亞德諾半導體 (ADI) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Denise and I will be your conference facilitator.

At this time I would like to welcome everyone to the Analog Devices second quarter fiscal 2003 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the opening remark there will be a question and answer period with our analyst participants.

If you would like to ask a question at that time, simply press star then the number one on your telephone key pad.

If you would like to withdraw your question, press star then the number 2 on your telephone key pad.

Thank you.

Ms. Tagliaferro, you may begin your conference.

Hello, this is Maria Tagliaferro, Director of Corporate Communications for Analog Devices.

If you don't yet have our second quarter release, you can access it from the home page from www analog.com.

This conference call is being broadcast live on the internet at the web cast.

If you prefer to tune into that web cast you can do so by clicking on the industrial relations page of the site.

This call is being recorded.

The recording will be available within two hours of the conference calls completion and will remain available for about a week.

The recorded call will be available by telephone and via the internet and you can get instructions on that from the earnings release.

Participating in today's call are Jerry Fishman, President and CEO, Joe McDonough, Vice President for Finance and also Mr. Brian McAloon, Vice President for our DSPS Systems Products Division.

We've scheduled this call for 60 minutes and we'll begin in a moment with Mr. Fishman's opening remarks.

The remainder of our time will be devoted to answering questions from our analyst participants.

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 are not guarantees of future performance and involves certain risks, uncertainties and assumptions that are difficult to predict.

Risk factors which may affect our future operating results are described in the companies most recently quarterly report, excuse me, on form 10-Q which is filed with the SEC.

Also, this conference call will include some time sensitive information that may only be accurate as of today of this live broadcast May 14th, 2003.

With that let's begin with opening remarks

Good afternoon.

Our revenues for Q2 totalled $502 million.

Up 21% from the same period last year.

And up just over 7% sequentially from Q1.

Diluted earnings per share under generally accepted accounting principals were 19 cents per share.

Up from four cents last year and from 16 cents last quarter.

Both our revenues and our earnings were ahead of the top of the range of estimates that we communicated during last quarter's conference call.

Both OEM and distribution revenues increased at approximately the same rate as during Q2.

The analog product revenues increased 7% sequentially while DSP revenues increased 8% sequentially.

These strong results in both analog and DSP products indicate that we continue to gain market share in the product categories relative to our competition.

Operating profits grew by 20% sequentially.

Nearly three times in the sequential growth rate of our revenues in Q2.

That expanded operating margins by 180 basis points to 17.6% of revenues up from 15.8% last quarter.

Obviously we are continuing to get high operating leverage on increasing revenues.

Gross margins increased year over year and also sequentially.

For the quarter gross margins increased to 54 1/2% up from 54.2% last quarter.

Average selling prices for both our analog and DSP products remains stable during the quarter reflecting the very high proprietary content of our product mix.

Operating expenses grew only 3% from Q1.

Which is a rate that is less tan half of growth rate of our sales.

Our balance sheet continued to strengthen in Q2.

Inventory declined again in dollars, resulting in day's cost of sales dropping to 117 days from 125 days last quarter.

Accounts receivable declined to a record 44 days.

And our cash balance increased by $102 million to now over $3.1 billion.

Capital expenditures were constrained to $14 million.

Order rates continue to strengthen during our second quarter and grew in all regions of the world.

Orders for shipment in the next 13 weeks grew by 16% sequentially from Q1.

Orders grew from OEM and distribution customers.

A book-to-bill ratio was well below one for the quarter.

Order rates were strong each month of Q2.

While Q2 is typically a seasonally stronger period for ADI.

Order rates exceeded normal seasonal patterns this year.

We continue to receive a significant percentage of our orders for shipment in the same period indicating the customers still believe that lead times are short.

Interestingly, for the very first time in many quarters, lean times for advance products that we access actually began to stretch out.

Lead times for internally manufactured products remain extremely short.

In our second quarter, we experienced sequential revenue growth in every market segment.

Sales to communication remain robust with particular strength in wireless handsets and base stations [INAUDIBLE] products and many other segments of the communications market.

We also experiences good sequential revenue growth in the computer market and both integrated audio applications and also paramanagement products.

Our consumer products grew sequentially with particular strength in digital cameras and other digital entertainment products in Japan.

And we also enjoy good sequential growth from industrial customers in line with stronger distribution sales and the early stages of improvements in industrial capital spending in the United States and also in Europe.

In aggregate, our market mix remains quite similar to last quarter with industrial customers representing 35 to 40% of total revenues, communications representing 35 to 40%.

Computer representing 15% and consumer representing approximately 10% of revenues.

Revenues also grew in every region of the world with the strongest revenue growth in southeast Asia and in Japan.

These patterns are in line with strength in wireless communications, consumer products and personal computers all area where ADI has great product strength and is gaining great market share and our customers are heavily concentrated in southeast Asia and Japan.

The U.S. communications market remains weak and the industrial markets are slowly recovering in United States and in Europe.

In aggregate, our geographic mix also remains similar to last quarter with the Americas representing approximately 26%, Europe 20%, Japan 18%, and Southeast Asia 36% of our total revenues.

But it's also important to remember that a portion of our Asian revenues are products that are sourced in Asia but are designed in the United States and in Europe.

Analog revenues grew by approximately 7% sequentially in Q2.

Our stronger sequential revenue growth was in converter products where today we continue to offer the highest performance converters to a very broad base of customers.

For every resolution from 12 bits all the way through 18 bits, ADI provides the highest performance converters on the market.

As we continue to pioneer break through converter architectures, we believe we can continue to build share in what is today the single most important product category in the end tire analog world.

High performance amplifiers also grew strongly sequentially as well.

Together, amplifiers and converters totalled approximately 55% of our Q2 sales and we continue to enjoy over 40% market share in both product categories.

We are also pleased to see a broad increase in analog product orders across many different market segments and [INAUDIBLE] geography and also in distribution.

Also importantly, customer orders strengthened considerably during the quarter.

During our second quarter we introduced many new break through analog products, including the one GHz DDS stack, a 14 bit mega sample per second ADD converter.

New 12 bit ADD converters that operate at voltages as low as 1.8 volts and seven new digital camera analog front ends.

In addition we introduced a new unique one bit digital amplifier which represents really the new frontier of high performance audio and also new notebook power management chips with the performance necessary for today's modern notebook computers.

These proprietary products should continue to solidify our market position as the high performance analog company to go to for the most demanding analog applications.

Our analog strategy remains unchange.

We develop break through core technology for our very broad base of over 50,000 analog customers around the world in every segment and in every geography.

As a result of our best in breed reputation with our analog customers, we often get a early window to emerging applications and higher volume vertical markets where our technology gives our customers an advantage with their customers.

We can rapidly wrap our products to these applications with lower costs and lower risk than if we developed these new architectures directly for vertical customers without a solid base of core technology.

This allows us to benefits the high growth, high gross margins and provides good R&D leverage as we advertise core technology investments that we made for the 50,000 customers over much higher volume vertical customers.

The return on investment in the analog business remains extraordinary.

We are also poised to continue to increase our margins in the analog business as volumes grow and we begin to ramp our internal fabs and enjoy the benefits of the significant cost reductions throughout our manufacturing process that we made.

DSP product sales continue to grow in Q2 and up 8% sequentially.

Our DSP sales are running 45% higher tan the same period last year which is well ahead of market growth rates during the past 12 months.

But the big news in DSP in our second quarter was the market launch of our 600 MHz extremely low power -- and also continuing progress on our high performance TigerSHARC family.

Black FPB's speed alone makes it the highest performance DSP in its class by every independent analysis.

But the additional capabilities of Black FPB includes media processing and micro controller functionality that up until today has required additional chips to implement.

Not only does Black FIN's functionality reduce system side and cost significantly, but perhaps even more importantly eliminates the need for complex operating systems that are required today to stitch all these chips together into an integrated system solution.

Black FIN was designed from the ground up with demanding multi-media applications in mind.

As compared to competitive DSPs which were designed many years ago for voice processing primarily in handsets.

The power of Black FIN is demonstrated by the recent announcement of our [INAUDIBLE] with Microsoft to standardize black fin and fuel the move to programmable DSPs broad range of audio individuals products.

Black FIN doubles with windows will enable a new series of next generation audio/video entertainment products, including smart displays, and digital media devices for the home.

We would anticipate many customer announcement on Black FIN in the coming quarters.

At the high end of the market, continue expansion of our TigarSHARC family has confirmed our technology leadership in 32 bit DSPs.

Our floating point processing speed our IO performance and on chip memory band width create the architecture that's useful for multi-channel applications such as bay stations where we won many new designs as well as other other applications in many market segments.

But I think even more importantly, beyond the very high growth vertical applications for Black FIN and TigarSHARC, these new architectures significantly expand the addressable market for programmable DSPS, beyond the traditional audio and motive space into a wide range of applications and virtually every market segment which resembled the diverse markets that exist today for high end micro controllers.

As new users who have never used DSPS [INAUDIBLE] of their hardware and software complexity and relatively limited performance, begin to substitute programmable DSPs for imbedded processor, we have the opportunity to not only grow rapidly but more importantly develop a franchise of tens of thousands of customers using ADI's DSPs.

This should provide a solid base of diverse customers that begin to resemble our high gross analog business.

Unlike many competitive DSP products that are at the end of their architectural road makes, Black FIN and TigarSHARC platforms are early products in a long road map of co-competable DSP processor that are much more than classical DSPs.

We believe we are at the early stages of what looks to be a very significant ref contribution that we are anticipating from the two new DSP product families over the next few years and that should favorably impact both our top line growth and our margins.

We were currently planning for our third quarter to continue the recovery that began five quarters ago for ADI.

As a result of stronger orders in Q2, we are currently planning for revenues to grow by approximately 3 to 5% sequentially in Q3.

We would expect gross margins to continue to increase slightly and we were planning for operating expenses to grow by only a few percent to accommodate salary increases that we have reinstituted for a portion of our population.

That would produce earnings in the range of 20 to 21 cents for the quarter.

Further, we anticipate day's inventory to continue to decline.

Capital spending to remain modest, and cash flow to again be very strong.

In the longer term, we remain very enthusiastic about what we believe we can achieve.

Based on our leading technology and market position in both high performed analog and DSP, we believe we can out grow the semi-conductor market by a wide margin as we have been doing for sometime.

We have significant gross margin leverage as analog sales grow and we realize the cost benefits that we worked to achieve in our analog business.

Longer term, we expect improvements in DSP gross margins as a result of the significant expansion in the breadth of our DSP customer base.

The foundations for gross margin improvement are already today in place.

The pace of improvement will be mostly determined by the rate of revenue increases from our industrial customers and our analog business and the relative mix of analog and DSP sales going forward.

In addition, we are planning to keep our expense growth well below our revenue growth until we reach what model operating ratios of approximately 25% of sales for operating expenses.

Expense leverage will continue to be very important ingredient and continue with improvements in operating margins going forward.

In aggregate is a rough rule of thumb.

Our goal is to grow our earnings at approximately twice the growth rate of our sales until we reach model margins for the company.

So that's all the formal remarks I like to make.

I will turn it back to Maria.

During the Q-and-A period, limit yourself to one primary question.

We will give you another opportunity to ask additional questions in we have time remaining.

Operator, we are now ready for questions from our analyst participants.

Any of the analyst parting by telephone dial in if you have a question please press star and the number one on your telephone key pad.

If your question has been answered and you wish to be removed from the queue, press star and the number two.

If you are listening on a speaker phone, please pick up the hand set when asking your question.

We will pause for just a moment to compile the Q-and-A roster.

We will take our first question from Clark Westmont of Salomon Smith Barney.

Please go ahead.

Nice job.

Couple of questions.

One and a follow-up.

On a lead time side, is that -- did that -- with the stretch out in some the advance logic processes, did that cause delinquencies?

And when do you expect that to be cleaned up

What happened, on the very advanced stuff,, they began stretch lead times up just a little bit.

That impacted our revenues a little bit.

Our sense is that that's going to -- they will catch up over the next quarter or so and that will not be an issue but it impacted our revenues a little bit this quarter

And the follow-up would be, it's a great quarter and nice outlook, but orders up 18%.

I don't want to be greedy but is 3 to 5%, is that just for seasonal reasons?

Way and see if you can do better than that or test the rational?

I think there are a couple of things, Clark.

The first thing is we are operating with very high ratio.

We will operate with more backlog.

An important part of improving our margins in the company is having more predictability and what we're going to actually ship when we say we're going to ship it.

Part of that is that.

The other part is with all the remaining uncertainties out there which there are many and everybody is focused on, I think we should be cautious going forward and we were intending to do that in both the way we manage the company and also the way we communicate to investors about that.

There is also the great [INAUDIBLE] to try to get ahead of the wave on this thing but we don't think there is any odds of that.

That represents the best guess with all things considered with all of the things going on in the world but we're going to achieve.

Thanks

Next question comes from Ross Seymore, Deutsche Banc

Congratulations on a strong quarter.

Just wondered in the segment breakdown, Jerry you talk about communications building 35 to 40%.

I wonder looking more glandularly if handsets or any other sub segments became a bigger part of that 35-40%?

I think over the last couple of quarters it's [INAUDIBLE] a little bit but not a lot.

If you look at the wireless part of the communication sector which includes hand sets and PDAs and base stations, and the like, that's somewhat over 50% of the communications sales.

But that's not a huge change from what's really gone on over the past couple of quarters.

And then just a follow-up and a bit of a different topic.

You have done incredibly well on the data converter side, very consistently.

Last week a number of us were down at competitor down in Texas and listened to their efforts there.

Doesn't sound like there is much traction being gained.

Are you seeing evidence of increased competition in that market?

We always respect our competitors and think if they devote enough time and money to get something, our goal is to do whatever they do to stay ahead of them.

We have a very very strong team of converter engineers that hundreds and hundreds of engineers that are the most experienced in the converter engineers in the world.

Our customers come to us for that technology.

So our goal is to maintain or even improve our position going forward.

Based on the strength of our brand and the strength of our people.

It's a franchise that's taken us 30 years to build. 50,000 customers and our analog business probably 30,000 customers by our converter products, and we probably have 2,000 from different converter products with ten different grades on each of them and the grade higher than our manufacturing group.

But that's all part of the franchise.

There is not one product or one customer.

We don't have any one customer that has more than 1 to 2% of the sales or product that's one or two person of the sales.

It's a very difficult thing for competitors to attack broadly it takes too many products and too many customers and too much time.

It's a very, very complex franchise to attack.

But we always remain cautious about that.

We keep a very close eye on what everybody is doing.

But I think your conclusions about traction are probably correct.

And one quick last follow-up.

You mentioned a couple of new products in the notebook power management side.

Can you break out of that 15% of computing approximately what are notebooks now and what you target going forward?

I don't have that.

Audio is an important product line for us.

As we said, we probably have 60% or so of audio switch that goes into every PC.

So I don't have a great break out of the audio business.

Great.

Thank you.

Next question is from Tore Svanberg at Piper Jaffray

Good afternoon.

First of all could you give me the business for the quarter and how much you expect for the next quarter?

Joe?

The turns business this quarter was a little bit over 50%.

And what we are trying to do next quarter is to get that down a bit.

Or at least we are expecting it won't continue at the rate it's been running.

We could be surprised.

We were surprised a little bit this quarter that the incremental revenue we got this quarter did come from turns business.

We exceeded the guidance by a couple of percentage point of growth

In general, the customers are still ordering very short lead time because they view that there is plenty of capacity and responsive companies to respond.

I expect turns will continue to be a very large part of our business for quite awhile.

That capacity starts to get eaten up and customer believe they have to order along the lead time

And how much of your production was outsourced this quarter and maybe you can give us an indication how that has trend in the last 12 months

The external business has been -- I don't have the exact number handy, but something in the 35 to 40% range, somewhere in the 40% range is on the external side.

That's been going up and down with the mix of business.

This quarter we saw more analog growth.

Last quarter we saw more DSP growth.

So our expectation is that as we move forward, Jerry mentioned the industrial business is showing signs of life.

And we expect that to continue.

We manufacture moat of that in the internal fabs, obviously variable cost on that is low when we do it internally and so we expect a mix to shift probably a bit more back toward the internal as the economy improves

One final question.

If you look at linearity, it looks like the orders improved quite nicely.

What if we look at the distribution channels specifically.

Distribution orders, it was interesting quarter.

The both the distribution revenue and OEM revenue grew at the same pace.

But the distributor saw a book to bill ratio on them well above 1.0 and they turned around and put that on us as ordered and that's the broadest base of customers.

And so we are seeing some good demand pickup in that distribution channel.

We look very closely at not so much the orders or distributors place on us which are interesting, but we look more closely at the orders that customers are placing on our distributors as much more of an indication of true demand and the orders that our distributors place on us have more to do with inventory level.

I think what Joe is saying is we saw a good increase in the orders that are distributors customers praised on them for the quarter which I think is the most reliable indication of in demand.

Very well.

Good quarter

Next question comes from Paul Lemming at the Columbia Management.

Hi.

I was wondering if you could go through the broadly defined end markets, communications computer, industrial automotive and rank order really where you're seeing the most strength to the least strength in terms of revenue growth quarter on quarter?

I would say to a first approximation, we saw approximately the same revenue growth across many of those product areas.

One or two percent change of differences between those and not be very relevant that one of the things we were happy about this quarter is in previous quarters you see one up and one down and this market's going up, this market's going down.

We saw sequential increases in orders and revenues and virtually every market segment.

And the only real exception to that is that at the end of the quarter we saw a slight fall off in our automotive business which is not surprising given what's going on with car inventories.

That's a small part of our business.

With the exception of that, we saw a good strength in each of those market segments throughout the quarter.

And in fact could just kind of the same cut from a geographic standpoint?

Well, I would say that as I indicated earlier, the most significant strength was in Southeast Asia and Japan.

But we did see order increases and revenue increases in every region of the world.

Given the products that are selling now and PCs and communications and still the industrial market lagging in those markets a little bit, that's not a surprising mix of our business.

As Joe said, over the next couple of quarters if the current trends continue, we probably see a larger contribution in the U.S. and Europe as the industrial markets continue to get a little better.

Okay.

Thanks, very much.

Next call we will take it from David Wu at Wedbush Morgan.

Okay.

Booking quarter.

I had a couple of clarification and one question.

Jerry, you mentioned earlier that I didn't quite get.

The story about some shortages or [INAUDIBLE] The process into one -- Q2 it will be cleared up if Q3?

What I said in the second quarter, for some the very advantaged technology, particularly the very final [INAUDIBLE] the foundaries got behind because they got a bunch of orders.

You saw that when you saw when you listened to TSFCs results which was posted a few weeks ago.

That resulted in few shortages, that resulted in lead time extending a little bit and we think that will be under control quickly

The other thing I was trying to understand was with the mix -- come back from the industrial base both America and Europe, why won't the gross margin be stronger in Q3 than what you are currently guiding?

I kind of remember that those gross margins probably are the richest in the company.

Joe?

It could be.

It's a little hard to be sure exactly what this mix is going to look like.

We did have this quarter a million increase in depreciation as you saw.

That's related to just a production capacity that we brought on stream in our eight inch fab in Ireland as a result of the program that we had under way to convert out of the four inch fabs to the six and eight inch fabs and we have more to go next quarter and that will be over as we move forward from there we will start to see the depreciation decline and certainly decline as a percentage of sales if the revenues keep growing as a decent pace.

There is a good deal of leverage in the gross margin coming forward.

Having a hard time in this environment as Jerry said, you can look at the order pattern and the order rate of growth and conclude that we are off to a roar.

But on the other hand, you can read the papers and say, who knows?

We are trying to put something realistic for realistic expectation

The other part as we said before, the real gross margin business and we really start ramping those fast and in these kind of increases, we really aren't doing that much yet.

You will see the leverage come out as the new fabs in eight inch conversions that we have done will start to ramp which I think we'll see as the analog revenues keep increasing.

Thank you.

The next call we are taking is from Adam Parker from Sanford Bernstein

I have a follow-up on that.

I noticed you did 59% incremental margins in the quarter or dropped through in the quarter and you referenced one million increase in depreciation, Joe.

You are indicating in the horizontal markets would have been higher gross margin parts.

Was there some pricing pressure at all that you are seeing?

Is there some other reason the incremental markets are lowers that you have low utilization?

I am trying just to sort of figure out why that incremental margins wouldn't have been more in the 70 range.

The utilization hasn't changed too much.

We start out the quarter and said that production plan is based on the guidance that we gave at the beginning of the quarter and we have decent amount of inventory that we are on the program and working down the days and did a good job on that and getting it down from what is a high of 135 and we are down to 117.

We got a lot going on here that we are doing in terms of managing the business.

And it's all sort of going in the right direction.

It's on plan.

And we think moving in the right direction.

The most important point -- we really haven't begun to ramp our analog fabs much yet.

And as the revenues keep coming in and if that business keeps growing as we hope it will, as we begin to ramp the fabs, where we get the real gross margin leverage in the analog business

[INAUDIBLE] I believe you have one four inch line basically closed.

When will you no longer be running four inch stuff at all or when will we see the ramp up on these new lines?

We are -- just to clarify a point here.

We are not bringing up new fabs.

We have got six inch line in three locations.

An eight inch line in Ireland.

We are ramping the eight inch fab in Ireland as part of this program.

And we were transferring production out of the existing four inch fabs on the same site into the six and eight.

That program is nearing completion and over the next quarter or so we will be out of the four inch line there sort of taking over to make sure we are getting everything right.

We not building any further die stocks but they are continuing to take over a bit.

We are in the program of realizing the kinds of benefits that we expected.

We need to be able to ramp them.

Right now we were running them more or less at the same running rates.

One to two quarters more your saying?

That's about right

I think the other thing to remember on this stuff is that we are growing the earnings at a multiple of our revenue growth rates.

So there is nothing wrong with the leverage we are getting.

The sale grew 7% and the profits grew 20 and that's not something we were embarrassed about either

Certainly not.

I thought I would say that.

Preaching to the converter

Next question, SG Cowen, Jack Romaine.

Thank you.

Could you talk about the gross margin trends within the individual business segments?

You did see more of a shift toward DSp.

Does your DSP gross margins improve during the quarter?

Or was this all improvement from the analog side?

We don't have all of the specifics of that nor do we generally talk specifically about the gross margins in any particular product area.

I would say that it's reasonable to say that we are doing well on both fronts and that is about all we will say about that.

And not get into the details of what the exact gross margins are in any particular product

And then just as a follow-up on the four inch fab question from before, when you completely exit those facilities, there will be fixed cost savings?

Absolutely.

And the magnitude you talked about in the past is about 60 million

And that's the plan and we realize some of them as we go along here.

And could you give us any idea on what's left of the 60 million to recognize per quarter?

Or is that an annual figure?

That was an annual figure and I don't have the details of it.

We don't get into it in that level.

I keep going back to the real important thing there is that still a fair amount of leverage out there in the analog business when we start ramping these fabs up.

Just on the depreciation line alone, as Joe was saying, as you go through the math and say the depreciation will stay flat or perhaps start moving down a bit as the older assets get retired, just on that line alone there is a fair amount of leverage in addition to the other things that we have done about moving our stuff offshore and doing the testing offshore and getting rid of some of the fixed costs associated with the fabs that you pointed out.

There is a fair amount left here that we got.

Okay, thank you.

Next question comes from Alan Buchon at CIBC World Market.

Hi, good afternoon.

Have you seen any indications that perhaps any component inventory building in either the wireless channel or possibly for Broadband?

And then I have a quick follow-up.

Let me take each of them individually.

The Broadband area is one of those area if we had more wavers would have shift more.

There seems to be more out there than excess inventory on the Broadband products that are access products that we have within doing.

In the handset area, we haven't seen evidence of any inventory building over there.

On the other hand, we read the news like you do and it's scary over there with what's going on in China and with the consumers over there.

We are looking hard at that all the time to make sure we don't get surprised by that.

I would say that with the guidance that we have given, the 3 to 5%, we were being cautious over what's going to happen over there because we don't know.

The best we can say is we read the same newspapers that you do and that's the only thing that we have to go by because we haven't seen any specific evidence with our customers but would surprise us if we didn't see some.

We will be cautious about that for the next quarter or so.

Do you give the break down between analog and DSP and wouldn't DSP -- just give us a rough break down of what end markets your DSP is selling to?

On the DSP analog break down it's about 78/22, approximately 78/22.

We don't provide any market break down on our DSP business.

Thank you.

The next question is from Bill Conroy at --

I may have missed this one.

What was the utilization in your fabs for the quarter?

The utilization is different in each of the fabs, but somewhere in the 50, 60% type numbers.

Within the DSP, the Black FIN and TigarSHARC, the bad way to state it is that they gain share within your mix with DSPs, can you say that?

If you look at the designing base, almost all new designing on our DSPs will be on our new architectures.

As far as the percentage of our revenues both Black FIN and TigarSHARC is a diminutive portion of our revenues.

Customers are just beginning now to sample and design in those products.

So again from the standpoint of share of new designs is high from the current orders and new sales is very low.

Next question comes from Bruce Howard at Tri Market.

Yes.

Thanks for taking my question.

Just a question regarding the cash balance and your plans for that and just generating 100 million a quarter here in the trough and just seems like it might be inappropriate time to start paying a modest dividend like some of your peers in this group.

Like I said before, we review that with our directors and that's one option we have looked at.

We tend to further your point not to be a highly [INAUDIBLE] company.

We aren't sort of saving it for the big bowl acquisition they are hard to do and often fail.

That is something that of course over time we will consider.

But we haven't decided yet or else we would have announced it.

I certainly understand your point

It's really 100% of your share holders equity right now.

It's going to be a drag of your return on that over time.

We under stand that, we are still getting used to the fact in our confidence of our cash generation capabilities.

As I said, we spend more time thinking about how to build it than do it.

Nice job.

But now that we are building it we're thinking of what to do with it too.

Okay, nice quarter.

Next question comes from Patrick [INAUDIBLE]

Thanks a lot.

Congratulations.

I guess at a high level, can you discuss the attachable rate for your DSP products that you are getting from your analog business.

I think you mentioned it before.

I don't think we mentioned the rate.

Just the general -- We think that statistic is not one that you can track reliably.

We don't pay much attention to it.

There is no doubt that a lot of our customers are using both analog functionality and digital signal processing in what we call the signal chain in the same application.

We have a lot of customers that by virtue of using our analog products that will rapidly be using our DSP products.

One good example of an end market on that might be the digital camera market.

We had a very significant position in the analog portion of that and increasingly now we think we will have a strong position that and increasingly now we think we'll have [INAUDIBLE] our DSPs [INAUDIBLE].

Just a host of other applications that began really by using our DSPs, and now as a result of the position we established with our DSPs , are going to use our analog products.

Probably best example of that is probably handsets where we started out by just supplying the digital base band and now we are supplying the analog base band, paramanagement, the radios, such that the analog portion of the materials is larger than the DSP portion of the bullet materials.

I think it does swing both ways and not surprising because many of our customers use both functions in their products.

Thank you, very much.

The next question we have comes from Nimal Vallipuram from DKW.

Yes, this is Nimal Vallipuram.

Just two questions.

The first, just in your opening comments you said that some of your sales growth might be coming from market share gains.

Last week we were at [INAUDIBLE]meeting and I think [INAUDIBLE] Was market share gain in almost every end market and every product category maybe in converters and so on.

I guess my questions is that, when two of the largest DSP and mix signal company are claiming the sales from market share gain, can you give us an idea what do you think is going on in the market?

Are there any other companies -- I don't want you to define by names, but at least if there are smaller companies or Japanese companies are they losing market share to ADI?

The only reliable way you can look at market share is sales.

Market share is something that people say I'm gaining and I'm gaining.

Everyone is gaining.

Somebody must not be gaining.

We have looked hard at our sales when the cycle started, which was early 1999.

And we looked at the upcycle and the down cycle and we looked at where ADI's revenues are today versus our three closest competitors, one of which you mentioned.

And I would say if you look at where our sales are versus any of those competitors, today versus when the cycle started, we were significantly higher.

In many cases and most cases by a factor of two.

So you could always define a market to be gaining market share, but the real question is what's happening with your sales.

I would say when you look at ADI's revenues versus our closest competitors over the last four year period, our revenues today is significantly higher than that and higher than any of our competitors that we compete with any of those product segments.

So again, that's really the only way I could really describe what we think about market share.

So market share isn't any product category go up and down quarter to quarter.

The DSP business, which is what I think you are referring to.

TI has made claims that they gained market share over the last year and taken it from everybody including us.

And I would say that if you look at the a size of our DSP business relative to three or four years ago and the other business, it's hard to make that claim that TI makes.

The other part is that a large part of DSP market share today is influenced by what goes on in the cell phone business.

About 2/3 of all DSPs today are going into the cell phone business.

A large part of what happens with recorded market shares in DSP is influenced not so much by what's going on in the end markets, but by what's going on in inventory in sell phone manufacturers.

When the inventories get too high, they stop ordering.

When they get back, they start ordering p.

So all of that has a lot of impact on what anyone reports as DSP sales.

A large part of ADI's business goes into -- I would be cautious about those kind of claims.

I would say if I were you, I would go back to what were the revenues and what are the revenues and see who is larger than they were when the whole cycle started.

If you did that, you would come out with a conclusion that ADI is gaining market share on everybody.

Thanks, a lot.

We have a few people still in line to ask questions and we were coming up on about ten minutes left in the call.

We may run a little long.

We will try to take all these.

The next question is from Michael Masdea at Credit Suisse First Boston.

Thanks and congratulations of the quarter.

One piece I'm struggling with and that's the profitability side.

You talked last quarter about doing 50% incremental operating margins and you came in at 42.

If you look back over the five quarters that's when you hit bottom and started recovering and we have seen only one quarter on the incremental operating side [INAUDIBLE].

You just help us understand why that is?

What we are missing.

A tougher environment right now or what is that?

Well, I think we grew the sales by 7%.

We grew the net income by 18%.

We look at that and that looks pretty good.

We came in above where we thought we would do on the sales.

We certainly have had in the past couple of quarters some stronger DSP-type of growth that has been in there.

We certainly have had in our expenses, for instance this quarter we had product introduction on the engineering side that go along with the new product costs.

We had some marketing for the Black FIN which is really a dynamite product which Jerry talked about.

We had in last quarter the effective of the holiday season which is fewer working days and lower spending associated with that.

We are trying to balance the whole thing and put together a financial result that is really quite acceptable from our standpoint that's with a we think we have achieved.

And I have to go back to the fact that if you can grow your profits two or three extra to your sales, that's something that we are proud of.

Thanks.

Our next question comes from Brian Wu at Bear Stearns

Question regarding the guidance and your take on end markets.

Looks like your guidance is probably slightly more conservative than your order book would lead you to believe.

Just wondering outside of Broadband access and the comment earlier that you are hoping for industrial pickup, what end markets are you more excited about?

As we progress through the year here.

I think the communications market.

We believe that still has a lot of growth ahead.

The world wants to be wireless.

We have a lot of propelling technology that goes well beyond handsets that would help the world become wireless.

I would say if anything we are more optimistic about the consumer business than we ever been.

We have compelling technology and great customers and we have been doing extremely well in the consumer business.

And the consumer to everyone's great surprise has been holding up pretty well.

The PC business is good for us.

We picked our places where we think we can add value and get paid for it and we are doing that so we are able to grow at rates that are above the unit growth rate of PCs we think that's important.

I think it's really across the board.

As Joe was saying earlier, the industrial market, there are signs it's getting better.

There is not one area where we are saying will lead us out of where the world has been.

It's the great diversity that we have in all of these end markets that is all sort of beginning or seems to be moving in the right direction.

I think that's what we believe than any one particular end market

If I could, a question for Joe on gross margin.

What is the potential for gross margin expansion in the currently sourced revenues.

Which revenues?

The sources -- the revenues coming out of foundery.

Will that be relatively stable?

I think the foundery gross margin realistic expectation will remain stable.

That's a great strength of our strategy is that we do outsource those products and we are able to respond to the market demand pretty rapid.

And that's over the past year have been pretty good portion of our business has been some of those products that are produced in the foundaries.

As Jerry said, when we looked at where is the gross margin leverage, it's roding the internal factories has the highest leverage.

The external business has very good drop through down to the bottom since the operating costs are all covered and just whatever the margin is drops through.

The highest variable margin is in the internal stuff and that's this primarily this industrial product base.

When we talk about industrial, we are talking about everything that's not communications, computer or consumer.

That included medical instrumentation.

It includes security defense.

Factory automation [INAUDIBLE].

It's a broad collection of everything that needs signal processing and almost everything.

That's the part that we are starting to see some evidence of some pick up.

But yet we haven't started to really load up the utilization rate of those factories

The best answer may be to clarify that is that the pace as I said in the opening comments, the pace of improvement of our gross margins will be mostly determined by the revenue we create we get from our industrial customers which are the customers that heavily load our internal fabs.

And also the relative mix of the analog and DSP business because the analog business runs higher gross margins.

The other section of those two things will really determine how fast the gross margin expand from the foundations that were put in to expand it.

And I guess a follow-up, if right now you are using about 40% externally resource and DSP is 23%, would that 18% difference a candidate of being rapidly moved in-house and if not, why not?

What products are we talking about here?

The other part of that is the part of our analog business that the products that we build on foundery CMOS.

The depending on the topography that we operate at, we can put that inside and a lot of them will stay outside because we are not going to be following the digital curve to our destruction in terms of trying to stay current at digital topography levels it costs two to three billion dollars to put up a new fab to do that.

There are a portion of that that we can do ourselves and that we vary between the foundaries and ourselves.

There is another significant part is that [INAUDIBLE] that we will invest into the future

Thanks, a lot.

The next question comes from Joe Osha of Merrill Lynch.

This is Matt Chan for Joe Osha.

One question here.

Jerry, you mentioned earlier that you saw some increases in notebook power management revenues.

Could you provide us with details there in particular I wasn't aware that analog devices had the certification of platforms.

We do have certification for that.

And that is a portion of where we are seeing revenue increases.

So mostly for the CENTRINO then?

Mostly board class Intel's processors

Great.

Thanks.

Our next question comes from Louis Gerhardy from Morgan Stanley

Good afternoon, nice quarter.

Just a couple of quick ones.

On your orders it was for the next 13 weeks, I think you said it was up 16% sequentially.

Can you comment on what your total orders in fiscal Q2 versus fiscal Q1?

Didn't we say it was 26%?

I'm sorry, did you say 26?

Don't take that to the bank yet.

We didn't.

We took that out.

Joe will tell you.

It was up 19%.

The orders for 26 weeks.

Which we saw as a good sign that at least there are some customers that are beginning to place orders for a longer term delivery than tomorrow

Would that put your 13-week shippable backlog at 280 million?

Can you be precise?

It's a larger number than that.

The backlog was up 13% quarter to quarter.

And then just my last question, do you expect analog or DSP to grow faster than you are ready to break out your expectations for general purpose versus applications [INAUDIBLE].

I would be hard pressed to make a prediction on that.

It's a very complex thing that we don't have a lot of data on.

I would say that what's been going on over the last two or three quarters is our DSP business has come back faster than our analog business.

This quarter was the first time that both those business grew about the same.

Our hope is that the analog business and the DSP business grows at the same rates.

It's very hard to predict that any particular quarter depending on what orders, what customers do.

But long term, that's not a bad way to think about our business is that those businesses should grow at about the same rate, perhaps DSP business growth will drop faster.

I don't think there are any fundamental difference in those two businesses

Thank you, nice quarter.

We have a few people still waiting to ask questions.

But we will end the call right here and you can follow-up with us at 781-461-3282.

That concluded our call today and behalf of Jerry Fishman, Joe McDonough, Brian McAIoon and myself, I would like to thank you all for your interest and we look forward for you joining us on the third quarter conference call which is scheduled for Thursday August 14th beginning at 4:30pm Eastern time.

Good-bye.

This concluded the Analog Devices conference call.

You may now disconnect.