Scott Wylie - VP of IR John Daane - CEO Tim Morse - CFO

Parag Agarwal - Jefferies & Company Michael Masdea - Credit Suisse Sumit Dhanda - Banc of America Securities Peter Ceuleers - Citigroup Tim Luke - Lehman Brothers Tim Kellis - Stanford Group Seogju Lee - Goldman Sachs Chris Danely - J.P. Morgan John Orem - Morgan Stanley Han Lee - Global Crown Capital Catherine Bogart - A. G. Edwards Steve Eliscu - UBS Ruben Roy - Pacific Crest Securities Danny Clove - Bear Stearns Tristan Gerra - Robert Baird

Good day everyone, and welcome to the Altera Fourth Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Scott Wylie, Vice President of Investor Relations for Altera Corporation. Mr. Wylie, please go ahead.

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, use code 258712. During today's call, we will be making some forward-looking statements, and in light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings 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, our Chief Financial Officer. Tim will open the call with a financial overview of the fourth quarter 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.

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Thanks Scott. Starting with the top line, fourth quarter sales of $317.4 million came in at the lower end of our guidance range, down 7% versus 3Q. New product growth of 6% sequentially was encouraging, but more than offset by declines in mainstream and mature products. Versus fourth quarter last year, sales were up 13% and new products led the way with 155% growth. With respect to product families, FPGAs declined 8% versus 3Q, but still gained 13% compared with 4Q '05. CPLD performance was more muted in both directions, down 4% sequentially, but up 7% year-over-year. Essentially, what we saw play out this quarter was pretty much what we expected, all be it with greater downward amplitude than first thought. Communications was an area of notable weakness and conditions elsewhere remained sluggish. John will provide more details by product family and market segment following my overview. In terms of operating results, gross margins finished at 66.3% for 4Q, toward the higher end of our previous guidance. Cost of goods sold included $400,000 in stock-based compensation expense. Operating expenses in 4Q decreased sequentially by $12 million to $132 million on a reported basis and roughly $130 million excluding the unfavorable impact of gains in our NQDC or Nonqualified Deferred Compensation Plan. Those gains are merely offset in other income for past practice and accounting guidance. Setting aside the NQDC, operating expenses were lower than guidance by $7 million, driven by lighter than projected compensation, commissions, stock option review and support costs. Total R&D spend was $58 million for the quarter and SG&A came in at $74 million. Those costs included stock-based and compensation expense of $6.5 million for R&D and $8.6 million for SG&A. Other income was $19 million for 4Q, helped by the NQDC adjustment described a moment ago. Our tax provision in the fourth quarter was favorably impacted by retroactive adjustments resulting from the reinstatement of the R&D tax credit, completion of tax audits, changes in the geographic distribution of pretax income and the filing of income tax returns. In total, these changes produced a fourth quarter net income benefit of $18 million versus what we would have seen at the previously estimated 15% rate. The R&D tax credit will also favorably impact our 2007 projected tax rate, while the other adjustments won't affect future periods. Net income for 4Q was $99.9 million or $0.27 per diluted share, including the nickel in tax favorability versus prior guidance. At year-end, cash and investments were $1.6 billion. We began repurchasing shares in mid November and bought back 4.4 million shares at a cost of $87 million. For the year, we repurchased 7.1 million shares, spending 140 million. For 1Q '07 quarter-to-date, we've repurchased 4.7 millions shares for $95 million. Also, on the balance sheet fourth quarter days sales outstanding of 21 days improved by 13 days versus the previous quarter due to a more front-end loaded shipment pattern. We had no significant past due accounts at the end of either quarter. Our operations team did a great job managing inventory levels this quarter against the backdrop of more rapidly declining sales than anticipated we finished with pipeline inventory of 3.5 months supply on hand versus 3.8 months in 3Q. Altera inventory decreased from 2.5 months to 2.2 months and distributor inventory remained unchanged at 1.3 months. Turing to our outlook for the first quarter, we expect to see sales in the flat-to-down 4% range. At the midway point of the quarter, business is tracking consistently against this guidance and we do not plan to provide another update for 1Q. Orders-to-resales was below parity in 4Q with turns in the low 50s. For 1Q, order-to-resale so far, has been slightly positive and turns are expected to be in the low 60s. Historically, our turns have run in the mid 60s. Our income statement guidance as usual assumes that there is no impact from our nonqualified deferred compensation plan. For 1Q, we see gross margins in the 65% to 66% range. In terms of operating expense, we expect R&D will be in the low-to-mid $60 million range and SG&A will be in the mid $70 million range. These projections include stock-based comp expense of $6 million for R&D and $8 million for SG&A. Other income will be approximately $16 million for the quarter. Our tax rate for 2007 will be in the 13% to 15% range on a GAAP basis and 2 to 3 points higher if you ignore effects of stock-based compensation. The difference versus our previously estimated GAAP rate of 15% is primarily the extension of the R&D credit. Diluted share count in the first quarter assuming no additional repurchases will be roughly 363 million shares. Pipeline inventory will remain within our three to four months desired. Finally, we expect approximately $12 million in capital expenditures for the quarter and $38 million for the year. With that, I'll hand it over to John.

Thank you, Tim. Revenues in Q4 decreased 7% sequentially due to the combination of the week communication sector and a decrease FPGA revenues. The latter associated with customer inventory reduction of high-end FPGAs and HardCopy devices after accumulation over the summer months when we were on allocation. Altogether, Q4 was slightly worse than the original forecast, but the driving factors were anticipated correctly. By product classification, we typically expect both new and mainstream categories to grow and mature products to decline. However, in Q4, we initially expected declines across all of our categories associated with the high-end FPGA inventory reduction. New products actually grew 6% sequentially. Cyclone II was up 28%, Stratix II and Stratix II GX up 2%, HardCopy decreased 5% and MAX II was up 10%. The growth in Stratix II was particularly pleasing, as new programs ramps more than made up for the inventory correction. Mainstream products declined 16% sequentially. Stratix and Stratix II GX declined 24% and Cyclone was down 4%. Mature products declined 6%. Overall, FPGAs were down 8% sequentially and CPLDs were down 4%. By vertical market for Q4, we had forecasted Industrial and Consumer to be flattish and Computer and Communications to decrease. At final tally, Industrial and Consumer were each down 2%, Computer down 14%, and Communications down 11%. In Communications, growth in networking was offset by declines in wireless and telecom as expected. In Computer, both Storage and Server sectors were soft as expected. FPGA inventory depletion, as forecasted, also affected each end market. For the year 2006 in total, Altera's revenues grew 14%, once again faster than the semiconductor industry as a whole. By product category, our new products dominated by 90-nanometer FPGAs grew 150%. Mainstream products grew 17% with the continued ramp of our 130-nanometer FPGAs and mature and other products declined 8%. For the full year, FPGAs grew 16%, HardCopy 15% and CPLDs were up sharply with 12% growth. I believe we increased market share in PLDs for the four straight years. For the year 2006 in total, we saw solid broad-based end market growth. Consumer was flat and the one area of disappointment. Here, growth in broadcast equipment was offset weakness in flat panels. We expect better results in Consumer in 2007 with new program ramps in broadcast, set-top decoder boxes and flat panels. Communications revenue grew 15% in 2006, once again outpacing the end industry by over 2x, as we continue to displace ASICs and ASSPs. We saw a double-digit growth in networking, wireless and telecom. Industrial grew 20% with particularly strong growth from military, test, and manufacturing systems sub-segments. And Computer was up 16% with double-digit growth in servers, office automation and storage equipment. In all, we had a solid growth across the board in our core and emerging market segments. A few highlights for the year. 2006 was the first double-digit growth year for Altera's CPLDs since 2000 and it was almost entirely due to our MAX II family, which shipped $30 million of revenue in the year. Through the unscheduled release of the Stratix II GX FPGA family with functioning transceivers, we've taken a leadership position in FPGAs with integrated high-speed serial transceivers. We announced the Stratix III 65-nanometer FPGA series with an industry-first programmable power management capability that results in lower power consumption than previous or competing FPGA devices. With up to 1 billion transistors on today's FPGAs, programmable power management is crucial to delivering high-capacity devices that can be used in infrastructure system that have fixed power budgets. Net income and earnings per share have increased for each of the last five years. And finally, we increased market share again in 2006. Over the last four years, our revenues have grown at a 16% compound rate with FPGAs growing at a compound rate over 20%. Moving to our Q1 forecast, a few months ago, we expected revenues would increase sequentially. We saw no additional major program transitions and expected FPGA inventory to be quickly reduced, as has been seen in prior cycles. However, the Communications industry, particularly wireless has become weaker with recent customer backlog push-outs and we now expect this segment to decrease sequentially. Also the Consumer, Computer and Industrial markets looked to be flattish. By geography, Japan is particularly weak with a typical fiscal year-end budget flush for Japanese corporations not happening. For Q1, we are forecasting revenues to be flat-to-down 4% sequentially. In summary, 2006 was a solid year for Altera, even with the soft Q4, as we achieved balanced growth across a majority of our end markets, executed on our new product introductions and outgrew the semiconductor industry. 2007 is an important year for Altera new product introductions and while I can't yet go into details, we have several new products in the pipeline that will extend our leadership and fuel future growth. You will hear more about these as the year progresses. Scott?

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

(Operator Instructions). We will take our first question from Parag Agarwal with Jefferies & Company. Parag Agarwal - Jefferies & Company: Hi. This is Parag for John Lau. Just wanted to get a long-term outlook in the sense that what do you expect to be key drivers as you go in '07? Specifically, do you think that you would be able to grow your Communications revenue faster than the end market like you did in '06?

We do expect that we will continue to be able to outgrow the end markets that we service, simply because we continue to replace ASICs and ASSPs with every new generation of equipment. We therefore manage to become a higher proportion of the raw materials and outgrow our customers. So, I think if you look at 2006, we had very balanced growth. As I mentioned, Consumer was really the only one point of disappointment for the company. We saw double-digit growth in probably 8 or 9 different sub-segments that I mentioned. We would expect to see continued balanced growth from the company. And we also expect Consumer to have a much better year than it did last year. Parag Agarwal - Jefferies & Company: Okay. As a follow up, what your wireless customers are telling you as of now like when do they expect to see recovery '07?

I think it is depended on the end wireless company, and what carriers they are serving and what technology space they are servicing. So, there is no one universal answer out of that question. What I would say is that currently we are seeing and do expect this year to see strength out of the 2G marketplace. We do see in China the deployment for the TD-SCDMA trials that currently is ongoing shipments. Although I think most people now expect that there will not be mass deployments of 3G within China this year. Overall though, there has been a slowdown of some wireless deployments at various carriers. Obviously, as we have talked about before, Japan had a very strong first half of the year in calendar year 2006 for us, associated with the carriers preparing for number portability, which came into effect mid-year or back half of the year. Therefore, it was weak in Japan for us in wireless. Also, there has been a slowdown in some of the North American capital purchases. So, I think it's hard to specifically answer the question. Do I think wireless will grow off of the lows that we are seeing this quarter? Absolutely. Exactly what that trajectory will be and where the number will end up, we'll just have to take one quarter at a time. Thank you. Next question please?

Our next question is from Michael Masdea with Credit Suisse. Michael Masdea - Credit Suisse: Yeah, thanks a lot. Maybe just kind of a bigger picture question, if you look at your customers' inventories and a lot of the areas that you are talking about on the comp side and computing, etcetera, they are pretty lean. Your inventories are lean. Distribution inventory is pretty lean, but I guess, EMS below high, is there a risk that either, your customers are getting too lean here and now we could see a snapback, or is this really a bigger picture problem with demand?

I think that it is somewhat demand. Wireless is slow right now, but I do think it's more of an inventory picture. And I do think that we are undershipping the actual end demand of our customers at this point, and that -- given some period of time, we will see a snapback on the orders. Simply, again, because we are undershipping the take rate that a majority of our customers have at this point. Michael Masdea - Credit Suisse: Is that timeframe too hard to predict now, based on kind of the surprises you've seen so far, and that's why you are not sort of calling the Q1 bottom or is there more to it?

I think it's hard for us to look beyond the quarter. I mean, our accuracy within a quarter has been pretty good on a directional basis. Our accuracy beyond the quarter has been pretty poor, simply because customers don't know where they are going from an end contractor and customer perspective. I would say, generally, I would feel like -- if you were to ask me the question today, do I feel Q1 is the bottom? Yes. Is it possible that things could happen or change the way that we would look at Q2 in the next couple of months? It's certainly a possibility. Michael Masdea - Credit Suisse: Great, thanks a lot.

Thank you.

And next is Sumit Dhanda with Banc of America. Sumit Dhanda - Banc of America Securities: Yes. Hi, question on the R&D guidance for Q1. At least for my model, it's coming in lower than anticipated. I beat all that you had guided for about $175 million in pro forma R&D for the full year. So, is the more depressed R&D run rate something we should extrapolate through the course of the year?

No, no, I don't believe so. We still see the total year guidance has been pretty much right on. Sumit Dhanda - Banc of America Securities: And so, then as it relates to Q1, are you seeing bigger savings relative to your 65-nanometer mask cost or what have you, or is there a percentage down? What's occurring on that line item?

The delta in R&D is not associated in this case with mask purchases or new product rollouts. So, I think we just probably could have done a better job at forecasting the first calendar quarter. Looking at Q2, you take the current run rate and we add on the number of tapeouts that we plan to do in the chips, and I think the tapeouts will absolutely happen at this point. We do expect that the sort of guidance -- excuse me, for Q1 is pretty accurate. And you -- we feel comfortable with the Q2 numbers, as I mentioned. So, I would just say, we probably did a poor job at putting together the number for Q1 more than it was anything else. Certainly, there were no product chops or things of that nature which caused a lower expense. Sumit Dhanda - Banc of America Securities: Okay. But in terms of the trajectory, my recollection, again, here is that it would peak some time mid-year and then start to taper off, is that something we should be thinking about or--?

Yeah, the trajectory, the peaks have not changed at all. The original guidance I think there was is still accurate. Again, the big increase this year in the R&D expense is mostly from the mask and wafer purchases for the new products that we are doing, and all of those remain on schedule. Sumit Dhanda - Banc of America Securities: But even after the more depressed phase you are entering Q1, you are expecting almost a larger spike as it relates to the 65-nanometer R&D spending than you did before or am I missing something in this analysis?

No, I think the -- again, I think we could have scrubbed the Q1 spend a little better. I think labor is lower this quarter than we thought it might have otherwise been. But again, if you look at the major increase this year in expenses, it's not labor-driven, it's predominantly mask and wafer-driven. And again, schedules for those products haven't changed at all. Sumit Dhanda - Banc of America Securities: Okay. Thank you very much.

All right. Thank you. Sorry for the confusion.

And next is Glen Yeung with Citigroup. Peter Ceuleers - Citigroup: Hi, this is [Peter Ceuleers] for Glen. You -- well, in terms of year-on-year growth, first quarter looks like it's going to below double-digit, do you still feel like you can pick up momentum somewhere during the year and get to a full year double-digit revenue growth? And do you have kind of a feel for when that would be or what would be the driver of it?

We don't provide long-term revenue growth rates. We provide, I think, most of the other numbers on a full year and we take the revenue of that quarter at a time. So, I prefer not to try to guess as to exactly where we will end up this year. So, I probably will just leave it there. Peter Ceuleers - Citigroup: Okay. Could I ask then a second question? Just in terms of inventory being down. I know you said that you feel like it's in part inventory still work, getting work through customers and in product demand. But specifically, on Industrial and Consumer, looks like it's a little weaker in the first quarter than you might have expected. Is that more macro driven? Or are there any customer-specific issues or product-specific issues and/or I guess end product-specific issues you can call out?

Calendar quarter Q1 is typically a down quarter for consumer. The fact that it's actually going to be flattish, I think speaks to the fact that we have some new program ramps that are happening this quarter. So, I think actually having consumer to be flat with calendar quarter Q4 is actually a positive. On the industrial side, I would say, it's a combination of the weakness that we are seeing generally in Japan where we do have a significant amount of industrial business combined with the continued general inventory overhang. Nothing that, I would say on a macro basis specific going on within that segment. And we do expect Industrials going to grow this year. Thank you very much. Next question please?

Next is Tim Luke with Lehman Brothers. Tim Luke - Lehman Brothers: Hi, John, can you hear me?

Yes. Tim Luke - Lehman Brothers: With respect to the com business that isn't wireless, could you give us any color on how you've seen that, basically for networking and wireline?

We would expect networking and wireline to be flattish this quarter, possibly networking could increase. It was -- we could have seen potentially coming into this quarter some growth out of the wireline sector and there were some GPON programs that we were going to ramp that had slipped out of quarter. Those are basically ramps of new product programs. But overall, we would expect wireline, wireline being the telecom side to be flattish this quarter and we would expect the networking business to be flat-to-up. So, overall, the decrease in the communications sector really has been driven by the wireless side. Tim Luke - Lehman Brothers: Is it significantly bigger, the wireless phase John? And that was just a clarification. And then the question I had was, just with the other side of expenses SG&A, should we still assume that the first half expenses will be higher than the second half, maybe you would like to confirm what the annual target was?

Tim, I will answer the first question and then I'll give it to the other Tim for the SG&A side. Tim Luke - Lehman Brothers: Thank you.

Just roughly, if you look at our communications sector it still is about 40:40: 20. So, about 40% wireless, about 40% in the telecom side and about 20% in what you would consider enterprise or networking.

As for SG&A, $300 million of the total year target. I would expect to be a little bit heavier weighted in the first half than in the second half. But it's really at this point, Tim, just kind of round the margins. It's a little too early to call and we are talking pretty small numbers of variance. Tim Luke - Lehman Brothers: What is the R&D number for the year now?

That was 300 as well. Tim Luke - Lehman Brothers: Thank you very much.

We had originally projected 22% in the first quarter, we might be $1 million, couple of million perhaps of that. Tim Luke - Lehman Brothers: Thank you.

And that's -- those are both GAAP numbers.

Yeah, both on a GAAP basis.

Thank you, Tim.

All right. Thank you.

And next is Tim Kellis of Stanford Group. Tim Kellis - Stanford Group: Yeah, just real quick one. I was wondering if you could give us the Cyclone revenue profile sequentially?

Let's go back to my comments. So, Cyclone II was up 28% sequentially and Cyclone I or Cyclone was down 4% sequentially. Tim Kellis - Stanford Group: Thank you

Sure.

And next is Seogju Lee with Goldman Sachs. Seogju Lee - Goldman Sachs: Hi, thank you, sorry. Tim welcome, looking forward to working with you.

Thank you. Seogju Lee - Goldman Sachs: In terms of the computing revenues, in terms of the guidance there, sorry, I missed it I am on my cell phone.

I am sorry Seogju. Is that the question is -- is it the Q1 guidance for Computer? Seogju Lee - Goldman Sachs: That's correct. Sorry about that. I am hopping around here in on my cell phone in Barcelona.

Nice place to be at the wireless conference. We expect the Computer business to be flattish this quarter. Seogju Lee - Goldman Sachs: Okay. So it's Industrial, Consumer and Computing all be sort of flattish?

That is correct. And Communications will be the down one and that basically is driven by wireless. Seogju Lee - Goldman Sachs: Great. And then in terms of the gross margin outlook for Q1 is in the lower half of your typical sort of target range. Just what is sort of driving that? Is it just -- more of just a coverage and how should be think about that trending going forward? Thanks.

I think the guidance on gross margins remains constant with what's its been, kind of the 65 to 67, probably narrowed the range a little bit for this call just for the fact that we are kind of mid way through the quarter. So, we've narrowed the range a little bit. But, we see things playing out as we've talked about previously. Seogju Lee - Goldman Sachs: Okay. And do you take it back towards the mid-to-higher end of the range? Is it -- I guess coverage will help a bit, but is the mix sort of as you would expect it or if you could walk through that a little bit, that would be very helpful as well. Thanks.

Margins for us, as we have said, are mix dependent from a market segment perspective. Certainly, there is a volume component of that. Note that, we have been reducing inventories at a time where our revenues have also been reducing. So, absorption is lower than it would normally be. So, I would point that out right now. We also do get cost reductions and yield enhancements that play out through the year, every year that go on. So, it's difficult for us to place exactly what our margins will be a year from now because of the mix component of our business. Nevertheless, we do feel comfortable with the range that we have come out with this year. And also note that, as we've said many times before, we do think that our long-term business will be centered around 65% gross margin. Exactly when we hit that, can't really predict, but that's again the long-term business model that we are managing to. Seogju Lee - Goldman Sachs: Okay, thanks, good luck.

Thank you very much.

Next is Chris Danely with J.P. Morgan. Chris Danely - J.P. Morgan: Thanks guys. Hey, John, you've talked in the past about perhaps getting a little bit more aggressive on pricing and driving a higher revenue growth rate, can you just give us an update on those thoughts to that plan?

I have never, Chris, I think talked about lowering prices to get more top line. I think what we have said is, we are not going to try to manage the company to margins that got us high, I think, at 69%, that 65% was our long-term goal on gross margins that there are some opportunities, particularly in the high-volume space, where you are displacing some ASICs, then you might be willing to take on some aggressively priced business against the ASIC industry, in particular, in order to bring on some more top line growth. But I don't think we view that getting more aggressive within our existing base of business from a pricing perspective is going to do anything positive. I think if we take a step back, note that we have probably about half of the FPGA revenues from the last products over the last four or five years, starting a price war in an existing business stream doesn't necessarily help us any. We also note that our business is not necessarily elastic within the existing business. And by that what I mean is, if you take an existing piece of high-end infrastructure equipment, if we were to give our FPGA wafer free, it is not necessarily going to help the customer sell more end pieces of equipment. The elasticity comes from being able to bring down your cost structure and therefore bring down your prices, so that you can extend in new higher volume pieces of equipment, where we have never played before, and really it has been the haven of the ASIC business historically. Prices continue to be aggressive for new design win sockets, as we have talked about before. I don't think really anything has changed there within our industry. It continues to be aggressive to win those sockets. As we have highlighted before, once we do win those, because the industry itself does not offer socket compatible devices, there tends not to be as much price pressure ongoing as that piece of equipment goes through its lifetime. Chris Danely - J.P. Morgan: Okay. Could you just expand upon that, are you seeing a lot of those, I guess new opportunities that you could take advantage of versus ASICs? How is that going? Are they in any particular end market?

You typically would see the ASIC business in higher volume applications for which we have not been in before. Those can be in, quite honestly, quite a few of our market segments. They could be things like printers. They could be things like some PC applications. You are now seeing CPLDs being integrated into cell phones, your traditional high-volume consumer space, even the high-volume areas of communications, for instance, the subscriber side of some of the network equipment. And so, those would be the applications where you would compete against ASICs in the volumes space. And I would note, we do now log a lot of ASIC design losses. So these are not losses to one of our PLD competitors. These are losses to one of the other ASIC guys. There is a threshold of the amount of business that we may take on. We don't -- again, we are trying to manage the long-term to a 65% gross margin model. And as we log that and we follow it, because as we introduce new generations of technology, our cost continue to drop. At the same time that, the NRE costs are going up for the ASIC devices. So, at some point, we feel that we can intercept more of this business and be able to take it on very profitably. I hope that answers that question, Chris. Chris Danely - J.P. Morgan: Yeah, that's very helpful.

Okay. Chris Danely - J.P. Morgan: What were the turns, by the way, in Q4?

50, above 50, it's 53% I think. I will check the number. Chris Danely - J.P. Morgan: Thanks. That's it. Thank you.

Yeah. And note that we had a couple of quarters during the allocation days where the turns were in the 50s. As I had also mentioned before, going into Q4, we did not see the overall cancellations or reductions in backlog that you typically see at the end of an allocation period. So, we ended up going into Q4 with a lot of backlog, and therefore with a lower turns rate than normal. But again, as Tim pointed out, historically, we've operated in the mid-60s turns per quarter. Thank you very much, Chris. Next question please?

Next question is from Mark Edelstone with Morgan Stanley. John Orem - Morgan Stanley: Hi, good afternoon. This is actually [John Orem] for Mark Edelstone. That's a good topic you just brought up there regarding the turns, very curious about that. Now that you've met your turns target for this quarter is in the low 60s, is that correct?

Correct. John Orem - Morgan Stanley: Okay. So -- and I think historically, you've said it's run in the mid 60s. Now, I am just kind of wondering with some of the challenges that you see out there in the marketplace, whether a low 60s target for this quarter is actually going to be conservative enough?

So, again, if you go back to the turns number that we are quoting, that's the turns required at the beginning of a quarter. Note also that we are now half way through the quarter having our conference call. So, we've had a little bit of time in order to watch the business, watch the book-to-bill and watch how things are filling in. So, we do feel comfortable with the range that we are putting out today. We do feel comfortable with the turns number based on everything that we've seen to-date and everything that we see and hear from our customers. John Orem - Morgan Stanley: Okay, good. Fair enough. Thank you.

All right. Thank you very much, John. Next question please?

Next is Han Lee with Global Crown Capital. Han Lee - Global Crown Capital: Hi. Thank you for taking my question. This is Han Lee for David Wu. Just a bigger picture question, I am looking at your gross margin line and it has decreased steadily from the 68, 69 percentage points range to down now of 58, 56 -- 65 to 66 percentage range. So, is there something fundamentally that that's changed for your business that caused this kind of declines in the long run?

Han, we think if you take a step back and you look at this business historically when we were just a prototyping corporation during the 90s, when most of the business that we did was low volumes, we were operating in the 61% to 62% gross margin range. Getting into the years over the last several years, our gross margins did drift up to as high as 69%, really caused by two phenomenons. Number one is, remember we had an inventory write-off in the year 2001. We have been shipping the product out in order to recover the cash basis there. That has helped our gross margins increase. Note that we did break those out every quarter, so that you knew what the benefit was from the written-off material. Secondly, we are also benefiting from the fact that we developed a series of low-cost products in order to move into high volume. And initially, over the last several years, those have been used a little bit more in prototyping phases at higher ASPs and therefore that has also temporarily helped gross margins. We also said during that period of time that we do expect that our long-term gross margin model will be in the mid 60s, about 65%, higher than where we were when we were just a prototyping-only company. Again, because we've created a series of cost optimized products that allows us to be prototyping as well as high volume production and to have higher than what was our historical gross margin base. So, I would probably coach you not to look at the last several years to look really at our long-term history. And I would also coach you, if you go back three or four years ago, you would have heard us at that time say that our long-term gross margin model was still 65%. So, nothing has fundamentally changed other than we have been able to really sustain higher margins much longer than we thought we would be able to. Han Lee - Global Crown Capital: Okay, thank you very much. And I have one quick follow-up. What's the percentage of revenue coming from HardCopy, the structured ASIC product?

We will find that out?

For what period? Han Lee - Global Crown Capital: For this quarter, for the reporting quarter?

Yeah, for 4Q it was 4.3% of the total. Han Lee - Global Crown Capital: And do you have any expectation for this specific product group for 2007?

I do think that this product is going to go through some strong growth in 2007. There are a number of new programs that are ramping both in the Consumer as well as wireless and wireline businesses right now. We are seeing some very significant orders. Their product will really start shipping due to lead times in the second calendar quarter. So, we do expect HardCopy is going to have some very strong growth, as we continue to diversify the business across a number of our different market segments. Thanks very much Han. Next question please?

Next is Catherine Bogart with A. G. Edwards. Catherine Bogart - A. G. Edwards: Yeah. I think you foresaw the inventory overhang in FPGAs during the quarter, but could you discuss the growth outlook for FPGAs versus the CPLDs in 2007 and any color by industry segment would be helpful.

Sure. So Catherine the FPGAs have been growing in a much stronger rate historically over the last four or five years than CPLDs. I think if I got my numbers right over the last four or five years, CPLDs have been growing at about 6% compound annual range. I think, we've seen FPGAs growing in the -- what 16% compound annual range sort of during that period of time for us. So, these are industry numbers. What we are now seeing, however, is CPLDs I think particularly in 2006 and probably going into this year as well are seeing some stronger growth. The reason for that is we are seeing inclusion of CPLDs in very high-volume pieces of equipment now. So for instance, handsets and toys games are starting to see a lot PLD adoption. So that combined with the fact that we developed a new architecture, which allowed us to lower our cost and increase CPLD functionality is I think driving some much higher rates for CPLDs going forward. I would still expect that FPGAs are going to grow at a faster pace than CPLDs. But I do think for the next several years we are going see CPLDs start to clock some much higher growth rates than we had seen over the last four or five years. Catherine Bogart - A. G. Edwards: Can you talk about the price elasticity in the two segments then? Is it a lot stronger in the CPLD area?

So, if you look at CPLDs historically, the cost basis and the functionality did not really change between process generations. So, really what it is as you are finding a lot of consumer equipments where to design the next generation ASIC, to include in a consumer design is taking two years, and yet the consumer product only has a six-month life. And so, we are starting to see CPLDs be integrated to add some small functions that are required that were not envisioned when they originally started the ASIC developments some years ago. And so, you are seeing really CPLDs or even small FPGAs in consumer product being almost like a coprocessor doing some small amount of functionality within those devices. And that's generally new, because again, the consumer business has really picked up for semiconductors. The consumers -- lifetime of equipment is very short. And again, the overall design cycle for an ASIC or an ASSP is fairly long, about two years. So, I think you are seeing that. Generally, the price elasticity is much higher in FPGAs, because as you move forward to new generations of process equipment, we can literally have the cost in some cases of a function that we did in the prior generation. And therefore, that allows us to extend in the higher volume pieces of equipment and pickup new revenues for the FPGA industry that we were not able to enjoy before. And so, the FPGA side is really broad-based. We see the ability to be -- to go into higher volumes across all of our market segments. We see that CPLDs today are enjoying pretty strong growth, mainly from Consumer, also you could throw in there things like some PC applications as well as printers, as an example. Catherine Bogart - A. G. Edwards: Okay, great. That helps. Thank you.

Thank you very much, Cathy. Next question please?

Next is Steve Eliscu with Pacific Crest Securities. Steve Eliscu - UBS: Yes. This is Steve Eliscu with UBS for Uche Orji. I would like to -- last year or this last year Consumer was expected to have some seasonal growth in the second half. We really didn't see that. And so, if you could talk about why this year you expect so much better growth with Consumer, if you can give us some more color on that? And what's driving your design wins for this year?

Yes. Steve, if we go back to the year 2005, coming out of that year, we had slow growth in Industrial. We had a lot of design wins and we said at that time and I think it was even in our Annual Report that we expected Industrial to have strong growth in 2006. And indeed, it did, and I think it grew 20% year-over-year. Consumer, we expect to have stronger growth simply because we have a number of new programs ramping, both in the broadcast side of our Consumer number, as well as in the other half, which is in Consumer products related to things like set-top decoder boxes, as well as flat panel television sets, so -- or flat panel monitors. So, just from a design win perspective, we expect to have a stronger growth in '07 versus '06. Again, to highlight, I think part of the reason that Consumer was flat in '06 is really panel -- flat panel side of the business was weaker than we had hoped during the year. But, again, we do have some new additional programs, which we are going to ramp this year, which gives us additive revenues. Steve Eliscu - UBS: Okay, great. And on a different note, with regards to China, you talked about the TD-SCDMA ramp, but the larger 3G standards seems to have been pushed out, you talked about the 2G. What are you seeing as the net result in terms of the revenue with regards to the way China is going to deploy wireless infrastructure this year?

I think the feedback from most of the customers that we have is, they do not expect China to do a significant rollout of 3G this year. Again, there was a trial already of TD-SCDMA. The Chinese government is going through an expansion of that trial. This is not a general rollout of the technology at this point. So, there is still a thought that 3G will be deployed prior to the Olympics. However, time is getting short and most of the carriers that we have spoken to have thought at this point that if there is a rollout this year, it will be fairly limited in terms of deployment. As to exactly what the numbers will be quarter-in, quarter-out is kind of hard for us to predict, because customers tend to change their forecast continuously. All I can tell you is, we do expect wireless to be down this quarter. Thank you, Steve. Next question please?

Our next question is from Ruben Roy with Pacific Crest Securities. Ruben Roy - Pacific Crest Securities: Hi, thank you. John, I had a follow-up on that last question. Can you describe the mix of your wireless infrastructure revenues, 2G versus 3G in 2006, and where you think that might be at year-end 2007? And also, is the PLD content different at all, either higher or lower in 3G base stations versus 2G? Thanks.

Thanks, Ruben. The second question, the answer is actually easier. The content in 3G base stations for us is over 2x what it was in the original -- excuse me, the content in 3G base stations is over two times what it was in the second generation base stations. And depending by architecture, it can be substantially higher than 2x. In terms of the breakout of 2G versus 3G, I have seen that in the past, I don't have the data in front of me. So, I hate to guess because I'm going to be fairly inaccurate. That is data that we can get and certainly put into the next conference call if people are interested. Ruben Roy - Pacific Crest Securities: And just a quick follow up, thanks John for that. On HardCopy products, the sequential decline in Q4 was that related to one or two programs that perhaps got delayed or pushed out or was the decline broader base and similar to what you saw in the rest of your business? Thank you.

Yeah. The HardCopy decline in Q4, Ruben, was based on the allocation phase that we went through in the summer months. Note that that was predominantly caused by a shortage of high-end substrates. And so, that affected a lot of our high-end FPGAs going back through APEX series and Stratix series as well as our HardCopy product. So, note that sequentially HardCopy was up 50% in Q3 from Q2. And so, a lot of that I think was probably customers just trying to pull in as much business as possible and anticipation that we would not be able to get through allocation on schedule. Once we got through and I think a lot of those customers realize the lead times were coming down. They had a buffer stock and therefore decided to cut back on orders from us for the quarter. All of that was anticipated. So, again, I think if you look at Q3, we saw a very strong growth in HardCopy. I think you see weakness in Q4. All totaled, it was pretty much caught up in the overall allocation issues that we had over the summer months, again, tied to predominantly the substrate shortages that we saw. Thank you very much Ruben. Next question please?

Next is [Danny Clove] with Bear Stearns. Danny Clove - Bear Stearns: Yeah. I just have a quick question. On your turns expectation looking now into Q1, it looks like obviously you guys are looking for higher turns. Clearly, turns bookings have strengthened in this quarter. Can you talk about which end markets you are seeing the strength and also may be address your linearity that you are expecting from a shipping perspective for Q1? And I have a quick follow-up.

I would turn you Danny back to the guidance that we gave on a vertical perspective rather than commenting on bookings trends by vertical. We typically -- in fact, we never cut the business that way internally to look at. So, I couldn't even give you the answer if we wanted to. In terms of the overall turns number, note that our historical turns rate has been in the mid 60s. When we were in the allocation period of time, obviously our lead times went out. Customers placed backlog on us. That's why our turns rates came down into the 50s in a particular quarter. Note that we saw rather than -- when we ended the allocation phase rather than seeing a sharp decrease in your backlog associated with customers cancelling orders, typically you will see that happen because customers eliminated the double bookings that they have been doing on you. Really what we saw is some push outs with customers maintaining the backlog that we had. So, we went through a period of time well over a quarter where our book-to-bill was under one, as we just slowly drifted down to more of what would be our natural sort of turns rate. I think to some extent we are still going through that in the first calendar quarter. The guidance of low 60s, we feel comfortable with based on business today. The current run rate that we are on, we are a very linear business, I would say historically. So, there is nothing that we are expecting to be tremendously different in this quarter. And again, we are sitting here today half way through the quarter. So, we feel we have a pretty good understanding as where we will end up. Danny Clove - Bear Stearns: Sure. And just a quick follow-up, I thought you mentioned earlier that your GPON business some programs got slipped. Did that slip from December quarter into March quarter and March quarter into June quarter, any color on that would be helpful? Thanks.

March quarter into June quarter. Danny Clove - Bear Stearns: Thanks.

Thank you very much Danny. Next question please?

Next is a follow-up from Michael Masdea with Credit Suisse Michael Masdea - Credit Suisse: Yeah, just a quick one. The lead times changed in the quarter and also how you have left on your approved buyback at this point?

Lead times have not changed since we really came off the allocation phase. In other words, lead times are back to the normal. It's either on the distributor shelf or we can replenish the distributor anywhere from usually two to six weeks. So, our lead times really came back to normal for almost every product, I think by September. And so, they remain at that normal rate ever since. In terms of shares available to repurchase?

9.5 million.

Note that we've kind of been on an annual basis of whenever we get close to a low number we've gone back to the Board and approved a higher number. So, it's not necessarily a limiter. At the same time, I can't really tell you today exactly what we will do over the rest of the year. Michael Masdea - Credit Suisse: All right. Thanks a lot.

All right. Thank you. Next question please?

Next is Tristan Gerra with Robert Baird. Tristan Gerra - Robert Baird: Hi. I was wondering if you could expand on the programmable power feature of Stratix III versus the competition. How unique do you think this feature is? And whether you think that will be enough for you to catch up with the delay versus your competitors' ramp in terms of next generation FPGA?

Yes, Tristan. So, generally if you look at our devices we've been doubling the number of transistors with every new generation of product. And in 65-nanometer, we now have in our largest Stratix device about a billion transistors. The difficulty with the technology today is the transistors do leak. The more transistors that you have, the higher your leakage current, and in another words, the higher the power consumption, even when the device is not doing anything. Plus you add that in every new generation of technology, our customers run our devices at a much higher frequency than they did in prior devices, as we really are becoming the heart of their systems. In other words, during the days when we sold the Flex 10K, we were really being used as a bridge or as glue logic. Today, a lot of customers are implementing really the heart of their system incorporating microprocessors DSP and a lot of logic that previously they would have done in ASICs, and therefore, more transistors, higher frequency, more, both static dynamic power consumption. The problem that we have is with our large devices we can consume more power than our customers can tolerate in their systems. Infrastructure equipment, by its nature, has a fixed cooling envelope that it can use, whether it's telelcom, servers, storage equipment, both because of the reliability as well as cost. And therefore, they have a budget for card. They are not willing to exceed that budget. We looked at the technology and said that if we had simply extrapolated the architecture that we had developed in 90-nanometer that we would not be producing parts that could work in volume production within the envelopes specified by the customers for power. And therefore, we needed to do something different, something innovative in order to deal with the issue. We developed basically what we call a dimmer switch, which is the ability for our software to program the transistor to either be high performance or low power. And by doing that, where you take a customer design for pass, there have to be a high performance, the transistor can be that. For most of the logic that doesn't need to be higher performance, we can turn down the transistor, lower the power through dialing it through our software. The customer doesn't have to do anything. It's all done automatically through our software. And the customer realizes the device in 65-nanometer that with twice the capacity can consume less power than our 90-nanometer FPGAs there or even any competing FPGA. So, we think that the innovation is something that will be required really by a bulk of what the programmable logic industry serves today in infrastructure equipment. It's been very exciting to sell to our customer base. The fact that we are doing innovation naturally requires a little bit more time in the competition. Nevertheless, I don't think we are late. And I think this creates a significant competitive advantage for us in the marketplace, and it is winning designs for us today. Tristan Gerra - Robert Baird: Great, thank you.

Thank you very much, Tristan. Next question please?

And our final question will come from Sumit Dhanda with Banc of America Securities. Sumit Dhanda - Banc of America Securities: Yes, hi. John, I know it seems like your orders in general have picked back up. Anything you can talk to as it relates to the trajectory of the pickup, when they really bottomed, and has the upward progression been relatively steady here through the middle of February?

I can't really comment on that, Sumit. I don't know that I could pick the point at which book-to-bill was over one or below one. Other to say than it was under one for last quarter, as customers continue to trim the backlog and adjust to our new lead times. It's over one now. But I don't know that I can provide any color to really answer that question or help you with that at this point. Sumit Dhanda - Banc of America Securities: Okay. Thank you very much.

Thank you very much for the question.

And with that, let me remind you that we will be presenting at three industry conferences this quarter. On February 21st, we will be in New York at the Banc of America Technology Conference. And then on the 27th of February, we will be in Las Vegas, where we will present at the Goldman Sachs Technology Investment Symposium. And then finally, on March 5th, we will be in San Francisco at Morgan Stanley's Technology Conference. Specific details are available on our website. And all these events will be webcast. This concludes Altera's conference call. Thanks for your participation and interest.

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