Scott Wylie - Vice President, Investor Relations Ron Pasek - SVP, Finance and Chief Financial Officer John Daane - Chairman, President and Chief Executive Officer

Joe Moore - Morgan Stanley Chris Danely - Citigroup Hans Mosesmann - Raymond James Ambrish Srivastava - Bank of Montreal Gabriela Borges - Goldman Sachs Christopher Rolland - FBR Capital Markets Srini Pajjuri - CLSA Securities John Pitzer - Crédit Suisse Tristan Gerra - Robert W. Baird Suji De Silva - Topeka Research David Wu - Indaba Global Research Doug Freedman - RBC Romit Shah - Nomura Ruben Roy - Piper Jaffray Deepon Nag - Macquarie Blayne Curtis - Barclays William Stein - SunTrust

Ladies and gentlemen, good day and welcome to the Altera Q4 2014 Earnings Conference Call. Please note that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. 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 will 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.

Thank you, Scott. Q4 revenue of $480 million was spot on to the mid-point of guidance. The mix between our verticals was different than anticipated, leading to a gross margin disappointment. John will elaborate on the verticals in a moment. On the product side, we continue to grow 28-nanometer revenue and are pleased to announce we shipped over $1 million in 20-nanometer Arria 10 revenue in Q4. OpEx results were as expected. Our tax rate reflects the catch-up effect from the reinstatement of the R&D tax credit last year, so we are well under guidance. In the quarter, we also repurchased another 4.3 million shares and exited 2014 with as planned additional cash available to continue our repurchase activities into the first part of 2015. For the year, we nearly doubled the growth of the semiconductor industry, with revenue growth of 12%. Although there was pressure on gross margin throughout the year, we did end the year with double-digit growth in telecom and wireless, albeit, more pronounced in wireless. This effort yielded two greater than 10% customers for the year. On the product side, new products grew 42% over the prior year, led by 28-nanometer, which grew 154% year-on-year. As we committed, we slowed the rate of OpEx growth to just 4.3% for the year and were in line with the guidance of $740 million. As a result, we expanded operating margin by 14% in FY'14. 2014 was an important year for what was accomplished in terms of shareholder cash returns. In addition to paying a growing dividend at roughly $200 million, we repurchased a bit more than 650 million of Altera's shares during the course of the year. Taken together, we returned nearly 130% of cash flow from operating activities, which is well above our 68% cash return goal. For Q1, we see revenue flat to down 4%. Although this may be a surprise to some, it is consistent with our plan for Q1. However, we do see sequential growth returning in Q2 '15. Gross margin will remain roughly flat to Q4 levels, but not for the same reasons we saw in Q4 '14. We see stronger than planned wireless revenue in Q1, a slightly weaker than planned growth in telecom, military and industrial. I want to reiterate what I said on the investor call we had on December 10th, we see gross margin improving throughout the year. However, given the gross margin forecast for Q1, we may be toward lower end of the 67% to 69% range I provided. Now, let me turn the call over to John.

Thank you, Ron. The telecom and networking markets led the fourth quarter sequential decline, with telecom weaker than expected. These declines were partially offset by stronger than projected seasonal growth in consumer. Wireless continued to be fairly stable and we expect this will continue over the next couple of quarters. For full year 2014, we experienced fairly broad growth, with 8 of our 11 submarkets up year-over-year and 7 of those markets up double digits. Overall, we were able to grow significantly faster than the market and our competition, and as a result increase our PLD market share. For the first quarter, we expect revenue to be flat to down 4%, sequentially. We believe telecom and wireless will be flat with continuing stability in wireless. We forecast the computer market to grow. We project the industrial market to decline, along with seasonal declines in military and consumer markets. As Ron mentioned, we expect growth in Q2 with stability in the communication markets and growth in many of our non-communication verticals. Additionally, we believe we will continue to grow in the second half of the year. The increase in R&D spending over the last several years has created a very strong product pipeline. In 2014, we released our Max 10 very low-end FPGA family and the ramp has been exceptional. Max 10 has set a company record for design kits sold. The Arria 10 mid-range family ramp is also doing very well as we shipped just over $1 million of revenue in the fourth quarter. Our Stratix 10 product, with the combination of Intel's 14-nanometer Tri-Gate process technology and our new HyperFlex architecture, provides high-end customers who have unparalleled FPGA performance and density levels. We achieved a 2X core performance increase over prior architectures, and not previously announced, we will have up to 5.5 million logic elements, 25% higher than competing products. ASIC replacement has long been the primary growth engine for the PLD industry. With the economics of Moore's Law, this trend will continue. However, acceleration is a new additive growth path for PLDs. CPUs alone are no longer providing the performance required by an array of markets and FPGAs are being adopted as coprocessor accelerators. We see this in data centers, networking with SDN and in robotics, security, automotive and military markets as examples. With our superior new FPGAs, combined with our OpenCL programming tool, we are uniquely positioned to take advantage of this new growth opportunity. In summary, we are pleased with our 2014 outgrowth of the semiconductor and PLD industries and our corresponding market share gain and our pipeline of new products. 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 that we give as many callers as possible the opportunity to ask questions during the call. Operator, would you please provide instructions and poll for questions.

Thank you, sir. [Operator Instructions] Our first question comes from Joe Moore from Morgan Stanley.

Great. Thank you. I wonder if I could ask for a little more color on the gross margin and this has been kind of a recurring mix that has caused you guys some headwinds. Is that a wireless impact or can you just be a little bit more specific on what the drivers are of the lower gross margin?

Joe, yes, I would say it is telecom wireless. As we said, we were more pronounced in growth last year in wireless. We also established two greater than 10% customers, so a lot of the growth we saw even though we had broad growth across many verticals, some verticals, it was more pronounced in wireless, that the fact on itself put pressure on gross margin.

I think if you look at Q1 and the reason that the margin is below the initial range that Ron had provided is we originally had expected a pause or a slowdown in wireless in the first calendar quarter due to really a pause between phases at China Mobile. What we are seeing in the business is, deployments and other carriers in China and elsewhere around the world for LTE as well as 3G, are picking up that slack and we are seeing basically our wireless business higher than we had anticipated in Q1. Correspondingly, we are seeing some of the other businesses that have a much higher margin, for instance, military and industrial be lower than we had originally anticipated, so our margins are a little bit lower. As Ron said, based on the fact that we expect wireless to be fairly stable for the next several quarters, but a lot of the gross to come from non-wireless segments that carry higher gross margins. We would expect our margins to expand as we move forward throughout the year.

Okay. Given that you are expressing confidence in being north of 67% for the year with flat wireless. I mean, are you saying that there is a lot of growth from the higher margin segments, what is your confidence level in that being north of 67%?

Yes. We talked about this on December 10th, some of the other high-margin verticals are going to grow a little bit slower the uptake here, but they are going to growth through the year.

Okay. Great. Thank you very much.

Thank you very much, Joe. Next question please.

Our next question comes from Chris Danely from Citigroup.

Thanks, guys. Just I guess, one more question or a series of question on the gross margins. Within the telecom and wireless segment, have you guys actually seen the gross margins within that segment, trend down over the last few years and have you done any I guess change in pricing strategies that could have an impact there on the margins?

Chris, this is Ron. I think as you grow large customers and their volume increases. In many cases that affords them lower prices, so that is one of the reasons you would see some margin degradation.

I think, if you sort of take a step back over the last several years, I would say there has not been much of a margin change in the telecom sector. Wireless tends to have much higher volumes as does the consumer segment. As we have commented before, our pricing is really volume-based, so both consumer and wireless tend to have lower gross margins than in the case of wireless that is driven by radios, which ship in the millions of units per year. Ultimately, I think what you have seen in wireless is the margins have come down a little bit over time. Some of that is because of the increased account concentration. If you go back four or five years ago, we saw a larger number of companies participate in wireless globally, now we are seeing a fewer companies that are doing most of the shipments worldwide. Therefore, since they have higher volumes, the pricing tends to be a little bit lower. I would say in general, the pattern in the rest the market has been fairly stable for a series of years. We really have not seen significant changes.

Thank you.

Thank you very much. Next question please.

Our next question comes from Hans Mosesmann from Raymond James.

Thanks. Just a clarification in terms of your view for the year, so yesterday your competitor had indicated that there is some clouds in the communications markets. Can you provide us your perspective on how you see the year just in general based on those comments?

Yes. I think, as we’ve commented before, we do have reasonable visibility in the short run. We have some projections from customers and discussion with carriers for communications, provides us an outlook for what we think will happen for the year. We think communications will be on wireless stable, I think telecom will grow from where it ended in Q4 over the year. We expect some very good growth there. I think there is a lot of nervousness around the discussion from carriers where they have said that they will reduce CapEx spending. In our discussions with them, that does not mean that they are cutting back on hardware spending. CapEx includes a number of different categories, which for the U.S. carriers for instance, includes labor, it includes software, it includes consulting, so where some of the carriers have talked about reducing CapEx, it has not necessarily meant reduction in equipment, which is what we’re in as much as it has been some of the other segments for which do not affect us. We do see growth opportunity in telecom through the year. We think it is at a low point. We think wireless will be very stable and networking should also grow for us for the year. Outside of that, we see some very good growth in some of the other verticals, so we would expect military as an example to grow this year. We have a number of projects which are due to go to production. Computer is an area, where we expect very, very good growth simply because we are seeing this adoption in our data centers for acceleration start to really kick in and we are moving into production with a number of different platforms. We expect industrial, which had very good growth last year to continue that trend and have a very good growth this year, again because of the acceleration trend we are seeing in data center, so we expect communications wireless to be stable growth in telecom and networking and then growth in a lot of our other verticals as well.

Great. Very helpful. Thanks.

Thanks, Hans. Next question please.

Our next question comes from Ambrish Srivastava from Bank of Montreal.

…14-nanometer first on what is the timing for the tape-out. Then just in terms of your commentary and then just put it against Xilinx. There is only two companies making high-end FPGAs and PLDs. Is that share gains or that you made at Ericsson that is translating into better environment for you here in the North American market, because they were pretty downbeat from what is going on in the carrier space in North America and your commentary is not at all reflecting that, so just trying to understand that, what's really going on? Is the end market kind of broad, but you are taking share and that is translating into your visibility versus theirs? Thanks.

Okay, so two questions. Let me start with 14-nanometer. Our original schedule was to tape-out in first calendar quarter, we’re running a couple of months late to that and are actively working to pull that in but worst case, we will sample this fall so we are still definitely in this year. I think overall if you look at the product we’re very excited about it. The change in architecture is allowing us to significantly increase the performance of our device. We’ve talked about 2X, we have actually had press releases with customers who have said that they see that 2X performance. That puts us in a different category. Certainly, they are not competition. The second thing is with using a true 14-nanometer technology, which is available only from Intel, we are getting significantly higher densities than our competition will be able to enjoy, so we think at least we will be 25% higher in logic elements than the competition. The higher performance and higher density ultimately opens up more of the ASIC space to replace and some of these capabilities are absolutely required for the data center, so we think as we move through this year and it really becomes all about the FinFET technology for the high-end, we really are going to move into a unique position, where were going to have by far the strongest product being a generation ahead in process technology combined with the new architecture, so we are very excited about that. Everything else is going extremely well there. In terms of differences between our competition and ourselves in outlook, we can't really comment a lot on the differences, but I guess there are two things at a high level that we would say. Number one is, we have been doing much better in the wireless segment than our competition and this goes back several quarters where they saw a decrease in wireless business and wireless for us has been continuing to be very stable, and as Ron mentioned, it was our fastest-growing vertical last year overall, so we continue to do very well in the wireless space. I think the second element is that we did not run an obsolescence program and where obsolescence can obviously have a great short-term benefit in terms of revenue lift, you eventually reach the point where it drives a headwind as that program ends, so our view of the future I think is different for at least those two factors and there could be others in terms of design wins of particular verticals or strength of products. Certainly, our OpenCL advantage allows us to get into some of these acceleration opportunities years ahead of our competition. Then there may be certainly other differences between the two companies as well. Thank you very much. Next question please.

Our next question comes from Jim Covello from Goldman Sachs.

Good afternoon. Thanks for taking the questions. This is Gabriela Borges on behalf of Jim. I wanted to ask on the cadence of the opportunity that you see in the computing and the hardware accelerated business. I can understand that this can be lumpy as this business ramps into volume. Maybe you could just talk about any big moving pieces that we should expect to see grow through year and what sort of growth rates we should be thinking about. Thank you.

I think ultimately you are correct in that you can get data center deployments as we saw last year, which can cause the business to go up and down. I did comment a few quarters ago that I expected as the business matures, within the computer segment and we had a large number of customers deploying that those ups and downs would sort of equalize as we have more stable business. I think ultimately now though, we have enough customers deploying. Even within these customers, they have multiple data centers, so they will do equipment upgrades sort of serially through each data center, through the year and therefore we should see or we expect at this point to see some fairly stable and solid growth in the computer segment throughout the year this year.

That's helpful color. Then as a follow-up, if I may back on the wireless business, to the extent you can comment on the relative mix being LTE versus 3G or 2G or older generations if you could give us on setting on what the percentage split is today and where that could be this time next year. Thanks very much.

Yes. Right now, if you sort of take the second half of last year, where you had heavy China Mobile deployment in TD LTE, plus FTD in the United States South Korea and Japan as well as the other two carriers were starting to ramp in China we saw that it was a much heavier LTE mix. Today what has happened is we have seen the some of the downturn or decrease that we have seen from China Mobile has been absorbed by an increase from other FTD a deployers. However overall, LTE is lower than it was last quarter and what has filled in the gap has been an increase in 3G spending and I would probably say that that will continue into Q2 at this point. Then we would expect later in the year that perhaps LTE picks up even more as we see China Mobile return to spending for their network.

Thanks for the color.

Thank you very much. Next question please.

Our next question comes from Christopher Rolland from FBR Capital Markets.

Hey, guys. Thanks for the question. On the last call, I think, you guys might have mentioned that you thought your 4G was going to ramp by year-end. Your competitor last night said that they did not expect them to take any product in 2015. They also said the same for India, so I was wondering if you guys still expect to see that if anything has changed there at all. That would be great. Thanks.

We have not seen anything significant change in the near-term other than, as we mentioned wireless is stronger than we originally anticipated in Q1 and a good portion of that coming from increases in 3G, part of that is for developing countries, part of that is for China itself.

Okay. Great. A quick follow-up, for North America, your competitor talked about weakness, particularly in wireline, they talked about AT&T and Sprint. Are you seeing those same effects with that lowered CapEx in North America?

Telecom was weaker for us in the fourth calendar quarter than we had originally projected. It was part of the reason that gross margin was lower in the fourth calendar quarter. We do expect telecom to grow this year for us, but be in the first calendar quarter fairly stable with where it was in the fourth quarter. Ultimately, I would say the weakness in the telecommunications area was not just specific to North America, it was other geographies as well, but again there are some new programs that we are ramping through the year and in conversations with some carriers, we do feel that there will be some equipment deployed at higher levels than what we are seeing today. Part of the reason behind this is, as 4G is getting deployed, there is the need for a wired network backhaul upgrade and I do think we will see an increase in spending as we go throughout the year.

Great. That is constructive. Thanks.

Thank you very much. Next question please.

Our next question comes from Srini Pajjuri from CLSA Securities.

Thank you. Ron, just a clarification, on 28-nanometer what were the revenue for the quarter? Then as we look into the rest of the year, how should we think about your market share at 28?

We did $95 million in 28-nanometer revenue in Q4. I think if you look at what we are projecting for Q1, well, actually on the basis what you will see is our market share being roughly a little over 40%. I still see us closing the gap as the year progresses. As you know, long-term we said, we would probably get to a 50% share at 40%. Anything above 40% is the market share gain for us.

I think that is important to underline. We obviously took market share last year 28-nanometer was part of the reason as we increased our market share. Overall, even if we were to worst-case, maintain the market share that we have in 28-nanometer today, we will continue to take market share as a company. I think there has been a lot of concern over 28-nanometer. I know that we will at least stay stable in market share is not take market share. Again, as these older node falloff where our competitors have higher market share and the newer nodes where we have higher market share continue to grow, we would expect, as we did last year, to continue to take market share. It has been something that we have said for years, so we think we are in a solid position this year. We would expect to take market share again this year overall, and we have a very strong position in 28-nanometer. I would say getting out of the Gate, very strong in 20-nanometer with $1 million shipped so far and a lot of strong design wins. Then very quickly transitioning the high-end to 40-nanometer, where very clearly from an architectural process perspective, we are really in the driver seat terms of the product line.

Okay. Great. Then one quick one again for Ron, Ron, I am just wondering what the linearity of the quarter was. The reason I am asking that is you obviously told us to expect or you raised your gross margin outlook for this year on December 10th and I am guessing something must have changed in the last few weeks of the quarter, so just trying to figure out what changed.

Well, for Q1 what changed is, we had start out with higher than expected wireless business that is really all it is. Then as we said in Q4, we saw slightly different mix as we finished the quarter, but came in right on the revenue number.

Okay. Thank you.

Thank you very much. Next question please.

Our next question comes from John Pitzer from Crédit Suisse.

Yes. Good afternoon, John, Ron. Thanks for letting me ask question. Ron, maybe just a quick follow on to that last question, absolute number for March came in with your expectations; mix different. I am just kind of curious what segments disappointed and more importantly, why? Then, John, you clearly have confidence to talk about sequential growth resuming in the June quarter. I am wondering if you can give us the confidence that you will have year-over-year growth in the June quarter, i.e., enough sequential growth from March to June still show a little bit of year-over-year growth in the June quarter. Thanks.

John, the first part of your question was about Q1 guidance?

Yes.

Okay. Real quickly, again, we are coming in stronger on wireless than we planned and slightly behind what we planned for industrial, military and telecom or wireline. That's it.

Any discernible reason for the weakness?

No. As we said, we expect those to be growth areas throughout the year.

Then John relative to sequential growth of the June quarter, do you think it is sufficient to drive year-over-year growth?

To be honest, John, we have not looked at that, so just I do not have anything in front of me that gives me the year-over-year based on what we do so, I can't answer that. I guess what we would say is, we do expect still to grow this year over last year and we feel that we have looked at a couple forecasts for the semiconductor industry non-memory. We think we have got a very good shot to at least what they are doing there if not to exceeded again as we did last year. Then the last point there is, we would expect to take market share again this year...

Perfect. Thanks, guys. Very helpful.

Thank you very much. Next question please.

Our next question comes from Tristan Gerra from Robert W. Baird.

Hi. Good afternoon. Based on the 2014 results, what is your assessment in terms of the TD-LTE basestation or ramp in China versus the stated China Mobile target for last year? Do you think that target was met or do you think that it fell significantly behind, which means that there was more growth ahead from an infrastructure standpoint.

Well, I think China Mobile has specifically said that they have deployed about 700,000 basestations last year and plan roughly to build another 300,000 this year. Again we do see a dip in China Mobile TD-LTE shipments right now. That is being filled in by FTD and by 3G, but we do expect that China Mobile will continue to aggressively build out their network and we will see a pickup in their business later this year.

Okay. Then as a quick follow-up, so you had mentioned the gross margin created pressure on the basis of wireless, last year at least. Then if we assume that wireless is maybe 40% of your communication revenue and we assume wireless was flattish, sequentially, in Q4 then it implies that telecom perhaps was down about 10%, sequentially, in Q4. Is telecom so much higher margin that a 10% decline, what is maybe 20% of your total business will be actually impacting gross margin so much, sequentially?

Well, Telecom was down significantly greater 10%, the difference in margin is significant. If you think of telecom platforms, our volumes is very low as it is for most infrastructure equipment. Again, basestations a reasonable margin and wireless, it is really the radios that have the much lower gross margin. The two things that were different, again, I want to go back to reemphasize that we are different in Q4 was the consumer was much stronger than we had originally forecasted and wireless was a stable and telecoms down more than with lots of really consumer was the piece that hit hard in last quarter and recent were starting lower than we expected this quarter is really we expected wireless to have a pause with China Mobile and ultimately wireless continues to be strong. We are not expecting the telecom is going to grow this quarter. This is a seasonal weak quarter for military, so you are really getting the worst of all elements from a vertical mix perspective hitting both, during Q4 in Q1. Again, going forward, we are very confident that the growth really is from the non-wireless segments this year and therefore since almost all of those have higher gross margin we would expect our gross margin to increase throughout the year.

Thank you very much.

Thank you very much, Tristan. Next question please.

Our next question comes from Vivek Arya from Bank of America Merrill Lynch.

Hi. Thank you for taking my question. This is Shankar for Vivek. I have a question on automotive. You said you had some design wins on Audi and I just want to know among the segments that are going to grow beyond Q1, how much of that is contributing from auto?

Auto will grow. It actually has been growing historically a very large percentage. It is just a small piece of the overall business. As you know, it typically takes about four years for new auto platforms to go into production. Then they are in production for 7 to 10 years, so we have been enjoying a very significant increase in automotive design wins for the last two years. I really think you will see that the hockey stick in automotive while we will continue to increase over time. We are really think in about three years we are going to see very, very significant uptick in automotive. To the point, we are anticipating it is going to be a very significant segment for us.

Great. I have a quick follow up. With regards to the OpEx trend in 2014, can you comment on whether it is going to be as tight as it was 2014 or do you see incremental R&D spend that is required to grow the segments…

We gave that guidance back in December, so we are only growing OpEx from $740 million in FY'14 to $760 in FY'15, so pretty minimal growth, very minimal growth in SG&A and in R&D. I think if you kind of look back, we expanded R&D spending significantly for a few years that allowed us to do a new architecture for Stratix 10, OpenCL new DSP architecture, which is very important for data centers, allowed us to expand our spending markets such as automotive and computer so we have really broadened our portfolio, a lot of that is rolling out right now, because of that we really feel that we are in now harvest mode, where we can take advantage of all that spending and all of that growth going forward, so that we would expect our earnings will grow faster than our revenue growth over the next several years. We feel that we are in a good position just to hold OpEx fairly flat for the next couple of years. Again, harvest all of that are spending through well revenue growth and more importantly profitability growth for the company.

Thank you so much.

Thank you very much. Next question please.

Our next question comes from Suji De Silva from Topeka Research.

Hi guys. On the wireless infrastructure are you seeing equal strength in share gain opportunity in 28-nanometer versus 40-nanometer and 65-nanometer and would that help the mainstream mix come back? I know it is down here versus new.

I am just trying to think through that. I think, ultimately as we have said before in any given segment, there is not one generation which is what shipped at any particular period of time. In wireless today, our customers are shipping systems that are made up of 65-nanometer, 40-nanometer, 28-nanometer and very soon 20-nanometer. It is not that one turns off and the other turns on as much as it is a mix. Longer term, we would expect our mainstream category to probably continue a slight decline and see a lot of growth out of our newer products, our 40 grew last year year-over-year. It looks like it has a chance actually to continuing into this year. 28-nanometer and 20-nanometer, obviously, are going to continue to ramp for the next several years. As we talked about earlier, we are also close to deploying '14, so I think the mix of the products in the mainstream area, probably will go through a slight decline over time. Overall though, what always happens with FPGAs is you just simply replace more ASIC sockets. In today's world, also we have the benefit of acceleration, so our new products will always be larger than our older ones. Even though our older ones will decline, on net basis we will continue to grow.

Okay. Then the OpEx real quick, the R&D guidance here, if I annualize it, it is a little higher than what you talked about in the full year guidance call. Is there a front end load to the tape out to the R&D spend or is that just splitting hairs there?

No. There is front-end load and I did give guidance earlier on that in December and said, the first half will be a little more heavy than the second half.

Okay. Great. Thank you.

Thank you very much. Next question please.

Our next question comes from David Wu of Indaba Global Research.

John, can you give us some idea about the computers separated in products, how many years do you think it will roughly take before they become, let us say, 5% to 10% of your quarterly revenue?

Well, I think honestly, computer is well over 5% of our revenue today and we are just looking for some statistics. I do not have a percentage, but well over that. We would expect that over time, we will see FPGAs really become more ubiquitous across much of the server space, simply because FPGAs are far more efficient at running of mathematics algorithms like search and compression and encryption, decryption then our CPUs and we take in order of magnitude less power than the GPU, so therefore we are the clear winner. I would say even though it's a very significant category already for us today, it should be the fastest-growing category for us for the next several years. Reason behind that is, there are as you know millions of servers shipped per year. Ultimately, the refresh cycle is about every three to four years, which is much faster than we see in many of our other markets and they tend to buy our high-end FPGA products which means ASPs are very high, so we expect to see continued expansion of that segment for years. We have announced with a couple of customers so far. There are a number of others are working with our technology. Obviously, I think everybody has seen at this point that even Intel announced that they plan to do an MCM with an FPGA and their server-based processors in the future. Clearly, the technology is really at the right point in time. We have got the right architecture, we have got OpenCL tools and I think, we are taking advantage of the opportunity much more than the competition.

John, can you explain a little bit at least on things partners like Intel and IBM that are selling your FPGAs as part of their, I guess, server solutions, how do these companies really split revenue with you? Do the margins change at all if it is part of their multi-chip packages?

Today, really all of our products and I am trying to think of anything across any vertical that is different really, we just sell FPGAs or CPLDs to companies we do so in some cases die and in some cases we saw packaged units, so we take revenue when a customer takes title of the product. We would treat IBM as an example just as a customer like any other customer for that matter if Intel were to buy our product, so all of these companies whether there are other semiconductor companies or they are systems companies, I think that the accounting is basically all the same.

Okay. Thank you.

Thank you very much. Next question please.

Our next question comes from Mr. Doug Freedman from RBC.

Hi, guys. Thanks for taking my question. If I could focus in a little bit on the operating income line, you have taken a lot of questions in terms of the gross margin trend, but when we look at the overall picture in the business your operating margins year-on-year comparison probably are one of the largest contractions we have seen in the last couple of years. Do you look at that line to try to determine how to run the business? What type of target should we have for you to run the operating margins maybe in the next year or two years out? Is there any chance that you drive it back to the 40% that you had in the past years?

Doug, actually we expanded op margin in FY'14, and what we articulated over the next several years just to add what John said is growing revenue in a fast rates than OpEx to continue for several years to expand op margin. Our stated goal is 32% to 33%. Again, we don't think that we can sustain a 40% op margin. When we enjoyed 44% FY'10 and 41% FY'11, we are pretty clear that that was not a sustainable model and made a desired effort to invest particularly in R&D for several years, which we did and now we are as john mode to get that op margin back up, so we did make progress and we will continue to make progress this year and in the next several years.

Okay. My next question is really on the 14-nanometer. You didn't acknowledge that it is running a few months behind. Is there a revenue impact to your plan in 2015, as a result of the present delay you are experiencing?

No. That is not in our plan. It is a couple of months our first case and that is not going to have a significant change at all to the plan this year.

Is there any reason that you can apply to the delay?

I guess, at a high level if your asking is it Intel or Altera, it is Altera. These products were extremely complex, there is a lot of modules both, digital and analog that we are hooking up and a couple of months hit in the schedule is not bad considering the complexity of the product, so I am still very excited about it and very excited to get this product into the marketplace this year.

Great. Thank you so much.

Thank you very much. Next question please.

Our next question comes from Romit Shah from Nomura.

Yes. Hi, John, you guys, I think, bought an analog company a few years ago, but for the most part have not done a lot. There was a lot of consolidation last year and I am wondering today, are you thinking more seriously about diversifying your product offering?

I think, if you sort of take a step back, I mean there have been a few acquisitions that we have done over the last 20 years and they really were to add pieces of technology to the company that were needed to work with our base FPGAs. In general, the reason that we follow that is, we really believe that there is strong growth potential of FPGAs is still intact. It is a great unique space to be in, because it carries strong gross margins. It is hard to get into and has a tremendous amount of growth opportunity, not only because Moore's Law is economically challenging a lot of companies. It is more expensive to move forward to newer nodes. Therefore, as they cannot, we can and we can move into their space with our programmable logic products and expand our revenue, but also now because of the acceleration opportunity, so for those reasons we have been really focused on how do we make our FPGA offerings more solid and how do we offer those to a broader array of customers that we have in the past. Thank you very much. Next question please.

Our next question comes from Chris Danely of Citigroup.

Hey, guys, since I am cycling through you for a second time, hopefully you will indulge me in just a couple of quick ones. You talked about 14-nanometer, have you guys made any decision on your foundry choice for 10-nanometer?

Chris, we have not made that decision. We have told both, Intel and TSMC, who are working with on the technology that will likely make a decision before the end of the first calendar quarter.

Got it. Then just my second question is given, I guess, a little bit of a slowdown in growth here, does this change any of your thoughts around your long-term growth rate or how you run the Company, or OpEx, or targets, or anything like that?

No. Chris, we really are feeling very solid about our potential both, to take market share with our industry, the ability to outgrow the semiconductor industry going forward, we like our product pipeline. As you know we are holding OpEx reasonably flat for the next several years, so we think we are just going to continue to move with this. We are seeing design win momentum picked up quite substantially across a lot of verticals, so we are our excited about where we are and we are going to hold the course.

Great. Thanks a lot guys.

Thank you, Chris. Next question please.

Our next question comes from Ruben Roy of Piper Jaffray.

Hi. Thanks, John. Just a segue on that design win momentum comment, I am wondering if you could give us a little more detail on the initial 20-nanometer interest end markets, where you are seeing the initial design activity and how you are thinking about 20-nanometer? Is it going to be a node that seeks out sockets that you think typically belongs to different technologies than FPGAs or is this a 28-nanometer replacements longer term. Thanks?

Just as a reference, we are doing a mid-range family. It is really midrange/a little bit high-end than we did before replaces both the Arria product line that we had Arria 5 as well as the large portions of Stratix 5 in terms of a technology, so mainly meant to be a mid-range but also extends into what we would consider the high-end range to an extent. In mid-range as we talked about before in 28-nanometer we were not as competitive this fixes, allows us to go back after a number of sockets and we are seeing success there. Also, because it is a cost reduction, a power reduction and an increase in performance, it allows us to go after some more higher end designs. We are seeing very broad acceptance of this product. It is designed in the wireless, military. We were seeing it in broadcast and some consumer applications lot of computer, test medical, so it is a very broad and then telecom, so it is a very broad technology usage. 14-nanometer for us will be high-end product and there we think we are going to be quite unique in terms of what we are offering in terms of technology. We expect the majority of our verticals are going to enjoy the product line telecom, networking, wireless for basestations, will see broadcast computer, in particular test medical and military all will be very interested our technology. In fact, we got a number of design wins it really covers that space as well. We really have a very strong product offering across the board. As I mentioned earlier, we have Max 10 at the low-end as well what we have introduced that we do not see one of our competitors really competing in that space any longer, so we are really excited about the product lineup and customer acceptance has been exceptional. We have got a very strong software system, so right now it is going very, very well for us.

That’s all I have. Thanks for the detail, John.

Thank you very much. Next question please.

Our next question comes from Deepon Nag from Macquarie.

Yes. Thanks guys. I had a question about the relative growth rates of high-end products like Stratix versus mid-range and low-end products both, in 2014 and then your expectations for 2015?

I do not know if we have that split. Well, okay, so we apologize. We have got it split by process node and we have got split by vertical, but don't have it split by, or we have all the individual products, so we just don’t have the data. I apologize.

Sure.

I could give you. My expectation is, probably our competition did better at the mid-range than us. Certainly at 28-nanometer, we did much better at the high-end and probably I am guessing a push in the low-end.

Sure. It seems like your competitor was able to gain some share, like you said versus even Stratix products in telecom, applications with their mid-range product and now they have Arria 10. Do you think that you can potentially see some margin accretion by introducing a more cost-optimized part of that market? Maybe as another quick follow-up on that, are you seeing any kind of pause in the high-end in terms of design traction as customers kind of wait for Stratix 10 to ramp up.

Yes. There will be some customers that will wait for Stratix 10 and we already have design wins for that. We provided software, customers are working on their products and design with that, so there are some customers that are heading in that direction, there are some that are working with 20. Honestly, there will be many that will continue to work with 28 that already well into the design. I think overall if you take a step back, it is not really about margin as much as it was competitiveness, so we now have a competitive product line up across the board, where previously perhaps the mid-range was an area that we were weak, but had a strong platform everywhere else. Now we are just strong across the board. Everything I tell you was even though we had a weak mid-range offering in 28-nanometer, we did not lose market share. In fact, we picked up market share overall as a company. I think when all that said and done well over 1%. We would expect that market share gain to continue this year and I think years in the future simply because whether it is 40 or 28 or 20 or now 14, we have a very, very strong product line up and we would expect our market share to continue to climb.

Great. Thanks a lot. I appreciate.

Thank you. Next question please.

Our next question comes from Blayne Curtis of Barclays.

Good afternoon. Thanks for the question. Just wanted to follow back up on wireless, you didn't see the pause that you were expecting, but then you kind of talked about a stable level for the next three quarters. Has that outlook changed? You are waiting some FTD deployments before. Is it the better way to look at it, just, you didn't see the seasonality and the flat; and it's, net-net, the same forecast? Or has that come down, your outlook for wireless?

You may be confusing our comments with other companies' comments. We did not say we were waiting for FTD to take off. I think really what we were projecting is if you think of last year, last year was a very significant deployment by China Mobile there was a pickup towards the tail end of the year by the other two carriers, Unicom and Telecom in China. As I mentioned last quarter, we also saw growth in some developing countries with 3G. We did expect a pause this quarter, simply because we did not expect to ship anything to China Mobile this quarter and therefore that would carry the overall number down. What we are seeing is, increases in deployment for the FTD side as well as an increase in 3G this quarter over the prior. The wireless is actually up from where we saw. I think what we will see is eventually China Mobile will ramp later in this year and that may replace some of the 3G strength we see today. All told, we now see instead of a dip in the first quarter and return to growth in wireless in second, which was original plan that will see actually a fairly smooth wireless number at lease for the next several quarters.

Great. Then on Telecom you saw a material decline in December, are you still looking for growth for the calendar year, and is that dependent upon you mentioned new ramps, but are you also expecting the end market to pick back up? Thanks

Yes. We are expecting both…

Okay.

Not this quarter, so we are expecting telecom to be fairly flat this quarter with the fourth calendar quarter, but grow in Q2 and thereafter.

Okay. Thanks.

Thank you very much. Next question please.

Our last question in the queue comes from Mr. William Stein of SunTrust.

Great, thank you for squeezing me in. Two quick questions, first, can you remind us how quickly the new nodes have tended to ramp in the past and whether you think that pattern is going to continue with regard to 20-nanometer in '14?

I think the pattern is very similar to what we have seen in the past. Usually, the first two years you get prototype and some preproduction. Years three, four and five, you see very strong growth. The one difference I would say that we have seen over the last couple of nodes over the ones from the early 2000s, is the peak ends up being farther out, so we were seeing year four, maybe year five, 10 years ago would be the peak. If you look at 40-nanometer, you are into six, seven starting get to the peak, so I think we are seeing these nodes last longer. That will probably be a trend that would continue. Now, what will create some difference in a particular product is obviously the ASPs. Higher end products with higher ASPs can give you some float faster than for instance, the Max 10 family where the ASPs are very low. On the other side of the coin the higher end products also will wrap little slower that the lower end once, but overall I mean when you look at the charts that we presented, I think the thesis is intact.

Okay. Then one more, this has not come up, I do not think, but and I do not think foreign exchange effects you meaningfully at all, but I wonder if you are seeing any impact from customer purchase or planning perspective from either the significant fluctuations we have seen in foreign exchange or oil in any of your end markets?

We do most of our business in dollars. We do however carry on the balance sheet some non-dollar currencies, but honestly we really do not see a lot of impact. We saw a little bit of impact to the yen, but it is not material, so you won’t hear me talk about it as...

Okay. Oil, and in particular in terms of customers order patterns, any effects there? Thanks.

No. Not that we can tell no.

Thank you.

Thanks, William. With that being our last question, we should ramp up this call today. Before we do so, we have two conferences this quarter. We will attend the Goldman Sachs Technology and Internet Conference in San Francisco on February 12. In March around, the 2nd, we will present at the Morgan Stanley Technology Media and Telecom Conference, also in San Francisco. This concludes Altera's earnings conference call. Thanks for your interest and participation.

Ladies and gentlemen, this does end our conference today. On behalf of the Altera Corporation, we do appreciate your participation.