亞德諾半導體 (ADI) 2005 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Analog Devices first quarter 2005 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.

If you would like to ask a question at that time, simply press star, followed by the number one on your telephone keypad.

If you would like to withdraw your question, press star followed by the number two.

Thank you.

Ms. Tagliaferro, you may begin your conference.

Hello.

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

If you don't yet have our first quarter 2005 release, you can access it by visiting our website at www.analog.com and clicking on the headline which is displayed on our home page.

This conference call is also being broadcast live on the Internet, from analog.com select the investor relations option 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 one week.

You can see the instructions for playback on the website or in the press release.

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

And Joe McDonough, Vice President for Finance and CFO, we also have with us today Bill Giudice who is the Vice President of our Micromachined Products Division.

We've scheduled this call for 60 minutes.

We'll begin in a moment with Mr. Fishman's opening remarks and the remainder of our time will be devoted to answering questions from our analyst participants.

Analyst participants via telephone can press star, one beginning at this time, to queue up for 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.

Risk factors which may affect our future operating results are described in the Company's most recent annual report and form 10K filed with the Securities and Exchange Commission .

Also this conference call will include time-sensitive information that may be accurate only as of the date of this live broadcast, which is February the 10th, 2005.

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

Well, good afternoon.

Our revenues for Q1 as you noted in the press release were $580.5 million, which were down 8 percent sequentially from last quarter and that put us at the lower range of the revenue guidance that we provided at the beginning of the quarter.

Our revenues declined sequentially in all regions except Europe, where revenues grew about 10 percent sequentially. 70 percent or $36 million out of the $52 million sequential revenue decline occurred in automatic test equipment products and wireless handset products.

As our customers continue to reduce inventories in these product areas during the quarter, after growing well ahead of end customer demand last year, that's pretty much the way we had described what we thought was going to happen last quarter.

Excluding these two end applications our revenues declined 3 percent sequentially.

Gross margins were 57.8 percent, and that was up 70 basis points in the same quarter last year.

And down 170 basis points sequentially, impacted mostly by adjustments that we made to factory loadings during the quarter, and scheduled factory shutdowns that we took during the holiday period.

Inventories grew by just over $7 million sequentially to 132 days, which was at levels well below the 15 to $20 million increase we forecasted at the beginning of the quarter, as we readjusted manufacturing levels and we reduced external inventory that we purchased during the quarter.

Average selling prices remained very stable during the quarter.

Our operating expenses declined 3.3 percent sequentially in line with the plan as we aggressively managed our costs to respond to lower sales this quarter.

Operating profits totaled $125 million or 21.5 percent of sales and earnings per share were $0.28.

Cash flow from operations was 117 million or 20 percent of sales before spending $24 million on capital.

During the quarter, we repurchased 4.5 million shares of our common stock for approximately $161 million.

Analog product revenues declined approximately 7 percent sequentially.

Driven primarily by the large declines in our automatic test equipment product revenues.

At the beginning of this quarter, you might remember that we said that further ATE declines were expected during the first quarter and we now believe that ATE revenues are at a level that any further declines this year are unlikely.

Analog sales into industrial products and communications infrastructure was stable during Q1, while analog sales into wireless handset platforms declined much, as I mentioned earlier.

Analog product shipments into digital cameras and advanced digital TVs remained strong during the quarter, primarily as a result of share gains, and increasing analog content in each of those systems.

The designing rate of our analog products remained very strong in Q1 as we continue to win many new designs for standard converter and amplifier products and as we penetrate higher volume applications in communications and computers and consumer products.

We have been particularly successful recently in attaching new analog functionality, such as paramanagement, phase lock loops, and RF products to customer platforms where ADI technology already controls the application.

Our DSP revenues declined 11 percent sequentially, primarily as a result of continuing inventory adjustments in wireless products in China.

We believe these inventory adjustments are now mostly behind us and wireless revenues are now planned to increase in our second quarter.

During the quarter our general purpose DSP product revenues increased sequentially as design ins for our Blackfin family began to ramp.

We also saw sequential gains in our broadband infrastructure products.

In aggregate, our market mix remained relatively stable during the quarter with industrial products at 35 to 40 percent of our revenues, communications at 30 to 35 percent, and consumer and computer customers each at approximately 15 percent of our sales.

During last quarter's conference call, we communicated that we believed that our Q1 would represent our top quarter for revenues and profits during this cycle.

Looking very closely at order patterns in Q1 and early Q2, we continue to believe that inventory corrections are now mostly behind us, and as a result, we're planning for a resumption of revenue growth in our Q2.

This plan is really based on the following observations: First, the economies worldwide remain mostly stable, and most forecasters predict that 2005 will be a good year in most regions.

Second, our end customer demand stabilized during Q1 after declining significantly during the prior two quarters.

End customer demand was slightly above revenues in the first quarter, which is a very significant improvement over the patterns of the prior two quarters.

Cancellations are now at normal and we believe stable levels.

Number three, demand for large automotive, communications, computer, and some industrial OEM customers began to strengthen in January and that strength has continued into early February.

We have agreed to accept forecast directly from the MRP systems of many of these customers instead of entering orders for backlog.

And we now accept such forecasts for approximately 25 percent of our early end revenue and that's up from 15 percent last year.

During this past quarter we saw a significant increase in forecasted demand for delivery this quarter, from these customers.

When added to the backlog from the OEM customers who still enter orders for backlog.

Our total OEM backlog for delivery this quarter is now 9 percent ahead of the levels that we had at the beginning of Q1.

Fourthly, the ATE or wireless handset markets which drove most of our revenue decline in the past two quarters are now at revenue levels that are unlikely to go any lower this year.

This should certainly provide a floor for our revenues for these applications going forward and hopefully we'll start getting some growth from those businesses in future quarters.

Lastly, we are entering a very strong product cycle as we continue to invest in new product development at rates well above our model or R&D during this cycle.

We've won some very important volume design ends as well as strengthened our position in a wide range of horizontal applications for our amplifier, our converter, and our general purpose DSP products.

Both areas include many new designs, as well as increasing ATI content in existing designs.

These factors in combination, I believe, support our revenue plan for sequential revenue growth in our 2Q in the range of approximately 2 to 6 percent.

At these revenue levels we would expect gross margins to decline slightly in Q2, as factory utilization will remain low and inventories plan to remain flat in dollars and down in days during Q2.

Actual gross margins are dependent on the mix of business we achieve, and the utilization rate of our factories but we expect gross margins to remain strong and above 57 percent during this cycle.

As demand increases and utilization rates of our factory improve we would expect to realize good gross margin leverage in the future.

Expenses are planned for Q2 to be roughly flat to Q1 levels and we are doing that since our expenses are today well above our model levels.

This would produce earnings in the range of $0.29 to $0.31 for the quarter.

We believe that we're at the end of the customer inventory correction that drove sequential revenue declines in our Q4 and our Q1.

As our revenues begin to grow, our plan is to realize operating leverage by improving factory utilization rates and by keeping expenses under very tight control.

We anticipate that we'll continue to generate strong free cash flow, as a result of very strong profitability, and lower capital expenditures given that we have quite a bit of capacity already on line.

In the longer term, we remain confident that our product position and our customer base offers ADI the opportunity to grow at above market growth rates over the next several years.

Our long-term focus on signal processing technology, both analog and digital continues to be one of the best businesses in the semiconductor industry as new applications and more content for applications drives our growth and our highly diversified customer and product base continues to provide very strong profitability and extraordinary cash flow.

Thank you, Jerry.

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

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

Operator, we're now ready for our first question from our analyst participants.

For any of the analysts participating by telephone dial-in, if you have a question, please press star and the number one on your phone.

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

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

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the Andrew Root with Goldman Sachs.

Thanks very much.

I just had a quick question actually on your manufacturing and impact margin.

Do you know what percentage now of wafers are coming from outsource, versus internal and how that changes in the first quarter and what kind of impact that's going to have on your gross margin

Andrew, this is Joe McDonough.

The wafers that are coming from external foundries are something in the 45 percent range of our revenues and that should remain in that same range next quarter as well.

So are you seeing any price concessions on foundry supplied wafers that are going to assist at all in gross margins or it's basically going to stay the same for the wafers out there.

Wafer cost won't have a significant impact on gross margins either way.

Okay and then a quick follow-up question relates to any update at all to the SEC letter that you guys had received a couple of months back and where that stands with regard to options?

No.

We don't have any update on that for you.

Okay.

Thank you.

Your next question comes from Michael Masdea with Credit Suisse First Boston.

What did turns end up coming in at last quarter and what are you expecting for your guidance going into the next quarter?

Let me respond to that and to include some comments that are related to the discussion that Jerry had in his opening comments about how we do business with our large OEM customers.

So I will respond to it by breaking the business into the OEM channel business and the DSP channel business.

And roughly half of our business comes through the distribution channel and the other half comes through the our OEM channel.

So on the distribution side, the turns business was about 38 percent this quarter.

The inventories that the distributors are stocking declined this quarter on their shelves and so they were able to service some of their demands through their inventories, the inventory levels that they are carrying and the turns that they are realizing are in line with what they were last quarter and they continue to have enough inventory to respond to the short-term demands.

On the OEM side, our turns business represented about 53 percent of our revenues this quarter but as Jerry mentioned about 25 percent of our business is now being done with the large OEM customers on a forecast basis.

And that forecast business is included in the turns revenue, even though we have visibility into that business at the beginning of the quarter.

So we're starting to think about that in terms of explaining the business, explaining the turns business since the real focus of the question is on what kind of visibility do we have into the next quarter.

By taking the -- so we're -- if you take the forecast backlog that we have and add it to the backlog that we have from the other customers, the turns business on a net basis was about 32 percent.

Next quarter we'd need about the same range in order to achieve the revenue forecast that we have given.

Okay.

And then I guess --

Does that help answer the question?

Yes, that helps.

You're looking basically for the same turns as you got last quarter but there are different pieces of it which makes sense.

I guess the other question I have is given your OpEx changes and your utilization changes, and it's a little bit different sounding than it sounded on the last earnings call is this a resetting to a lower level of demand or is this looking at the slope of the growth or what does this signal to us?

The -- well, I think -- you know, the revenue that we had this quarter was within the range that we gave out at the beginning of the quarter.

We're going through a period here where it's fairly difficult to be precise about the revenue range.

We did talk last quarter about expecting to see sequential improvement in revenues in the second quarter that's what it looks like is turning out to be the case.

Our plans are set on that.

Of course, you know, it's difficult to really know for sure what levels of revenue we'll have.

But what we have done is over the long term, our inventory model was for 100 to 110 days of inventory.

I think we indicated last quarter that we expected the inventories to rise 15 to $20 million.

That could have caused the days inventory to rise up toward 140 days.

We began looking for opportunities to try to control the number of days of inventory that we had.

We have pulled back a bit on the external foundry purchases on the assembly and tests with our third-party assembly partners.

We've pulled back a bit on some of the test outs from our internal factories and we had some shutdowns during the first quarter, as a result the loadings in our factories are down a bit and that will continue going into next quarter.

So our objective is to have enough inventory to be very responsive to the customer demand, and to keep the lead times short in order to be responsive to that demand.

Our lead times are now down to about 4 weeks.

Our inventories are at 132 days.

The distribution inventories are normal, and so what we're planning to do is to hold those inventory levels flat in dollars next quarter, to realize some reduction in the days inventory as the revenues increase and to -- our plan is for the gross margins to remain strong.

I guess my question really is getting at, you know, as we're going into this last quarter it doesn't seem like revenue surprised you in a big way but it seems like you changed your strategy a little bit on how much you're going to spend on OpEx and a little bit on how much you are going to pull back your manufacturing.

Is that just being prudent?

Well, the operating expenses we had indicated that we thought we could reduce operating expenses about 3 percent. 3 to 4 percent I think and we came in 3.3 percent down.

Right.

Okay.

But nothing changed in your manufacturing plans during the quarter that you decided to pull back a little bit?

Or you just had some opportunities and decided to take them.

Well, we took a hard look at all of the stocking levels of all of our products between diebank and finished goods and so we're -- we probably have a little less finished goods than we might have planned at the beginning of the quarter.

We are holding that inventory in diebank.

Fair enough.

Thanks a lot.

Your next question comes from Louis Gerhardy with Morgan Stanley.

Good afternoon.

I understand the new turns requirement, I think, you know, all companies are seeing that.

But I just wanted to understand the situation under the old methodology.

You know, can you talk about what your starting backlog was on the first day of the fiscal second quarter, without the MRP added into it?

The backlog at the beginning of the second quarter -- the total backlog --

Starting 90-day backlog.

Starting 90 day backlog is in the $300 million range.

Okay.

And under the old methodology, you suggested your turns were around 46 percent for the current quarter, and then, I'm sorry, for the January quarter and then for the April quarter, you know, it sounds like it would be sort of mid-50s type of range.

Yes that's right.

Okay.

Depending on the level of business.

Yes.

Okay.

And -- okay.

And then just in terms of the distribution orders on ADI, and then the end user orders on the distribution, do you have those numbers you could share with us?

The end customer bookings on the distributor were approximately equal to the distribution revenues, their point of sale revenues.

We recognize revenue, as you know when distributors ship to their end customers and we do that everywhere in the world.

And then the DSP orders to you, how much -- what was the sort of sequential change there?

Sequential change?

They were approximately even to last quarter.

Okay.

All right.

Thank you.

Your next question comes from Apjit Walia with RBC.

Thanks.

In terms of geographically, which end markets geographically you believe as it's going this quarter you feel you might see strength or you might see weakness?

Is your question geographically.

I didn't get that.

Yes, geographically, that's correct.

My expectation is that we would see some sequential growth in all the regions.

Is there any particular region you expect an upside to come from?

Typically in our second quarter we see a good snap back in our industrial business because there are more days and more activity in industrial factories in the second quarter and that's heavily concentrated Europe and the United States.

As I said earlier we are expecting some of the Asian businesses that were weak last quarter to show some growth also.

And Japan, which has a heavy consumer content our forecasts are that that's going to be a little stronger as well.

Mostly related in things like cameras and digital TVs, which we've recently acquired a lot more share of that business.

So I'd say, you know as much as you can tell sort of 10 days into the quarter which is what we are, you know, really, the second week of the quarter that's our expectation right now.

And in terms of going forward like when when do you -- your secular launch to graduate, when do you expect to go back to seasonal strength?

In the next quarter itself or is--?

I think it's very hard to predict that right now given all the different dynamics that are going on.

I mean that was one of the factors in trying to, you know, sort of decide what the growth rate was going to be next quarter and certainly that has some seasonal aspect, but it also had some other things going on in terms of new products and a bunch of other things also.

So I think we'll know a lot more about, you know, sort of the direction for the second half of the year once we see exactly how Q2 turns out

Great.

So if I was to just put a macro question as to when do you believe units should bottom for the sector in general, analog, in general, when would you say that?

I think units probably bottomed in Q1.

Great.

Thanks.

Your next question comes from Adam Parker with Sanford Bernstein.

Yes, hi.

A couple of things, first, can you talk about what was so strong in Europe, what end market fueled the growth in the reported quarter in Europe.

I think a portion of that was in broadband infrastructure.

I think the notable market that -- that's not necessarily related to, you know, the health or the weakness of that market.

It's that, you know, we've scored some pretty good-sized design wins over there and they are beginning to go into production.

So that's up more than 20 percent sequentially.

I don't have that number, Adam.

I'm just trying to figure out how the whole region got up 10 percent sequentially.

Well, I don't know what the exact numbers are for the broadband, but that was certainly one of the notable increases.

All right, maybe just a second question then.

If you get -- you know, a little more color on what somebody else asked but you normally get, you know pretty good growth in the middle of the year, in the July quarter, 4, 5, whatever percent sequential growth.

If we assume that that kind of plays out somewhere near that fashion given we don't have visibility on it yet, you know, would you be able to increase your factory loadings in that quarter or?

I'm trying to figure out what level you want your days inventory to settle out before you'd be willing to basically increase factory orders so you can realize some more of the margin expansion there.

I think the first order is the responsiveness to the customers and to try to keep the lead times as low as we can.

To keep the lead times as low as you can.

Well, the most important element of serving the customers is to be responsive to their demand.

And they have as much difficulty as anyone else in forecasting the demand.

So as the lead times stretch out, what we have always seen is that the MRP systems start to call for more and more inventory and that causes us to reserve more inventory for those customers which causes other customers to put on more orders.

That's how the cycle gets going.

So one of the objectives is to try to hold as much as we possibly can in diebank of the long life cycle products.

There's very risk to that given the life cycle of those products and to try to have the lead times as low as possible.

Well, is this--.

Now, what will happen as -- on the other hand, you know we don't really want to be carrying an excessive amount of inventory either.

So as we start moving up into the 130, 140 days of inventory that starts to temper the amount of diebank that we built.

I guess when you say lead times though, I mean, historically I think of you guys as kind of wanting some kind of 8 or so, or even 10 weeks of lead time.

Is this going to be--?

That's what it's turned out to be.

But what is the ideal way you would like to operate?

Lead times we have now probably is--.

What 4 to 6 weeks.

Closer to four weeks.

I think the way we look at it is we like to keep a lot of diebank inventory given the diversity of our product lines and and we like to have that inventory 3 or 4 weeks away from the customer.

We think that precludes customers from over ordering, and oneing up their MRP systems because lead times stretch out.

And if we could keep the lead times at that level through this up cycle, I think that will be a good result for us and a good result for our customers.

I think what Joe is really saying, Adam, is we don't want to go a (Expletive) of a lot above the mid 130 days of inventory to accomplish that.

Right.

But the most important thing for us to do is not to force the turns down, the inventory down 110 days over two quarters either.

The most important thing is to keep the lead time short and the service levels up so that customers don't start piling on extra demands that turn out that, you know, 2 years from now, we say, well, it looks like we over shipped again and we start showing those 40 percent year-over-year comparisons which then confuse everybody.

Yes, I'm just trying to figure out when you could load the factory and get some more margin expansion given that there's clearly more margin expansion ahead of you guys when the revenue gets to certain levels.

I'm just trying to figure out, do I have to wait until the October quarter under kind of a normal scenario or when can you increase the factory loadings.

Well I think we'll have a better answer to that when we see the demand patterns this quarter.

The important takeaway of this conversation is what Joe said, is the forcing function we are using is service and 100 -- you know, we stopped building inventory because we thought more than 135, or 140 days is too much but there's no urgency to bring that down quickly.

If you shorted customers in the last up cycle is that why you had to have longer lead times.

Why couldn't you always have 4 to 6 week lead times the whole way through?

Well, because customers started placing orders on us at extraordinary levels well above what they needed.

And what happens is that reserves inventory and they start going up 6 weeks and 8 weeks and sometimes higher than that, and that causes more people to order, and, so, I mean each of these cycles we try to do it a little smarter.

Our goal in the cycle is to keep the lead times low so that we don't get confused about the upside.

Thanks for your time, guys.

Your next question comes from David Wu with Global Crown Capital.

Just a clarification, please.

The last conference call, I remember Jerry and Joe, you folks were quite explicit that you were quite happy to build further inventory into this first quarter.

And I noticed that and to not to adjust factory loading levels but I noticed that you changed your mind.

At least slightly.

What caused to you change your mind even though, you know the long lead time products are going to be useful to your customers when they ever come back to ordering.

And the follow-up is quickly on the wireless handset side, in China what kind of visibility do you have that these people -- you know, the OEMs in China have finished flushing through those 2g phone systems?

Well, I think the first question there, you know, our sense was that we were going to -- as you mentioned that we were going to try to keep the factories level loaded as we really started looking into that and we looked at the order patterns early in the quarter, you know, we were concerned, you know, because most of the strength we saw in the orders was really in the second half of the quarter.

So we were concerned that, you know, we could wind up with inventory levels potentially above where we wanted to be.

We had the opportunity in Q1 to reduce the start levels and other things, as Joe said, because we were in the holiday season and we thought it was prudent to do that.

And that is a slight change for what our position was at the beginning of the quarter.

David, I'm looking at the transcript here and I said that the utilization has been running around 75 to 80 percent last quarter, and that it will be probably down a bit next quarter.

This quarter it ran around 70 percent.

Which I think is consistent with that.

What we did do is we did change the mix of the way that we're handling some of our manufacturing costs.

We reduced a bit more some of the wafer purchases from our foundries.

Some of the assembly and tests from our third party subcontractors and we reduced some of the running rates in the back ends in our factories.

We are still carrying increased diebanks this quarter.

So maybe we created that perception, but I think we've been operating more or less in line with what we expected.

Help me clarify just one more point.

If you are going to cut back from your third-party people, you know, third parties, shouldn't that affect your gross margin much at all?

No.

And reducing your back end operations?

As I recall those back end operations aren't very capital intensive.

So I was a little surprised how much your gross margin actually declined quarter on quarter on the kind of moves that you talked about.

Well, we came in at the lower end of the revenue range.

Is what ended up happening.

I think if the revenues came in at the higher end, there wouldn't have been that kind of decline.

I think really the way to look at it David is that, you know, we get through the cycle with these kind of modulations in what's going on and the unpredictability of what's going on and gross margins draw to 57 or so percent, we think that's a pretty good accomplishment and a pretty attractive business.

I wouldn't get too hung up on the details of what happens along the way there.

Okay.

Can you talk about the China handset situation?

How confident are you that we basically flesh through that in Q1.

We just really reflect the comments our large Chinese customers are giving us.

You know some of the large Chinese customers have really not ordered very much over the last two quarters relative to the early part of 2004 and I think that the competitiveness of the Chinese handset manufacturers is getting stronger every day.

So -- I mean, we believe, and all the feedback we get is that, you know, the Chinese are going to be a very important part of this market, and they're beginning to expand in selling handsets outside the borders of China to many, many other countries for the first time.

So I believe that the opportunity is very, very solid in China.

You know, you can never predict what's happening exactly but when we look at the inventory levels they carry, we look at their plans to sell through over the next couple of quarters, we look at our position relative to those customers.

I mean that gives us at least some confidence that we are at the end of the correction and next quarter order growth and then we'll have to wait and see how that materializes during the quarter.

Okay.

Okay.

We've seen a pretty good decline in that business over the last two quarters so they've -- and they're -- you know, their sell through is a lot better than their orders to us.

Right.

Thank you.

Your next question comes from Tore Svanberg with Piper Jaffray.

Yes, good afternoon.

First of all, Jerry, on the analog business you talked about some new products or new projects, in power management PLL and RF, can you expand a little bit more on that, please.

Yes, we have some very large vertical businesses that, you know, we were selling sort of pinpoint solutions into.

And we're able in those -- in those products to now sell the rest of the analog functionality that exists and in many cases some DSP functionality as well.

You know that's always been an important part of our strategy of why it is, if we really control the performance of that particular application with our technology, why we don't get all the peripheral chips around that as well.

So we've made a very concerted effort over the last year or so to flush out the rest of that content and certainly customers want us to do that.

Because customers don't want to buy pinpoint products in these large vertical applications and if they can replace other solutions and concentrate on, you know, one or two vendors to provide the bill of materials, they are quite happy to do that.

Some of the areas I mentioned and some of the radio products and some of the products like phase lock loops and products like some of the paramanagement that goes into many of these large vertical markets, I think we're going to do real well in the future.

Okay.

Very well.

And my follow-up question, maybe going back to what Adam was talking about, why is it so hard -- I understand why it is hard, but what can be done to keep lead times a little bit more stable.

I realize it depends on customers but is there anything that you can do as a Company to try to keep those a little bit more stable.

Well, we can try to really do a better job at understanding when the customers start loading up orders what it's based on.

You know through distribution that's a little bit harder because there are so many customers.

But certainly in some of the larger customers and some of the verticals what we start seeing in order rates that are well ahead of prior consumption rates and we don't get a very good explanation for that we are beginning to push back hard on those orders.

Thank you very much.

There's not a lot you can do.

Thank you.

Your next question comes from William Conroy with Sanders Morris.

Good afternoon.

A couple of questions.

First, Jerry at one point you had come back from Asia and I think were expressing some optimism based on what you were hearing from customers.

In the ensuing months -- I guess it's been a couple months since then, has that played out accordingly or has anything changed from what your perceptions were when you came back.

Not really.

You know I would say that the kind of comments the customers were making over there, we got your business looks good and there's some inventory corrections going on that are going to last a little bit longer but at that time, they believed that once those were sort of completed that their business was strong and that we ought to plan their business to be strong, and I don't think anything we've seen has changed our view of that.

Right.

And as a follow-on, you have expressed some optimism on this call about the consumer business in what is normally a seasonally weak period and you have cited specifically digital still camera, digital TV, what's going on there that's leading you to some optimism that sounds like, at least to this analyst, that it's a little bit more than normal seasonality.

Well, in digital camera area which is an important area for us, as you know, we have won a couple of fairly sizable lead design ins, customers that we didn't have any volume at last year.

And so I think that, we believe, at least when we go through the customer list, and what they are expecting for next quarter that's going to more than overcome the normal seasonality of that business the first quarter.

In the digital TV market, I mean that -- that's not a market that historically, you know, has a lot of seasonality, plus it's really an emerging market and growing and growing and growing.

So it's not like the DVD market which is a commodity market which everyone buys everything off the shelves in October and nobody buys anything until February.

These are emerging -- in one case an emerging market and the other case we've picked up a fair amount of share.

So I think both of those things give us a little more confidence that can overcome the normal seasonality we seen that is typical in that business period.

Right.

Thank you very much.

Your next question comes from Jack Romaine with SG Cowen.

If we take out the utilization effects can you give us some idea on what factors may be affecting mix over the coming quarters?

You mentioned the Blackfin product ramp, and I think you mentioned a couple other analog products.

Can you give us a little bit more insight into what's going on there?

Sure.

I would say the first and most prevalent impact on the mix is overall analog business, versus the DSP business.

You know, the analog business carries much higher gross margins than the DSP business.

I think most people who know analog know that.

The second order of fact is within those product lines, you know, are the products that are going to pick up sort of horizontal products or vertical products?

Quite clearly the highest gross margins we get are on horizontal analog and DSP products.

So to the extent that we see good recovery in the horizontal markets, as well as good recovery in the vertical markets, you know that's sort a neutral on the mix issue for the gross margins.

To the extent that one grows faster than the other, it impacts gross margin, either up or down on the mix issue.

And based on what you are seeing in these MRP systems can you give us any kind of trends that you are seeing right now.

Well, I mean, it's really hard to predict that.

I mean in the MRP systems we tend to see the larger customers.

And the 60,000 customers come in one at a time, you know, every 15 minutes.

So the forecast orders tend to be more the larger customer orders than the other stuff.

But I would say to a first approximation, we don't see any massive change in that coming up in our revenues and most of the gross margin will be determined by the factory loading.

Okay.

And then can you give us some rough idea on the size of the ATE handset and wireless infrastructure markets for you guys?

I think I can give you -- I will give you general guidelines on that, at the peak our ATE revenues were 6 percent of our sales of our peak sales.

They are now down to probably about 1, maybe -- say 2 percent of our lowered sales.

So the difference between 6 percent of peak and 2 percent of lowered is a big number.

I would say in the communications market, you know, we say that's somewhere around 30 or 35 percent of our sales.

Probably overall the wireless market is -- what would you say, Joe?

About 20 percent of the 33? 35 percent?

Roughly -- the handset is roughly half.

Half of the -- Yes, so the handset business is probably right now in the 15 percent range, maybe a little higher.

And the infrastructure part of that is another probably as much as 9 or 10 percent of our sales.

Okay.

Good.

Thank you very much.

Your next question comes from Craig Ellis with Smith Barney.

First on the CapEx side I think the last conference call we were looking for about 140 million this year is that still the number we should be looking at?

We're trying to have that number in the 110, $120 million range.

Okay.

And then as we think about where you shave that back, is that proportional front end to back end, or is that more on the front end side?

I would say it's probably more in the front end.

I mean we've got a lot of wafer capacity, and, you know, the yields at our fabs are pretty good, so -- but I don't know.

We don't have the detail this year.

It's hard to comment on it.

I think the way to think about it is our depreciation is running about 150, $155 million a year and so for us to bring the capital spending down to 110 to $120 million, we're at the, you know, level of a lot of squealing going on about cranky equipment and replacing spot needs and so, you know, it's not any kind of major expansion.

I would call it sort of needed capital, that we have to have in order to sort of meet our customer service requirements and introduction of new products.

Okay.

Great.

And then just as a follow-up there was a lot of good commentary on an end market basis with regards to the outlook, but can you talk about the linearity that you would expect to see in your quarter patterns from February to March to April and then looking a little bit bit further if you could comment on any color on the third quarter?

I know you haven't provided guidance there, but any would be helpful.

No, I couldn't.

It's very hard to comment on the third quarter.

It's hard enough to comment on the second quarter.

Our sense is starting in early January, the order patterns picked up.

We sort of expected that, we hoped for that, and it did happen, we needed that.

You know we only have one week of this quarter past and the early part to, you know, the first week looked pretty good.

So our sense is there's no real reason why the linearity should be marked to any one particular month this quarter.

That's not typically what we see in the second quarter.

So, I mean, our sense is to a first approximation it ought to be a fairly linear quarter.

Okay.

Great.

And then if I could squeeze in one last one.

With -- with the OEM business that you seed through your MRP system increasing from 15 to 25 percent in the last year as you step back and look out over the next year or two, how significant could that be?

Well, you know, it's really hard to tell.

One of the interesting things is we have been studying this question and, you know, Joe has talked about this quite a few times and I think I finally believe he's right that there really isn't any difference between forecast orders and backlog.

You know, both of them could get cancelled and both of them have very similar rates of conversion into shipments.

So I think the historical way of looking at it and fixating on this backlog question, as most customers, most large customers really want to operate out of their forecast and their MRP systems instead of putting on orders and changing them every week and so on.

And they want to pull product from us, based on those forecasts.

I think the sort of classical ways of -- that all of us, you know, the investors, as well as the Company, have looked at backlog is very problematic.

And I think the largest customers and particularly the most sophisticated customers that's not the way they want to deal with their vendors.

And for us, it's no real change.

Because, I mean, the backlog -- I mean backlog goes away as fast as anything else, as we have all seen.

So our sense is really it's not a bip change and it won't change very much and if anything, it will give us a little more confidence in what we're going to do, because the forecast tends to be fairly carefully done.

And the backlog and the people place orders not very carefully, has become obvious over the last 25 years in this business.

So, I mean, I think we just ought to adjust to that and say that's the way the large customers are going to order.

And they are going to do that in every region of the world, they are already doing it in many regions of the world and we're going to have to live with that.

That's great.

Thanks, guys.

Your next question comes from Romit Shah with Lehman Brothers.

Thanks.

Just to be clear, for fiscal Q2, you expect all of your end markets to grow sequentially or is it more industrial and communications?

I mean, at first pass, I would say all of our end markets are going to grow in the second quarter if we meet our plan.

Okay.

And then you mentioned that you're lowering your CapEx forecast for the year to 110 to 120 million, can you just tell us what's the thinking behind that?

Well, I think as Joe was saying, you know, we have a fair amount of diebanks.

We're just, at the time when business goes down our yields are going up in our factories.

We've got plenty of capacity, and I think as a result of that, we're going to need a little bit less capital.

But I don't think you should read anything into that, that we're less optimistic about our business.

It's just we're starting off low, and, you know, in the first quarter, and, you know, I think that we have plenty of capacity.

So we're pushing back very hard on our product groups to say, you know, listen, we have plenty of capacity.

We started out the year with low revenues and, you know, we got plenty of die we can respond to the customers and so what's the sense of putting on more capacity right now?

Okay.

And just a final question--.

I think the way to think about it is, it's a push out.

The revenues come in at the lower end of the range and we've had two quarters that have been down.

We don't really want to get started on ramping up the capital spending until we have to.

And just final question on the gross margins.

Should we assume that your gross margins, you know, may be bottom this quarter on 57 percent and then, you know, maybe stabilize there or slightly improve after that, depending on what type of revenue growth you see.

Well, within a couple of tenths of a point, its pretty hard to predict the gross margins, you know, given the mix of the business and everything else that we've got.

But what we have indicated is that our plan is to expect the gross margins not to fall below 57 percent or be in that range.

Whether they are 57, 57.5 next quarter, that's pretty hard to tell.

Okay.

Thank you.

Your next question comes from Ross Seymore with Deutsche Bank.

Thanks, guys.

Just a couple of follow-ups here to some earlier questions.

The booking strength that you have seen thus far in this calendar year, has that been more from vertical or horizontal markets, as well as DSP versus OEM.

I think it's been across the board.

Okay.

And how about the impact or potential impact of Chinese new year and the timing there?

Does that tend to affect the bookings that you see in any given month and make the quarter front end or back end weighted.

Well, a little bit in those markets but, you know, I would say that without getting down to levels of granularity that we just don't know what's going to happen.

You know our best guess when we add up all the different things that are happening is that the order patterns and the sales patterns ought to be roughly linear this quarter A lot of factors going a lot of different ways.

We have very diverse business geographically, productwise, and marketwise.

So all we can do is look at the aggregates and that's the way we see the aggregates unfolding this quarter.

Okay and then from your answer on the bookings is it safe to assume that the analog and DSP general segments should grow at about the same pace or do you see that mix shifting a little bit in the next quarter.

I would say there's a lost of factors going on here to try to predict and we're only in week 2 but I would say, I don't know any reason why they ought to grow at different rates.

Okay.

Then the final question, as we get further into growth mode here and whether, you know, the seasonal ramp really kicks in this quarter or next quarter, what do you expect OpEx to do?

Do you think it will probably start growing at about the same rate it did in the last up cycle?

Or is there anything different we should expect this time.

Well, you know, our operating expenses are well above our model levels in both R&D and in SMG&A, and, you know, our goal is -- as business gets better to bring those down, you know, closer to the model levels that we've talked about for quite a while.

So that means that I can't say they will be absolutely dead flat or they'll go up or down a little bit, but they are not going up a lot.

Okay.

Thank you.

Your next question comes from Bill Lewis with JP Morgan.

Mould you talk about what bookings did in total in the quarter if they declined, maybe, by how much.

I was looking at where revenue fell and stable cancellations were maybe down even in dollar terms that would kind of imply, unless there was a big fall off in bookings that you might have a book-to-bill that's trying to creep up towards 1.

If you could talk about that.

Well what we -- I think I indicated that the overall bookings were relatively flat to last quarter but what we have also looked at is then end customer bookings.

Now the end customer bookings are the bookings that the distributors get from their customers on them and for our OEM customers the combination of the bookings plus the forecast that we're getting from our customers.

And so in the aggregate, the book-to-bill ratio was slightly above one for all of thos end customers.

At the end customer but on your books in terms of your book-to-bill.

It was approximately flat.

Okay.

Compared to last quarter.

And then separately, could you give an update on your power management business.

Certainly last year that was one of the better growing analog markets.

But it's also been very competitive market and could you maybe update us on how you think you are doing, how the competitive landscape might be affecting pricing and some of opportunities for you this year.

Sure.

I mean, a lot of the emphasis in our R&D and paramanagement is on portable products and I would say increasingly, as I -- I might have said earlier, on products or in market segments where we have a lot of other analog content, where we can use the fact that we have a large part of the application, the leverage power management solutions.

Either as integrated solutions on a different chip or at least that we can provide the entire reference design or build the materials.

I mean those are the areas where performance is very key, and we think we have got some real good design wins and some real good technology.

Certainly, in the desktop area, there's a lot of competition, the prices are lousy and that's not a large emphasis in a lot of the R&D that we're doing; although we still sell some desktop paramanagement products and we have some very good customers that buy them.

But our goal is not to get into the muck in that business.

Our goal is to think of the paramanagement business that we have, much the same as any other analog business where we've got to be able to do things that other people can't do, and we have to be able to price those products to the value they provide to customers and for product areas where they become options or, you know, very commoditized.

Those are not areas that we have a lot of interest and devote a lot of R&D to.

Do you have a sense of when you achieve that kind of level of performance that you desire?

Well, I think in many of those applications we already are, and in many others we'll see that this year.

Great.

Thanks.

We have just a couple of people left in the queue, and although we're coming up on our 60 minute limit, we're going to go ahead and just take the remaining calls.

Your next question comes from Sumit Dhanda with Bank of America.

I just wanted a quick clarification first.

Joe I think you said that the backlog was 300 million.

So based on the old methodology is it accurate to say that the turns department is about 50 percent because I heard mid-50s?

Mid-50s.

It's not a change in methodology.

We've been accepting these forecast orders from large OEM customers for quite a while but the percentage of the sales have been accepting has been increasing as we qualify more customers for this forecast basis.

So, you know, I think the way we tend to think about this, is that at a point where the demand gets low, and the backlogs are low, and there's a high turns requirement that's an inflection point.

At that inflection point if we look at the MRP systems from our large OEM customers, and we see an increase in the forecast demand from those customers.

That gives us an insight into what those customers are thinking.

And so the fact that we've seen this increase during this quarter gives us more confidence that we're likely to see a revenue increase next quarter.

That's what we are trying to convey.

As you get to a point in the business cycle where lead times stretch out, everybody thinks they can't get anything, all the customers believe they are going to conquer the world, and their end markets then, there's so much backlog, so much forecast demand that it really doesn't have much meaning anymore at that point.

Okay.

That's the purposes of trying to communicate at this point.

Okay.

But just to clarify, the mid-50s versus 46 last quarter, is that the accurate comparison.

Yes that's right.

The other question I had.

Could you quantify the level of cancellations and compare that to what it was last quarter.

It was approximately the same, down around 10 percent.

Okay.

Thank you.

Your next question comes from Kevin Rottinghaus with Midwest Research.

Thank you.

I guess first off, any -- I guess because the OEM orders are picking back up, the assumption here or the correct way to look at this is the end -- the inventory to end customers is at correct levels now.

There's no component in to the end customers.

That's a concern here?

That's our belief.

That this excess inventories been worked down.

Okay.

Any -- second thing, any changes in your distribution channel in this quarter over last couple of quarters with, you know, shifting partners around that's had an impact here, will have an impact going forward?

I think very minimal.

I don't think that's relevant to our results in the short or medium term.

Okay.

So no impact from that.

We only recognize revenue when the inventory is shipped to end customers.

And so, you know, any changes in the distribution line up doesn't have any significant impact.

Okay.

I didn't know if it had an impact because if you are dropping partners, they may give their customers additional inventory, which could cost them some softness going forward.

We watched that pretty carefully.

How about on the manufacturing profile as far as wafer sizes.

Are there any changes going on there or was -- are you moving up to 8 inch wafers from 6 or 4?

Is there any changes going on there?

I think we're at the end of our 4-inch fab life cycle and that's going to force all the production on to 6 or 8-inch wafers.

That's where we want to be.

And that's where we got to.

So I don't think there's any big change on that.

Okay.

No big change there.

And last one, you talked about Blackfin.

Can you give us any update on TigerSHARC DSPs and any opportunities you are seeing there?

I think the largest opportunities for TigerSHARC appear to be in -- as we've talked about in infrastructure, and that's in wireless and wired infrastructure.

I would say we're also seeing a lot of interest in TigerSHARC in a lot of very high resolution imaging applications.

But I think it's -- it's pretty much the way we have been describing it.

Blackfin is a much more diverse product, and therefore the applications for Blackfin and the amount of different users and different segments or industrial to consumer indications and the like, and so you know, that's a much, much more diverse product given its costs and its performance ratios.

But TigerSHARC focuses on those markets that I just mentioned.

Thank you.

Your next question question comes from Paul Lemming with Solei Securities.

Good afternoon.

I was wondering if you could talk a little bit about how you view Analog Devices, revenue performance if you look out through your guidance for the April quarter, and then kind of roll it back over the previous four quarters.

It really looks at this point like you guys have seen a more pronounced sharper downturn than most of the peers that you are compared with.

And I was just wondering what color you would put on that if you think there is significant end market business differences that account for that.

Are there share issues in your mind that you need to address?

But if you could just talk about that some.

Sure.

I think the -- our revenue declines in the last two quarter have been greater than at least some of our competitors and it turns out if you go back and look historically, you generally see that pattern where we go into the cycle faster, and we come out of the cycle faster.

We tend to grow faster and decline faster, and I think when you -- I mean that's been a typical pattern for us, and some of that has to do with how we recognize revenue and there's many other factors that cause that to happen.

I think if -- so it's always dangerous to look at any particular few quarters and try to raise any conclusions.

So many of our competitors who have been sort of flat are now predicting down quarters coming up and have also made, I think very pertinent comments about the rapid nature of their order declines recently.

I think to a first approximation, we're in slightly different markets.

We have a heavier concentration than some of those competitors in the ATE business, and that's hurt us a little bit but will certainly help us a lot on the up turn because that business tends to respond very rapidly up turns in the cycle.

And I think we've got hit a little harder than some others because of our dependence on the Chinese handset market which has been hurt a little bit more than the overall wireless market in the world.

But as I view it, all those areas that will show equal positive performance in this part of the cycle, and I think when history is written and you look at our revenue growth over virtually any period of time relative to competition, it is actually quite good.

I don't think there's anything else going on there, other than in some cases timing, in some cases slightly different market segments.

If I could just follow up on an item you touched on there, your exposure to the Chinese handset market, has Analog Devices exposure to vertical markets, as opposed to horizontal markets increased noticeably over the last 3, 4, 5 years?

My sense is that it has, and if that sense of mine is true, are you comfortable with that?

Do you think at all about trying to dial back the exposure to the verticals and you know, move back to the more traditional exposure you have had to the horizontal markets?

I would say to a first approximation we look at those businesses a little differently, but our goal is to grow our horizontal business as fast as we possibly can.

So that implies that we get out the highest performance products at the best price performance ratio in the industry and that continues.

I mean if we look at our share in the two most important horizontal segments which are amplifiers and converters they are still approximately 60 percent of our sales and we have very high market share that's been growing in each of those segments over the last 4 years.

So I mean, our goal continues to be grow those businesses as fast as we can and invest in them as heavily as we can figure out what to do in those businesses and have those businesses continue to be a very important part of what we do in Analog Devices.

At the same time, in our sights, you know there's larger opportunities out there, and, you know, customers that we used to think of as horizontal, we now think of as vertical.

So I think there are opportunities for technology in that business, and I think that does give us a little bit more volatility, but if you look at all our -- you know, let's take a look at our analog competition and you ask them, how much of their business they are doing in handsets or how much of their business they are doing in consumer products, vertical products and how much are they doing in other vertical products I would say to a first approximation you won't find a terribly different pattern and our analog brethren, particularly in the high performance analog brethren than you would see in our portfolio today.

Fair enough.

Thank you.

Your next question is a follow-up question from Lewis Gerhardy with Morgan Stanley.

Hi, thanks.

Two quick follow-ups.

Joe, based on what you were saying, it was a little confusing to me if the net book-to-bill was closer to .9 or .95, if you could clarify that and then Jerry, just in terms of what you are saying about the backlog situation, I mean if we think of it in the traditional sense, what do you think, you know, sort of your turns requirement again in the traditional sense might settle out at?

Like how many guys would stay with sort of the old school methodology of giving you backlog and then how many -- how much of the business would go to the MRP type forecasting system?

Well, I will answer the second part.

Joe can answer the first part.

My sense in talking to a lot of those customers over the last couple of quarters is customers are moving to forecast as fast as they can because that's -- it's the way they think of their business.

And I think sending in all of these sort of purchase orders over the internet, sort of separates everybody from reality so I think there -- all the customers that are operating their businesses at a fairly sophisticated MRP systems, I believe want to deal with us like that and they want to deal with everybody like that.

And they're already dealing with many like that.

And that is the reality of what's going to happen, whether that -- you know as Joe said that was, you know, 25 percent, up from 15, how high will that go?

It's hard to tell but I'd say directionally, it's going to keep going up.

Yes.

And I think that's quite appropriate.

And I guess for the other point on this forecasting approach, is we qualify the customers to agree to use that approach, and that qualification requires, you know, some expectation that we can depend on those forecasts.

And so we have been converting a fairly high percentage of those forecasts into revenue.

And not too dissimilar from the conversion rate on the backlog.

So it's not every customer that we're just prepared to jump into the forecasting process.

No, and we make it very clear to those customers that if they are not converting those forecasts at a pretty good level, then we're not going to do anything with the forecast when they send them.

I mean much the same way as we get backlog from customers and we know that's not any good either and so we don't necessarily build it.

So I think what we're really trying to communicate, and it is a complex thing to communicate is that, you know, in both the up and the down cycles backlog is becoming irrelevant.

And the only way you can get any information is to get forecast from customers and the conversion rate of those forecasts is to a first approximation, the same as the conversion rate of backlog.

And so I don't -- you know, even though there's great temptation to think, oh, I have 70 percent backlog coverage, I'm in good shape.

As we have all seen that backlog moves very, very fast and disappears very fast and I think, you know, you folks as much as anybody have listened to all the companies telling you the exact same thing that the backlog is changing that's why everyone got caught surprised in their cycle.

So I think that even though backlog gives you a little bit, you know, where historically might have been comfortable, I don't think it's a very good indicator of anything in both the bottom of the cycle or the top of the cycle.

Great.

Thanks for that.

And then Joe the first part of the question was just--.

The first part of the question, the book-to-bill ratio from the OEM customers was about .96 and from the DSP customers was .85.

Thank you.

So you can see that the DSPs are working off of the inventories that they have in fulfilling their backlog.

Great.

Thank you.

You have no further questions at this time.

Well, thank you very much to everyone for participating this afternoon.

And we look forward to talking to you again our second quarter conference call is scheduled for Thursday, May the 12th beginning at 4:30.

Thanks.

This concludes today's Analog Devices conference call.

You may now disconnect.