Altera Corporation (ALTR)

December 04, 2012 4:45 pm ET

Executives

Scott Wylie - Vice President of Investor Relations

Ronald J. Pasek - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

John P. Daane - Chairman, Chief Executive Officer and President

Analysts

Vivek Arya - BofA Merrill Lynch, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

Sanjay Chaurasia - Nomura Securities Co. Ltd., Research Division

Shawn R. Webster - Macquarie Research

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Parker Paulin - Wells Fargo Securities, LLC, Research Division

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

David Wu

Ian Ing - Lazard Capital Markets LLC, Research Division

Auguste P. Richard - Piper Jaffray Companies, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, everyone, and welcome to the Altera Q4 2012 Business Update and 2013 Financial Guidance Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Scott Wylie, Vice President, Investor Relations. Please go ahead, sir.

Scott Wylie

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'll find complete instructions. The telephone replay will be available at (719) 457-0820, 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 on 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. Ron will open the call with a few brief remarks before turning the call over to John. After John concludes his remarks, we will take your questions. Prior to the Q&A session, the operator will be giving instructions on how you can access the conference call with your questions.

I would now like to turn the call over to Ron.

Ronald J. Pasek

Thank you, Scott.

Earlier this afternoon, we released our mid-quarter update for the fourth quarter and our 2013 guidance. As a reminder, we are discontinuing the practice of giving a mid-quarter update. So from here forward, we will give quarterly guidance only on our earnings call.

A few highlights about our plan for 2013. You should expect gross margin to be in the 69% to 70% range for the year. This is essentially flat to 2012. Gross margin will be above our long-term model for the fourth year in a row and is the result of good cost control as well as prudent pricing practices.

R&D is targeted for $404 million, an increase of 12% from 2012. Keep in mind, nearly all of this increase is the result of 3 factors: increased variable compensation expense, as well stock-based compensation; annualizing partial-year salaries for people we hire in the course of 2012; and to a far lesser extent, a small amount of incremental hiring in 2013. While these factors explained the change year-to-year, what amiss is, of course, are the strategic priorities, which John will elaborate on in a few minutes.

We're planning SG&A at $315 million, an increase of slightly less than 9%. The majority of the SG&A increase is the variable compensation for the bonus, sales commission and stock-based compensation. Headcount growth and SG&A will also be very nominal. Keep -- please keep in mind that in both the FY '12 and FY '13 SG&A, there's an $8 million to $10 million cost relating to our IRS litigation, as well as patent litigation brought on us by several non-practicing entities.

Our core tax rate for 2013 will be 13% to 14%, which is slightly higher than 2012 and relates to an increase in U.S. income as a percent of total. The rate assumes current tax policy, including the absence of an R&D tax credit in the U.S. Not counting any share repurchases, which we may be do in 2013, fully diluted share count will be in the low 320 million shares. Finally, CapEx will be in the $60 million to $70 million range.

Now, let me turn the call over to John.

John P. Daane

Thank you, Ron.

I would like to spend the next few minutes outlining Altera's strategy and the opportunity, and in turn, some of the details behind the 2013 numbers that Ron just presented.

The rising cost of chip design with each new process node has provided an increasing advantage for programmable logic. As we opened a 3-process node lead over ASICs, we created the tipping point where our FPGAs provided a lower-cost total solution for many markets. With the tipping point, we were able to accelerate FPGA adoption and our revenue growth. With a few of the top 10 ASIC suppliers now exiting the market, we have a $12 billion ASIC replacement opportunity in front of us.

Our goal is to continue to grow at least twice as fast as the semiconductor industry on average, and ASIC replacement is one avenue to achieve this. We have an equally exciting opportunity to replace ASSPs, a servable market of $36 billion; and microprocessors in the embedded market, a servable market of $9 billion. Our thought process here is the same as when we embarked on a development of a true low-cost FPGA family with Cyclone or integrated DSP blocks and transceivers into our FPGAs. These investments build upon our programmable heritage, open new markets, increase our ASP through IP integration and, in total, enable faster growth through an expanded servable market.

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