Last week I wrote a post discussing Xilinx and Altera Q3’09 results, and I mentioned Xilinx’ operation margin consistently trailing Altera’s by 3-4%. I had a few emails regarding that gap, and why that gap would be closed eventually. Let me address this topic with this post.

Comparing the yearly fiscal exercises directly would be biased (Xilinx’ fiscal year end on March 31st, and Altera’s fiscal year on Dec 31st). Instead we can look at a quarter by quarter comparison, even though that can be too low a level. Better is to look for ttm (trailing twelve months) comparison to smooth out the local variations.

Source: Yahoo! Finance. All figures in thousands.

One can see that Altera’s operating margin is overall better. Also in their respective Q3’09 revenue reports, Xilinx expects its Q4’09 gross margin to improve to 62-63%, and Altera sees his to be 67-68%.  So a 3-4% operating margin gap will remain, which is significant.

On the other hand, Xilinx quotes 3145 full time employees, and Altera 2760. This means that a Xilinx employee brings back revenue about 26% higher than an Altera employee! So it all boils down to the question: how can Xilinx be more cost efficient?

One of the differences is the way software is developed. Altera’s software is mostly done in their technology center of Penang, Malaysia, with a very small core technology group in Toronto, Canada. Xilinx’s software team is mostly in the US, and only 5% of the team is in their R&D facilities in Hyderabad, India. A back-of-the-envelop calculation shows that if Xilinx had the same software team but with a US/India ratio 1/3-2/3, which is a healthy ratio for a company that can leverage its India facility, Xilinx would improve its operating margin by one point.

If you extend the same reasoning to whole R&D –not only software–, then it is clear that Xilinx can get the upper hand. Looking at the R&D job listings, it is also clear that Xilinx is moving into that direction. The question then is whether Xilinx has the structure and the drive to achieve such a transformation successfully.

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