亞德諾半導體 (ADI) 2004 Q1 法說會逐字稿

Good afternoon.

My name is Derrick (ph) and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Analog Devices first-quarter fiscal 2004 earnings conference call.

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

After the opening remarks, there will be a question-and-answer period for our analyst participants. (OPERATOR INSTRUCTIONS).

Ms. Tagliaferro, you may begin your conference.

Hello, everyone.

This is Maria Tagliaferro, Director of Corporate Communications here at Analog Devices.

If you don't yet have our first-quarter 2004 release, you can access it by visiting our website at www.analog.com and clicking on the headline (indiscernible) on our home page.

This conference call it also been webcast live on the Internet as a webcast and is also accessible at analog.com.

A recording of this call will be available today within about two hours of the conference call completion and will remain available by telephone or Internet playback for one week.

Participating in today's call are Jerry Fishman, our President and CEO;

Joe McDonough, Vice President for Finance and CFO;

Brian McAloon, Vice President of the Digital Signal Processing and Systems Products division; and also Vincent Roche, Vice President of Sales and Marketing.

We have scheduled this call for 60 minutes.

We will 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. (OPERATOR INSTRUCTIONS).

I 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 feature 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 Securities and Exchange Commission.

Also, this conference call will include some time-sensitive information and that may only be accurate as of the date of this live broadcast, which is February 12, 2004.

With that, let's begin with Mr. Fishman's opening remarks.

As you can tell from the earnings release, our Q1 for 2004 was really a terrific quarter for ADI.

Our revenues increased to $605 million, which was up about 9 percent sequentially and 30 percent from the same quarter last year, which was well ahead of the plan that we communicated last quarter, and we benefited of course from demand continuing to strengthen throughout the quarter.

Orders for shipment in the next 13 weeks grew by 8 percent sequentially, after growing 30 percent sequentially during the prior quarter.

Orders for shipment in the next 26 weeks grew by 14 percent sequentially, which really reflects our customers' increased visibility and the confidence our customers have in their business going forward.

Overall, our order rates are now up over 50 percent from the same period last year.

As a result of our strong orders, our backlog, which was requested by our customers for shipments, increased 23 percent sequentially to now $475 million, which is certainly the best visibility into next-quarter sales that we have had in many, many quarters.

The shipments were strong in all regions of the world and in all the end markets we serve.

Of particular note in Q1 was the significant growth in sales to a wide range of industrial customers, including factory automation, process control, medical instrumentation, automatic test equipment, defense applications, automotive applications, and many other applications which we broadly lump into the category of industrial.

And that group of customers actually grew 12 percent sequentially, which we believe is very much in line with increased capital spending worldwide.

Our communications, our consumer and our computer sales all grew sequentially as well.

The gross margins expanded significantly to 57.1 percent, which is up 130 basis points sequentially, representing 72 percent incremental gross margins on increasing sales, which is great leverage by any measure.

To respond to increasing customer demand, we have continued to ramp production in our internal fabs, which has continued to give us very good gross margin leverage going forward.

Engineering and sales and marketing and administrative expenses grew approximately 5 percent sequentially and are up 12 percent year-over-year on a 30 percent revenue increase.

Expense increases in Q1 are primarily the result of increased incentive payments in line with much higher profit margins, some legal fees we have incurred and some IT litigation, and some promotional costs which we incurred in support of some very significant new product launches at Analog.

As a result of much higher sales and good gross margin and expense leverage, our operating profits increased to $145.6 million, or approximately 24.1 percent of sales.

Net income rose to 19.3 percent of sales and earnings per share of 30 cents was 2 cents above the high end of the range that we communicated at the beginning of this quarter.

Our balance sheet again strengthened, with cash increasing by $190 million to now $2.3 billion, after spending $27 million on capital and paying approximately $15 million in dividends.

Inventories declined to 103 days and Accounts Receivable remained at a very comfortable 48 days.

Financially, we are accomplishing exactly what we planned to do.

We are achieving very solid revenue growth with excellent earnings leverage.

We have much-improved visibility as our backlog increases, and we still have significant operating leverage ahead of us as utilization increases and as expense control remains tight throughout the Company.

In addition, we are generating significant cash flow as is inherent in our business model.

Today, our Board announced a 4 cent cash dividend for Q1 to stockholders of record on February 27.

Converters, amplifiers and power management products all grew strongly, both sequentially and year-over-year, powered by recently introduced products, but also by a resurgence of our long lifecycle products within our highly diverse customer base.

Converters, which represent over 40 percent of our revenues, grew 12 percent sequentially and 35 percent year-over-year.

Converters and high-performance amplifiers in combination represent 60 percent of our sales and we enjoy over 40 percent market share in each of those categories.

We are also very encouraged by extremely heavy design-in activity and high customer acceptance of our newest DSP products.

We now have over 5000 customers around the world evaluating Black Fin and TigerSHARC, and approximately 1000 of those customers have now moved into active design in a wide range of applications, including digital cameras, cell phones, base stations, media gateways, automotive Telematics, and literally hundreds of other industrial instrumentation and defense applications.

Sometimes our DSPs are replacing older ASICs; at other times, they are replacing embedded microprocessors, in addition, of course, to more traditional DSP applications.

During our first quarter, we also introduced our 750 megahertz Black Fin processor, furthering our lead by providing the fastest, lowest power and most cost-efficient DSP that is in the market today.

Both analog and DSP products grew by similar percentages, both sequentially and year-over-year.

High-performance analog and DSP are likely to continue to be amongst the highest growth product categories in the semiconductor industry, as this cycle continues to unfold.

This is a direct result of the increasing pervasiveness of signal processing technology in virtually every type of electronic equipment and every end market, as well as many new applications that require signal processing.

The bedrock of ADI's business strategy remains our core analog and DSP technology, which we provide to over 60,000 customers around the world.

This strategy not only provides the core technology for many of these new emerging applications, but also generates extraordinary profits and cash flow.

We believe that our growth is really the result of two intersecting trends in addition to a general strengthening of the economy.

First, new applications that really didn't exist just a few years ago; and second, the increased content we are able to provide in both some of these new applications and also in many existing applications.

A few examples that I am going to provide I think will really illustrate that point.

Advanced digital entertainment products such as digital cameras and digital TVs are new emerging applications where ADI content is increasing significantly.

Five years ago, film cameras of course dominated photography.

Early digital cameras were somewhat crude by today's standards, but nevertheless required our highest-speed ADD converters, converters that were originally developed for radar signal processing applications and now convert analog images into digital format in cameras.

Other camera functions were provided by numerous individual digital ASICs.

The total opportunity for ADI in cameras five years ago was perhaps 5 million cameras sold using a sub $5 A/D converter.

In 2004, we estimate that more than 50 million digital cameras will be sold, and that doesn't even include camera functionality that is now routinely included in we estimate 30 percent of all cell phones.

We are now providing not only the data converter, but an integrated mixed signal analog front-end, as well as a Black Fin DSP used for color correction, digital zoom and many other functions, such as motion video.

Further, we are adapting our core power management and micromachine technology to satisfy other emerging requirements in the newest high-powered cameras.

In total, the opportunity for ADI in digital cameras has increased from under $5 to now between $10 and $15 per camera.

Therefore, the total opportunity has expanded not only in terms of a 10X increase in units, but also significantly more content per unit.

Advanced digital consumer products like cameras, advanced audio systems and advanced television systems helped accelerate our growth over the last few quarters.

In televisions, ADI has evolved from historically and interestingly no content in analog TVs to many new signal processing functions throughout new LCD and plasma TVs, which is one of the hottest growth markets of this decade.

The advanced TV market, which includes digital TVs, A/B receivers and high-definition video recorders, has tremendous signal processing challenges, and will require the highest-performance analog mixed signal and digital signal processing technology.

Today in DVD players, we dominate the video encoder function.

The next generation of high-definition players and recorders not only extends our encoder position, but also opens an important new content opportunity for our newest laser diode drivers, which we have recently introduced.

These devices deliver the industry's highest performance and are now being actively designed in by the world's leading consumer electronics manufacturers.

Wireless products have also undergone a significant evolution towards more and more content of ADI's advanced signal processing technology.

In the early days of cellular technology, we provided standard analog functions, such as amplifiers and converters, to leading base station manufacturers around the world.

It was a very profitable business, but certainly not a very high-volume business in base stations.

By the late 1990s, we had optimized our amplifier and converter core technology for radio transceivers, and our solutions were adopted by most of the world's leading base station manufacturers.

Today with soaring call, voice and data volumes and multiple new standards in use around the world, base station manufacturers are under enormous pressure from carriers to lower their costs as volumes expand.

To help our customers meet this challenge, we recently expanded our penetration into the digital signal processing section of base stations.

Our innovative TigerSHARC architecture significantly reduces our customers' bill (ph) of materials by eliminating ASICs and FPGAs from the signal processing chain, and also significantly reduces our customers' engineering development costs by providing a fully software programmable solution.

Again here, ADI's growth opportunity expands through the multiplicative effect of much higher unit volumes and increasing content per box.

The base station business has accelerated significantly for us in recent quarters, particularly last quarter, and remains a key growth market for ADI going forward.

In handsets and PDAs, we have emerged from historically supplying a converter at the analog base band to today supplying the analog and digital base band, the radio transceiver, power management and the power amplifier.

Again, the multiplicative effect of unit growth and increasing content.

That cell phones follow the PC ODM model, vendors who can supply the entire signal chain and reference design with an architecture that can rapidly evolve new features, such as higher data rates and multimedia capabilities, have a real advantage over single function suppliers.

Cellular handsets continue as a good source of growth for ADI.

In computers, ADI has gone from historically supplying very little content to now providing high fidelity audio, power management and thermal monitoring solutions in both desktops and, more recently, laptop computers.

Today, the available market accounts for approximately $10 of content per PC, and new opportunities continue to emerge as the IBM's ThinkPad's recent use of an ADI Accelerometer to protect disk drives upon impact.

There are many more examples -- there are too many examples to cite here this afternoon, from cars to medical equipment to security to automatic test equipment to defense electronics -- all really following the same formula -- new applications and more ADI content per application.

These are just a few of the diverse markets that are driving our growth today, and this is the reason why we are so enthusiastic about our growth rates in the future.

The real growth engine for analog is not any one of these applications; it really is the great diversity of applications that we serve and the much broader sales reach that we have developed over the last few years to service these increasingly global customers.

We believe these signal processing applications in combination are the next killer application for the semiconductor industry.

Today, very few semiconductor companies have the technology base, the experienced engineering community and the financial wherewithal to win in these diverse applications over an extended period of time.

We are planning for our second fiscal quarter to be another good quarter for Analog Devices.

With significantly higher backlog and great order momentum, we are planning for a 7 to 10 percent sequential growth in Q2, which would provide revenues in the 650 million to $665 million range.

We are planning to continue to expand gross margins and continue to constrain operating expense growth to well below our sales growth.

This would produce our second quarter earnings per share in the range of 34 to 35 cents.

For the full year of 2004, based on what we know today, we now believe it's realistic to raise our revenue growth plan to about 30 percent.

Given the increasing pervasiveness of signal processing in all electronic equipment, we also believe it is reasonable and realistic to assume a long-term growth rate for ADI at rates well above that of the industry that we participate in.

(OPERATOR INSTRUCTIONS) Operator, we are now ready for questions from our analyst participants.

(OPERATOR INSTRUCTIONS) Michael Masdea.

Congratulations on a great quarter.

The first question is back here in industrial, and you mentioned wireless infrastructure, some of these areas that have been stagnant for a while.

Did it feel like to you that these are sustainable, and if so, what really gives you that confidence?

Of course, time will tell.

But many of these customers have been over the last couple of years just working down the inventory that they have had, that they developed back in the 2000, 2001 time frame.

Their order rates to us were significantly below their consumption rates (indiscernible).

Their businesses have gone on and they have consumed products.

And I think it is very clear, particularly in the industrial area, that capital spending is picking up.

All the statistics you about here in the United States and in virtually every other region of the world is that capital spending is improving.

And so it is not surprising that we would see an increase from our industrial customers.

The same was really true in the base station market.

Call volume has been increasing; people sending more data; and still it is hard to make phone call without getting disconnected.

So I think it is pretty clear that those types of applications, there is a need for technology, and we have pretty good solutions.

And when we look at the book-to-bill ratios, particularly in the infrastructure business, they are pretty strong right now.

You can never predict this for sure, but given the breadth of customers both in the industrial pickup and also in the infrastructure pickup, it looks to us like that is real consumption that is going on.

Of course, time will tell.

That's helpful.

The power management side, you have talked about trying to move into the higher value added area, little bit more profitable area.

Could you talk about that and if you have had success there?

Yes, up until very recently, most of our power management products -- the regulator parts of those, at least, were in desktops where we carved out a surprisingly strong position in a surprisingly short period of time.

Of course, our goal in that business has always been to use that as an entree into that business and move on to products that are much higher value-added products and move from desktops very rapidly towards laptops.

And our portfolio has done that and I think that that is going to be an important source of growth for us in the future, at pretty good margins.

There are many examples in that business of people who make extraordinary margins in that business and there is absolutely no reason why our products would command any less margins than those.

You guys were constrained in that last quarter -- or the quarter before last.

Were you constrained at all last quarter?

Yes, in the part of the market, the demand has come up so fast, we were still constrained in that part of the business last quarter.

Gross margin, can you give us an idea of how much of the strength in your incremental gross margin was mixed versus utilization and bringing more in-house -- or having more in-house growth?

It was a combination of a lot of different things.

Of course, when the industrial business picks up and that business heavily loads our internal fabs.

So there is no doubt that probably the most significant influence in that was the fact that our industrial business really picked up and we began to load our fabs a little bit more than we had in the past.

That is something that we all have been hoping for.

We have been predicting that for quite a while and we were delighted to see it finally happening.

Great, thanks.

Adam Parker.

Could you help at all with some of the gross margins you are getting by product?

In other words, are converter margins significantly different than your overall corporate margins here?

And what about power management?

And how is this going to trend?

I think it is very varied.

We sell probably 5,000 different convertor products, and each of them has a very different gross margin, depending on whether it is a product that we are selling to 1000 or 2000 customers, or it's one we are selling to 20 customers.

So the spectrum among gross margins in all of the different product areas are very different.

The one thing I can tell you is of course the converters that we sell to industrial customers, which tend to be very broadbased customers; and to infrastructure customers, that tends to be very high gross margin business for us.

What about the power management?

The power management business historically, that has been relatively low gross margin business for us.

I think as we go forward, the gross margins in that business ought to improve substantially as the product mix changes.

Adam Parker;

Can you add a little bit more color on that mix changing?

I think it is move from selling desktop products that don't get very high average selling prices to more laptop products and much higher order functionality of power management that could command much higher gross margins.

Okay.

Just another question, shifting gears, on this whole semiconductors cycle, Jerry.

May you can just add your color on if you think there is anything -- do you have any deal for when you think this cycle is going to peak or do you think there will be anything different about this cycle in terms of inventory levels or what defines the peak (indiscernible) prior ones.

We are so delighted to see it rise, we are not too much worried about the peak yet.

That is always very hard to predict.

Our sense is there is a fairly broadbased economic recovery going on.

I think with all of the doomsayers about no growth left in the semiconductor industry, all these new applications are emerging.

I believe for those companies that have a lot of signal processing capability, where most of the growth is going to be, it is going to be a good cycle.

How long that lasts, I'll leave that to you guys to figure out.

I guess what I wanted to ask is do you think there's a chance the peak is in 2004?

There is always a chance.

Certainly it doesn't look like that to us, but it is just impossible for anyone to predict that.

It looks like our customers are getting ready for a pretty good growth cycle and if it only turned out to be one year, it would be very atypical.

Great.

Ciao.

Brian Wu.

Just a question on the DSP side of the business.

How do you feel about your capacity from the foundries and what are the pricing trends there?

Well, our ability to access foundries is very, very much dependent in this part of the cycle on the very key partnership that we have with TSMC that we developed many, many years ago.

For those who remember Analog in the last up cycle, it turned out that despite some unbelievable growth rates in that part of the business during the last up cycle, TSMC did a great job in keeping up with us.

I mean, these are the parts of the cycle that if you are in the spot foundry purchasing business -- in other words, you don't have a strategic relationship with a foundry; you are just buying available capacity -- it is going to be a tough place to be for the next year.

But our sense is TSMC has always stood behind us and certainly all the evidence we have is they will again during this cycle.

Okay.

Internally, can you talk about your utilization rates and how they --?

We are running something in the mid 60s range, probably around 65 percent on average.

Now of course, that differs across our different factories.

And we are in the mode of continuing to ramp some of our production and our capacity throughout the year.

As we mentioned at the last call, we increased our capital spending budget for the year up in the 130 to $140 million range.

That capacity that I mentioned is based on our equipped capacity at the moment; it is not necessarily our staffed capacity.

We are starting to ramp some of the staffing levels in order to ramp the utilization rates a bit more.

And then we also have some product transitions that go on through the year.

Some of our products -- as Jerry mentioned, some of the power management products are transitioning to external foundry sources as the products get redesigned, and that gives us more capacity as we go through the year.

So our sense is we have pretty easily got the capacity to double our revenue base from our internal products as we go forward.

Thanks a lot.

Nimal Vallipuram.

I just want to congratulate on an accident quarter.

Jerry, two questions.

One is on the broader industry plans; the second one is on your long-term gross margin model.

If you look at the broader industry trend, this assumption might be wrong -- if I'm wrong, please correct me -- that lately, in the last three or four months, typically the last leg of the semiconductor pick-up is coming through -- it seems like with the economic improvement we are seeing the economic-sensitive end markets like the distribution or the industrial end markets and also the enterprising market coming back.

I guess my question is that if you look at the end markets from your perspective, how much of this improvement is being driven (indiscernible) the majority by the economic improvement and which one of these end markets are being driven by some sort of secular trends, which if the economy gets weaker, the margins would not be impacted?

I think as is typical in these kinds of cycles, there is always a little bit of each.

Probably the one that is most economically sensitive to economies is markets where capital spending drives those market, the broadbased industrial markets.

If you look back over 30 years of our business, our sales to industrial customers quite handily tracks capital spending, and it is not surprising that it would.

There are other markets that are brand new markets that are developing; some of them I mentioned a little earlier -- if you take a look at digital TVs.

I think that to some degree is economic dependent, but even with a lousy economy, people started buying a lot of those TVs last year -- and digital cameras and all those kind of things.

So I think the way we tend to look at our business is much more that it is the pervasiveness of this technology that we are supplying, it is so significant that it does really kind of balance economic uncertainties from time to time.

Now of course, if the whole world goes into a funk, we will too.

But there is such a wide diversity of applications that -- I mean, that is really the hallmark of Analog Devices.

Some go up and some go down and some are economically sensitive and some are secular inclined.

But all told, at least as we see 2004 and who knows after that, 2004 looks pretty good.

Just on the second one, if you look at your gross margin, you have done exceptionally well -- around 57 percent or so, with a run rate about 600 million.

Last peak, you got margins like this when the actual sales run rates (ph) were much higher than that.

Given that, can you give us an idea, with your cost reductions and so on in the last couple of years, what is probably your internal model for the peak margins in the coming cycles?

We have talked about in previous conversations here about the fact that we used the downcycle to fundamentally reduce our infrastructure cost and manufacturing and we closed down a couple of old fabs.

We have done a bunch of other things that we have talked about.

The goal of that was to use that downturn to get ready for the upturn and to try to achieve the peak gross margins we achieved in the last cycle at lower sales rates.

That is certainly our goal.

Our gross margin model at least at this time is about 60 percent.

We can see how to get there from here and when we get there, we will stand back and we will reevaluate what the right model should be for that going forward.

Certainly we would expect to get to the kind of peak gross margins we got to before at somewhat lower sales rates than we got to last time.

That is certainly our intent, that is why we did a lot of the things we did over this cycle and I think that is a realistic assumption going forward.

Thank you, Jerry.

Congratulations again.

Tore Svanberg.

This is actually Jeremy Kwan calling for Tore.

A quick question on the outsourcing trend.

I think last quarter you mentioned that you had roughly 40 percent outsource wafers.

Can you talk about how that might have changed this quarter and how you see that going over the next several quarters or years?

Probably it is in the same range this quarter, probably that is heavily dependent on which of the market segments we get the greatest growth from.

The stronger our industrial business goes, the more the mix shifts starts internal the more some of the end markets like the consumer market or other markets that we sell a lot of DSPs into goes, the more that gets outsourced.

So it is heavily dependent on the mix but right now it is about what it was.

And how about longer-term with some pricing condition (ph) to outsource, do you see the 40 percent going up to something more like 50?

It is very hard to tell at this juncture.

The complexity of our businesses is so intense with 10,000 products that we sell to 60,000 customers that you try to eyeball the stuff it is very hard.

We will just have to wait and see what happens.

Okay.

Can you provide maybe some color in terms of your end market breakdown?

I think in the past consumer has been pretty small.

With the single processing content going up in some of these consumer electronics, do you see that going up going forward?

The interesting part is that the single processing content is going up in all of the end markets.

So it really does turn out that other than quarter-to-quarter variations where one quarter industrial might be stronger or one quarter consumer might be stronger, the mix hasn't been changed dramatically over the last couple of quarters.

Industrial products are sold (ph), depending how you count them, between 35 to 40 percent.

Computers, it's always (ph) around 15, consumer is about 10 and communication is somewhere around 35 to 40 percent, depending how you count it.

The mix hasn't shifted all that much despite a lot of stuff going on quarter to quarter.

Okay, thank you very much.

David Wu.

Lillian Li (ph) for David.

Congratulations.

I have a question on the gross margins, follow-up on the previous discussion.

When are you going to hit the 60 percent gross margin rate:

When the revenues get higher.

I know, but --

Each quarter, it is always risky to say exactly what it is going to be when you don't know what the mix is going to be in advance.

We have been making good progress sequentially on gross margins, and our goal is to continue to do that over the next couple of quarters.

A lot of that will be dependent on the mix and how it all goes.

So (indiscernible) continue to make progress and we are going to continue to do that.

Do you feel that you can still maintain this 70 percent incremental gross margin for the next two quarters?

I think (multiple speakers) what the incremental gross margin is because it is so dependent on the mix in any particular quarter.

But I think our goal has been to get to 60 percent gross margin, as Jerry said.

We can see our way there, if the business environment continues to be as robust as it appears to be as this year begins.

We certainly would like to get there -- to that goal this year.

It is probably toward the end of the year before that is going to happen, but we can get surprised if the business keeps moving forward at a rapid pace.

There is an issue here of what the level is in these end markets, as has been asked in previous calls.

And I think one of the economic statistics that came out yesterday that Greenspan mentioned is that inventories are at a record low.

So that does suggest that there is a lot of appetite in terms of rebuilding the levels that can support production.

It doesn't suggest that there's overinventoried positions throughout the economy.

And we are seeing a pretty broad strength in the market as we begin this year and we're going into the second quarter, which is typically a pretty good quarter for us.

I think the other color I would provide on that is we have said all along that if our industrial business really picks up, that that's the place where the most gross margin leverages.

And as we have said this quarter, where we did see a big pickup in that business, the gross margin leverage was pretty good.

As Joe was saying, it is a lot dependent on what the mix of business is.

But in any case, as we look forward reason, we are reasonably enthusiastic about that.

I also wanted to ask about the operating expenses.

I remember you talked about keeping it only growing half of the rate of revenue.

Are you planning to do that even -- everything was going so well?

We still have very tight operating expense constraints and we are maintaining pretty good constraints on our hiring, as we said we would.

In any particular quarter, it is always hard to say exactly whether it will be 2 to 1 or 1.8 or 1 or whatever it turns out to be.

But certainly our expense growth is going to be significantly below our revenue growth, and that remains our goal throughout this year, and certainly until we get to the kind of model margins that we think this business should produce.

That is the way we would like to frame it.

Some of the leverage is in expenses; some of the leverage is in gross margin.

But together, there is a hell of a lot of leverage left in this business.

Lastly, I want to ask about the lead time.

Can you talk about it?

I remember last time you were talking about four to six weeks.

What about now and what are you seeing in the customers' order pattern -- are they nervous about shortage --?

I would say that one of the biggest shifts we have seen over the last three months is that when we talked to customers six months ago, they were more concerned about their inventories; and when we talk to customers today, they seem to be more concerned about supply.

That is a very fundamental shift in their thinking, and it is a natural thing that would happen if it's part of this cycle.

Generally, the lead times are stable; there are a few product areas, as Joe was saying before, like power management, where the lead times have extended a little bit.

But in general, the lead times seem to be under reasonably good control.

So is it six to eight weeks -- would that be a reasonable assumption?

I think -- again, there are 10,000 products, so they vary.

Some of them are longer; some of them are a little shorter.

But the average hasn't shifted a hell of a lot in the last three months.

Chris Caso.

I wondered if you could talk a little bit about turns, and where you are running turns as a percentage of business right now.

And given the increasing backlog, what you're expecting for turns going forward -- is that likely to go down a bit as customers are more confident and putting some bookings on you?

The turns or bookings and shipments within the same quarter this quarter was in the mid-40s.

That is down significantly from what had been well over 50 percent.

We are going, as Jerry said, into the next quarter with $475 million in backlog that customers are requesting delivery within the next quarter.

So it is reasonable to believe that the turns component is likely to continue to drop.

We always like to think of how much we like in backlog to run the business comfortably so that we have some visibility and we can know what we're going to produce in advance.

And with 475 against the revenue targets that we have for the Company, that is sort of in the vicinity of about 70 percent, which for us is a comfortable level of backlog to work (ph) through the quarter with.

Okay.

Regarding the end markets that you typically see seasonality in -- PCs, notebooks and handsets and such -- now that we are past Chinese New Year, I would expect that you have a little better visibility on that now.

Any areas where you see the any differences from what you would consider normal seasonality in those markets?

Not really.

You know, typically our second quarter is strong industrially, and some of the other more consumer markets cool off a bit after the rush.

We have been actually encouraged by the fact that in even some of the markets that would typically cool off after the Chinese New Year or after Christmas in the U.S., the order rates for those kinds of products is still pretty good, which indicates that the sell-through of those products appears to have been pretty good.

So all that says that we don't see any real alarm singles out there in any of those markets.

I guess in that, with the order rates for those getting a little better, are you getting the sense that customers are trying to build a little bit of inventory there in anticipation of better demand?

I think what customers are trying to do -- we saw that in our 26 week orders -- is I think customers are getting to believe that they can't call you up and get product in 24 hours.

So the more in-control customers are starting to place some backlog on for three to six months out, which is a new trend for them and for us.

And we think that is a healthy trend.

Okay, thank you.

Tom Thornhill.

Could you comment a little bit on what you're seeing and anything new with pricing trends?

You talked about lead times firming, longer-term orders.

Is that starting to hand the pricing leverage back to the supplier a bit?

We're not a good indicator of that because so many of our products, there is no second source for, so we don't drop the prices when business gets bad or raise them much when business gets good.

We have a small part of our business where there are many second sources for.

Certainly the opportunity is there to keep the price a little firmer than in the past.

No doubt about that.

But it is not a large ingredient for Analog Devices.

Understood.

You mentioned that you have seen strength continue throughout the first quarter.

That would imply good linearity right through the end of January.

Has that continued through?

Am I interpreting that correctly and has that continued --?

Yes.

Is that a good answer?

That is a very good answer.

In the area of -- some of the products, you mentioned that some of the consumer-related products, either handsets, notebooks, you are seeing less than typical seasonality in those end markets from your perspective of the demand that customers are placing on -- ?

Yes, we are seeing a little bit less, but we can't tell if that is because of what is going on with the units or it is because our content is increasing so high in some of those products.

So we are probably not a great bellwether for that.

We just look at what we are doing, and I think it is as much the increasing content as it is the units that they are selling through (ph).

You mentioned that your customers are changing their attitude toward placing longer orders.

Are you seeing anything different in the way distribution is handling their inventory requirements or their perspective on --?

Sure, they are trying to get ahead of the wave as well.

They haven't been carrying much inventory and their customers are starting to lean on them for availability.

So for us in a lot of ways, we are trying to manage our distributors' orders to us so that, particularly in areas where the products are scarce, that we don't put out all the inventory to places where it is not going to ultimately result in consumption.

We are watching them pretty carefully, as we always do in this part of the cycle.

Because distributors have a habit of trying to ride that wave as much as they can.

So you're holding them to being pretty much in line with consumption?

That's what we're trying to do.

That's a complex thing with 10,000 products and a lot of distributors, but we're certainly looking at that very hard right now.

Thank you, Jerry.

Andrew Root (ph).

Question on the base station business.

I hear what you're saying about customers cost reducing, and it makes complete sense.

Interestingly, though, some of the people who are being cost-reduced out are saying the complete opposite thing.

Do you think the difference is in the timing that old designs are ramping and what you're actually seeing will be accelerating over the next two or three quarters?

Or is it really affecting your revenues coincidentally or something we should model in as a growing trend?

I'm not exactly sure what the root of your question is, Andrew.

That the FPGAs are being replaced and being cost reduced by replaced by replacement with DSP in the signal path, which makes complete sense.

But the FPGA businesses and the commentary is actually completely opposite when the specific question was addressed.

I think -- there will still be plenty of FPGAs and base stations doing some of the sort of data control and a bunch of other things.

And most of those applications where DSPs are replacing FPGAs or in 3G base stations, which -- that is only a very minute (ph) part of the business.

So I think as the world shifts to 3G, that trend will tend to get more visible.

Okay, that makes sense.

The second question relates to power management.

I know it's the largest part of your business, but one of the drivers in power management revenues in the next couple quarters will be Intel's transition of technology in 90 nanometers to launch PCI Express.

Is there much risk in your guidance if Intel were to end up pushing either of those things out?

And if there is risk, is it more in the next quarter or is it more in the July quarter?

Vince is the one who's the most familiar with Intel, so I'll toss this over to him.

The Analog penetration across the PC space is very intense in the best (ph) top space, including Intel's.

We are in the next-generation architectures with Intel, but we're not dependent on any one customer in any one region.

So if it grows, we grow with it.

But I suspect that Intel's going to have a very serious position in the next generation, and we'll be right there.

If they have to push out either (indiscernible) or (indiscernible) a couple months, is that going to affect --?

We'll probably just (indiscernible) and hold the stuff.

I think that is just going to be a mix factor.

I think the prognosis for PCs this year is very, very good, as the business spending increases, more PCs are being consumed, so I think it is just a question of mix factor.

Okay, thanks.

So Vincent's goals remain the same for sales, regardless of what happens with Intel.

Is that the way I would translate that, Vince?

I got the bottom line there, I think.

Louis Gerhardy.

Great job getting all of those parts out in the holiday quarter.

I wanted to ask you just on distribution, what percent of your revenue did disti represent?

And then also the same question on your total bookings.

I think disti last quarter was approximately 48 percent and OEM was 52.

That is not a terribly useful statistic since it changes by virtue of the channel that some of our large customers buy through.

So our sense is that you have to be very careful, because we have some large vertical customers that buy through distribution and that swings that number a lot.

So there is not a lot of useful information in that number as a trend.

I just trying to get a sense of did bookings for you this quarter grow faster in distribution or in the direct business.

They grew a little faster in distribution.

But again, some of the large OEM accounts bought through distribution.

So it is harder.

But when you add all that in, particularly with the growth of our industrial business, which is heavily service data (ph) distribution, that is not surprising.

What percent of your distribution is U.S. versus international?

I don't have that statistic with me, I'm sorry.

I didn't hear the split of analog and DSP in the quarter.

Do you have that number?

Let's see -- it was 78/22, which is about the same as it was last quarter because they both grow at about the same rates.

Do you expect your net bookings to grow in fiscal Q2?

That's Vincent's goal.

The answer is yes.

Care to put a number on that?

No.

All right.

Thank you.

What we really are trying to do -- and on the disti question, we recognize revenue when they ship it out as we have mentioned before.

So we really watch the inventories week to week; we get it by product and we are trying to service the customers.

So the bookings, as we have said before, are less relevant to us in terms of the whole equation.

Obviously at this juncture we are seeing more of a pace that customers are looking for product distributions, looking for product on their shelves, and we are looking to supplying the demand at the end of production (ph).

Thank you.

William Conroy.

First, Jerry, with the increasing emphasis in the consumer space, are there any fundamental differences within that space relative to the way we have historically thought about ADI?

No, I don't think so.

We have always had business strategy that we start off developing the technology for the broadbase customers, and very often we find applications where a certain group of customers wants to use (technical difficulty) that we adapt to those applications.

It is interesting that despite all of the increases we have had in the consumer business, it is still approximately 10 percent of our sales.

So it really hasn't rocked the boat a hell of a lot, and I think it's going to be a great growth market for the future for us, given the pervasiveness of signal processing in new consumer products.

But I think those other markets are going to grow pretty fast also.

So it's probably not going to change the mix a hell of a lot.

Stereotypically, that is a market that had extraordinarily rapid turnover -- customer whims, fancies, etc.

You're able thus far to preserve the margins?

Yes, I mean the margins -- we are able to enable new functionality in some of these products that really adds value to the product.

So in that sense, there is always great pressure from every customer on cost and price.

But if you can add a lot of value and there are not a lot of competitors that can do that, if you can offer them things like programmability with DSPs so they can rapidly go from model to model without changing and putting in very expensive ASICs, if you can increasingly integrate analog functionality for them, as we have for example with digital cameras, I think we have shown that if you are there early, if you work on three generations of product at the same time -- that which you are shipping, that which you are hoping to ship in the next 6 to 12 months, and that which you are trying to sort of break new ground in from a year to two years from now -- if you do that and you do your homework well and you really work on the costs upfront, we make very good margins in that space.

Thanks very much.

Ross Seymore.

Maybe my math is a little screwy here, but if I put your January quarter and then the April guidance together and then just get normal seasonality after that, I get to about that 30 percent growth number that you gave for the whole year.

Is there some reason why you would expect us to drop back to normal seasonality or is that just kind of a bit of conservatism baked in?

I think it is the fact that we like to talk about what we know is going to happen for sure, or almost for sure, let's say, that we have a lot of visibility on.

We will update that periodically as we see what happens with the order trends.

We are looking at it -- I mean, we are comfortable raising it up to 30 now based on what we saw in Q1, and we will certainly take a hard look at that after Q2.

I think the math works out to something like mid single digits toward the end of -- the latter two quarters at the end of a year.

30 percent is a great number.

I just wanted to see if there's anything else that you saw --.

We are not trying to fine-tune it, you know, 1 or 2 percent either side of 30.

But we think if it turns out to be 30 and we get the kind of leverage we are thinking we will get on the 30, I think everybody will be pretty happy.

On the handset side of things, did you notice anything recently in business around the Chinese New Year or post the Chinese New Year that was surprising?

Any new customers coming in or old customers going off the order books?

I think we have a pretty diverse group of customers, particularly in Asia.

Those customers are pretty committed to Analog and they have been for a while and we didn't see anything particularly irregular about that.

The only real trend that we are seeing is that customers are shifting rapidly towards camera phones.

In many locations, you sort of can't sell a phone without a camera in it right now.

And a lot of those camera modules are coming from our Japanese, and to some degree, a little less degree, our Korean camera customers.

So that has really helped us.

On the capacity side of things, if you are at about 65 percent right now, you obviously see some strength going into the next few quarters.

At what sort of utilization levels do you start thinking about having to expand your total amount of capacity?

We are going to expand our capacity, as Joe was mentioning, during this year.

We have 130 or a little more than that devoted to our capital plan this year.

That is going to put on more capacity.

But as Joe was saying, one of the very significant things that is going to happen is some of the products are sucking up a lot of capacity and moving out of our fabs, particularly some of the power stuff.

And that is going to free up a lot of capacity as well.

We have a pretty good bead on with the kind of capital spending that we have dialed in and the kind of utilization we have, particularly after some of the products move out, we are in pretty good shape in our internal capacity throughout this year.

And as we get through the year, depending on what we believe about 2005, we will make modifications to our spending at that time.

But the overriding takeaway is, with very small amounts of capital investment, we can generate significant amounts of excess capacity.

Great, thank you.

Wilmot Kidd (ph).

Margins.

You say gross margins of 60 percent is the near-term target.

Can you break that down between DSP and analog?

Not really.

I think again it very much depends on the mix in the DSP business, depending on how rapidly some of the horizontal DSP applications go in the analog business, depending on the mix of business we have.

It is very complicated.

But when we look at it all and we average it all out, we think 60 is a good model for us.

But I can't provide much more detail on that right now.

I remember years ago wondering how good the -- why is the DSP business so good?

Can you give us any -- is this for competitive reasons or --?

Certainly, over the last couple of years, our competitive position in DSP is significantly better than it was earlier.

Is that why you don't want to talk about margins?

No, it is just that first the categorization of -- we are integrating analog content on DSPs and DSP (indiscernible) on analog at a pretty high rate, so the exact description of that is a little complex.

I think generically what we can say is that our analog business gross margins are still quite a bit higher than our DSP gross margins.

But on the other hand, there are very few businesses on this planet that produce the gross margins that the high-performance analog business does.

On the other hand, the amortization of R&D expense in our DSP business has given us great leverage, as the DSP volumes continue to increase.

So all told, when you look at the operating leverage we have, in the analog business because of utilization, DSP business, I think primarily because of operating expense leverage.

I mean that is why the profits are growing at a rate much, much higher than our sales right now and will likely continue to.

Which pulls the other most -- does DSP pull analog or does analog pull DSP?

Depends on which of our groups you ask.

Our DSP group is certain the only reason we get any analog business is because of our DSPs; and our analog business is certain that the only reason we get any of that businesses is because of the analog product.

So I think depending on where you are and which application or which customer, you get a lot of pull both ways.

Thank you very much.

Before we take our last few questions, I would like to mention a few upcoming dates.

Our second quarter 2004 earnings release is scheduled for just after the market close on Thursday, May 13, and the conference call will start at approximately 4:30 PM Eastern Time on that same day.

I would also like to add that the Analog Devices' 2003 annual report to stockholders is now available.

You can get hard copies by telephoning us here at Investor Relations or download an electronic copy from our website at www.analog.com.

We also have our shareholders' meeting scheduled for Tuesday, March 9.

That takes place at 10 AM here in the Boston area.

Next question, please.

Nimal Vallipuram.

My question has been answered.

Thanks a lot.

Tom Thornhill.

You mentioned data converter growth rates quarter-to-quarter, year-to-year.

Can you also discuss the amplifier growth rates, please?

Let's see if we have that here.

The quarter-to-quarter growth rate -- again some of the products with amplifiers, the categorization is a little bit hard sometimes.

But it looks like it was about 10 percent up sequentially somewhere around 20 percent up year-over-year.

Thank you, Jerry.

I think that was our last question.

I want to thank everyone for your participation today and we look forward to talking to you again on our second-quarter conference call.

Thank you.

Goodbye.

This concludes today's Analog Devices conference call.

You may now disconnect.