亞德諾半導體 (ADI) 2003 Q3 法說會逐字稿

Good afternoon, everyone. This is Maria Tagliaferro, Director of Corporate Communications for Analog Devices. If you don't have our third quarter release yet, you can access it by visiting our web site at www.analog.com and clicking on the headlines displayed on the homepage. This conference call is being broadcast live on the Internet as a webcast. If you prefer the webcast, click on the Investor Relations page on our website. This call is being recorded; the recording will be available today, within about two hours of the conference call's completion and will remain available for one week. The recorded call will be available by telephone and by the Internet. The earnings release contains replay instructions or you can visit the Investor Relations page for instructions on getting a replay.

Participating in today's call are Jerry Fishman, President and CEO; and Joe McDonough, our Chief Financial Officer and Vice President of Finance; Robert McAdam, our Vice President for the analog semiconductor components division; and Brian McAloon, Vice President for the digital systems processing products division. We've scheduled this call for 60 minutes. I will begin just in a moment with Mr. Fishman's opening remarks and the remainder of the time, we will devote to questions. Analysts participating via telephone can press star 1 on their telephone at any time, beginning now, to ask a question.

I'd 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 involve certain risks, uncertainties and assumptions, which are difficult to predict. 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 SEC. All references to the financial results discussed during today's conference call will be in GAAP. Also, this conference call will include some time sensitive information that may be accurate only as of the date of this live broadcast, which is August 14. Finally, the -- this call is the property of Analog Devices and any redistribution or rebroadcast of this call is expressly prohibited without our written consent. With that, we'll begin with Jerry's comments.

Good afternoon and thanks for joining us today to learn a little bit more about our results and our outlook for the future. Our revenues for Q3 totaled $520.4 million, which is up 17% from the same period last year and up 4% sequentially from Q2. Our diluted earnings per share under GAAP accounting principles were 21 cents, up from 8 cents last year and up from 19 cents last quarter. Both revenues and earnings were in line with the estimates that we communicated during last quarter's conference call. Both OEM and distribution customers -- or revenues from both OEM and distribution customers -- increased sequentially during Q3 with our broad range of distribution customers growing slightly faster than our OEM base. Approximately 50% of our revenues came through distribution, as it's been over the last couple of quarters. Analog and DSP product revenues both increased approximately 4% sequentially on a year-over-year basis in Q3, analog revenues were up 14% and DSP revenues were up 28%. These strong results in both analog and DSP indicate that we continue to gain market share in both product categories.

Our gross margins improved by 60 basis points sequentially to 55.1%. We continue to enjoy the pricing strength of our propriety products and we began to realize the benefits of manufacturing restructuring, which we undertook over the past year. Overall, factory utilization was approximately 50%, as we brought up our 8 inch wafer fab in Ireland and closed the 4 inch wafer fab in Santa Clara, California. Operating expenses grew 1% sequentially as we continue to control all spending throughout the company. Operating profits grew by 13% sequentially, expanding operating margins by 160 basis points to 19.2% of revenues and that's up from 17.6% last quarter. The drop-through of revenues to operating profit was approximately 60% in Q3 as we achieved very high operating leverage on increasing revenues.

As a result, our net income grew 11%, sequentially nearly three times the growth rate of our revenues in Q3. Total of net income for the quarter was $79 million or approximately 15.2% of revenues. Our balance sheet continued to strengthen in Q3. Our days cost of sales and inventory declined to 116 days, which is only slightly above our model of 110 days. Accounts receivable remain under good control at 45 days and our cash balance increased by $128 million to over $3.2 billion now. Capital expenditures were constrained to approximately $20 million.

The order rates for Q3 were approximately equal to our revenues, despite cutbacks from Asian customers in late May and June due to the SARS uncertainty. July orders were bounded significantly and this strong order momentum has now continued into the early parts of August. We continue to receive a significant percentage of our orders for shipment in the same period, indicating that customers are still operating with the expectation of very short lead times while they're suppliers. During Q3, we, again, received approximately 50% of our revenues from turns business. In Q3, we experienced sequential revenue growth in every end market. Our strongest revenue growth was from consumer customers as a result of our very competitive position. And many different digital entertainment products that continue to rely on ADI signal processing technology. In addition, our sales of advanced audio and power management products, to computer customers, remained strong.

We also enjoyed another quarter of sequential growth from our broad base of instrumentation, medical, defense, automotive, factory automation and other industrial customers. This suggests that we are, in fact, in the early stages of improvements in industrial capital spending worldwide. Sales to communications customers also grew sequentially with the strongest growth in our very broad base of horizontal communications customers. Wireless revenues were approximately flat sequentially. In aggregate, our market mix remains very similar to last quarter with communications representing 35 to 40%, computer customers representing slightly above 15%. Consumer customers slightly above 10%, and the broad base of industrial, automotive, defense, and instrumentation customers representing the remaining 35 to 40% of revenues.

During Q3, revenues grew in every region of the world, with the strongest quarter-to-quarter revenue growth in Japan, primarily as a result of very strong consumer revenues. In aggregate, our geographic mix also remained similar to last quarter with the Americas representing approximately 25%; Europe, 20%;, Japan, 19%; and Southeast Asia, approximately 36%. It is 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.

Our analog revenues grew approximately 4% sequentially in Q3 after growing 7% the prior quarter. Again, this quarter, converters remained very strong, in line with ADI's 40% share in this very important product category. Converters represent approximately 50% of our analog sales. We saw good growth in very -- in specialized analog front ends with digital still cameras, integrated audio equipment and DVD players, where ADI's converted technology enables the highest level of integration and performance. We've also won, recently, many new designs in digital TV applications, which is an exciting new growth market for ADI.

Our analog power management revenues also grew in Q3 as we continue to penetrate wireless handsets, laptops and desktop PCs. Analog's power management portfolio really has two key areas of focus. Thermal monitoring and power management. We're always held very high market share in thermal monitoring. Many of the highest performance laptops use our integrated temperature controllers to significantly save the battery life of their systems by reducing heat dissipation. This is also emerging now in desktop systems among customers designing quiet, energy-efficient PCs. With a goal of developing key customer relationships, and gaining a better understanding of their power needs, we exploited our excess low cost capacity to price aggressively and gain significant share in power management. Having achieved that goal, we're now moving towards more innovative products that provide key advantages to our customers and at the same time represent very good profits for ADI.

In addition with the importance of Intel compliance growing, as a new generation of CPUs comes to market, our position, due to our close relationship with Intel, is strengthening. In both laptop and desktop power management, we're now applying our analog design expertise to a new and more innovative product road map that leverages our relationship with Intel and many of the world-leading PC and motherboard manufacturers. During the third quarter, we introduced many new breakthrough analog products, including several new 18 and 16 ADB converters, offering accuracy in power levels, several high speed new amplifiers and a dozen new converter-based products for digital cameras, digital TVs and portable computers. These new proprietory products and many others that we introduced in Q3 should continue to solidify our market position as the high performance analog company to go to for the most demanding and broadest array of analog applications. Our analog strategy remains unchanged. We develop breakthrough, high-performance analog core technology for our broad base of over 50,000 analog customers in every electronic and equipment markets and in every geographic region.

As a result of our best in breed reputation with our analog customers, we often get an early window into emerging applications and higher volume vertical markets, where our technology gives our customers an advantage with their customers. We can rapidly adapt our standard analog products to these applications with much lower costs and much lower risks than if we developed new architectures directly for vertical customers without a solid base of core analog technology. This allows us the benefits of high growth, high gross margins, and provides good R&D leverage as we spread core technology development costs over much higher volumes. The return on investment in this business remains extraordinary.

Sales of our MEMS products also grew in the third quarter. That's our micro machine products. While the automotive sector has showed some weakness over the past six months, we've been able to grow market share as a result of the strength of our integrated inertial sense of products. In addition to the inertial sensors in air bags, we've won new designs for our MEMS gyroscope in automotive rollover safety systems. The gyroscope is a great product opener for micro machine technology A wide variety of customers are working with samples of our products and the design momentum continues to be very strong for this award-winning product family. Many emerging applications, it turns out, will require both inertial angular rate sensing as well as barometers in the same design, giving us the opportunity to generate significantly more revenues per system. We continue to see and take advantage of opportunities to expand the micro machine market, given that ADI today has signal conditioning technology that goes around the micro machine sensor and the only high volume dedicated manufacturing facility for integrated inertial micro machine products in the world. We believe these competencies are increasingly vital to customers and at the same time, the lack of those capabilities are weakening our competitors.

DSP product sales also continued to grow in Q3. And were up 4% sequentially. Our DSP sales are now running 28% above the same period last year and that also was well ahead of market growth rates. Last quarter, we spoke of the introduction of Tiger SHARC and Black FIN. Today, the highest performance in those versatile DSP processors that are available on the market. We're now going get a sense of customer reaction to these products in both the broad based horizontal customers and also certain vertical markets. We've now sold over 3,000 developing kits for our new DSP products and the momentum has accelerated over the past few months with the introduction of the higher speed version of our new DSPs.

As we've consistently indicated, we're committed to building a large, horizontal franchise for our DSP products, similar to the one we enjoy in our analog products. The raw processing speed and overall performance of Black FIN and Tiger SHARC are now widely recognized as the very best in class available in the marketplace today. Opportunities span consumer, computer, communications, industrial and defense markets, indicating the very broad array of potential applications for these new products. Many of these applications are simply upgrading existing DSP-based applications. Others are substituting a programmable DSP for existing ASICs, which have become too expensive to continuously replace as standards or applications change. Still, others are now understanding the power of using a programmable DSP to hand over the processing of multiple reverse algorithm sets in the same application. Thinking together, we believe that these new architectures will significantly expand the available market for our new generation of more modern DSPs.

Black FIN has also caught on in some of the most exciting vertical markets. In digital imaging, Black FIN delivered so much performance with so little power that high performance cameras will use it to , zoom and many other features that can be executed in software. Existing cameras today generally use separate hard-wired ASICs for each of these functions. In bay stations, clusters of Tiger SHARCs are replacing older DSPs, SPGAs and custom ASICs. It gives customers a cost advantage and provides a solution that can be modified with software rather than hardware. This will allow many of your customers to significantly reduce their infrastructure costs and focus their engineering on more value-added tasks instead of designing and redesigning expensive and inflexible ASICs. In audio and video network products, Black FIN allows customers who are currently using dedicated ASICs for encoding and decoding functions to integrate all of these tasks into a single Black FIN processor. This allows customers to make changes in software right up to the release date of their product and certainly as they change their products over time.

At a new automotive telematic systems, the programability and performance of our new DSPs allows system functions, such as GPS, voice recognition, text of speech, and MP-3 to all be accomplished on a single DSP platform. The common elements many of these new DSP opportunities is running multiple algorithms that are constantly being upgraded and changed. In this arena, Black FIN and Tiger SHARC are today far and away the best, and in most cases, the only solution available. Because of the combination of thousands of new DSP customers who have not historically used DSPs due to their complexity and relatively limited performance, and many other customers who substitute programmable DSPs for embedded processors, we expect to continue to grow our DSP business rapidly. But more importantly, these opportunities, in aggregate, should provide a very solid base of diverse customers that in many ways resembles our analog business.

Unlike many competitive products that are at the end of their architectural road maps, both Black FIN and Tiger SHARC platforms are early products on a long road map of code compatible DSP processors that are much, much more than simply conventional DSPs. We believe we're in the very early stages of what could be very significant revenue contribution from these two DSP platforms over the next few years and that should, of course, impact both our top line growth and our operating margins substantially. We're currently planning for our Q4 to continue the recovery that began six quarters ago for Analog Devices. Although the continuing high turns environment makes it continuously tough to be very precise, as a result of the very strong order of momentum that began in July and has continued into early August, our plan is to grow our revenues in Q4 by between 3 and 5%. We continue to see good evidence of the gradual recovery and many of our end markets, accelerated by good ADI penetration in many emerging markets and market share gains in key product categories.

We would expect gross margins to increase again sequentially in Q4 as revenues grow. We're planning for operating expenses to grow slightly but we will continue to constrain the growth weight of expenses as we have been doing over the last few quarters. Our plan is for EPS in the range of 22 to 23 cents for Q4, depending on the actual revenue levels we achieve. And, of course, the product mix of those revenues. We anticipate days in inventory to continue to decline. We anticipate capital spending to remain modest and cash flow to again, be very strong in Q4. We're also planning for capital spending to remain low through the entire fiscal 2004, since our factory utilization remains low, and we have ample capacity to respond to whatever the market demand turns out to be.

In the longer term, we remain very enthusiastic about what we can achieve. Based on our leading technology and market position and high performance analog, DSP and micro machining, we believe we can continue to outgrow the overall semiconductor market by a factor of 2 as we've now been doing for some time. We believe we have 10 to 15 points of operating leverage, as sales grow, since our goal for gross margin is approximately 5% above the current levels, and our goal for operating expenses is 10% of sales below current levels. In aggregate, as a rule of thumb, our goal remains to grow our earnings at twice the growth rate of our sales until we reach model margins for the company.

Thank you, Jerry. That concludes Jerry's prepared remarks. During the remainder of our time, we will be taking Q&A. Please limit yourself to one primary question and no more than one follow-on. We will give you another option to ask additional questions if we have time remaining. Operator, we're now ready for questions from our analyst participants.

For any of the analysts participating by telephone dial-in, if you have a question, please press star and the number one. If your question has been answered and you wish to be removed from the queue, please press star and the number two. If you are listening on a speaker phone, please pick up the handset when asking your question. We'll pause for just a moment to compile the Q&A roster. Ms. Tagliaferro, you may go ahead.

Thank you very much. Our first question comes from Louis Gerhardy with Morgan Stanley.

Hi, good afternoon. A couple of questions if I could. Back of the envelope calculation seems to suggest bookings were down a little bit sequentially. If you could just confirm that? And also give us a sense of the change in your 13-week backlog.

Well, our bookings were about flat sequentially. You know, we had a large run up in the bookings in the second quarter and held the gain last quarter. Early in the quarter the bookings rates were impacted by what went on in Asia. But I think if, you know, when we looked at July and what's happened in August, the autumn momentum has really accelerated in the last six or seven weeks, but roughly, our bookings were about flat last quarter.

The backlog.

The backlog was flat.

The bookings were down a little bit from quarter-to-quarter because we had such a strong run up in the second quarter.

Okay. And Joe --

I think the encouraging point, as Jerry mentioned in his comments, was that, you know, we did see in late May and June, the impact of the SARS concerns and then we saw a substantial rebound in July and that continued on into this quarter.

Okay, great. And then, Joe, if I could ask you, give me a sense of what percent of your cost and expenses are not in dollars, just trying to understand the impact of the weaker dollar potentially.

It's a very small percentage of our business that is not transacted in effectively dollars. We have a lot of dollar business around the world, half of our business is in Asia and in Japan, most of our business is transacted in dollars -- and a lot of -- and in -- certainly in the U.S. -- we do it in dollars. And in Europe, quite a bit of the business is either indexed to the dollars or transacted in dollars.

I'm thinking of your costs, like the fab in Ireland.

We have, for a long time, had a hedging program on that -- those costs over in -- in Ireland. So that we essentially lag the currency moves and therefore we can mitigate in the short-term of the impact of currency moves and over the long-term, obviously we can look at it and figure out what to do.

Okay, thank you. Thank you.

Our next question comes from Michael Masdea over at Credit Suisse First Boston.

Great, thanks. You guys showed nice improvement in profitability this quarter. Is 60% kind of the right incremental operating margin to think going forward? Or how revenue-dependent is that?

I think we've been trying to express that our goal is to grow our profits twice as fast as our revenues until we get to model margins. And that should, you know, be, I think the right way to think about it. In any one quarter, I think last quarter, we may have dropped through 45 or 50% and this quarter, 60%. It will be a little different from quarter-to-quarter, depending on the mix of the business and, you know, the -- all the different things go into operating the business quarter-to-quarter. But something in the 50% range is probably the right way to think about it.

And can you talk about the mechanics of the manufacturing cost savings, you know, in the past you talked about $60 million. Where are we on that? You shut down the 4-inch fab. Is it all variable cost savings going forward? Or is there any fixed cost left?

Well, we're pretty well along on that program and it's going on plan and I think you can see some of the benefits of it in the fact that since the same quarter a year ago we have a 200-basis point improvement in the gross margins. A lot of the real benefit of what we've done comes with the increasing the utilization of the fabs. That's where the leverage comes. We're still in the point where we brought on this quarter, as we mentioned, some additional capacity over in Ireland and in our 8-inch fab. We shut down a fab in California that was a 4-inch fab and so we actually replaced the 4-inch fab with more capacity and more potential capacity. So, we're running in the vicinity of 50% when you get finished at the end of this quarter, which gives us a huge amount of headroom going forward in terms of our ability to respond to future demand and to improve the gross margin leverage.

So, it's much more of a utilization and product mix than anything fixed from now on, is that fair?

Yeah, that's right.

Thanks.

Okay, next question, David Wu at Wedbush Morgan Securities.

Good afternoon. Can you clarify one thing now that you've closed down your 4-inch fabs, do your inventory days -- should we expect inventory days to be more normal at about 100 to slightly over 100 days pretty soon? And the other question I have is if you look at the business, how many quarters have the industrial markets really improved? And is there any seasonality in that business between a first half of the -- of your fiscal year and the second half of your fiscal year?

I will take the first question. Maybe Jerry, you can take the market question. On the days inventory, what we've expressed is that our financial model for inventory is about 100 to 110 days. And at this point in the business cycle, we'd expect to be more that n 110 days rather than 100 day range much. We're not too far away from that. We're migrating in the direction and will continue to do that.

The second part of your question, about the industrial markets, it's been, you know, ticking up slightly for the last couple of quarters is how I would categorize what's been happening here. There's a lot of different segments there, you know, all the way from industrial products to automatic test equipment to instrumentation, military, automotive. There is a lot of different things going on there. But when you add them all up, they've been trending up slightly.

Is there any seasonality in the first half or the second half of the fiscal year?

Well, historically in the industrial markets it turns out that, you know, the summer period is usually a little slower in the U.S. and Europe, and in some of the other markets, in the consumer markets, in the computer markets, they have very different seasonality. So, you know, there's sort of 40% of our business does have some summer seasonality and the rest probably doesn't have much seasonality.

Thank you. The wireless business, I assume, is coming back with inventory getting reduced in Asia, right?

Yeah. We said in aggregate the wireless revenues were approximately flat, which, you know, given what went on there in Asia and sort of late May and June, was a pretty good result and with the momentum, we've cut back in the business in July and so far this month, you know that looks pretty good.

Okay, thank you.

Our next question comes from Adam Parker at Sanford Bernstein.

Yes, we've talked about Tiger SHARC and Black FIN. Can you talk about the lag in terms of 3,000 kits sold versus when you can think about potential incremental revenue. Are we talking first half of calendar '04, or could it be sooner than that?

I think it varies tremendously by application. You know, in some of the customers are sampling this, that are in industrial and military products, it is a fairly lengthy takeup rate, and some of the more aggressive applications, when you put a Black FIN into a phone or a PC or, you know, a new camera, they tend to move up, you know, a lot faster, but, you know, our expectation is that when we look out into 2004, we're going to start seeing some real impact of these products. When you look out further, the impact will be greater.

So, starting sometime in '04, I should think about the incremental, you know, opportunities?

Yeah, I would say so.

Okay. Also, one other question, sort of separately. I think you mentioned that the revenue was stronger than the OEMs during the quarter.

Yes, that's right.

Was that a statement that applied for the entire quarter or was the strength in July and August still, you know, was that more toward OEMs in the latter half of the quarter? I'm trying to sense if OEMs are picking up --

I think a lot of the OEMs fell off a lot with the SARS thing because a lot of what we sell in Asia is in a lot of large vertical markets. But I don't think there was any definable trend, you know, sort of the overall rates just, you know, sort of went down a lot and -- in late May and most of June and really did -- across-the-board in both distribution and with the OEM customers snap back very hard in July. So, we haven't been able to see any real data there that would be useful.

Is your sense that the inventory of your parts and distribution is in a good place right now?

Yeah. Yeah. We get very constant updates on that and our sense is that the inventory is in pretty good shape here.

Thanks, Jerry.

The next question is from Brian Wu at Bear Stearns.

A question on the industrial business, you mentioned a number of different kind of sub categories. Can you carve that up for us and maybe give us a breakout of your industrial, maybe by medical, auto and the other, larger categories.

In terms of percentages?

Yeah.

That's very, very hard for us to do. You know, I would say the largest, you know, it's hard to be precise in there, I will try to give you a generalized comment. You know, the largest segment of that business for us has always been this mass of historically industrial accounts. You know, process control, factory automation, you know, that's where you have a very, very fragmented customer base and there's thousands of large, small, medium customers in there. You know, the -- so, that's the largest part of our industrial business, is in that category. You know, automotive tends to be a relatively small percentage of our sales. It's made up of, you know, wha t we sell into air bags, applications, but increasingly we're beginning to sell our analog products and we hope in the future our DSP products into automotive applications, so, we expect that there's going to be more and more and more penetration of signal processing in cars and that, therefore, is going to be a larger portion of our business than it has historically. You know, the mill arrow card, for the old timers who remember analog in the old days, that used to be a large percentage of us . Now that's probably down in the vicinity of 5% of our sales. So, that's still, you know, not a very large percentage, but it also turns out that, you know, with many new military applications developing and many security applications becoming much more relevant, you know, all of these new security applications are chockful of, you know, signal processing. The -- the medical and imaging, which makes up sort of the balance of this stuff is smaller than the -- you know, the broad-based industrial segment more relevant, you know, all of these new security applications are chockful of, you know, signal processing. So, you know, it's -- it's very hard to be precise. The characterization of the sector is very hard. Clearly the hardest part of that is the large broad base of traditional industrial customers and other ones make up the balance.

The other part that we actually saw good growth on last quarter for the first time was automatic test equipment. You know, that used to be a very large business for analog, we went through a period of a couple years where the guys didn't buy anything. I think if anything, during this cycle, you know, given that we stayed with it and, you know, we have a very significant customer presence in that business, if anything, our share in the business coming out is probably going up. So, it's really a combination of a lot of different things.

All right. That was helpful. Thanks.

Thanks, Brian. The next question comes from Tore Svanberg at US Bancorp Piper Jaffray.

Yes, good afternoon. You mentioned your book-to-bill was approximately 1. Were there any subsegments of the business where book-to-bill was above one?

We don't really publish data like that. So... I think we'll have to back off that. It's a level of specificity we just don't have handy here.

Fair enough. And also looking at your consumer business, it is doing well now, a lot of your new products, also, look to be target at the consumer markets and it's running around 10% right now. How -- how quickly will this business grow and when do you think it becomes more so like 20 to 25% of sales?

Well, that's hard to predict in terms of the ramp rates, but, you know, the products where we sell into, you know, if you looked at say digital cameras, where we have a very, very high percentage of the analog content and believe we'll have a pretty high percentage of the DSP content in the future. You know, these are product categories now that are getting to be very large unit volume markets. You know, our latest estimates were there were like 40 million digital cameras sold in the last 12 months, growing at a pretty good clip. And many of the other digital entertainment products have really taken off. And a lot of those new products, you know, the signal processing requirement's getting harder and harder to do, which means there are fewer and fewer companies that can meet those kind of criteria. As an example, the whole digital TV, you know, when you're going to the stores now, it's going to be harder to buy a catheter-grade TV anymore. You know, the world is chockful of LCD TVs and plasma TVs and generally digital TVs in general. Our market share in those products is also going to be really high in the future, as well.

It's very hard to be precise, but I expect over time, consumer products will become a larger percentage of our sales. I think it will be quite a while given the momentum in the other markets until we get to 20 or 25%, but it's been creeping up there a percent or so, you know, a quarter or half a percent a quarter over the last couple of quarters. So, I think it's clear that's becoming an important part of our business and, you know, what's really shaped that market is really moving towards the kind of technology that we have, particularly in the high end analog and DSP business. So, it's not surprising that it would.

Great, thank you very much.

Thank you. The next question comes from Joseph To at Lehman Brothers.

Hi, can you guys talk a little bit about sales per geography, specifically North America and Europe? If I do a back of the envelope calculation, it looks like North America was a little bit weaker than both Asia and Europe. Just, first off, am I right? And secondly, anything going on there specifically?

Hold on for one second. Well, we had very good growth in all the different regions as Jerry said, with the strongest growth being in Japan. And as we've seen for quite a period of time, this goes back, you know, over a year, there has been a higher growth rate in Asia, over that period of time than in America or in Europe. But quite a bit of the activity gets designed in here or in Europe and -- and we deliver over into Asia. And so it's always hard to tell exactly, you know, what the sort of design in activity is and where the product is delivered. We're reporting our revenues based on where we're shipping the product.

Okay, and secondly, in terms of DSP and analog, which do you expect to grow faster in the next quarter?

Well, that's, again, always hard to predict. You know, it turns out that increasingly our analog products are DSPs on the same boxes because people have an overall signal processing problem and, you know, we have good in both areas. So, that's hard to figure. I think generically, our DSP business will grow a little bit faster than the analog business, but in in any one quarter it could be quite variable.

Okay, thank you.

Thanks very much. Our next question comes from Ross Seymore at Deutsche Banc.

Hi, guys, I had a couple of questions. First one I think you mentioned about power management transfer at Intel. Just want to get some color on any areas of strength, like core, who you're displacing? Second question I had was on the use of cash, I think you had 2 billion out, like paying down debt versus, you know, dividends in the future. Can you comment on that, please? Thanks.

I will let Robby take the questions on the power management and I will construct my answer on the cash.

Okay. On the power management side, we have been gaining share in the desktop and laptop space and I shouldn't comment on who here, but basically we've got solutions for the desktop for the year-end which has significant advantages over the competing parts. And it is fully compliant with the Intel specifications. Similarly on the IMVP laptop area, we have a solution, which again, offers an efficiency and accuracy advantages and which translates into better materials advances in the system. So, I think we're very well placed, but business -- especially desktop reaction -- has been mostly sourced with a lot of differentiation. But as a processor, speeds increase. We work those through Intel, under the next generation and the VRM 11, you know, the press cut and beyond processors, I believe goes significant advantage in this space now. On a differentiated product.

You know, this is really a little bit of a change over our strategy over the last couple of quarters on the power management stuff. I think as we communicated last quarter, you know, we began down this path as a way to use some of the excess capacity we have to really learn more about what the customers really wanted and really align ourselves with the people that ultimately we thought were really going to call the spec shots in the business. And through doing that and building some of the relationships, you know, we've now really understood and we understand what the things to do are. We started out in a somewhat more opportunistic strategy and has now become a much more clear strategy for us as we now, you know, have devoted a lot of analog circuit design creativity to solving the problems and carefully aligning ourselves with Intel on this thing. And as Robby said, in the old generations , you know, people didn't really care about that so much and there were a lot of products not very differentiated.

But now, as the processor speeds keep going up and the problems keep getting harder, I think it's going to be a tremendous advantage to offer a solution that really is compliant with the Intel spec, you know, we jointly market the products with Intel and we think that's going to, you know, create an ability to differentiate our products so, you know, quite a bit for many of the incumbents. And in that differentiation lies the opportunity to make good profits in this business. So, you know, that is a -- you know, a sort of a -- you know, a change in the way we thought about this business over the last couple of quarters and -- and we have pretty good expectations for this stuff going forward. You also asked about the cash, so, you know, I will try to answer that as directly as I can. Obviously our cash flow has been, you know, very strong for the last year or two and, you know, we are -- we continue to seriously consider, you know, what we should do with that. As soon as we sort of decide that, you know, we will certainly announce that.

Thank you.

Okay. Thank you, our next question comes from William Conroy at Sanders Morris. Bill, go ahead.

Just a couple of first ones real quick. Can you tell us what the amount of business enforced on the country was for the quarter?

I'm sorry, Bill, can you say that again, a little bit louder, please?

Sorry, is that better?

Yes.

Can you tell us how much of the business was sourced from foundries in the quarter?

Roughly 60 percent internal, 40% outside.

Great. Thanks. And --

Generally, the lion's share of our analog business is produced here and all our DSP and DSP-related business is outsourced.

Right. Okay. And to change gears a little bit, I hope you would talk more about the bay station business, how did that look during the quarter? And I think you've given the number in the past, Jerry, can you tell us what percentage of the communication business was wireless?

Yeah, the bay station business, you know, we saw some -- some small improvements in that for the quarter, you know, even as, you know, the whole, the whole handset market goes through the gyrations, the call volume still goes up and people need more bay stations, so, you know, for the existing bay stations, we're seeing -- you know, that business went down a lot and it's gotten better. I don't think there's anything of any real significant consequence to report there. You know, we have a very small -- strong position on the analog side. You know, we believe our DSP position, particularly for some of the newer bay stations, is going to be extremely strong given the takeup rate of Tiger SHARC with the leading bay station manufacturers. We actually, last quarter, deployed our first Tiger SHARC bay station. Which was a great cause for celebration for us -- in Japan. And we expect that as we look over the next couple of quarters we're going to do extremely well not only on the analog side, but the DSP side of bay stations, because it really turns out our solution does significantly reduce the bill of materials, and it really allows the software, programmable bay station, where none of our competitors can achieve that. So, I think that's going to be a source of important revenues for analog in the future.

Great, thanks, Bill. Our next question comes from Sumit Dhanda of Banc of America. Sumit?

Hi, a couple of quick questions. First, on the circling back to the power management stuff, you indicated that you're moving toward more innovative products. Can you talk a little bit about what specifically there are? And is the implication here that you're going to gradually de-emphasize the core of power management solutions for desktops and laptops? And I have a follow-up.

Can you repeat the last part?

And I said is the implication here that you're going to de-emphasize the core power management solutions for desktop and notebooks going forward?

No. And the certainty -- integration is part of what we're doing, but more a question of following the Intel performance curve on these parts. And I think that the core part goes in desktop and in the notebook would be very significant part of what we do going forward. I think we have more scope in the notebook to expand beyond the core that will be the anchor in the notebook. It is different here in our space.

Okay. And along the separate line, on the DSP side of the business, one of the things that sort of stood out in some of the recent SI data is relatively core pricing trends, I wonder if you've seen that in any of your business?

You must be relatively --

Relatively what? I'm sorry?

We missed the last part of your statement. Industry statistics, we didn't get that part of your question.

Oh, okay, if you look at the recent industry statistics, the SI data seems to suggest that the pricing trend, within the DSP segment, have been relatively poor. I wondered if that had been through the same kinds of pricing pressures or erosions in that segment or business?

You know, I think our pricing is holding up quite well in DSP and also in the analog sector. You know, the -- the average prices people report in very broad categories of SIE data is very, very dependent on the product mix of SDD SPs that get shipped. So, you know, when the -- the product categories are -- like a lot of the basic DSPs, that tends to be, you know, get the prices down pretty low. That's not, of course, the segment that we're in. So, I'd say if I had to make a comment on that, I wouldn't pay lot of attention to the data on the stuff except for product mix.

Okay, thank you.

Thank you. The next call comes from Clark Westmont at Smith Barney.

Hi, everyone. As far as the, Jerry, the January quarter has typically been slower sequentially for you, of, you know, on historical basis of -- from, you know, for our modeling purposes, is there any reason to deviate from that, you know, for example, because of the July order pickup? Or help me walk through that.

Time will tell. As I said, the seasonality of our business has changed a little bit give n the, you know, difference in the -- in the market segments. So, it's very hard to read, you know, now, with -- with a lot of the shift toward Asia, that creates a little difference rather than historically, but frankly right now we're just focused on the current quarter. We will have to wait and see, you know, what happens, in aggregate, with the economy, with the end markets. I think it's a little bit hard to project out there right now.

Okay.

If you ask us next quarter, we will give your our sense of the first quarter.

I think it's fair to say we think about production plans for next year, even though we haven't finalized our plans. And a broad planning basis, we're looking for pretty good growth next year.

So, again, whatever the industry growth rate, you think you will do about twice that?

That's certainly our goal.

Okay, good enough. Thanks.

Thank you. Okay, our next question comes from Joe Osha at Merrill Lynch.

Can you guys hear me?

Yes.

Sorry about that. Can you -- I apologize I came in a bit late. Can you talk, if you haven't already, about the -- the handset, in particular, sort of the non-brand name ODM handset end market and what that -- what it did for you during the quarter, what you think it's going to do for you in the upcoming quarter?

You know, I think most people are really studying what's going on in the handset market. We've been talking about it for a year already that, you know, the model is shifting to the ODM model like PCs did and shifting away from the propriety solutions that, you know, used to be heavily dominated by the European cell phones manufacturers. You know, the ODMs, particularly the Asian, the Chinese ones, others, are gaining market share in the business very rapidly. You know, our solution, I mean the reason we've done well in the business and think we will continue to do is that, you know, our solution is the total reference design, you know, we supply all the products, including the power management products, the radio, analog base band, DSP base band, RF protectors, we supply the entire chain. For the ODMs, that makes it a very attractive solution. That's why the takeup rate has been very good on our DSP products. So, I think it's if those guys continue to gain shares, I believe most people will, you know, I believe we will continue to do well in that part of the business.

Can you --

That's true, I think, by the way, for both our DSP products and analog products, as well.

Do you -- do you guys see in the July quarter, you know, one of your major competitors had said that market kind of rolled off for them real hard. Do you see that at all?

In the middle of the quarter, you know, when the SARS outbreak there started heating up, a lot of customers got cautious and a lot of people stopped the music, but as I mentioned earlier, we saw a good snapback on that in July.

Thank you, Jerry.

Okay, thanks, Joe. We have a couple of people left to ask questions. We have a second round starting now. If you'd like to enter your question. And while you're doing that, let me just remind everybody that the next conference call for our fourth quarter earnings results is scheduled for Tuesday, November 11, beginning at the -- I'm sorry, Tuesday, November 18, beginning at 4:30 p.m. Eastern Time. So, we're going to take a second round of questions here with the first one coming from Michael Masdea at Credit Suisse First Boston.

I'm sorry if you talked about this already, but say where the strength in orders in July and August is coming from?

Well, interestingly, it's coming on a very broad range of customers. It's not any one customer, it's not any one product, distribution has been good. The OEM customer base has been good. Good in most geographies. You know, we've looked through that pretty hard to see if there was any sort of one thing going on there, but there really isn't. It's a -- it's a broad array of customers, it's in both the analog and DSP business. So, it's, you know, the early part of July through, July, what we've looked at recently, has been pretty encouraging.

More of probably an industry phenomenon?

We're worried about analog right now. You know.

Thank you.

Thanks. Next question is from David Wu at Wedbush securities.

Yes. Jerry, can you talk a little bit about your communications business? What roughly is the break between the -- I guess the infrastructure wireless bay station, the handset? And then the -- I guess the ADSLs and other optical components you sell?

We don't go that level of detail, Dave. We just don't have it in the conference call here. So, if, you know, I can't provide that to you.

Okay. Fine. Jerry, it's -- is there any plans that you folks have to go into the CDMA market, which seems to be the faster growing of the -- of the -- you know, standards these days.

Yes, this is Brian. And going into the pure existing CDMA standard, we don't have any intention of going in there. Going into wide band CDMA and the 3 G products, we most definitely have intentions there. As we inject, you know, Black FIN into a digital baseline products, you know, one of the advantages it can bring, obviously is that 3 G signal processing requires quite an amount of DSP processing and that's really going to bring a tremendous amount of benefit to us. Now, in -- also in the bay station area, and, you know, Tiger SHARC is deliberately targeted towards big advantages within the bay station area in terms of the integration of the older DSP functionality. So, yes to wide band CDMA in the handset and bay stations. No to standard CDMA in the handset, but of course we're already in with our analog products and DSP products in standard GSM and CDMA bay stations.

Would the Black FIN help you at all in the GPRS/edge kind of products, or do you have to wait for 3 G to rollout?

No, no, we've actually got, you know, working designs right now with Black FIN working at a digital base band for a GPRS and edge. Edge also takes quite a lot of processing power and we believe we're going to be, you know, within the first, you know, two or three manufacturers out there and actually start an edge handset, qualified edge handset, you know, available. So, Black FIN gives significant advantages toward edge signal processing.

Thank you.

Thanks, David. And Louis Gerhardy at Morgan Stanley.

Hi, I think you mentioned in your opening comments that your turns business for the quarter was actually about 50%. And that's a little higher than what I thought you'd require to hit your guidance. Did you see an increase in cancellations or pushouts? Is that why the number was higher?

No, actually the cancellations were pretty good this quarter, down as a percentage of backlog canceled. We -- I believe that the beginning of this quarter talked in terms of needing about 50% turns in order to get our revenue goals.

Okay. So that requirement --

I think maybe what you might be thinking about is we had higher turns in prior quarters. We required a little bit less this quarter and will require, you know, a little bit more next quarter, but still in the 50% range. Which we believe is kind of normal at this point in the cycle. Out there, the product is readily available, certainly there's enough capacity around in the system. So, this is likely to be the environment we're going to operate in and adjust the company.

Thank you.

Okay, thanks. We have just a couple of minutes left and just a couple of callers. Elliot Glazer at Vachez and Company.

Hi. Probably a question for Brian. As you talked to customers, are they concerned at all about the recent rise in long-term interest rates? And is there some level of rates where they would be concerned and cause the current gain in industry semiconductor sequential revenues to flatten out a bit?

This is Joe McDonough. We like Brian to be concerned with orders, not interest rates. I think we have really never seen,our business, an impact of interest rates at the level that you're talking about. Certainly we're working in the macroeconomic world, we're affected by the economy in that world. What happened. But down at that level, we found that we're affected.

Great. Thanks a lot.

Okay, thank you. And lastly, from Augustine Chin at RGG.

Good afternoon. I was wondering if someone can comment on ADI's overall performance on the broadening communication lines, specifically given Asia's fast growth in DSL products, what are ADI's plans to start the position in Asian countries, especially China?

Yeah, our DSL business, you know, stayed basically flat quarter on quarter. The DSL business is all about, you know, you know, regional deployment. I think, you know, right now it's pretty obvious that Japan is really deploying DSL with standards very, very quickly. We have a presence -- a good presence in both Asia as well as France, Germany and the U.K. and the deployments will continue. Perhaps not as rapidly and dynamically as the stuff that's happening in Japan. I think as you look at the -- the DSL business, you know, our intent, at least is to continue to develop products into ADSL 2 and 2 plus. We believe we have a leadership position in terms of ADSL 2 plus, as shown by some of the results from the recent New Hampshire Plug Fest, where, you know, various companies were -- were asked to show their performance to the new ADSL 2 and 2 plus standards. So, we'll -- we'll continue to develop products both in the CO and CPO area.

An as you look forward, you know, one thing we've used that you have to be careful of is you have a regulatory standard, either 2 or DSL. The reality is that the gross margins and the profits come under a lot of pressure there. And, you know, we view that the inner face peripheral or inner face standards, like DSL, are a critical piece of our portfolio as we give total solutions for set-top box, you know, solutions, for network media and so on and so forth. And that, you know, really a key goal for us, in staying in the -- on the DSL business is to maintain that interface band so we can integrate it into overall total solutions as we move forward. As a stand alone business, just as you can see in some of the other industry regulatory products, you know, prices and -- and margins are going to come in under ongoing pressures as you look forward.

Thank you.

Thank you very much, everyone, for listening. On behalf of Jerry Fishman, Joe McDonough, Brian, Robby, and myself, thank you for joining us today, and we look forward to hearing from you in the fourth quarter conference call, Tuesday, November the 18, beginning at 4:30. Goodbye.

This concludes today's Analog Devices conference call. You may now disconnect.