亞德諾半導體 (ADI) 2004 Q2 法說會逐字稿

Good afternoon.

My name is Deborah, and I will be your conference facilitator.

At this time I would like to welcome everyone to the Analog Devices second-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 with our analyst participants. (OPERATOR INSTRUCTIONS) Ms. Tagliaferro you may begin your conference.

This is Maria Tagliaferro with Analog Devices.

Thank you for joining us today for the second-quarter call.

If you have not yet received our press release you can access it by visiting the website at www.analog.com and clicking on the headline displayed on our home page.

This conference call is also being broadcast live on the Internet as a webcast from analog.com; select Investor Relations and follow the instructions shown next to the microphone icon.

A recording of this call will be available today within about two hours of the conference call's completion, and will remain available via telephone or Internet playback for about a week.

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

Joe McDonough, Vice President of Finance and CFO;

Vincent Roche, Vice President of sales and marketing and Brian McAloon, Vice President of the digital signal processing and systems products division.

We scheduled this call for sixty minutes and we are going to 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.

Analysts participating today via telephone can press Star one on their telephone at any time beginning right now to get into the queue to ask questions.

I would like to point out that under the provisions of the Private Securities Litigation Reform Act of 1995 this conference call will include forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict.

The risk factors which may affect our future operating results are described in the company's most recent form 10-Q filed with the Securities and Exchange Commission.

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 May 13th.

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

Good afternoon.

Our second quarter turned out to be a truly great quarter for ADI.

Revenues increased to $679 million, which is up 12 percent sequentially and 35 percent up from the same period last year.

Both of those are well ahead of the plan that we communicated to you at the beginning of this quarter.

Shipments continued strong in all regions of the world with the highest growth in the United States, where sales increased 18 percent sequentially, representing an accelerating industrial economy and increasing capital spending.

Our U.S. sales have always correlated very well to capital goods shipments, which economic reports now indicate are now in a very steep upward trend.

Our sales also grew in Europe and Japan and also in Southeast Asia.

For the quarter, North America accounted for 24 percent of our sales, Europe 19 percent, Japan 20 percent and the rest of Asia approximately 37 percent.

From an application standpoint our strongest sequential percentage growth in Q2 came from consumer and industrial customers, where our revenues increased 21 percent and 15 percent, sequentially, respectively.

Sales to communications customers increased 10 percent sequentially, and sales to computer customers increased five percent sequentially.

Our gross margins expanded significantly to a record 59.2 percent of sales, which was up 210 basis points sequentially and represented 77 percent incremental gross margins on incremental sales, which is great leverage by any measure.

We continue to ramp our internal fabs to respond to customer demand for high-performance analog products, which we fabricate in our internal fabs, and that should allow continuing progress towards our 60 percent gross margin goal perhaps a bit sooner than we earlier anticipated.

Operating expenses declined 150 basis points to now 31.5 percent of sales as we continue to constrain operating expense growth until we reach our goal of 25 percent of sales for operating expenses.

As a result of higher sales, very strong incremental gross margins and very tight expense controls, operating profits rose to nearly $188 million or 27.7 percent of revenues, which was up 360 basis points sequentially and more than double that of the same quarter last year.

Net income rose 31 percent sequentially to 22.5 percent of sales, and earnings per share of 39 cents was 4 cents above the high end of the range that we communicated at the beginning of the quarter.

Our balance sheet continued to strengthen with cash increasing by $235 million, accounts receivable declining to 44 days, and inventory declining to 102 days.

Financially we are continuing to accomplish exactly what we planned to do.

We're achieving very high revenue growth, and we are achieving excellent earning leverage on the increasing sales.

And we continue to generate significant cash flow as is inherent in our business model.

Today our Board of Directors declared a cash dividend for the quarter at 6 cents, which is up 50 percent from the 4 cents of last quarter.

Demand continued to strengthen this quarter.

Orders for shipments in the next 13 weeks grew 12 percent sequentially, which is up from the 8 percent sequential growth that we experienced last quarter in orders.

In addition, our second-quarter orders were up 47 percent from the same period last year.

Orders for shipments in the next 26 weeks also grew substantially, reflecting our customers' increased visibility and their confidence in their businesses going forward.

Our order rates continue to run ahead of our sales rates with the book-to-bill ratio once again well above one.

As a result, our backlog that is requested for shipment next quarter increased approximately 20 percent sequentially to now $571 million, and now represents approximately 78 percent of the middle range of our revenue plan for Q3, which is certainly the best visibility we've had in many quarters.

Our strongest revenue growth this quarter came from our analog products, which grew 15 percent sequentially, 40 percent year-over-year and accounted for approximately 80 percent of our sales in Q2.

Orders for analog products shippable in the next 13 weeks were up approximately 10 percent sequentially.

Converters, amplifiers and other analog products all grew strongly both sequentially and year-over-year, powered by many recently introduced new products but also by an increase in demand for our longer-life-cycle standard products that we sell to a very broad base of over 60,000 customers.

Most noteworthy were sales of our converter products, which grew 16 percent sequentially and were up 40 percent year-over-year.

Our converter products continue to outdistance the competition which has made ADI the number one supplier by a very wide and an increasing margin.

The breadth and the depth of our portfolio is unmatched in high-speed converters.

No competitor has yet cracked our recipe for combining high-speed with very high signal integrity, and that's why customers continue to choose ADI data-conversion technology first and most often.

Also, in precision converters (those with very large dynamic ranges), our leadership competitive position also continues to strengthen with many significant new product introductions.

Converter products that we introduced this quarter include a new converter that breaks the one giga sample per second speed barrier.

Our 14-bit, 9736 EA converter combines the industry’s fastest sample rates with leading accuracy, power specifications for applications as diverse as instrumentation, automatic test equipment, wireless infrastructure equipment, radar-signal processing and avionics.

Customers in every market are designing applications that need to be portable.

Whether they are for instrumentation, entertainment or communications, these handheld digital systems rely on digital analog converters for interfacing to the real world.

This quarter we launched our nano dack (ph) family, which provides all the performance of our ADI's converters while reducing power consumption by 80 percent and the physical area of the chips by 70 percent.

High-performance amplifier products also did extremely well this quarter, with revenues up 12 percent sequentially and 29 percent year-over-year, representing a continuing acceleration in the growth rates of our amplifier products.

During the quarter the electronics industry honored ADI with the innovation of the year for analog products.

Our 88,099 high-speed operational amplifier won this honor and continues our forty-year track record of helping engineers make their design ideas real by pushing analog technology to yet new levels of performance.

In addition to the strong sequential gains in our standard analog products, we also had strong sales growth in many application-specific analog products.

Of particular note was strong sales into digital cameras, into projectors, advanced digital TVs and many other audio and video products where we have very high market share and increasing content per system.

For analog products we also saw a strong growth in wireless base stations, cellular phones and also in broadband access products.

In each of these areas where we already have high market share, our strategy is to win more and more content within each system by developing products that serve the entire signal chain.

And that is a strategy that most of our analog competition could not easily follow.

In wireless base-station applications we've been expanding into the radiofrequency area ,and just yesterday we announced a new radiofrequency detection product that uses proprietary circuit design at our proprietary silicon-germanium manufacturing process, to produce a device that can accurately measure the power of radio signals from 1 MHz to 8 GHz, which exceeds the previous peak of 2.5 GHz by a wide margin.

This capability will drive down the cost of transmitters and will greatly simplify network management for operators.

DSP product revenues grew 2 percent sequentially and 20 percent year-over-year.

Our second-quarter DSP sales were driven by very strong sequential and year-over-year growth in both wireless, and general-purpose DSPs, offset by a decline in DSL due to supply constraints caused by very short lead-time orders.

Orders for DSP products shippable in the next 13 weeks were up more than 20 percent sequentially, in line with the increasing design rate in both horizontal and vertical DSP applications.

We continue to make great progress in establishing Blackfin and TigerSHARC in wireless and also in a very broad range of general-purpose applications.

In Q2 we shipped a record 1600 Blackfin development kits as industry awareness of the performance and the versatility of Blackfin continues to accelerate.

We're now well along toward our goal of 10,000 development kits in our customers' hands by year end.

Beyond the thousands of horizontal applications for Blackfin, during the quarter we secured several new design wins for Blackfin-based EDGE handsets based on Blackfin's unique ability to implement EDGE in software rather than by using hardware accelerators as most of our competitor's solutions do.

We also secured several Blackfin design wins in IP set-top boxes where Blackfin performs the task of decoding multiple video algorithms, replacing several ASICs.

The common theme in many of our design wins continues to be using a programmable DSP as a vehicle for our customers to decrease their costs, while increasing features using software rather than hardware.

The Ericsson design win that we announced earlier in Q2 is another example of this theme.

Ericsson's selection of TigerSHARC, the new 3G base stations, is a major breakthrough for ADI, given Ericsson's high market share in base stations.

It also underpins the significant value that Ericsson and other base station manufacturers can derive from TigerSHARC, mainly decreasing their overall engineering costs while creating a platform that can support multiple standards and evolving features through software programmability rather than costly ASIC redesign.

Based on our higher backlog and our continuing strong order momentum, we are planning for Q3 to be another good quarter for ADI.

We are currently planning for 7 to 10 percent sequential growth in Q3, which would provide revenues in the $725 to $745 million range.

We are planning for gross margins in the 60 percent range, with a higher mix of DSP sales in Q3.

Operating-expense growth is planned again to be well below our sales growth.

This will produce earnings per share in Q3 in the range of 43 to 45 cents.

Overall, the success that we continue to enjoy is the result of a much-improved economic environment worldwide, many new diverse applications that require high-performance signal processing technology that very few semiconductors can provide, and more and more ADI content in every application that we serve.

The combination of these factors will likely produce another year of above-industry growth for Analog Devices.

Given the current visibility we have, we are now raising our 2004 year-over-year annual revenue growth objective to 35 percent, up from 30 percent which we communicated last quarter, and we are planning for continued expansion of our profit margins as we realize the leverage that still remains in our operating model.

Thank you, Jerry.

During today's Q&A period please limit yourself to one primary question and no more than one follow-on.

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

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

(OPERATOR INSTRUCTIONS) William Conroy with Sanders Morris.

Good afternoon.

A question on the gross margin fall-through in the quarter just reported.

Is that a function more of the higher proportion of analog products, which you mentioned and the analog carrying higher gross margin manufacturing efficiencies?

Sort of the suddenly popped through, anything unusual, can we just get a little more detail there?

It's a combination of all of those factors.

As we’ve been saying for many quarters, the mix certainly makes a difference in terms of the gross margin in any quarter.

We've had a number of actions underway for a very long time and the manufacturing area improved the profitability and reduced the costs of our manufacturing, and we've increased the utilization a bit this quarter, it probably went from something in that 5 percent range last quarter up into the 70, 75 percent range this quarter (technical difficulty) so you put all that together and we got a drop-through that was (technical difficulty) percent or something, and I think what we have been looking at in recent quarters as drop-throughs been in the 70 percent range, a little higher in some quarters than other quarters.

And that's what we're trying to do on a go-forward basis, have a drop-through (technical difficulty) to 75 percent range depending on the nature of the quarter, the mix of the business or other factors.

A quick follow-up.

Jerry, you mentioned you expect ESP growth to kick back up somewhat in the current quarter.

Is that coming from the newer products, TigerSHARC and Blackfin or from the older ones (multiple speakers)?

It really comes from a combination of things, certainly some more sales on TigerSHARC and Blackfin.

That product is really still in its infancy, in terms of measurably moving the needle in the sales.

But it's really a combination of both some of the newer stuff and some of the older stuff; it turns out we built some backlog in DSP last quarter.

Our orders were quite a bit above our sales, and that's going to, we're going to catch up on that this quarter we think.

Adam Parker, Sanford Bernstein.

Can you talk a bit about your inventory levels here, growing a little bit the last couple of quarters, do you expect inventory to build during the July quarter?

And then also externally are you seeing any spots where there are shortages for your parts or any spots where there is excesses?

Joe, do you want to take the inventory question?

Our inventories were down in days this quarter, from 103 last quarter, 102 days.

As we’ve been saying our model for inventory is 100 to 110 days, so we were down toward the lower end of that.

Our plan for next quarter will probably call for that to come down a bit more in terms of days.

We're not seeing anything unusual in terms of our own inventory.

I could not hear what you said.

Your plan for this quarter is what?

Plan for next quarter is for the inventory to continue to come down in days.

The cost of sales -- when we look across the distribution channels we are seeing that their turns are actually going up so their inventories are actually down relative to their sales growth.

As we look at the customers, it’s kind of hard to tell but we don't really see any evidence that there's any real buildup of excess inventory out there.

It certainly turns out that our lead-times are relatively stable.

We've been able to keep up with our customers’ demands for the most part in the cycle, and in some cases better than some of our competitors.

So we think the situation is in reasonably good equilibrium right now.

Shifting gears to one other issue, given you’ve pretty much achieved the 60 percent gross margin goal or it looks like you will in Q3 and you already kind of achieved the peak-to-peak margin expansion, do you want to try to set a new gross margin goal here, or for 2005 so we do get some continued industry growth and we continue to get ADI's above-industry growth?

What could we see for 2005 gross margins?

I like to turn this over to our conservative New England-.

Let's get Joe involved so we can hold him to it.

When we look at it, as you know, Adam, we are really looking at the highest value for the food chain in the semiconductor.

So we have an analog business that has the capability to run with the best of the high-performance analog companies.

And you know what the gross margin potential is there.

We've been doing a lot in terms of all the activities in factories and everywhere else to improve those gross margins and when we look at the DSP business, we have a very high gross-margin objective for that DSP business, as well.

But I think we still have a few points we think ahead of us that would bring us into the low 60s as a gross margin goal.

And that seems like a reasonable goal for the kind of business that we are running.

So you don't want to give a specific number?

Well, I think that that's probably enough at the gross margin; where we have a lot of leverage is down on the operating expense.

They are running at 31.5 percent today.

As we’ve been saying for a long time, our goal is really 25 percent of sales for operating expenses, and so -- and we're growing expenses and intend to continue growing expenses at a rate much lower than sales growth.

So when you put it all together what we would be looking at is the goal of around 35 percent operating profit, and looking at drop-through down to the operating margin that is something in the range of 50 percent of incremental sales as we go forward through '05.

Now obviously that will be different from quarter to quarter; itwill depend on the business conditions and markets and the mix of business, but that is the way we are trying to manage the business.

Thanks for your time, guys.

Romit Shah with Lehman Brothers.

Thanks, and nice quarter.

You mentioned a couple quarters back that your customers were concerned mostly about their inventories and the last time we heard from you, you were mentioning that they were concerned about supply.

Could you just give us an update on how they are thinking about the environment today?

Is supply still a concern and if you could maybe tie that back to how lead-times are trending versus the previous quarter.

I think many of our customers believe that this cycle is really still got (sic) a lot of legs left, and they believe we are in the early stages of recovery.

So they of course at this part of the cycle they get more concerned about making sure they have a source of supply, particularly for those product areas that are mostly proprietary, as is ADI's.

On the other hand, during this cycle which is a little different than the last cycle, we been able to pretty much keep up with what our customers’ demand is.

The lead-times have really not in most cases extended out beyond what we are comfortable with.

So that really hasn't forced them into a panic buying mode as it did in the last cycle.

Like I said, our lead-times have been stable, despite the fact that the sales have been growing at a pretty good clip, and we're not hearing any real signs of panic from the customers, at least for our products.

I can't really speak for other products in the industry.

So our sense is, the system is in reasonably good equilibrium right now.

Just a follow-up.

Your guidance for the July quarter is certainly better than we were expecting, and I think what is usually a seasonally slower quarter for you, so in terms of the segment heading into Q3, where would you expect to see less-than-typical seasonality in terms of the end markets?

A lot of our historic seasonality has been the result of a very heavy concentration on the industrial area, and that does have its seasonality in the summer period just because there's a lot of customers, and there's less sales days in that period due to vacations and everything.

I think now when you look at our business it is so diversified -- you know we have a large percentage in consumer, communications, computers, and those businesses tend to be a little acyclical relative to the industrial business.

So while the July period always causes you to be a little bit more cautious about the outlook, our sense is, with the backlog that we're starting out with, that is a reasonable expectation.

Typically what happens is the industrial business slows down a little bit, and the other businesses start their building for the school period, and other factors that go into some of the other markets.

This year at least we're not expecting a whole lot of seasonality other than potentially in July we will see some slowdown probably in the industrial business.

Bill Lewis with J.P. Morgan.

Could you talk about where you are on utilization now?

How much maybe that extended in the quarter and what if any capacity you're bringing online and CAPEX changes you might expect to over the next few quarters?

The utilization was somewhere in the 70, 75 percent range on average across the company, up from about 65 percent last quarter.

We are continuing to bring on more capacity and to ramp some of our capacities; we have capital spending this quarter of about 43 million.

We have a current plan for the year of about 155 million or so.

And so it's reasonable to expect capital expenditures next quarter to be in the same vicinity as this quarter.

Second question, if I could.

Maybe on the product area, what percent is would you call just the consumer piece today, and what was really behind the strength if you can identify it in the quarter?

The consumer piece is somewhere around 10 or 11 percent of our sales.

These percentages on the size and the numbers that we have in these markets don't change very much quarter to quarter.

That's been about where it is.

The strength in the consumer market is actually very, very broad based.

We've had a very strong position in digital cameras.

That continues.

Growth rates for digital cameras are beating most people's expectations.

We have an important position in some of the new digital TVs, in a lot of audio and video applications.

So it is really across the board in many traditional and many emerging new consumer products that is spread out amongst many, many different applications.

It turns out that interestingly many of those products, which people think are digital products like digital cameras, have a very high analog content to interface with either audio, video or imaging signals.

So that is where our high speeds, A to Z converters and many other products like that really have a lot of traction.

So that business has been very strong for us, and our projection into the third quarter at least is that that is going to stay like that.

Thank you very much.

Chris Caso with Schwab SoundView.

Jerry, wonder if you could expand a little bit on some of the comments you made inside the DSL side, with some of the supply constraints you talked about.

Am I right interpreting that as supply constraints from your foundry (multiple speakers)?

Yes.

In our DSL business, given the kind of business it is, that customers tend to order for very short lead-times and we don't carry a lot of inventories.

We got some orders, and we could not ship them all so we're going to ship a lot of those orders next quarter.

Is that on the customer premise side?

Pardon?

Is that on the customer premise side, the DSL?

Yes.

Just to clarify that, it wasn't a foundry shortage.

It was the orders came in from the customers late, in terms of being able to turn them around within the lead-times they would like; we have to build the product for them before we can ship it.

I was wondering, as a follow-up, if you can talk about going forward about your product mix, and I know that your fab is fully loaded right now, but you can probably see to the fab getting higher levels of loading in the back half of the year.

Are there any levers that you can pull with improving the mix that may improve margins going forward?

Sure.

We talked about some of the mix that was driving down the margins in that business in previous quarters, some of the very low-end power management stuff.

But I think the mix is improving in those fabs.

As Joe said, we are continuing to invest in new capacity for what looks like very modest investments, capital we can get a fair amount or output out of those fabs, and that's what we're intending to do.

So it’s really a combination of a slightly richer mix in those fabs and also probably most importantly a lot more importantly than the mix in those fabs is, that for very, very modest capital investments we can generate a lot more sales.

And that is what we're planning to do.

Tore Svanberg with Piper Jaffray.

Good afternoon.

Could you give us a little more color on your XFCB-3 silicon-germanium process and how that stacks up vis-a-vis some of your competitors?

Well, we optimize our silicon-germanium process for the kind of analog products that we think our customers are after, particularly radiofrequency products.

And so there's a lot of silicon-germanium processes out there that are optimized with a lot of other characteristics.

We tend to try to build very high-frequency radio products and other products like that (inaudible).

It's a process that we've been working on that we've been, over the last probably six to nine months been ramping up, and that looks like it's going to be an important process for us going forward.

Is that an internal or outsourced process for manufacturing?

That's internal.

We build that here in Massachusetts.

Thank you very much.

Louis Gerhardy with Morgan Stanley.

Great job with the quarter.

A couple questions on distribution.

Can you just remind us of what percent of your total revenue is distribution, and of that how much is North America versus international?

The distribution business grew a bit faster than the OEM channel this quarter.

We have about 51 percent of our revenues coming out of the distribution channel, and I don't have the North America split on that here.

Would you have just a rough estimate as to how much would be North America versus international?

In the distribution channel, is that you are looking for?

Yes.

It's probably somewhere in the 30 percent range.

North America?

It is a little bit confusing because from quarter to quarter we ship to very large OEMs through distribution, particularly in Asia.

So it's not nearly as clean a number as it used to be in the old days when we shipped to small customers, distribution to the large customers direct, it turns out in Southeast Asia for a whole bunch of reasons, some of the large customers get shipped through distribution.

So that tends to make the number bounce around a little bit.

So the relative mix of and relative growth rate between distribution and the OEM business is not really a good, reliable indicator of what's going on anymore.

And do you have the distribution POS numbers, as well as your (indiscernible) numbers that you can provide to us?

The only numbers that we report are the revenues when the distributor sells it out.

And so when we are talking about -- when we're talking about revenue from distribution, we're talking about the revenue we earned as our distributors sell our product to their end customers.

That's true everywhere in the world.

We get inventory every week from every distributor everywhere in the world, and we calculate the revenue every week on the basis of the inventory change.

Thank you.

Just to sort of clarify this question of geographies, approximately a quarter, 25 percent of our business is in the U.S.

Approximately 20 percent is in Europe.

Twenty percent is in Japan, and the balance is in the rest of the world.

Ross Seymore with Deutsche Bank.

Thanks, and congratulations on a strong quarter.

Just wondering if you could talk a little bit about your handset-related business?

And what was going on within both the DSP and analog side for that and market in the quarter.

The handset business generally was very strong for us in Q3.

That's been going on most of the year.

A large part of our handset business is Southeast Asia and Japan, and I think there have been very clear market-share shifts to that region over the last couple of quarters.

We've been particularly strong on the migration towards EDGE, which is the next-generation standard, and we are one of very, very few companies that can actually deliver a type (ph) approved EDGE solution right now of chipsets.

So that business is good for us.

The outlook for the next couple of quarters is also strong, and I think we have a good competitive position.

The model that we adopted, of really going after the stuff there in Southeast Asia and also to some degree in Japan, has really helped us because that is certainly the way the market is shifting right now, not only for production but increasingly for design.

The ability to have sort of a full chipset that includes everything from the antenna up is a very, very important distinction between us and many of our competitors.

Does that help?

Yes, yes.

Jerry you mentioned earlier that you've been able to hold your lead-times relatively stable, but with the type of growth we're seeing and the utilizations across the industry rising I would imagine your customers have to start behaving a little bit different where they want to order a little earlier.

Have you noticed their behavior changing on either your DSP customers or OEM customers versus say three to six months ago?

Well sure.

I think six months ago, as I said they were worried too much about having too much inventory.

So I think customers are trying to line up their inventories in line with what they think their sales are going to be.

And I think, whereas at six months ago it was at an equilibrium from the standpoint of they were well below what they needed to do, now they are getting in equilibrium.

We're seeing that as we look at the 13-week order rates, but also the 26-week order rates that customers are more willing now to place orders for quarter or so out than were six months ago.

All those are signs of things being relatively healthy, and in a reasonable state of equilibrium as compared to six months ago, nine months ago or a year ago.

One quick last follow-up for Joe, the interest income popped up pretty nicely in the quarter; is that the sort of sort of level we should think about going forward that 7 and change million?

Yes, maybe a little bit stronger than that, one million or so next quarter.

Interest rates are improving a little bit.

Cash is improving, so we get more interest income.

(indiscernible) with RBC Capital.

I have a question about the consumer business, currently what percentage of sales is it and how quickly do you think this business will grow in the coming quarters?

The consumer business is somewhere around 10 or 11 percent of our sales, and that has been growing at a pretty good clip over the last year.

And we see nothing that is really going to change that.

So all the forecasts we have for large consumer companies over the next couple of quarters seem pretty positive.

Partly that is the result of the sell-through of those products, but it’s also -- in ADI's case at least, it's a result of the fact that a lot of consumer products, we’re getting more and more content.

Typically what happens in our Q3 into Q4 is, there is a good seasonality for those products, as people build up for, first, the school season, and secondly, the holiday season.

So our sense at least, from what our customers are saying and our field sales folks are saying, is that business is going to stay strong for the next couple of quarters.

My last question is in regard to your gross margin trends within individual business segments, do you see more shift to a DSP at this point, or this quarter's improvement came from a high-performance analog business?

As Joe said, certainly the gross margins from quarter to quarter vary to some degree, based on the mix between our analog and our DSP business.

As I think I said in the opening comments, we think some of the backlog we built in the DSP business where the orders were higher than the last quarter, is going to come through in third quarter.

But despite that, we are still believing that the gross margins are going to increase next quarter again.

And that is a sign of the underlying strength of that when, even in a quarter when maybe the DSP growth might be a little higher than the analog group next quarter, the gross margins are still going up.

All that, we view as a very positive sign.

Jack Romaine with SG Cowen.

Can you guys give us any sense of where your analog gross margin is?

Just in rough terms, is it 65 percent, 70 percent, higher than that?

I think you're in the right neighborhood.

You can't be any more specific than that?

No, we don't really want to get into the details of the gross margins in the various businesses.

We do have very strong gross margins in the analog business, and we have very good gross margins in the DSP business.

They're actually high gross margins for that type of business, as well.

Over the past several quarters has your DSP gross margin continued to trend up?

It has been holding right in the neighborhood where we would expect it to be.

It moves around a little bit from quarter to quarter, but trending in the right direction.

I mean, we don’t get as much leverage on the DSP gross margins with volume as we do the analog business, but that's mostly out of the foundries, because the analog business you get the leverage of filling our factories.

But I think the gross margins in the DSP business are, relative to a lot of the comments we've seen about that, are higher than people believe they are.

Okay.

The right way at a company level to think about it is incremental gross margins in the 65 to 75 percent range, from quarter to quarter, will be at one end or the other of that range, depending on what the nature of the business that quarter might be.

Yes, the mix.

One last question on the data converter business, do you have any statistics you can give us on how often when you sell a data converter you sell another analog component with that as part of a package sale?

I would say probably 95 percent of the time.

Okay, thank you.

Andrew Root with Goldman Sachs.

It's actually Sak Chu (ph) for Andrew.

Two relatively quick questions.

Number one on the computing side that was up, I believe you said 5 percent quarter-over-quarter?

So I was just wondering what drove the growth there in particular just given the seasonality in that business.

We have a lot more content in PCs then we used to, and we're doing well in that business.

Our business, as we said in a lot of these market segments, isn't nearly as dependent on the unit growth in those segments as it is the content that we provide in those segments.

That allows us in segments like the PC business to grow our revenues at a rate a little faster than the unit growth rate of the end markets.

Your content growth is – you’re gaining additional power management?

That is certainly part of it.

Okay, and then second question was on the Blackfin development kits, if you could just remind us how many you shipped to date and what particular areas of strength you are seeing that in.

We've been shipping development kits at the rate of about 1000 units a quarter, development kits a quarter, maybe 1100 in some quarters.

We shipped now very close to 6000 development kits.

It was a marked step-up this quarter in development-kit activity, and I think what is really going on is as people really get to understand the power of this product, it is generating, it is now almost in a self-generation mode.

It has a lot of industry buzz and a lot of people want to really see what the power of this product is and what they can use it for -- and in just a myriad of applications.

And probably if you look at that base of 6000 or 6500 development kits its probably a base of customers that ranges from industrial to consumer to communications to military.

It is just, when we look at the chase (ph) list that our sales folks have for this thing, it is just across a myriad of different applications.

As well as I mentioned a few of the larger applications where Blackfin is getting a lot traction as well.

We've always looked at that business or Blackfin as a product that has a great horizontal appeal, that we can sell to a lot of different customers and also a product that would catch on in a few very high-growth and high-volume verticals, as well.

And I think the mix we're seeing between that, between some of these high-growth verticals and the horizontal base is a very encouraging mix, which we think over time will really help the gross margins of our DSP business.

So we are actually quite satisfied with where that product is, and we are building our base and a franchise in that product that we think is going to last many, many years into the future.

Michael Masdea with Credit Suisse First Boston.

This is Ed Tye (ph) for Michael, great quarter, guys.

Just two quick questions.

I was wondering if you can give us a little color around pricing?

Have they been relatively stable, or have you actually been able to raise some prices in certain high-performance analog areas?

In general I would say our pricing is stable.

We tend not to raise our prices in the up cycles or alternatively we don't decrease them in the down cycles.

So our customers really need these applications to understand where they can rely on us for price, given that so much of our product base is proprietary.

So with the margin we see a little bit of price-stiffening in some of the areas that where there are second sources for.

But by and large the prices across all our product lines are relatively stable.

Great.

And then really quickly on the Ericsson TigerSHARC design win for 3G base station there, I know it's a little bit early to assess this but how would you characterize your relative positioning in 3G base station versus 2.5G and 2G?

Is it better or are you kind of in line?

I would say on the analog side where we've always had very, very strong position, that continues.

We have a large part of the analog content on 2.5G base stations; we have a correspondingly large part of the contents on 3G base stations.

I would say the part that is changing the most is in the 2.5G base stations; we don't have much DSP content.

And in the 3G base stations we expect to have a lot of content as the architectures really change.

TigerSHARC, as you can well imagine with the Ericsson win, is gotten (sic) a lot more visibility than many other base-station accounts, given that Ericsson has the highest market share in 3G base stations by quite a margin right now.

So our sense is, that with the design wins we already have and with the list of customers that are in very active stages of evaluation and development, that we are going to have a very important position, not only with the analog part 3G base stations, but also with the DSPs.

And winning the Ericsson deal was a very important milestone in that; given Ericsson's position, it’s something that we worked extremely hard on for the last two years with Ericsson, and I think them selecting TigerSHARC is a major milestone for us.

Great.

Thanks so much.

Nimal Vallipuram with DRKW.

First of all let me congratulate you on a great quarter.

Jerry, you have been in the business long enough to have seen enough cycles.

Thanks a lot.

Can you give an idea where we are, from what you are seeing out there in terms of demand?

Customer reaction, order cancellations and everything else?

How do you feel where we are here?

I mean can you just let us know what your thoughts are on that?

Well, I mean, these things are always hard to read.

You’ve been around a few of these cycles too, Nimal, I hate to tell you.

But our sense is, we are still in the early innings with this thing.

It started out with some of the verticals, went very well in the communications sector in the computer industry.

It recently in the last two quarters started working out for the industrial sector where as you might remember, last quarter we said we had seen pretty good uptake in the order rates for industrial customers.

This time we saw it in sales.

So at the risk of being an optimist (which I am not reputed to be around here), I think we are still in the early innings of a fairly robust technology cycle.

That for those companies that really do have the right stuff -- and we continue to believe that signal processing is really the driver of a lot of this cycle, we think they are still in the early innings.

The year-over-year growth rates are still accelerating, so if we meet our objectives for the next couple quarters, we think that will continue.

So it's hard to look out for a very long period of time in this business, as you know, but we still think there's plenty of running room left in the cycle for us.

As a follow-up question on that, right now Intel on the analyst meeting introduced a new communication chip for 3G architecture handsets.

Are they using the DSP developed with ADI, and also if they do use it, does ADI get any sort of a royalty payment from that DSP (inaudible)?

No, we joint developed that product, and we each contributed to the development of it.

And we each have product type that a little bit different.

Maybe Brian -– Brian runs that business; maybe I will ask Brian for his --.

What we did is several years ago, we jointly defined an architecture; since then, Intel has taken it its way and we have custom-designed it for speed and power and taken it into both the horizontal market, as well as we —you know, with the EDGE design wins that Jerry mentioned, we’ve actually got Blackfin designed into several new handset designs, which are going to come out towards the end of this year and the beginning of 2005.

Intel have basically taken the architecture as defined a couple years ago, and as I understand it integrated it with their X scale (ph) processor and that's basically what was happening out there.

I think I prefer to leave it to them to comment on how things are going with the design wins and so on.

But the clear answer to your question is, each of us can use that core (ph) for whatever purpose, and the only thing that we basically conceptually agreed on a few years ago is we would work real hard to keep the core's instruction set compatible.

And there's no cross-royalties or we do not owe Intel any royalties, (inaudible) owe us any royalties.

It's a clean break.

Thanks a lot.

Congratulations on a great quarter.

We have a couple of people remaining in the queue to ask questions, so if any of the analysts who have already asked would like to request to get into the queue for a second round of questions you can press star one on your phone right now and do that.

So we will give you a few seconds to do that, and then we will move on to the remaining people in the queue.

Tom Thornhill with UBS.

This is Steve Elesque for Tom Thornhill.

If you can break out for the analog business, the amplifiers, converters and other analog we would appreciate that.

The converters are something in the vicinity of about 41 percent of our sales.

The amplifiers are in the 20 percent vicinity, and the total analog products are about 80 percent of our sales.

So all the other analog is the difference.

And can you also break out the other segments?

You talked about consumer being 10 to 11 percent of your business.

The computer business is in the neighborhood of 15 percent.

Industrial is 35 to 40 percent, and communications is 35 to 40 percent.

One last question.

With your DSP as being foundries, do you see any evidence of upward pricing pressure from your foundry partners at this point?

Not really; we have long-term relationships with the foundries and they sort of treat us like we treat our customers, that we have certain price targets, they have certain commitments they've made, and you don't want to be in the spot foundry market in this part of the cycle.

These are long-term strategic relationships, and so our foundry partners and in particular GSMC have done an outstanding job for us in allowing us to participate in some of these markets without a lot of price volatility based on supply and demand.

Thank you very much.

Jerry Spot (ph) with Columbia Management Advisers.

Can you put some color on how much of your business is sort of China-sensitive?

And how much of an impact would there be with China trying to slow down their economy?

I don't have the exact breakouts of Southeast Asia.

We sort of said that the Southeast Asia part is about 35 or so percent of our business.

China is probably a third of that, maybe a little bit less.

But that is a very, very rough number.

And then the follow-up.

In the aggregate it's probably 10 percent of our total sales, something like that.

And as a follow-up, the CAPEX figure going up this quarter and then I think I heard you say that the next quarter is going to be about the same level.

Given that -- I thought I heard you say you are about at 75 percent capacity utilization, what types of things might you be spending that money on at this point?

When we talk about the capacity utilization, we're talking about the average across our fabs.

Obviously as the business picks up, we have spending requirements at the back ends for test equipment.

We have some spending that's going on within our fabs in order to buy some pieces of equipment that are -- maybe you can look at them as bottlenecks.

We have some spending that will go on to expand the capacity in some of the fabs as we go forward, and I think capital spending this quarter was about 6 percent of sales; depreciation was about 5.5 percent of sales.

We think we are in the right neighborhood there.

We have always had a goal to get depreciation down toward 5 percent of sales, and approaching that goal.

And our capital spending, while it's up, is up from extraordinarily low levels.

And we would say that it's up to more normal levels.

I think the important thing to remember is, we have a lot of footprint capacity so we don't anticipate in the future unless the order sales rates really go in the stratosphere that we're going to have another sort of one of these huge capital expenditure years coming up real soon, which is what you have when you don't have footprint capacity.

We have plenty of footprint capacity and now we just add capacity in relatively small increments that, for every dollar of capital we put in, we get a lot of sales.

So that's where we are in the cycle right now.

Louis Gerhardy with Morgan Stanley.

A couple of quick ones, if I could.

Can you tell us what your booking plans are for the next quarter, and I also wanted to ask you -- without the DSL issue in this last quarter, would your DSP business have been up around 12 percent sequentially?

Thanks.

The first part of your question, we don't really forecast our bookings plan.

We work off our backlog, we look at a certain amount of turns business.

Bookings are-.

I would also say it is not very accurate.

Joe basically hates the word bookings because they bounce around so much.

Our sense is that bookings are going to continue strong in the quarter, and that's about where we will go with this.

The second part was about DSL.

I don't have those statistics handy because there are so many product groups in there.

The important thing to say is that our wireless business and our general-purpose business were up quite a bit sequentially.

And also the backlog in general, DSP is up quite a bit sequentially because the orders grew over 20 percent sequentially.

So I think with all that you get a flavor of the general health of the business.

Thank you.

Before we take the last few questions I would like to mention that our third-quarter 2004 earnings release is scheduled for just after the markets close on Thursday, August 12.

And our conference call begins at approximately 4:30 Eastern time that same day.

Now we're ready to take the last additional questions.

Bill Lewis with J.P. Morgan.

Can you talk about what turns were in the quarter and if you expect those to climb next quarter and then secondly, could you talk about the power-management business a little bit?

I understand that was a small piece of your business, but kind of did it grow in the quarter, and what your expectations are for that over the next couple of (inaudible).

The turns were in the vicinity of 40 percent of sales.

That's down a bit from last quarter when I think it was about 45, and we expect to have less turns, revenue next quarter on the guidance that we provided.

The power-management business, our revenues were up sequentially in the power-management business.

As we mentioned I think in previous calls, we are focusing a lot of our R&D and have been in the power-management business towards much higher value-added products than we had initially.

Those are products that are going to be heavily utilized in laptops, and I think we're making good progress on that.

So if you look out in time, I believe power-management will be a larger portion of our sales than they are today.

We continue to rely heavily on our relationship with Intel; power management (inaudible) continues to set many of the standards for both desktops and laptops.

And aligning with the standards there really helps us in that business both with Intel and with all the board manufacturers in Asia, as well.

So that's going to be a more important part of our business.

Focus on the high-value-added stuff, and I think all the signs look positive in that for us.

Is that an area you'll move up the value chain this year's laptop cycle or is that more for 2000 and -.

We're moving up it right now, and we will move up it even more next year.

All right.

Thank you.

Tore Svanberg from Piper Jaffray.

Two quick follow-ups, first of all a clarification; when you mentioned 35 percent growth target would that be your fiscal year?

Yes.

Second of all, could you tell us how much of your analog business is outsourced versus in-house?

Probably in the 20 to 25 percent range.

Is outsourced.

I mean that varies tremendously with how strong the industrial business is relative to some of the other businesses like consumer. (indiscernible) our internal, the percentage internal probably went up a little this quarter but the industrial business grew very quickly.

So that varies, mostly dependent on the market segments that are growing the most quickly.

Thank you very much.

The way we think about it is, we run something in the 55 to 60 percent of revenues from our internal fabs, and it stays pretty much in that range.

Thank you.

I think that concludes it.

Great, it looks like we've got to everyone's calls for today.

I want to thank everyone for their participation, and we look forward to talking to you in the third-quarter for our scheduled call on Thursday, August 12.

Thanks.

This concludes today's Analog Devices conference call.

You may now disconnect.