third thing I'd say is the book-to-bill, which was over one -- in calendar quarter Q1, was really the result of people laying in backlog and real increases in business rather than the change in lead times. Because the change in lead times, which really came from our foundry, came very late in the quarter. And we, in fact, did not start telling customers until the last week of the quarter about the change in some of our lead times. So I would say that the bookings in Q1 were really more of a business trend than it was due to the change in our lead times. So overall, I would say things can change and certainly have in the past. But we feel fairly confident based on our conversations not only with the wireless companies themselves, but in some of these cases with the service providers themselves such as China Mobile.

Okay. Then my quick follow-up on 3G, and this is the same question I asked Alex [ph] yesterday. You mentioned that India has come in, so if you just look at 3G versus 4G, do you expect -- the concern that I have is, is 3G going down dramatically as we go through the year to offset any gains in 4G? Clearly, right now, it's not. But can you just help us understand the dynamics of 3G versus 4G for your business, John? John P. Daane: I think 3G actually has already gone through somewhat of a downturn because if you look at China, for the most part, you've got a major shift where China Mobile is no longer procuring other 3G TDFC/DMA standard, they're going to 4G. Telecom, right now, is really not procuring much of anything. Unicom still procuring some 3G capacity or equipment but not a lot. So China's soft. Certainly, if you look at the U.S., there's not a lot of 3G deployment going on. Europe, there is a minimal amount. So really, if you look at the world in the format of 3G, most of the deployment is going in building countryside. Russia has been strong of late. India is picking up. Brazil should pick up at some point. And so I would say probably, 3G for us has been at the bottom more than it is an area that will decline. 4G, I think, is still in very early innings. We're seeing the U.S. pick up. We're seeing some signs of Europe starting. And obviously, we're still very early in China. 4G will be choppy just because China does very large build outs very quickly and then takes a pause for a period of time. But ultimately, I think we're in very early innings, and should continue to see wireless growth for some time.

We'll now go to the Romit Shah from Nomura Securities. Romit J. Shah: Yes, and John, I'm just trying to dig a little bit into where the upside for Q1 came from. Looking at 28-nanometer based on my math, revenues from that category were up about 25% versus guidance of up to 30%. So did 40-nanometer just not decline as much as you thought, or was more of the upside from mainstream and mature? John P. Daane: So I think it was a couple of things. First of all, the growth in Industrial does have an impact on our mature market. Because you'll see industrial product really flow throughout all 3 of the categories: New, Mainstream and Mature. Because that equipment lives for so long. I think if you look at the new product area, we had growth, certainly, from 28, 40... Ronald J. Pasek: Flat. 40 was flattish. John P. Daane: And I would say probably, overall, if you looked at it, Mainstream and Mature were up a little bit more than we would have otherwise thought, but not a significant change or delta. Romit J. Shah: Okay. That's helpful. And then my... John P. Daane: And I guess one question that you're kind of asking is "Wireless is up a lot, why isn't new products necessarily driving all of the growth or particularly 28?" Remember -- go back to the comments that I've made for many, many quarters, which is the equipment in wireless is a combination of 65, which you're going to find in our Mainstream category; 40-nanometer, which is in New; and 28, which is in New. It really is a combination of those events. So that's what you see spread throughout the business mix that we have. Romit J. Shah: I got it. Okay. And then I just had a question on gross margin and how to think about it long term? You're guiding this year, I guess, 67-plus percent because Wireless is going to be stronger than you originally thought. But given that we are sort of in the early innings of an LTE build out and your position is very solid here, then, how does that impact your view about long-term gross margins beyond 2014? Is 70% still the right number to think about? Or just given where you see the mix coming in, if this LTE cycle is for real, then should we think -- should we be thinking more mid- to high-60s? Ronald J. Pasek: So Romit, I think you have to realize the unique thing about this year is the really only growth we're seeing that we didn't anticipate is in Wireless, where our single largest customers reside. We're not seeing broad-based growth like we did, say, in 2010. So what that means is I think going forward, I wouldn't change what we've said, which is a range of gross margins between 67% and 70%. That's still very achievable. That's still the company target.

Your next question comes from Alex Gauna from JMP Securities.

I was wondering, John, you said in a couple of places that you're still in the early innings of China and you've given some color around that. I'm wondering, is it so early such that we can have a strong Q4 without necessarily baking in some unknowns around China Unicom or Telecom? Or is it, like you said, lumpy? Are we at risk that hey, the big build is happening now over the next 2 quarters, and then we've got a vacuum that needs to be filled in Q4? John P. Daane: And that's why I think ultimately, Q4 becomes very hard to call, Alex. Remember, China Mobile tends to do builds over 6 months to 9 months and then slow down for 6 to 9 months and then do another build. So they have probably been the reason why you've seen the Wireless business or our particular industry's Wireless business be more choppy than it otherwise would be. If you look at Telecom, Unicom, AT&T, Sprint, Vodafone, Deutsche, or France Télécom, they tend to procure over a longer period of time at much more sustained rates. China Mobile is clearly trying to pull product ahead as quickly as possible to extend their lead. And it could be -- already, they went into the year, they were talking about 500,000 base stations, now we're clearly well above that. They could continue to grow. We could see China Telecom really put their foot on the gas because they're losing a lot of 3G subscribers. We could see, certainly, a further pickup in North America and Europe. It just is an unknown. And so our customers themselves have clarity in their minds through Q3. Q4 for us is too early to call as to whether it's flat, up, down, and so we'll just have to see how that develops over the next quarter.

And quickly, is it accurate in that flattish kind of projection for Q3? And thanks for going out that far in the first place. Is any -- China Unicom or Telecom baked into that or if some of that fell in Q3, that would be upside? John P. Daane: Telecom and Unicom would be upside because they're not procuring right now. So the expectation from the government is -- originally, we were talking about a late Q3, it was a September date potentially for the license. Now what you hear is more like an October date for the potential licenses of the FTD side. And neither company is really wanting to spend anything on TD. They did some small initial TD appointments, about 20% of what they bought -- most of it is FTD. But as soon as the government put a clamp on their FTD operating license, they just stopped buying entirely. And that's what we see in China right now, is 2 of the carriers really are not buying anything in 4G. So anything that happens earlier would be pure upside to what we're expecting.

We'll go to Chris Danely from JPMorgan. Christopher B. Danely: Just a quick question on gross margin. So you said that the mix is driving the downside. When I go back to the last build, in 2010, I look at your percentage of revenue from Telecom and Wireless and I think it was pretty much the same, like mid-40s. And I think your largest customer now was an even bigger customer then, but your gross margins back then were in the 70s. So can you just talk about why gross margins are lower this time around? And then, is there anything you can do to maybe get those to increase? John P. Daane: I think if you go back during to 2010, Chris, what you saw on that year is all of our vertical markets grew between 55% and 75%. And so you had strength in every one of our verticals from the lower margin ones such as Consumer; to some extent, Wireless; all the way through the higher margin ones like Military, Defense or Industrial. What we're seeing right now is most of the growth is really from Wireless. And so therefore, you get the pressure on the gross margins. If in 2010, most of the growth had been only from Wireless and not the other verticals, you would have seen our gross margins go down. Because if you kind of track us over a number of years, and I know you know us very well, we've always said that the margins that we have as a company will depend on mix. Certain verticals have lower gross margin than corporate average, and certain verticals have higher. And 2010 just happened to be a pretty good year were everything grew. Right now, we are seeing growth in really predominantly, one vertical and a mix in the others.

[Operator Instructions] We'll now go to Srini Pajjuri from CLSA.

This is Ryan Goodman for Srini. I'm just curious, could you share just how big your largest customer was in the quarter? And also if you had any other 10% customers? Ronald J. Pasek: It's slightly over 10% in the quarter, and there was only one customer.

Okay. Great. And then just as a follow-up, I'm just looking at the earnings announcement, the Networking, Computer and Storage business is down quite a bit. I know you mentioned there in the script before that computing was weaker. But just could you give a little color on what's going on in that segment that drove that decline in this quarter? John P. Daane: Yes, we have predicted -- if you go back to prior quarter, we have predicted that we would see Computer down in the first calendar quarter. It was. Two effects there; number one, Q1 is typically a seasonal weak quarter for Computer, so that drove the business to be down. Number two, we saw a softness from some of the flash-based storage system vendors in the first calendar quarter. We do expect Computer to pick up this quarter. The other thing I'd kind of caution you on, and I talked about this in the prior quarter, is we have had the prior 2 quarters, Q3 of last year and Q4 of last year, we had double-digit growth out of Computer. And we said it would be somewhat choppy until the business matured because it's concentrated on a few customers who will do large data center build outs and then sort of slow down for a period of time. That impacted both the server side as well as the storage side in Q1, as well as the other items that I mentioned. As we continue to develop a broader business base with more customers in the Computer area, I would expect that business to be smoother from a quarterly perspective. But again at a high level, we do expect that vertical to grow this quarter by a slight amount.

It appears there are no further questions. [Operator Instructions] And it appears there are no further questions. Actually, I apologize, Ambrish, we'll take a question from him, from BMO.

Yes, I had a quick follow-up, John. On the lead times extending out, is it just primarily 28? And all related to wireless or are there any other areas as well? Ronald J. Pasek: So Ambrish, this is Ron. It was actually more 40 than 28, and some 65. The 40 will persist for a couple of quarters; 65 should recover by the end of this quarter. 28 is in reasonably good shape.

Okay. 65 is then related to the wireless that John was mentioning? Some of the wireless that's ramping is 65, right? Ronald J. Pasek: No, it's part of wireless. Yes. John P. Daane: Overall, I think you have to take a step back and recognize it's not due to our inventory position. It really is a tightening of capacity that we're seeing at our foundry vendor. If you go back to last week, they had very strong numbers that they announced. Most of their advance nodes are fairly full and that's really what's driving it more than it's been anything else from our perspective. So we've been working with them. We are doing very well from a supply perspective to our customer base. It's a slight, I would say, it's a slight issue, it's not a major issue. But it is something that we did want to highlight because our lead times are on some of these products like 40, 65, 180-nanometer embedded flash, those 3 areas in particular have seen a lengthening of lead time.

Can you just highlight what are the milestones with Intel that have been met that you are happy with year-to-date so far in the relationship? John P. Daane: Yes, so what has happened so far, certainly, from an external event, which I think is very important, is we do have working test chips in 14-nanometer with our technologies both include P&L transceivers and FPGA blocks. As we've highlighted, going back years, we like to do test chips in order to prove the silicon. And make sure that there's good silicon to stimulation correlation and then the blocks work. So that when we do the final assembly of the chips, everything is working well. We're very happy to announce that we've got the first working transceiver in a finFET technology. And so we're very excited about the fact that we're well on pace with what we're doing with Intel at this point. Our plan is, at this point, to tape out our first design in Q1 of 2015. That shifted out a couple of months. The reason for that is we are making some very significant architectural changes in order to enhance performance and really significantly increase the density. And this is something that's well beyond anything that's ever been introduced in our industry. The architectural changes have added a little bit of time to what was our original schedule. But they're well worth it in terms of what they'll deliver. Because we really will find ourselves alone at the high-end, both from a density performance and certainly core performance rate, well above anything the competition could ever do. Something at the rate of up about twice as fast as we've been able to run the core in prior generations of technology. And it's coming out very, very quickly. So we would expect the -- at the high-end, where we are the leader today, that we will continue to be the leader as we introduce that product set. So, the test chip was one good milestone, there are others, but it's certainly probably the best public milestone that we can offer at this point.

And the 1Q to '15 is the move -- is the shift from 4Q, right? Because I... John P. Daane: Yes, it's a couple of months shipped in terms of the overall schedule. But the architectural improvements are proving to be -- that we've made to the product, are proving to be very, I think, the right thing to do. Because the feedback -- what we've done, and we haven't talked about this openly, but we've provided our customers with design tools now that we can work with them on the new architecture. And the benefits that we're seeing are so dramatic that, for instance, we have one customer that was looking at implementing an ASIC because they've always done an ASIC as the heart of their system. But because we could operate at a 2x performance versus our prior generation, they've now canceled that ASIC and they're going to do that program specifically within our FPGA. We're the only FPGA that can do that. So by making these changes to the technology, it really allows us to reach into much further into the ASIC business and take on chips that require performance levels, for which we could never dream of achieving. And so for that reason, we've delayed our product a couple of months. But I think it's well worth it when you can see the results at the end of the day.

And we'll now go to Blayne Curtis from Barclays Capital.

This is Mark Kelley on for Blayne. I just had a quick one on the emulation market. Can you remind us how big that market is per node? And also where you think we are in terms of that subsiding, I guess, that have one [ph] for you guys on 28? John P. Daane: I think it's a couple of hundred million dollars. And it's a combination of selling parts to people who make boards, and there are a number of companies who do this that we sell it to the marketplace. It's also most of the major semiconductor companies buy these parts themselves and make their own boards to do the emulation of their own chips. I think it's obviously still active in 28-nanometer. It will switch over to 20 and then ultimately to 14, as those products become available. And I think where you're going to see us really own that market is as we introduce our 14-nanometer technology because our density will be so much higher than anything our competition could do, that we really take on that market. And I think that's probably in the second half of 2015, you'd really see that shift over to us in a very meaningful way.

Okay. And do you think you'll participate on 20-nanometer? John P. Daane: It's possible. We're just doing the mid-range product in 20. But so far, our mid-range density is higher than what we've seen from the competition. And it's certainly higher than what was available on the last generation of the high end, so there is a possibility that we'll pick it up. But ultimately, I wasn't really planning on that. I've always talked about 14-nanometer for us as the take-over point at the high end.

Actually, there are no further questions. I'll turn the conference back over to our presenters for any additional or closing comments.

Great. Thank you, Jessica. As to conferences this quarter, on June 4, we will present at the Bank of America Merrill Lynch 2014 Global Technology Conference in San Francisco. This concludes Altera's earnings conference call. Thanks for your interest and participation.

This concludes today's presentation. Thank you for your participation.