Rick Muscha - Senior Director, Investor Relations, Xilinx, Inc. Lorenzo A. Flores - Chief Financial Officer & Senior Vice President Moshe N. Gavrielov - President, Chief Executive Officer & Director.

Ian L. Ing - MKM Partners LLC David M. Wong - Wells Fargo Securities LLC William Stein - SunTrust Robinson Humphrey, Inc. Christopher B. Danely - Citigroup Global Markets, Inc. (Broker) Ross C. Seymore - Deutsche Bank Securities, Inc. Vivek Arya - Bank of America Merrill Lynch Tristan Gerra - Robert W. Baird & Co., Inc.

(Broker) Ambrish Srivastava - BMO Capital Markets (United States) Anil Kumar Doradla - William Blair & Co. LLC John William Pitzer - Credit Suisse Securities (USA) LLC (Broker) Blayne Curtis - Barclays Capital, Inc..

Good afternoon. My name is Ian and I will be your conference operator. I'd like to welcome everyone to the Xilinx First Quarter Fiscal Year 2017 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I would now like to turn the call over to Rick Muscha. Thank you Mr. Muscha, you may begin your conference..

Thank you and good afternoon. With me are Moshe Gavrielov, CEO, and Lorenzo Flores, CFO. We'll provide a financial and business review of the June quarter and then we'll open the call for questions. During the quarter, we reclassified our product categories to be consistent with how these categories are analyzed and reviewed internally.

Specifically, we are grouping the products manufactured at the 28-nanometer, 20-nanometer and 16-nanometer nodes into a category named Advanced Products, while all other products will be included in the category entitled Core Products. This representation is consistent with what was presented at our recent analyst meeting.

For comparative purposes, we have provided supplemental information on our website at www.investor.xilinx.com that presents results based on previous classifications.

Let me remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We want to caution you that such statements are predictions based on information that is currently available, that actual results may differ materially.

We refer you to the documents the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This conference call is open to all and is being webcast live.

It could be accessed from our Xilinx Investor Relations website. Let me now turn the call over to Lorenzo..

Thank you, Rick. In the June quarter, Xilinx sales were $575 million, up 1% sequentially and up 5% on a year-over-year basis. Advanced Products increased 10% sequentially and 60% year-over-year, with 28-nanometer and 20-nanometer products each reaching record sales and 16-nanometer beginning its revenue ramp.

As expected, Core Products declined on a sequential and year-over-year basis. Communications increased 4% sequentially with growth from both wired and wireless. Communications has staged a modest, but consistent recovery since bottoming in the June quarter a year ago and is up 22% on a year-over-year basis.

Industrial and A&D was down slightly with strength and test measurement and emulation not quite offsetting expected declines in industrial and aerospace and defense. Broadcast, Consumer & Automotive was flat on a sequential basis, slightly better than anticipated due to stronger orders from Zynq-driven ADAS applications.

Both automotive and test and measurement reached record levels for the company in the June quarter. Gross margin in Q1 was 70.7%, higher than guided due to the mix of customers and products in addition to increased manufacturing efficiencies. We continued to aggressively optimize gross margin across our product portfolio.

Operating expense, at $220 million, was in line with our guidance. Operating income for the quarter was $186 million or 32.4%. Other income and expense was an expense of $5 million, as guided. The tax rate was 10% for the quarter, better than guided.

This included the impact of the early adoption of an accounting standard related to the treatment of stock-based compensation. Our net income for Q1 was $163 million or $0.61 a share. This included a positive $0.02 a share impact associated with the accounting standard I just referenced.

Operating cash flow was $339 million, driven primarily by strong profitability and a significant reduction in accounts receivable. Diluted shares were $266 million, including $10.5 million from the convertible. During the quarter, we repurchased 2.2 million shares for $100 million and we paid $84 million in dividend.

Some key points on the balance sheet. We ended the quarter with $3.7 billion in gross cash and $2.1 billion net cash after our debt. Inventory was $195 million, up $17 million from the prior quarter and down $27 million from the same quarter a year ago.

We continued to manage our inventory by balancing levels against expected demand and potential upsides from customers. Accounts receivable declined $90 million to $217 million, reflecting ordering patterns during the quarter. Now, turning to our September quarter guidance, we expect revenue to be approximately flat.

We enter the quarter with backlog that is down sequentially, but we have forecasted demand from key customers that is not currently reflected in our backlog. As a result, we expect turns for the quarter to be approximately 54%.

We expect Advanced Products to continue to grow, with 28-nanometer sales increasing to a new record, 20-nanometer exceeding $40 million and our 16-nanometer UltraScale+ family demonstrating material growth. With respect to end markets, Communications and Data Center is expected to decline after four consecutive quarters of growth.

An increase in wired business will not completely offset a decrease in wireless sales. Industrial and A&D is expected to grow, driven primarily by strength in test, measurement and emulation along with growth in Aerospace & Defense and ISM. Broadcast, Automotive and Consumer will be flat sequentially.

Our gross margin will be approximately 70% and our operating expense will be approximately $230 million, including $1 million of amortization. The increase in operating expense is in line with the investment in accelerating our leadership position, as we discussed at our Analyst Day.

Other income and expense will be an expense of $4 million and our tax rate is expected to be 14%. Share count is expected to be $266 million. Finally, at our Analyst Day in May, we discussed our expectations for 4% to 8% growth in revenue for FY2017 along with gross margins in the 68% to 70% range and the accelerated investment I just mentioned.

As we end our first quarter, we believe we are on track on all of these elements. Let me now turn the call over to Moshe..

cloud computing, Embedded Vision, Industrial IoT and 5G wireless. In cloud computing, we're in production with three of the largest hyperscale data center consumers with two more in extensive trials.

Additionally, we led the formation of the very broad CCIX Consortium with the singular role of bringing a high-performance, open acceleration framework to data centers. We're winning in fast-growing Embedded Vision applications across numerous markets including industrial, aerospace and defense, automotive, broadcast, and consumer.

In particular, our ADAS penetration in automotive will reach 85 models this year. With regards to Industrial IoT, we're seeing continued success with both Zynq and Zynq UltraScale+ families, securing platform design wins with the largest Tier 1 players.

Lastly, in 5G Wireless, we have 90% market share in pre-5G proof of concept deployments and 5G prototyping. We have attained an unprecedented position of strength, opportunity and momentum. This is driven by our exceptional execution, leadership products and customer adoption in the four multi-market drivers which will fuel long-term revenue growth.

We are committed to maintaining this leadership while delivering 30% plus operating margin in the long term and continuing our strong commitment to shareholder return. Let me now turn the call back to the operator for Q&A..

The floor is now open for questions. Please limit your questions to one to ensure that management has adequate time to speak to everyone. Our first question comes from the line of Ian Ing..

Yes. Thank you for taking my question. So Intel last week talked about being on track to ship Stratix 10 to customers, some samples this year. Obviously, you already shipped last year. Any thoughts in terms of what the potential share split is given the timing of product in customers' hands? Perhaps some boundaries around the share splits..

We can say that being more than a year ahead is tremendous benefit, having the broadest product offering is a tremendous benefit, having. Having production level material faster than we've ever achieved before is a tremendous benefit and that's why we're investing to exploit the leadership we have.

So we have no idea how it will turn out, but this is the strongest position we've ever had over the past three nodes..

Thanks, Moshe..

Sure..

Our next question is from the line of David Wong..

Thanks very much.

What were your total revenues from Zynq in the quarter and what are currently the biggest end markets for Zynq?.

So Zynq, just a second, well, let me start with the end markets for Zynq. The Zynq end markets, I think the showcase end market for Zync is really automotive and ADAS applications. The product is strong in wireless as well in many different applications and is also leading the Industrial IoT platform wins that we have.

We think it's a little bit in the, what we call it, as a percent of our total revenue, 8% or so of our total revenue in Zync and continues to grow strongly quarter on quarter and year on year..

And our next question is the line of William Stein..

Great, thanks for taking my question. Moshe, you talked about the CCIX at the Analyst Day and you mentioned it again today. Can you sort of frame the current impact or expected impact of this? Are there products that are relevant to this consortium? Is there any revenue or customer interest? Any details would be helpful..

Okay. So this is a market which today is dominated by Intel's very strong position on the server space. It's a market which is fast emerging; it's expected to be a very large market going forward and the expectation is that it will get split between additional players as competitive products are available from these players.

Now these competitive products can come from a variety of architectures. They can come from x86 solutions; they can come from power-based solutions and then they can come from the numerous players who are committed to the ARM architecture.

Those additional ones are still to emerge at the performance level which will enable them to penetrate the market. CCIX is basically an opportunity which now has been identified by all of these other players as the need to have a common interface standard that all can integrate and support.

From our perspective, we did, at the analyst meeting, talk about one product, at least conceptually, which targets this market which will be implemented in 16-nanometer and then will have our traditional all-programmable devices at 16-nanometer and also a whole host of solutions at 7-nanometer that address the market.

For us, we believe this has the potential of being several hundred million dollars in the 2020 timeframe. In order to get to that point, it was really essential to have this multi-partner opportunity, open multi-partner opportunity, in order to enable us to participate broadly in it.

And so, at this point in time, our revenue in data center does not yet comprehend this opportunity. It's more in traditional storage and networking data center applications. Over the next few years, we expect our business to grow to reflect that. So that's about as much information as I can give at this point in time. I hope it helps..

That's helpful. If I can get a follow-up, in server acceleration in the data center, there is discussion not only of FPGA being helpful here, but also GPU. And I'm wondering if you view that as a stable competitive environment or if the dynamics there are changing. Thank you..

So as I said, this is an emerging opportunity. And as such, the historic position is clearly led by Intel. And that's driven off their server and high-performance strength.

NVIDIA definitely identified several years ago this as an opportunity and they have invested heavily and we believe that there is a host of applications which are served well by a GPU solution. But that is a subset and not a particularly dominant subset of the future applications that will use this.

And so we do expect this market which is a large market and will grow rapidly over the next few years to be serviced by numerous solutions from numerous players.

GPUs definitely will be one, but they have a whole host of applications where, due to power and a whole host of other issues, they don't provide an optimum solution and programmable logic actually can provide much higher performance per watt per dollar, the most – the best solution in that regard.

And that's why we're talking to all seven major hyperscale players and a few other players too. And we believe that our solution will have value for a whole host of these new applications. Having said that, we expect that GPUs will continue to do well in this market too..

And our next question is from the line of Chris Danely..

Hey, thanks guys. Just a clarification on the yearly guidance. So you're sticking with the guidance provided at the Analyst Day.

On the gross margin, could it be 70% for the next couple of quarters? And then on the OpEx, are you still saying that SG&A is going to be flat and that the 7% to 9% growth is all R&D?.

So I'll start backwards. On OpEx, that guidance is essentially true, we can see plus or minus a couple million dollars. But in aggregate, the expense growth is R&D. On gross margin, I'm not going to go into specific guidance for the second half.

The 68% to 70% range for the year that we provided at the Analyst Day comprehends a few different scenarios about how the actual revenue, product and customer mix would come out. And so I think we're comfortable leaving that range..

And our next question is from the line of Ross Seymore..

Hi guys.

Just a question from the end market side of things in your Communications and Data Center side, out of that 44% of revenues, can you remind us the split between wireless and wireline, and to the extent the wireless side is falling off, how do you view where we are in the wireless market? Obviously a year ago, we had a huge inventory drawdown and then you've grown nicely since then.

Is that inventory refill back to a normalized level and will we ship with demand from here forward? And if so, what are your views on demand? Thank you..

So as you look at Communications and you break it down between wired and wireless, what happens is they tend to have different characteristics. Wireless tends to be more choppy. Wired tends to be more gradual in terms of its growth.

What we've seen is on the wired side, basically driven by a very strong technology portfolio, that business has been growing now consistently, and in particular, it's being driven by 28-nanometer and 20-nanometer shipments. On the wireless side, it is volatile.

It had its ebb, its lowest point in the June quarter of last year and since then it has recovered. It's grown by about 40% since that low point. It hasn't gotten back to its peak and we don't necessarily expect it to get back to its peak. Its peak was about 2X higher than its low point.

But it's hovering just about in the middle and we expect it to continue to go up and down, but more around this new number, right, as opposed to the low point. And it will be based on deployments. During the past quarter, China was steady, India was up; EMEA was weak.

North America was steady; it sort of tends to change from quarter to quarter as the deployments are geographically spread around the world. But we do expect Communications generally to continue to grow.

And if you can neutralize the wireless volatility or sort of flatten it out, we do see that the communications market overall, including data center, to be a long-term growth driver for us.

Next question, please?.

And our next question is from the line of Vivek Arya..

Thanks for taking my question. And Moshe, thanks for the color around the wireless business. I had one follow-up to that. If you look at your content in a base station today, how does it compare to what you had the year before or the year before that? I understand the volatility in deployments.

But over a longer period of time, when I look at the low growth in this Communications business, for not just yourself, but for your competitor as well, has it been a unit issue or has it been a content issue? That yes, units have been volatile, but is it possible that content has not grown at the same pace? And any color around that would be very useful.

Thanks..

Okay. So from generation to generation, the level of integration is much higher and the power reduction requirements are becoming more and more significant. And as such, we're seeing a higher level of integration and our customers are moving to the higher end of our product offering. It's still – it's not the high end.

It's not Virtex products, but it's Kintex and Zynq products. And generally speaking, the percentage of the dollar content which is implemented in programmable logic, be it Zynq or be it a non-programmable solution, has gone up from generation to generation. What we're seeing – and so if you look at the numbers, on average, 4G was higher than 3G.

Best we can tell, 5G is an incredibly sophisticated requirement with – and as we are being used in a vast majority of the early deployments, these are not going to be the massive deployments. Those are still three or four years ahead of us.

But we're sort of seeing the level of complexity is very high and unquestionably, the level of integration is high. And I would say generally speaking, the average price that we realize has gone up with a significantly higher level of functionality. The volatility is due to markets happening at different rates.

In particular, China is very difficult to predict, but I wouldn't say that overall we've seen the dollar content shrink at all. It's gone the other way at this point, per unit..

And our next question is from the line of Tristan Gerra..

Hi. Good afternoon. Could you elaborate a little bit on the operational efficiencies and mix? I know you're not providing a gross margin guidance beyond this current quarter. But if you could explain a little bit what's happening in terms of operational efficiencies and whether there is a lasting effect that we can expect beyond this coming quarter..

Right. So, Tristan, as you know, the gross margin has direct price, direct cost and manufacturing overhead type of components that drive it. And we have a portfolio of customers, a portfolio of end markets. And the customers all take, in those end markets, a portfolio of different products.

So what we see across the board is a continued drive toward manufacturing side efficiencies, getting our products at lower costs over time. We see continued price pressure from our customers across the board. And larger customers, obviously assert more price pressure.

And we just – we try to balance that and continue to get the broad savings to manifest themselves in our overall gross margin. On the overhead side, that will swing from time to time with different factors and what we're doing with inventory strategies. But in general, we're approaching manufacturing efficiencies there very aggressively as well.

So as is common in the semiconductor industry, costs continue to go down, but price pressure continues to increase. And we, again, try to manage that through the broad portfolio that we have..

And just to sort of summarize because Lorenzo gave you all of the data without answering the question, we think the 68% to 70% will continue to be in the foreseeable future where we are. Could we from time to time, as we are now, just rise above that? Yes. But that is neither our target nor do we think that it's a sustainable goal going forward..

And our next question is from the line of Ambrish Srivastava..

Hi. Thank you. We talked about Communications. I was wondering if you could talk about the other end markets.

And specifically embedded in your guidance, what are the – how are these end markets behaving versus what you would normally expect if there is any such thing as normal in the semi industry? That would be helpful if you could provide us with some – extra additional color on the other major end markets. Thank you very much..

Okay. So, Ambrish, we break it down into eight markets overall. And we're very pleased that we hit above the midpoint. But if you look at the growth overall, it was not huge. It was driven by five of the eight markets I think we highlighted, which – those were in terms of the past product.

And it's wired and wireless were up, automotive was up, Consumer was up and test – yes, test was up quite significantly. Going forward, we're looking at flat, right? So there's probably going to be some up and some down. And I can only give you a short-term projection at this point in time.

But as you look into the second half of the year, if I had to guess, we do expect Communications to continue to grow slightly. We expect A&D to be flat. We expect Automotive to be up significantly, driven by the large number of design wins we have and we would expect ISM also to get back into a growth mode.

So that's the best forecast we can give you for the second half based on what we know now. And just for the upcoming quarter, I think Lorenzo gave some of our prognostication there.

Next question, please?.

Please limit your questions to one to ensure that management has adequate time to speak to everyone. Our next question is from the line of Anil Doradla..

Hey, guys. Thanks for taking my question. So Moshe, I think you referred to Zynq contributing about 8% of revenues right now. A little surprised. I thought that would be higher; might be in double digits.

Now is this contribution volatile or it's been pretty much in the – kind of the high single digits over the last couple quarters?.

wireless, automotive and industrial market. Of those three, wireless has gone into production; automotive is going into production and should grow very rapidly and the industrial market tends to move quite a bit slower. So that is ahead of us.

What you will see is as the 28-nanometer grows, then the next growth vector, which is driven by the Zynq product line, will be a 16-nanometer where we have a lot of design wins. You could assume that that will follow a similar pattern to what we've seen at 28-nanometer. So – and this'll drive our market expansion.

It'll just be delayed by three years or four years vis-à-vis what you saw at the 28-nanometer in terms of its significance. And that's the nature of the businesses we're in. They move at a slow rate. So as it's a new product line with a new role in the customer systems, it has now – starting to be significant.

But in the same way the 28-nanometer took several years to get to where it is now, Zynq, which is a subset of that and was late – was the last part of the product offering we rolled out is now starting to hit its stride market by market. And the next growth in 28-nanometer is going to be in automotive then.

By industrial, we actually see a lot of aerospace and defense going forward and then we'll start seeing the 16-nanometer version. Would I like for it to be faster and – yep, I would. But reality is that's the nature of the business we're in. Hope that answered your question..

Our next question is Romit Shah..

Hi. This is Kristin Shaka (37:14) in for Romit. So my question is more on the automotive side. Even though we've had some strong results in the automotive semi space so far this earnings season, I think we're still seeing some concern about declining vehicle unit SAAR.

Are you seeing any weakening in auto unit demand in the coming quarter or do you think demand is going to hold steady?.

So we are expanding both the footprint we have in terms of the models that include Xilinx-based ADAS systems, and those – as well as the depth, continuing to move from premium to mid-tier to lower-tier in terms of the offering. So unit growth is going to be less of an impact to us than overall penetration and expansion.

That, as Moshe said earlier, will show as significant growth in the automotive business for us through the year..

And our next question....

Next question..

Our next question is from the line of John Pitzer..

Yeah. Good afternoon, guys. Thanks for letting me ask the question. Moshe, I kind of want to go back to the gross margins. And given how high your gross margins are, it's a little silly to nitpick.

But when I look at the quarter just reported, you would have thought that both by end market and geo, that the mix would have provided actual headwinds to gross margin, you guys actually put up really good numbers. And I understand the long-term target that you talked about of 68% to 70%.

I'm just kind of curious as to why that is the long-term target.

Do you feel like that's the gross margin level needed to drive your growth aspirations? I'm just kind of arguing, given the value you bring to customers, why shouldn't gross margins migrate up to that sort of low- to mid-70%s range permanently?.

You know, you're right, it's a balance between growth and profitability. And we think we are striking the right point here with – we believe that we can over time generate more gross margin dollars if we stay at this level and not aspire to higher levels. And that's the trade-off that we are striving for at this point in time.

And there's very few examples that are sustainable at higher levels that can provide growth. And one of the things we want to do is to deliver the 6% growth on average over the next few years. And so that's what we are targeting at this point in time..

And our next question is from the line of Ian Ing with a follow-up..

Hi, yes. Thank you for a follow-up. Apologize if this was asked, but turns higher in September because key customers are giving you forecasts instead of firm orders.

Could you talk more about the applications there and what gives you confidence those forecasts will become orders actually?.

So I won't talk about the specific customers or applications, but we have done extensive work in identifying the additional orders that we expect to come in this quarter to hit our revenue guidance, and we have confidence that those will come in..

And our next question is another follow-up from Chris Danely..

Hey. Thanks, guys. So your major competitor was acquired a while ago.

I was just wondering if you can maybe give us some perspective on, has anything changed over there? Has it been about as you would have expected, anything different going on across the way?.

Well, we're definitely focused on our execution. What we are seeing is, we seem to be very far ahead. We were far ahead on 28-nanometer, definitely very far ahead on 20-nanometer and we appear to clearly have this one-plus year advantage on 16-nanometer versus their offering. We are pursuing this with gusto.

I think that by the end of the year, it will be clearer how Intel will decide to maximize their return on their $17 billion investment.

And – but at this point in time, I would say that the – as I check with our sales force, they appear to be winning based on the very strong technology portfolio, both on the silicon and the software and the IP that we have. And that is a multi-year investment we have made which has come to fruition now.

And I believe that most of the success we're seeing now is a result of that as opposed to anything else. I do believe the jury is still out with regards to how Intel will pursue the market long-term. There are various options they have, some of which may make more sense to them than the others.

But when you look at the customer base, we're seeing customer base becoming more and more interested as there's massive consolidation in the semiconductor industry which everyone, including yourself, have commented on numerous times, the customers are recognizing that they need to align with companies who are around and are committed to perpetuating their model.

And that, I believe, has benefited us over the past year as it has become clearer and clearer that we're committed to this business and we're committed to technology leadership. And I think that's the other thing which maybe has changed in the competitive environment is actually the customer's approach is quite different.

And that's not only due to Intel, but it's due to other things that have happened in the industry which are highlighting that there are fewer and fewer players who are going to be around to advanced nodes. And Xilinx has demonstrated that it can and will do that.

And our increased investment is another proof point that we're going to be there for them.

Any more questions?.

And our next question is a follow-up from Blayne Curtis..

Hey, guys. Thanks for squeezing me in. Lots of calls tonight. I just wanted to follow up back on that, Moshe. Obviously, you can see the timing of your products and it does appear that you have a lead. I guess when you look at the results and you still get them from your competitor, they're growing a little faster year-over-year.

And obviously, it's hard – you have to look at a broader period here. I'm just kind of curious. At this point, 28-nanometer and 20-nanometer should be contributing some outperformance. So you're in the weeds.

I'm just kind of curious to hear your perspective as to why that hasn't shown up yet and when do you think you should be able to see some outperformance from this year again?.

So, Blayne, the numbers – the competitive numbers are very sparse. There's one number. There's no breakdown. There's lots of things that can be done. There's no understanding if it's new nodes or old nodes, right? And all I can say is we knew – we've grown our Advanced Products 60% year-over-year. That's 28-nanometer, 20-nanometer, and 16-nanometer.

So – and that's what is happening. The old nodes are now contracting, in the contraction phase. They're contracting at a slower level than they had been in the past, so we think that the headwind from that is going to be slower.

And what we're seeing is massive growth of our new technology and massive sets of design wins and very close alignment from the customer. So I don't – I think all of the data which is available is such that indicates that Xilinx continues to do extremely well.

And I think it's – if there was a huge breakdown, we could – a more detailed breakdown, we could tell, right? But it's like this is great in terms of technology leadership and in terms – and it's great in terms of revenue growth at these new nodes. And that's what matters for us.

So it's going to be more and more difficult to do meaningful comparisons going forward.

But we're very comfortable with our position; we're very comfortable with the absolute results we're delivering and we're very comfortable that our market share on new nodes now for three nodes in a row is substantially – and that is substantially – above the natural market share in the past.

The analysis of that and what the outcome is, is pretty clear..

Please limit your questions to one to ensure that management has adequate time to speak to everyone. And at this time, I'm showing no further audio questions. Presenters, I turn it back to you..

the Pacific Crest Global Technology Forum on August 9; the Jefferies Semiconductor Hardware and Communication Infrastructure Summit in Chicago on August 30, and the Citi Global Technology Conference in New York City on September 7. This completes our call. Thank you very much for your participation..

Ladies and gentlemen, thank you for joining us for the First Quarter FY 2017 Earnings Release Call. You may now disconnect..