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Welcome to the Analog Devices fourth quarter and yearend earnings release conference call. All participants will be able to listen only until the question and answer portion of the call. Today's call is being recorded. Those with objections may disconnect. At this time, it is my pleasure to introduce our conference moderator, Mr. Jim Fishbeck, Director of Corporate Communications. Mr. Fishbeck, you may begin.
JAMES O. FISHBECK
Well. Thank you and hello everyone and welcome to our fourth quarter yearend earnings release conference call. If you do not yet have our fourth quarter release, you can get it by visiting the investor relation section of our website. That is at www.analog.com. Just click on financial releases. This conference call is also being broadcast live on the internet as a webcast, so anyone with real player software can tune in to the call by visiting ADI's investor relations website and clicking on the page Financial Releases shown next to the microphone icon there. Participating in today's call are Jerald Fishman, President and CEO, Joseph McDonough, Vice-President for Finance, Vincent Roche, VP of Sales, and Brian McAloon, VP of DSP and Communications Products. We begin, as always, with opening remarks from Mr. Fishman and the remainder of the call will be devoted to answering questions from our analyst participants. Our analyst participants can press * 1 on their telephone at any time beginning now to ask a question during the first round, and we will poll for questions in the same order we receive them. Please do not press *1 more than once during the first round. If you do press *1 to ask a question and wish to cancel your request, you can do so by pressing *2. I would like to point out that under the provisions of the Private Securities Litigation Reform Act of 1995, this conference call will include forward-looking statements. These statements are not guarantees of future performance and they do involve certain risks, uncertain, and assumptions, which are difficult to predict. The risk factors, which may affect our future operating results, are described in the company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission. Further more, this conference call will include time-sensitive information that may be acted only as of the date of the live broadcast, which is November 20, 2001. Finally, this call is the property of Analog Devices. Any redistribution, retransmission, or rebroadcast of the call in any form without the express written consent of Analog Devices is strictly prohibited. We are now ready for Mr. Fishman's opening remarks. Jerry.
JERALD G. FISHMAN
Well good afternoon to everybody and thanks for taking the time. Thanks for taking the time to join us this afternoon. First, our fourth quarter came in at $423 million, which is down 12% sequentially from last quarter ...[break in signal]...
All participants please standby. The conference will continue momentarily. All participants please stand-by. All participants please continue to standby. Your conference will resume momentarily. Once again, all participants please continue to standby, your conference will resume momentarily.
Okay. Well, again, thanks for joining us this afternoon. We are sorry for the inconvenience. [But somehow or the other] the line went dead, probably too much electronics that applies here. Anyhow, sales for our fourth quarter were $423 million, which were down about 12% from the last quarter and down 47% from the same period of last year as industry conditions remained weak through most of the quarter. Operating profits at 14% of sales and ProForma earnings at $0.14 with a high end of guidance that we provided in the last quarter's conference call as gross margins were above planned and expenses corporate-wide were favorable to the plan. Analog revenues, which are currently 80% of our total revenues, declined 14% sequentially and are now 42% below our peak levels, which we achieved in Q1 of 2001. Our DSP revenues were down only slightly, sequentially, as this business now appears to have stabilized. The largest declines in Q4 occurred in the OEM channel and were heavily skewed towards communications OEMs, particularly in broadband, and also in wireless infrastructure or base stations. Our distribution business which now has gone up to 50% of our revenues stabilized during Q4 and only declined slightly sequentially. I will talk in a little more detail of trends in each of the market segments in just a few minutes. Our gross margins remained very strong at 52% of sales despite very low utilization in our internal fabs, depreciation increasing by 170 basis points to now 9.9% of sales as our fixed costs amortize over a low revenue base and again, some additional inventory reserves that are included in that gross margin.
Inventories declined by an additional $32 million sequentially despite lower revenues. We have managed to keep gross margin strong despite the dramatic revenue falloff by decisive actions to significantly reduce manufacturing costs over the past year. Manufacturing costs have now been reduced by over 50% during the past four quarters and that is aided by our outsourcing strategy for our most volatile products, scheduled periodic shutdowns of our manufacturing facilities worldwide, and also reductions in force in many of our manufacturing operations around the world. We have also taken this temporary low to accelerate the permanent reduction of manufacturing infrastructure costs such as the consolidation of internal testing and assembly in a single site in Asia, and the rationalization of planning and quality functions worldwide. Pricing, for the most part, remains very stable particularly in our analog business as a result of our heavily proprietary product base. A reduction of manufacturing infrastructure coupled with our factories that are now operating at approximately 50% utilization will provide very high gross margin and operating leverage when revenue growth resumes. Operating expenses declined by an additional 9% sequentially and are now down 22% from the peak levels during Q1 of 2001. Engineering expenses have declined 15% from the peak and SMG&A expenses have declined 33% from the peak as very aggressively manage expenses by eliminating bonuses, by reducing the pay of our highest-paid employees, and by reducing all discretionary expenses throughout the company.
During this period, we have retained and supported the most vital engineering programs while we accelerated the [ICE] growth the economy recovers while using this period to weed out marginal programs that are just not affordable in this environment. In the SMG&A area, we redirected internal marketing resources to applications on the field working with our customers to [_____] our latest products. It turned out that 2001 was a record new product year. We have many, many new products out there and we need good applications people in the field to help our customers design [end this] latest processes. Despite all these actions, operating expenses are now running 38% of sales, which is well above our model of 25% of sales. This will also provide very good operating leverage as revenue growth resumes and we amortize these costs over an increasing revenue base. Operating margins totalled 14% of sales which was down very substantially from the peak levels of last year are certainly quite respectable, given the magnitude of the revenue dropoff. Our balance sheet strengthened significantly during Q4. Cash increased by an additional $120 million to now $2.8 billion in cash. Inventories, as I mentioned earlier, declined by an additional $32 million and days' inventory will reduce by one day to 111 days. Accounts receivable declined by $52 million or 5 days to [_____] days, our best level in recent memory despite very poor industry conditions. The communications market remained weak during Q4 as inventories remained high and end-consumption rates remained generally weak. On a positive note, we experienced a pickup in handset and PDA-related business during Q4, much as we had predicted last quarter.
We saw our increasing volume in analog [_____] and base band DSPs and also power management chips for handsets and PDAs. Our wireless base station business remained at very depressed levels as excess inventory continued to be worked off. This has mostly affected our high-speed converter and other analog products that enjoy extremely high market share and base stations. As quality usage continues to grow and as inventories dissipate, we are extremely well positioned for analog [_____] and for DSPs for both existing and future generations of base stations. The weakest sector of our communications products has been in broadband products both for access and for infrastructure, where very high inventories and low overall consumption rates have led to large order reductions and significant cancelations over the past three quarters. Despite the current situation, our product portfolio remains extremely strong for DSL, cable products, and also for set-top boxes. Our newest DSL infrastructure and customer premises products now provide the highest level of integration and the lowest power consumption in the industry. Customer feedback from these products is extremely strong. Our increasing optical product portfolio for optical electrical control and micro machine products while, of course, currently caught up in the telecommunications chaos, will likely emerge in 2002 as a key growth area for ADI. Communications products in total have now declined by 65% from peak levels and now represent 30% of our total revenues, down from a peak of 45% of our total revenues last year.
While the precise timing of the revenue growth recovery in communications is really impossible to predict. We are confident that the communications market is still a great growth opportunity for ADI's signal processing technology and we are ready with the right products whenever the market recovers. Revenues from computer customers increased significantly in Q4 as expected as inventories have been reduced now to unsustainable levels and Christmas buys accelerated throughout the quarter. We saw our increases in orders for power management products, particularly those that support the Pentium 4 and also for integrated audio products, which are both areas where we enjoy very high market share. Our personal computer products now represent approximately 20% of ADI's total revenues. Revenues from consumer products declined slightly in Q4 as consumer confidence waned a bit and consumers began to cutback on high-end digital entertainment products. But despite these concerns, high-end products such as DVDs, digital still cameras, flat panel displays are still selling well and our market share remains extremely high in these product areas. In addition, we should also capture a higher percentage of the available building materials in next generation products, as we begin to integrate analog and DSP functionality on the same chip. Consumer products now represent approximately 10% of our total revenues. Revenues from industrial customers declined almost 20% sequentially in Q4, heavily impacted by large reductions in automatic test equipment product sales, which have now reached the [minimest] levels and also by a general softness in overall capital spending.
Excluding automatic test equipment products, industrial revenues declined 12% sequentially. This is a pattern that we have seen many times in the past as industrial revenues decline late in the semiconductor cycles. The current expectations are that this sector should begin to recover in our second fiscal quarter. Industrial products now comprise approximately 40% of our total revenues. Revenues for our analog products in aggregate are now running 42% below our peak levels of the first quarter of 2001. For the year, analog revenues declined only 3% [_____] by strong first half results after growing by 68% last year. Amongst our analog competition, we both grew fast than last year and declined less this year resulting in market share gains, we believe, in both years. While our margins in analog products have of course declined this year as factor utilizations have come down, they remain extremely high and cash flow in our analog business remains extraordinary. Despite the high margins, we have also taken steps this year to fundamentally reduce our manufacturing infrastructure costs for analog products worldwide and we should see the benefit of that as our analog revenues recover in 2002. The high performance in analog sector continues to be one of the very best sectors in the entire semiconductor business. The secular growth rates have increased markedly as analog technology is now at the heart of the fastest growing applications in communications, in computers, in consumer products, and also in industrial products. In addition, we serve over 50,000 customers worldwide in our analog business and virtually every market segment, which provide the degree of insulation from specific sector or from specific customer issues.
This business produces industry leading margins and cash flow in the up years and the down years given our proprietary products, our strong and stable ASPs, and also our relatively low capital intensity for analog products. ADI's position in the analog business has been improving steadily now for many years. Our growth rates have exceeded our best competitors, our margins have dramatically improved, and our design talent is superior to any other company in the analog business by a wide margin. We are the largest high-performance analog company in the world, and we are increasing our lead in this business each year. We are very well positioned to resume growth and sales and in margins as the economy recovers. Our DSP revenues are now running 63% below peak levels. For the year, DSP revenues declined 32% after growing by over 100% last year and by 70% the year before that. DSP products have been particularly hard hit by well-documented [_____] and virtually every sector of the communications market since 75% of our DSP revenues were from communications customers. Given the relatively high engineering intensity in DSP, coupled with the precipitous revenue decline, our operating margins have declined significantly in this business over the past few quarters. Despite the declines, we have managed our inventory very well by significantly reducing external wafer purchases very early in the cycle when we began seeing instability in our backlog. The significant downturn in our revenues relative to somewhat less of a downturn that is reported by our equipment customers, we just believe that there is good reason to believe that we are now approaching the [trough] in our DSP business. Competitively, our DSP business remains very strong and poised with significant growth as the communications market recovers.
Our DSP core roadmap is extremely competitive. Our vertical market penetration is strong in many emerging market segments and our organization is very focussed on winning in sustainable and profitable segments in the DSP market. We have been gaining market share for the past few years in DSP and we expect that trend will continue in the future. Increasingly, DSP is necessary and core technology in many large and fast-growing markets and the synergy with our high-performance analog business is very well documented. Increasingly, the ability to combine high performance analog with DSP is a competitive weapon against both our 'analog-only' and our 'DSP-only' competition. Well, of course, this market makes it very difficult to offer very precise guidance of our results in the short-term. We continue to see signs that we are approaching the [trough] of this cycle. [Gross/Growth] orders and new orders for shipment during Q4 both increased sequentially by approximately 16% be it from very depressed levels in Q3. As expected our churns business increased to $156 million or 37% of our total revenues and that is up from $125 million or 26% of our revenues during the quarter before that. Cancelations also continue to abate. Nevertheless, while our book-to-bill ratio improved during Q4, orders were below our current shipment levels and backlog declined during the quarter. Based on the best information that we have from our customers and from our distributors, consumption of our products is well ahead of current order levels as customer inventories continue to decline. Order and shipment rates are most stable in distribution and are weakest in large communications and more recently, in large industrial OEMs.
I think, one way to think about our current revenue level, is that we [appear] to be approaching the [trough] at the $400 million level with a large portion of our OEM business at extremely low levels and in many cases at levels close to 0. Based on the success of new and ongoing design and programs with these OEMs, we should see significant revenue growth from these customers as inventories dissipate and as the overall economic picture improves. Given the lower backlogs and a relatively short seasonal Q1, we are planning for our revenues to decline in Q1 by approximately 5% to the $400 million level. To achieve this plan we will require that most of our current backlog remains firm and that churns business increases to approximately 50% of our total sales. Given the fact that customers across the board are waiting until the very last minute to order. This is a very typical pattern at this point in the cycle and a reasonable expectation on which to plan our business in the short-term. Based on the most recent feedback from our customers, we would expect revenue growth to resume in our second fiscal quarter. We would expect gross margins to hold in the 51% range at these revenue levels. Operating expenses are planned to continue to decline from Q4 levels as they have each of the last three quarters. Our plan is for operating margins of approximately 13% and earnings in the 11% range as non-operating income is planned to decline by $7 million sequentially due to the drop in short-term interest rates that we get on our cash.
Given the really chaotic events of the past year, I think it is really important to put the entire year in perspective. We finished the year 2001 with revenues of $2.3 billion down 12% from the prior year after growing by 78% in the year 2000. Our analog business declined only 3% after growing 68% last year. Our DSP business declined 32% after two years of exceptional growth. While Q4 revenues declined 47% from the peak. We have produced strong operating margins and extraordinary cash flow. We believe that our market share in both high performance analog and DSP will again increase for the year when market share statistics are published after yearend. As we saw signs of a revenue inflexion point early in the year, we reacted quickly and decisively to preserve our financial performance while continuing with the most important new products that will be critical to emerging from the cycle with the wind at our backs. As a result, compared to peak levels, we reduced manufacturing spending by over 50%. We reduced our inventories by over $100 million, we reduced SMG&A expenses by 33%, we reduced engineering investments by 15%, we reduced accounts receivable by 6 days and during that same period, we increased our cash by over $550 million. Additionally, we have used this [_____] from high growth to accelerate our plans to structurally lower our costs throughout the company. We have now completed the move of 95% of all testing to Asia where we are clothing a smaller test facility in Taiwan and we have rationalized our planning and our quality of operations worldwide. Capital spending has now declined to minimal levels and will remain at very low levels until utilization increases to FY 2000 levels.
All these actions should have a very positive effect on our gross margins as revenues and as production levels increase in 2002. During this period, we also used our financial muscle to invest aggressively to continue building our product portfolio in high performance analog and DSP. New product output was exceptional during 2001 and despite reduced R&D spending from peak levels. R&D spending increased by 17% last year and we are still investing at an annual rate of $400 million or nearly 25% of our current sales. We see a good payback on this investment as business conditions improve. I can tell you that at ADI, the new product gun is locked and loaded and aimed at some great new applications. We are emerging from the cycle, a much stronger and even more competitive company with great market position, a solid reputation with our customers, and an energized employee base committed to our success. That is a claim that I believe, few companies in our industry can honestly make. We believe we have struck a good balance between our commitment to our employees and doing the very best job possible for our stockholders in the most difficult period in 30 years in the semiconductor industry. We believe that we have done a much better job of managing our business than during previous much less-severe downturns. I believe that the real true test of a management team is how they manage through a period with incomplete, rapidly changing, and often conflicting information. Certainly during this cycle, ADI has [_____] compared to most other companies in the industry and managing through the downturn. I can tell you that we are all ready to move back to a growth mode with really good operating leverage as industry conditions improve.
JAMES O. FISHBECK
Thanks Jerry. This is Jim Fishbeck again and we are now ready for your questions from our dial-in participants. For any of the analyst participants who missed the comments at the beginning of the call, if you have a question, please press *1 on your phone or ask the questions in the same order that we receive them. If you are listening on a speakerphone, please pick up the handset when you ask your question and also, please limit yourself during each round to one primary question and no more than one follow-on question. Today's call is being recorded so that those who are unable to join us [_____] to listen to it. The recording will be available about two hours after the conference call has been completed today and will remain online for one week. Recorded call will also be available via the Internet by visiting the Analog Devices website at www.analog.com. Our first question today comes to us from [Manish Goel] at [_____]. Go ahead Manish.
MANISH GOEL
Yeah. Hi! The question is on GSM chipset. Recently National Semiconductor announced that they had design win with Ericsson. I guess you guys were designed in their earlier...what was the competitive reason? Why did they have a design win over you?
JERALD G. FISHMAN
Well first of all, I think that is one of those questions like how well can you can you beat your wife? We have no knowledge of any design wins that National has with Ericsson. We have not been supplying chipsets to Ericsson in the baseband and the business that we have with Ericsson we have maintained. So that is the best answer I can give to that question.
MANISH GOEL
All right. Thank you.
JAMES O. FISHBECK
Okay. Thank you, Manish. The second question comes to us from Vadim Zlotnikov from Sanford C. Bernstein & Co. Vadim...!
VADIM ZLOTNIKOV
Thanks. If I look in the history that the first quarter for you guys, in general, is not a very strong quarter and in your guidance you are assuming a pretty substantial improvement in the churns business, I guess about 33% or so. What gives you the confidence that you are going to get that improvement in what is adjacently not a particularly great quarter, and also could you just update us on the Siemens business, how that is going and whether you are seeing meaningful shipments?
JERALD G. FISHMAN
Well. I think, the core is that as we said in the opening comments. You know, the first quarter has got a lot of assumptions in it. You know in each part of the cycle, virtually all business that is coming in is churns business with the lead time, being like 80% of our products are probably stock and the other 20% are within two or three weeks. You know, customers all across the board in semiconductors are, I believe they can get products immediately and I think that is why we all do not have much backlog going into this quarter. The churns business is not going up each quarter. Inventory levels of many of our customers are down quite a bit. So, we believe that you know, the assumption of getting our churns business up those levels is consistent with what we have seen in prior cycles. But I would honestly say that, we do not know for sure if that is going to happen. Well, in some ways when we have a lot of backlog, you tend to be a little more confident although, I think, in a lot of cases, that is false confidence because backlog disappears very quickly as we all found out, well, over the last three quarters. So, I think that is an assumption that we made, we think based on all these trends that we have looked at. It is a reasonable assumption. It is certainly not a worst worse assumption, but that is the assumption by which we are operating the company in the full quarter. The Siemens business is continuing. I think we mentioned in the last call, a lot of our business is now coming through OEMs in Asia and we think we are going to do pretty well in that business with Siemens and a few others in 2002. We have a lot of new designs for our [_____] chipset in both handsets and I think that we announced just yesterday, a fairly major win with Compaq and I think that business is also going to do pretty well in 2002.
VADIM ZLOTNIKOV
Thanks.
JAMES O. FISHBECK
Thank you Vadim. The next question is from Douglas Lee from Banc of America Securities. Doug.
DOUGLAS LEE
Hi. Good Afternoon. Just a couple of things, the first one for Joe first, on the tax rate this quarter was 25%, Joe for modeling purposes. Should we expect the tax rate to stay at that level?
JOSEPH E. MCDONOUGH
Yes. We think that looking forward in the next year that 25% is a reasonable tax rate for the year. We have seen a bit of a different mix in the business and as a result of some of the changes that we have made in the way that we operate the business, we think it is reasonable to assume that 25% is an appropriate tax rate.
DOUGLAS LEE
Terrific. And just an accounting question, if you could look it up, may be I will ask Jerry a question down. Could we typically track this deferred income to distributors' figures? Do you have that off-hand?
JOSEPH E. MCDONOUGH
We can look it up for you. I do not have it right here. The inventory that the distributors declined were slightly less last quarter. So the deferred income would remain more or less in the same range.
DOUGLAS LEE
Okay. Terrific. Jerry, you talked about consumption. I know it is an awfully hard thing to get your hands around for all of us. But you can give us some sense of where you think real consumption is or was, last quarter for Analog Devices, just so that I can get a sense of how to think about a re-acceleration in your business in the second quarter.
JERALD G. FISHMAN
Of course. It is a very complex question and the reason is that I made that comment is, you know, if you look across our top, let us say, 20-50 OEM accounts in the last year, or even if we look down as deeply as maybe a hundred accounts, our business last quarter, our shipments or sales to those customers in many of those accounts was very, very close to zero. Now, given that those accounts are still shipping products to their customers, they have to be consuming inventories. Because we are not shipping anything to them and they are shipping products to their customers. What I am saying that our shipments to some of these larger OEMs is virtually zero, that is not...I am not taking license with that. I mean, I am saying it is virtually zero. So, I mean, that gives us confidence that, you know, when they sort of run out of inventory, they can opt to start ordering. Now if they try to put a number on that is very, very difficult. But, you know, it would be very easy to say that at least a hundred million above the kind of order rates that we have seen and maybe more ... a lot of it.
DOUGLAS LEE
You are not like other companies. But, you have been down like, 4 quarters in a row sequentially. Do you think that the consumption or the demand on your customers is surprising them to the extent that they have to keep kind of, lowering their forecast to you guys?
JERALD G. FISHMAN
Well, I think, you know, their forecasts to us have never been very good even in the upturn. So, I do not know what their forecasts are. I read all the releases and we talk to all the customers that we have for these products, and certainly the competitive landscape has not changed. So it is not like there is any losses of share here; in fact quite the opposite. So, I mean, it is very hard to quantify, but I think that they are going to start using products soon and they have got to start ordering and I think, as they do, and the lead times start, you know, to move out from everything in stock to have to wait for weeks to get it, I think we begin to see that in the order rates.
DOUGLAS LEE
And then lastly, you mentioned of the R&D is $100 million run rate. Should we expect that to be flat for the next couple of quarters?
JERALD G. FISHMAN
It is certainly not going to go up.
DOUGLAS LEE
Thank you very much.
JAMES O. FISHBECK
Thank you Doug. Our next question comes to us from Louis Gerhardy with Morgan Stanley. Go ahead Louis.
LOUIS GERHARDY
Yeah. Good Afternoon. Two questions, if I could. Three weeks into the first quarter here, can you comment on how much the roughly $200 million in turns you require have been booked so far? And I have a followup.
JERALD G. FISHMAN
The only comment I would make is that for the first couple of weeks, we are operating pretty much on the plan that we set out for the quarter.
LOUIS GERHARDY
Okay. And then I had a question on inventories. Is inventory declining because the finished goods are selling out but the buybacks is increasing and the reason of that question is you know, should we expect the factory output in the first quarter to be above the billing, Jerry?
JERALD G. FISHMAN
I will say that you should not expect that. We do not expect to build inventory in Q1...I mean, that is what our plans are right now. You know, we have really worked hard to not do that during this cycle. You know, it is very tempting to goof up all the margins, you know, and to keep building inventory during the cycle and then, you know, we can get really scrappy, just have a one-point charge and write it off. But, you know, we have resisted that temptation during the cycle and we are going to try to continue to do that. You know, we have, you know, large die banks that I think it is efficient, almost in any condition to get us through where we have to get to and you know, most of the die banks are in the vicinity of two to four weeks away from production. You know, we have worked hard to get our cycle times in that area down to very, very low levels. So I think that is going to be pretty much the way we continue to run the business.
LOUIS GERHARDY
Thank you.
JAMES O. FISHBECK
Thank you, Louis. Next question comes to us from Brian Marshall with JP Morgan. Go ahead Brian.
BRIAN MARSHALL
Hi! Thanks guys. Just a couple of quick questions here. I was wondering if you could talk about your seller exposure on an end market basis for the calendar year 2002. Do you actually think you could see greater revenues from the seller and the handset market or the PDA market?
JERALD G. FISHMAN
I think that is one of the unknown. We have fairly substantial aggressive designs for [_____] and you know, depending on how many of those get volume on their handsets and how many of those get what the other PDAs do. I think most people recognize that we have a very large market share for entire wireless chipsets and PDAs. You know, most of the PDA manufacturers...so I think it all depends on how our customers do.
BRIAN MARSHALL
Okay. I was wondering if you could give us your opinion on the rollout of GPRS say over the next year and what type of impact that might have on your business?
JERALD G. FISHMAN
You know, Brian, I think...yeah, we expect GPRS is going to rollout quite successfully. You know, I think as you saw in the Compaq announcement they are going to be using the sell the RS chipset as well as the analog and the digital base time parts and as you look at one of the real important features in a PDA, I think, a lot of communication is the one from more surveys that is the most important one. Right now, in fact, for the last several months, we have really been one of the few companies, if not the only company out there with GPRS class 12 capability which allows the highest data rate transfer. So we are very optimistic that number 1 is that there is a very high demand for, you know, a lot of data services for both PDAs and also for web browsing on handsets. Number 2 is that we have got the right products, at the right cost, and the right performance for the marketplace. So we are quite optimistic.
BRIAN MARSHALL
Okay. That is helpful. Under that scenario then, could we assume that we can potentially see significant pickup in your base station business, say starting in the Q2 time frame the next year?
JERALD G. FISHMAN
On the base station site?
BRIAN MARSHALL
Correct.
JERALD G. FISHMAN
Yeah. I mean that is our assumption. You know, our base station, you know when you start looking at that list of 50 accounts that I mentioned earlier, base station guys were on the list of some of those biggest accounts and our business has really declined by probably 80 or 90% from the peak in base stations. And certainly if some of these new services are getting deployed, we would expect that our base station business will pick up with that as well.
BRIAN MARSHALL
Right. Thanks guys.
JAMES O. FISHBECK
Thank you. Next question comes to us from Shekhar Wadekar with RBC Capital Markets. Shekhar.
SHEKHAR WADEKAR
Good evening gentlemen. Couple of quick questions for you on...one, I am sorry I did not catch the non-operating income guidance for next quarter.
JOSEPH E. MCDONOUGH
This is Joe McDonough. The non-operating guidance is that the non-operating income would decline from $11.7 million this quarter to around 7% next quarter due to the decline in interest rates on our invested portfolio.
SHEKHAR WADEKAR
That is $ 7 million or a 7% decline?
JOSEPH E. MCDONOUGH
The number next quarter would be...our estimate...our best estimate is $ 7 million of non-operating income next quarter.
SHEKHAR WADEKAR
Understood. Also, Jerry, question for you based on the end market. There seems to be the expectation that the end market consumption right now is a lot healthier than what revenues from semiconductor companies would indicate. However, there is a burn-off of inventory. Putting all that aside, the guidance for the whole lot of high-flying areas is basically down in 2002 if you look at networking, capital expenditure...it is going to be down while this is not expected to be a real good strong growth in the next year. PC is the same story. When you put all that together, is it likely that you will see a little bit of a lift in the second fiscal quarter in revenues, and the need to flatten out again or even, perhaps, decline now more in line with the actual demand rate?
JERALD G. FISHMAN
Nobody really knows what is going to happen. If we could forecast that, we would not sit here on the day before Thanksgiving at six o'clock. I think we can only operate the business with two basic caveats. You know, one is that we are keeping the costs as low as we possibly can. We have a lot of capacity that we can bring towards...you know, revenues that we get and we are going to try to manage the business as carefully as we can. We are not going to incur a lot of costs until the revenue is confirmed and that is all we can do in managing the business. You know, what happens, and you know, there are as many theories as there are economists out there. What can happen in some of these end markets and we just do not know. So the only thing we could do is sort of be cautious, and you know, try to keep the R&D engine fine and yet, you know, run the cost down of the company as well as we possibly can.
SHEKHAR WADEKAR
If I may follow up on the R&D issue, I mean, clearly as we go through a downturn like this, priorities and platforms change directions quite dramatically. What you thought you were going to build as a platform for either wireless or communications in general suddenly is no longer the case. It is going to be something else. Are you prepared to meet those sudden, sort of, twists and turns in the road?
JERALD G. FISHMAN
Yeah. I mean, in aggregate, of course. You know, we have gone through it fairly significant sort of ...we look at all the investments we are making. You know, given the magnitude of the revenue decline, and we have changed to round some of the R&D priorities. We, you know, added investments in some areas and decreased investments in others, but, in many of these businesses, you know, one of the most important things is you got to sort of stay at it. You know, many of these are three-to-five year investments and I think constancy in some of those is a good idea. Having said that, you know, we have changed around the portfolio a little bit and if things continue to be at these levels, we will keep doing that.
SHEKHAR WADEKAR
Superb. Thank you.
JAMES O. FISHBECK
Thank you, Shekhar. The next question comes to us from [Caitland Wilfred with Trolles Management]. Go ahead with your question please.
CORTLAND WILFRED
Yeah. Thanks a lot for staying around until 6 '0' clock. We appreciate it.
JERALD G. FISHMAN
Oh, with 200 of you guys that stayed around, so that is the least we could do.
CORTLAND WILFRED
Thanks a lot for taking the call. My question is: It is a kind of a twist on the R&D, but I really want to focus in on the capital expenditure. It looks like, is this where you are going to baseline it...going forward at the $18 million - $ 20 million dollar per quarter level?
JERALD G. FISHMAN
Yeah. I see it in that range.
CORTLAND WILFRED
Okay. So, in the event, and you listen to all of the capital expenditure suppliers that are out there, the equipment providers that are telling someone adds that the semiconductor companies are, you know, are not ramping up for all of the next generation staffer are going to be left behind if in the previous question, the scenario plays out that we have, kind of a baseline of business, are you at risk at any point, that you will be under invested in your capital expenditures area?
JERALD G. FISHMAN
I think there is always a known risk for that. What you really have to look at is the difference between internal capital spending for analog products and you know, fine line much products. And on the analog business, you know the technology does not move all that fast. You know, our analog business used to be 40-50% larger than the rates that we are building stuff at now. So we have a fair amount of capacity to go into an analog business. On the digital side, thankfully, the foundries make all that investment. So as far as getting up to the, you know, the [____] and those kind of things, you know, we let those guys worry about that.
CORTLAND WILFRED
Okay. Just as follow-on on that. I want to make sure I got this right. Did you, in your prepared comments or when answering one of the questions, say that capital expenditures will not be turned up until approach fiscal 2000 revenue run rates? 1:48:55
JERALD G. FISHMAN
Yeah, I mean, the way we think about it is, when we are operating at 100% or so of our analog capacity at the peak quarter in 2000 and we had a fair amount of growth to get to those levels again. So, you know, if you look at that, if you look at the improvements we have made in yields, the reductions that we have made in infrastructure, you know, we could regard a lot of leverage there that we had a lot more analog capacity and still we can increase the sales by over 50% from where we are.
CORTLAND WILFRED
Okay. Thanks a lot, you guys and good job on the quarter.
JAMES O. FISHBECK
Thank you. The next question comes to us from Tore Svanberg with Robertson Stephens. Go ahead Tore.
TORE SVANBERG
Yes. Good Afternoon. Coming back a little to the churns question maybe I can ask it a little bit in a different way. Should we assume that the quarter will be a little more front-end loaded given seasonality issues here or should it be a fairly linear quarter, you think?
JERALD G. FISHMAN
We have no idea. I think the only thing we know is that the, you know, one to two lousy weeks out there, the Christmas, and typically we have now a pretty good November, December starts to get scrappy around Christmas and January is a very strong month for us. I would expect that to be the same pattern that we see this quarter.
JERALD G. FISHMAN
We have no idea. I think the only thing we know is that the, you know, one to two lousy weeks out there, the Christmas, and typically we have a pretty good November, December starts to get crappie around Christmas and January is a very strong month for us. I would expect that to be the same pattern that we will see this quarter.
TORE SVANBERG
Okay, very good. And I believe you indicated earlier that you had seen your power management business grow nicely. Is this the result of some market share gains? Has there been any significant design wins there? I am just asking because historically your emphasis on power management has not been as high. I am just wondering if there is a change in character here from the company overall?
JERALD G. FISHMAN
Well, I think one way to think about power management business is, you know, even though that was not the largest business for us it got us to a running rate approaching $100 million a year, which is larger than many companies that just do that. You know, the power management business fell heavily, as you know, computer inventories piled up and handset inventories piled up, which is two of the areas that have large consumers. Our power management products as well as [_____] you know ... no more inventory reduction there. Those businesses have picked up. How that happens in the future ... time will tell if that really sees through, you know, in the second, third and fourth quarter of next year. Right now, the computer business has picked up. I think many companies have reported that and so has the handset business, PDA business and those are all large consumers of power management. Hopefully, you know, that will continue but we do not really know yet.
TORE SVANBERG
Very good. And finally, I believe you mentioned an additional inventory reserve. Could you maybe quantify that amount?
JERALD G. FISHMAN
I think we will not do that. You know, we have talked about the kind of inventories that we have been taking. We have been very conservative in making sure inventory is, you know, quite fully reserved. That continues to be our policy. And I think we will leave it at that.
TORE SVANBERG
Very good. Thank you very much.
JAMES O. FISHBECK
Okay, thank you Tore. Next question comes from Tristan Gera with Prudential Securities. Go ahead Tristan.
TRISTAN GERA
Good Afternoon. Industrial revenues typically decline at the end of a downturn. I was wondering how industrial revenue has behaved in past cycles for you at a trough and when we could expect to rebound in industrial revenues?
JERALD G. FISHMAN
Well, I think historically, based on a lot of views of doing this ... industrial revenue tends to decline late in the cycle. They tend not to collect this heavily some other markets because the excesses are not as prevalent in the industrial market as so is the case in the communications market. And generally, because the inventories have not been so whacked out in other markets, they tend to come back reasonably nicely. So it would not surprise us to see, you know, after a very substantial, sort of, decline in the last quarter that by Q2 of this year those orders from the large industrial customers begin to replenish. At least that is the advice we are getting from our largest industrial customers.
TRISTAN GERA
Right. Thank you.
JAMES O. FISHBECK
Thank you Tristan. Next question is from [_____] with [Lemierre Securities]. Go ahead.
Unknown Speaker
Hi! One question. Regarding your foundry outsourcing strategy, do you see any chances of increasing your analog portion of the business to foundries?
JERALD G. FISHMAN
Not very much. There are some analog products that are built on foundries, but still the largest majority of our analog products are built on our own internally produced and homegrown processes. I mean, typically, analog products need very unique processes that are not very profitable for foundries to use, the volumes are not that large, and the proliferation is very high. So I think those are going to continue to be, you know, relatively proprietary internally homegrown processes for the lion's share of the analog business for quite a while.
Unknown Speaker
Okay. Thank you.
JAMES O. FISHBECK
Thank you. Our next question comes from [_____] with Kent Bridge Capital. Go ahead.
Unknown Speaker
Hi! Change of path. Can you comment on the company that you acquired back in 2000 the BC Technology in Belfast, Ireland and what your outlook is for the overall business in the technology?
JERALD G. FISHMAN
That is the company that we acquired sometime last year ... a lot of the substrate and the infrastructure capability to make optical memory products. The design work on that and the pre production work with many of our largest customers that we talk about, and some of them are still going extremely well. The memory products business as a whole is doing well for us right now. As we said, that is one of the more exciting turn around that we are seeing in Analog over the years. So I think memory technology is very relevant technology ... when we combine that with our analog and DSP stuff, we got some real great products coming out. A lot of that of course, will be determined by how fast the optical infrastructure business recovers, but on the other hand, it is very, very competitive technology and we have some very good stuff there that we are optimistic about in the future. Exactly when that can start at high revenue level, your guess is good as mine.
Unknown Speaker
Thank you.
JAMES O. FISHBECK
Our next question is from Tony Scott with [_____]. Go ahead Tony.
TONY SCOTT
Can you hear me?
JERALD G. FISHMAN
We got you.
TONY SCOTT
Okay. Can you just go into the inventory thing a little bit more in terms of what you have in [_____] versus you know, vox components?
JERALD G. FISHMAN
We are not going to go into that level of detail. First of all, we do not have it. We do not think it is hell of information ...a lot of information. Certainly a large part of our inventory is in buy-back. In the semiconductor business, you know, that is low inventory point. You always have to balance that we want to be very close with being able to say yes to everybody who calls up right now given our [_____] so much turns business. But, I mean, nothing much has changed on that.
TONY SCOTT
Okay. Thanks very much.
JAMES O. FISHBECK
Thanks [Tony]. We have just one name allowed for our first round. So therefore beginning now, any of our dial-in participants can press *1 on their phone if they would like to queue up for a second round questions. We are waiting for a few seconds if we have any second round questions. I would like to mention that our first quarter earnings release is scheduled for just after market close on Tuesday, February 14. The conference call will begin at 4:30 ET that same day. You may wish to note that date and time on your calendar now. And now for the last question of the first round comes to us from Seth Dickson with Lehman Brothers. Go ahead, Seth.
SETH DICKSON
Thank you very much. I am wondering ... I apologize if I missed this, but what was the PC end market down sequentially in the fourth quarter, and then, I amd wondering if you could characterize how order rates have been ... I know it is very early in the quarter, but so far this quarter and has there been any material change following sort of, the last month and the prior quarter? Thanks.
JERALD G. FISHMAN
The PC market, for us, was one of the few market segments that was actually up in the fourth quarter. So that is one of the positive features there. You know, is your question about have we seen anything in the last couple of weeks, I do not think very much. As I said earlier the first couple of weeks was pretty much right on the plan that we have, and I do not think it is anything new ... it will move one way or the other.
SETH DICKSON
Okay. Are you expecting the PC in that particular market to decline Q1 versus Q4?
JERALD G. FISHMAN
No.
SETH DICKSON
Okay. Thank you.
JAMES O. FISHBECK
Okay. Thank you Seth. We are not showing any questions here for the second round. So apparently we have answered all your questions for today and I guess that would then complete our call. We thank you very much for joining us. On behalf of Jerry Fishman, Joe McDonough, Brian MacAloon and Vincent Roche, thanks again to all of you for your interest in Analog and taking your time to be with us and we do look forward to talking with all of you again during our first quarter conference call which once again, will be Tuesday, February 14, beginning at 4:30 and again everyone who is on our analyst list will receive an invitation by e-mail. Thanks again and good bye for now.