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Operator
At this time, I would like to welcome everyone to the Analog Devices fourth-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. (OPERATOR INSTRUCTIONS).
Ms. Tagliaferro, you may begin your conference.
Maria Tagliaferro - Director, Corporate Communications
Good afternoon, everyone.
This is Maria Tagliaferro with Analog Devices.
If you don't yet have our fourth-quarter 2005 release, you can access it by visiting our website at Analog.com, and there is a headline displayed on our homepage that will take you to the release.
This conference call is also being broadcast live on the Internet from that same website.
Select investor relations and you can follow the instructions next to the microphone icon to listen via the Internet.
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 approximately one week.
Participating in today's call are Jerry Fishman, our President and CEO;
Joe McDonough, Vice President of Finance and Chief Financial Officer; and also Brian McAloon, Vice President for the Digital Signal Processing and Systems Products Division.
We have scheduled this call, as usual, for approximately 60 minutes.
We will began 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.
Analysts participating via telephone can press *1 on their telephone at any time beginning now 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 on Form 10-K filed with the SEC.
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 November 15, 2005.
With that, let's begin with Mr. Fishman's remarks.
Jerry Fishman - President and CEO, Corporate Division
Good afternoon.
The fourth quarter turned out to be a very strong quarter for ADI, with revenues growing 7% sequentially to approximately $622 million, which was well ahead of the level that we had planned for the quarter.
Our strongest revenue growth quarter to quarter came from the communications market, with strength in products sold to both wireless handset and networking customers.
Our base station revenues declined slightly in Q4 after very strong growth in earlier quarters.
We also experienced continuing strength of sales of our products to consumer customers, which grew significantly in such product areas as digital cameras and advanced digital TVs.
Both of these are areas where ADI is extremely well-positioned with all the marketshare leaders.
Revenue from computer customers also grew during Q4, as our power management sales also improved.
We continue to focus our power management product development on portable products and in particular in end market products, where we have very high market share for our converters, our amplifiers and our digital signal processors.
Our revenues from industrial customers were approximately flat sequentially and accounted for 39% of our revenues for the quarter.
Communications was approximately 30%, consumer 16% and computer was approximately 15%.
Revenues grew in all regions of the world, with the strongest revenue growth from Korea and Taiwan, followed by China, Japan, Europe and the Americas.
Given the volatility in the end markets over the past few years, we think it's informative to review multi-year growth rates to understand directional shifts in our business, if any.
Over the past two years, our fastest-growing business has been our consumer products business, which have grown at a compounded rate of 21% per year between 2003 and 2005 as our signal processing technology continues to enable unique sight, sounds and imaging features in a wide array of new consumer products.
Interestingly, our industrial products, which comprise thousands of products sold to tens of thousands of customers around the world, grew at a compounded rate during the same period of 13% per year, indicating that our core technology position remains very strong, which is supported by high market shares in key product areas and very clear trends in many industrial customers, who use more and more signal processing technology.
Within the automotive segment, which we currently capture when we talk about industrial end markets, the design-in rates for our analog and DSP products are accelerating, and that includes new accelerometers and gyroscopes, analog products that sense and control electronic systems and DSP products that are the main processing engine for telematic systems being designed by many leading car manufacturers.
While today's sales to automotive customers represent approximately 7% of our sales, the opportunity going forward for analog is exceptional, given the convergence of new automotive applications with ADI's signal processing technology.
As we have seen for many years in the airbag application, which we have been serving for the better part of ten years, the time to revenue in the automotive industry is long.
But once platforms go into production, these applications provide stable and very long life cycles at good margins.
Over the past few years, the computer market has lagged somewhat for ADI, as we continue to address the market for portable products while we still have an installed base of slower-growing desktop products.
Clearly, computer products and the power management products in computers, which account for a large part of our computer sales, represent a lot of upside for ADI going forward, as our products that we have introduced over the past few years go into production.
Overall, the communications market has had very different results in different end markets or segments of the communications market.
Our base station business, which was approximately 9% of our revenues in the fourth quarter, has grown at a compounded growth rate of 20% per year since 2003.
We sell literally dozens of different leading-edge signal processing and control products to virtually every base station manufacturer in the world.
Optical communications products, while today a relatively small business for ADI, has been growing at very high rates during this period.
Enterprise networking products have also shown good growth, while DSL revenues roll off and newer, high-technology content analog and DSP products enjoy a strong market reaction and reception.
Wireless handset product revenues declined in 2005 after growing 39% the year prior, primarily as a result of very high volatility in the Asian handset market.
We believe that most of these issues have now stabilized, as evidenced by the recovery in our handset revenues in Q4.
Our sales from handset customers are comprised of approximately 40% from analog products and the balance of 60% from DSP baseband products.
In total, handset revenues represented approximately 13% of our revenues in Q4, and that is the combination of analog and DSP content.
As we mentioned last quarter, we're continuously reshaping our handset product portfolio to a richer technology mix of both analog and DSP technology.
During Q4, analog revenues grew approximately 3% sequentially and were up slightly year over year after growing 30% the prior year.
Our strongest growth came from converter products, which grew 4% compared to the third quarter and 9% year over year.
For the fiscal year 2005, converters represented 43% of our total revenues, up from 40% of FY '04 sales.
Our market share in converters remains well over 40% and brand studies continue to indicate that customers around the world prefer ADI's converters by a very wide margin relative to competitors'.
Given the fact that converter performance continues to drive system performance for our customers, converter products remain ADI's top priority.
DSP revenues grew 26% sequentially in Q4 but declined year over year, primarily due to lower baseband DSP sales to cell phone manufacturers earlier in the year, as compared to the record sales of handsets that we enjoyed during Q4 of last year.
Our general-purpose DSP product sales continued to grow in Q4 and for the year 2005, and now represent approximately 7% of our total sales.
In aggregate, analog sales represented 81% of our total sales in Q4 and 79% of our total sales for the year.
Gross margins improved slightly to 58.3%, despite continually low utilization in our internal factories.
Inventories declined by $20 million sequentially or 14 days to 115 days, which are now beginning to approach our model of 100 to 110 days.
Last month, you might remember we announced that we would be phasing out our production in California and our California wafer fabs over the next year and transferring that production to other fab locations in Massachusetts and in Ireland.
This will save ADI approximately $45 million a year in costs, and at the same time provide better loading to existing underutilized fabs.
We are planning for this transition to be complete by the end of 2006 and to begin to realize the benefits during 2007 and beyond.
We have ample capacity in our remaining fabs to nearly double existing rates with very low levels of additional capital spending.
Our operating profits for the fourth quarter totaled $123 million or 20% of sales, after including $31.5 million of restructuring-related expense.
As a result of higher gross margins and continuing very tight expense controls, we dropped approximately 50% of our incremental sales to operating profit for the quarter, which grew to $154 million, and operating margins grew to 25% of sales, excluding the restructuring-related charges.
Our balance sheet remains very strong.
Our Q4 cash flow from operations totaled approximately $200 million or 32% of our revenues.
We spent $21 million on capital, producing free cash flow of $179 million.
During the quarter, we were aggressive buyers of our stock, purchasing 6.7 million shares for approximately $241 million.
For the year as a whole, ADI generated $673 million of cash from operations, spent $85 million on capital, producing $588 million of free cash flow.
We repurchased 14.6 million shares, or nearly 4% of our outstanding shares, for $525 million.
We paid out $119 million in dividends, and we received $89 million from employee stock programs.
For the year, as a result, we returned essentially 100% of free cash flow to investors via stock purchases and dividends, and we ended the year with approximately $2.7 billion in cash.
Today, we also announced that our Board has approved a $0.12 per share cash dividend, which represents a 20% increase over last quarter, and two times the payout of dividends about a year ago.
Orders were very strong in the fourth quarter in every region of the world, with the exception of Europe, where orders declined sequentially.
Turns orders, which we define as orders that we book and ship during the quarter, remained very high and comprised approximately 50% of our sales for the quarter.
Inventory levels declined in distribution.
This is all consistent with our continuing short leadtimes and the very high turns environment, which we still are operating.
As we enter 2006, we are planning for a very good year.
Our 13-week backlog at the beginning of the first quarter is approximately 4% higher than last quarter.
Due to normal seasonality in the consumer and the industrial markets over the holiday period, we are planning for first-quarter revenues to be approximately equal to fourth-quarter levels, and for the first-quarter EPS to be approximately $0.31, which includes approximately $0.05 of previously-announced restructuring-related expense and stock-based compensation expense, which we begin expensing in Q1.
We are also planning for sequential revenue growth to resume in the second quarter, and for gross margins to continue to improve throughout the year, as we increase the utilization of our internal wafer fabs.
We intend to keep expenses very tightly controlled, with most increases in expenses tied directly to improving financial performance.
In aggregate, we are planning to hold the rate of expense growth well below the rate of sales growth, and thus continue to drop down to operating profit a very high percentage of the planned sales growth.
For ADI, one of our primary objectives in 2006 will be to continue to focus on products and end markets, where our technology is unique and where we can earn high and sustainable returns because of this uniqueness.
We made some good early steps towards that objective in late 2005, and we will continue to pursue opportunities to better focus our business during 2006.
We also this afternoon issued a press release announcing a tentative settlement with the SEC regarding the investigation into our stock option granting process, which was announced a year ago.
The release contains the terms of the proposed settlement, and is everything that we are permitted to say about the settlement at this time.
We will now be happy to take any of your questions about our quarterly results and our overall business strategy going forward.
Maria Tagliaferro - Director, Corporate Communications
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
(OPERATOR INSTRUCTIONS).
Michael Masdea, CSFB.
Michael Masdea - Analyst
Let me start off by saying we appreciate the restructuring efforts you guys put in place last quarter.
My first question relates to the handset business.
Jerry, as you yourself said, it's a pretty volatile business.
We saw a pretty big downtick last quarter, a pretty big one -- uptick this quarter you just announced.
What gives you the confidence that we are not seeing just another volatile swing and we are not going to swing back around in the next couple of quarters?
Jerry Fishman - President and CEO, Corporate Division
It's always hard to predict any particular end market, whether it be a consumer product or a handset product or anything.
Our sense is that many of the Asian customers went through some tough times.
They have now refreshed their products.
We are moving and continuing to move our products sort of upscale to the higher end of the market, and I think that end of the market over time will become less volatile than the lower end of the market.
The important thing to point out, Michael, I think, is that in aggregate, handsets are still a very small part of our business.
If you look at the DSP baseband, which has caused a lot of the questions by many investors, that's even a smaller part of it, given that the analog content in handsets is sort of 40% of our total handset business.
And that's no different than the content that any analog supplier has in handsets.
So we are continuing, Michael, to refine our strategy.
We are trying to move upmarket.
We are trying to get rid of some of the volatility that we've had, but I think in aggregate, it's still a fairly small percentage of our business, and that's where we would like it to be.
Michael Masdea - Analyst
And then, a follow-up is the 2Q kind of commentary you gave around revenue and gross margin.
What is driving that confidence, given the short leadtimes and the lack of visibility that's generally (multiple speakers)?
Jerry Fishman - President and CEO, Corporate Division
Are you asking, Michael, about Q2?
Michael Masdea - Analyst
Yes, the fiscal second quarter.
Jerry Fishman - President and CEO, Corporate Division
Typically, what happens in our businesses, particularly in the consumer business and the industrial business, in the industrial business, we tend to have a lot less sales days; that's been typical in analog for 20 years.
And so distribution business tends to get a little softer around that period, because we lose almost two weeks of production.
And in the consumer business, they tend to gear up just prior to the holiday and then they sort of take a breather and see what's sold through in the early part of the year.
Typically, for analog, if you go back many, many years, our second quarter turned out to be a pretty good quarter.
The industrial business has in a full quarter, the consumer business isn't in (ph) the sort of reaction to what happened over the holiday period, and over many years, in good and bad economies, we tend to do pretty well by Q2.
And our sense -- you know, our operating assumption in our plan for 2006 is that the world is going to hold together.
If the world dissipates and energy costs or whatever other exogenous factor makes the world collapse, who knows?
But that is certainly not our assumption in our plan, and therefore if we look at Q2 just historically, that tends to be a reasonably good quarter for us.
Michael Masdea - Analyst
And all the signals coming from your customers sort of support that?
Jerry Fishman - President and CEO, Corporate Division
Yes.
Operator
David Wu, Global Crown Capital.
David Wu - Analyst
Can you explain a little bit more about your restructuring?
Because what I saw was TigerSHARC core is being discontinued.
On the other hand, that has been your better-growing business, as you have said in the last two years, and I didn't see much in terms of -- at least visible to the outside world -- anything you did in the handset business, which has been the problem area for you.
And my follow-up is pretty simple, actually.
Your looking for a good year in FY '06, and I was wondering what on earth a good year means.
Jerry Fishman - President and CEO, Corporate Division
Let me try to address each of those.
First of all, I think it's inaccurate to say that we discontinued our TigerSHARC family.
What we have done is we had a lot of disparate resources in many different locations around the world, and we consolidated those resources into one location, to try and get the costs down.
The architecture now is very stable, and our sense is the best way to perpetuate the architecture is to do it sort of in much fewer locations than we were doing it before.
So I think the perception that TigerSHARC isn't an important part of our future is not the way we look at it at all.
I would say, on the restructuring stuff, David, the actions that we have taken in 2005, particularly the actions relative to the wafer fabs, are primarily related to the analog business, where we have a lot of opportunity to get even higher gross margins than we have been getting in that business.
But I would not necessarily mistake that to think that that's all that we're going to do going forward.
We are reviewing all our businesses carefully, and the criteria, as I said before, and the bar is getting higher.
We are looking to predominantly be in businesses where our technology really does differentiate the end product, and we can get the kind of margins that we think are appropriate to this business.
And I think you'll see that in 2006, and we'll tell you about any actions that we take as we finalize them.
David Wu - Analyst
So we have not finished with these -- looking at (ph) individual businesses?
Jerry Fishman - President and CEO, Corporate Division
Well, we are continuing to try to move our product families in all our businesses upmarket a little bit, and we think we have opportunity to do that, given our breadth of technology.
As far as 2006 goes, what is a good year?
We will see how the world goes.
We're expecting we will have good sales growth, and we think that's going to begin in Q2.
And we expect it will wind up being a good sales growth year, and that our profits can continue to grow faster than our sales.
I think that's about as far as we are going to comment right now.
Operator
Bill Lewis, JPMorgan.
Bill Lewis - Analyst
If I could ask a little bit more about the restructuring, is there anything you can share with us in terms of some of the targets you're looking for, what you think gross margins and operating margins should look like, say, four quarters from now, roughly, when you have completed the fab closure and have the full benefit of the restructuring?
If you don't achieve those targets -- and, I guess, maybe talk about what the targets might be and what you might do, in the event that things don't cooperate in your achieving of those targets?
Joe McDonough - VP of Finance and CFO, Corporate Division
We have not changed our goals, which are 60% gross margin and 30% operating profit.
And these actions that we've taken and things that we are reviewing are all aimed at increasing the chances of achieving those goals.
I think the fab closure in California is a consolidation of existing manufacturing capacity into existing fabs.
That will be completed at the end of the year, and therefore the benefit of that will be in fiscal '07.
And we announced the benefits that we expect to derive from that in the previous press release.
So we are -- through fiscal '06, we are currently operating with utilization rates that are around 60% of our capacity; that's similar to where it was last quarter.
Typically, we go into the first quarter with a little lower utilization, just simply because of the effects of the holidays.
And then, as the second quarter, third quarter and fourth quarter unfold, as Jerry indicated, we're looking for sequential growth to resume in the second quarter and continue on through the balance of the year in response to what we think is an economic environment that looks healthy.
And as that utilization goes up, we should see the impact on gross margins throughout the year.
And as we enter '07, we should see the benefits of the fab consolidation.
So now, how fast we get to the goals that we set are really dependent on the rate of revenue growth.
Bill Lewis - Analyst
And a follow-up, if I could, just on the revenue guidance that you gave.
I understand the point you're making, Jerry, about seasonality in this upcoming first quarter of yours.
But flat would appear to be a little bit below kind of a normal season, at least based on your long-term history.
What is it that you think might be keeping you slightly below normal seasonal, currently?
And then, as you look to April, are you expecting to kind of be back to your normal seasonal, which would suggest a very strong quarter, as you were talking about?
Jerry Fishman - President and CEO, Corporate Division
Well, I'd say that it really depends very heavily on the product mix.
When we have a higher mix towards consumer products than we did in the past, that gives us a little bit more seasonality.
But on the other hand, typical seasonality for us in many years is for the first quarter to be down a little to up a little.
So this is sort of, I think, in the middle of the pack of things that we usually get, maybe a little bit more exaggerated because of a little bit higher dependence on consumer products.
I'd say that our plan right now indicates that we would see a pretty good Q2, and that's certainly our expectation.
Operator
Jack Romaine, S.G. Cowen.
Jack Romaine - Analyst
Could you guys give us a little bit of insight into what's going on in the data converter market?
I think in your release it said that your revenue this year was flat to down slightly from last year.
Can you talk about that in the context of the entire market?
The data that seems to be out there varies from the market being down 6% last year to up 24%.
Can you let us know what you think about the market and what is changing out there?
Jerry Fishman - President and CEO, Corporate Division
Yes.
I would say that you really have to look at this thing over a slightly longer period.
I think what's going on out there is the converter market still is reasonably good.
I think it got a little oversold in 2004, when our converter revenues, I think, in 2004 were up 31% year over year.
And I think it gave back a little of that this year, and I think if you look over a three-year time cycle, our converter revenues have grown 17% a year, compounded for three years.
I think that's a reasonable expectation of what you will see going forward.
The periodic data is a little bit lumpy and confusing, and I think it's very hard when we look at it to make anything of it.
I think the most important thing is, when we look at all the studies about our share, when we look at all the studies about our brand, despite the fact that there's a lot more competition out there chasing us, I think our converter business is doing quite well and will continue to in the future.
Jack Romaine - Analyst
Can you give us some idea of the split on how you characterize that between low end and high end?
And is there risk that the low end of the business is getting integrated in the system on chips from --?
Jerry Fishman - President and CEO, Corporate Division
That's a good question.
For years, the low end has been integrating, but that's not where we tend to have most of our products.
The kind of products we do, the kind of processes we do them on make them challenging to integrate.
And when they do get integrated, we try to integrate them.
So I don't think that's a big factor, any more so than it's been in the past.
Jack Romaine - Analyst
Can you give us a number for the split, or is that not possible?
Jerry Fishman - President and CEO, Corporate Division
No.
Everyone defines the high-performance analog business differently.
We tend to define it by the gross margins.
So we run extremely high gross margins on our converter business, and I think that just gives an indication of what kind of percentage of it is really high-performance as compared to, you know, low performance.
But there's not any particular performance spec that we look at.
Sometimes you can have a converter with sort of 8 bits of accuracy and very high speed, and the question is, is that high-performance or low-performance?
You could have one that has very high accuracy but very low speed.
So there's so many different performance indicators and specs that are important to converters -- from accuracy to speed to noise performance to, in certain applications, many other things -- that it makes that distinction very hard to be specific on, other than by the gross margins.
Jack Romaine - Analyst
Trying to pin you down to a number here, if we used the cutoff of, say, 50% gross margin, can you split it that way?
Jerry Fishman - President and CEO, Corporate Division
Yes.
I'd say, in that sense, a very high percentage of our business is high-performance converters, extremely high.
Put two extremely's there.
Operator
Adam Parker, Sanford Bernstein.
Adam Parker - Analyst
I think three months ago or so, Jerry, you said that exiting part of the vertical market DSP business was a when, not an if.
And you mentioned it was probably quarters, not years, not months.
Should we still be thinking in the first few months of '06, or is there an update on the timing part of exiting part of that vertical market DSP business?
Jerry Fishman - President and CEO, Corporate Division
Oh, Adam, I would still stick with the comment I made in the last call.
Adam Parker - Analyst
So it's still quarters, not years, not months, and a when, not an if?
Jerry Fishman - President and CEO, Corporate Division
Yes.
Adam Parker - Analyst
In kind of thinking through that, how do you reduce your R&D scope in the vertical market DSP business and actually improve your positioning?
Can you just expand a little bit on the strategy for how you are going to be more effective with your R&D there?
Or, more generally, talk about what the revenue gross and operating margins can look like for that business long-term for the average guy competing in what looks like a pretty tough base kind of business.
Jerry Fishman - President and CEO, Corporate Division
Well, I think the way to think about it is that about 19% our sales last quarter were in the DSP business. 7% of that 19 was in the GP business.
The GP business has very similar margins to our analog business, and it's not surprising because it's highly fragmented, and we have a very, very wide range of customers in many, many markets.
And our primary objective is to continue to grow that business at a very high rate, particularly with some of the new products we have.
So I think that that business -- as that business continues to become a larger percentage of the total, which it has been, and probably will continue to, I think that's a good sign for our DSP business.
The other point that's important to remember about the DSP business is the vertical opportunities are much, much beyond everyone's focus on the handset business.
Certainly, handsets today represent probably 80% of the DSP market.
But if you look out a couple years, given the design-ins we have in things like new cars and automotive systems and medical instruments, a whole bunch of other what we called in the past sort of shallow vertical, where our technology really does differentiate the end product, I think we have lots of opportunities to grow the DSP business at margins that we would all be proud of.
I think the handset baseband has been a source of great frustration to everybody out there, but it's a small part of our sales that amortizes some of the R&D, and it's not going to be a very large portion of our business that is going to modulate our margins very much.
So I would say that, when you look forward in that business, we will have a richer product mix and we will have a more fragmented customer base, and we will have a less volatile product mix than we have.
And as a result, I think the DSP business, while I don't think we will have the same margins as our analog business, it will have a lot higher margin that it does today, particularly as we prune out sort of some of the lower gross margin business.
Adam Parker - Analyst
That all sounds fine.
I just -- given your operating expense, they are still a much higher percent of sales than, say, some of your analog peers.
We all naturally assign that to DSP.
Maybe you can share -- you said your long-term goals are 60/30 gross operating for the overall company.
Can you share what it is, maybe broken between analog and digital, just as you prune out some of these businesses, what the profitability profile would look like for the two separate product areas?
Jerry Fishman - President and CEO, Corporate Division
Well, I think, on those averages -- I mean, the only thing I can tell you is that on the analog business, it will be higher than that, and on the DSP business in aggregate, it will be lower than that.
Adam Parker - Analyst
Well, even I had that figured out.
Jerry Fishman - President and CEO, Corporate Division
Yes, I know.
Well, even you figured that out.
But I would say that the levels of disparity will continue to converge.
I think generally, the --
Adam Parker - Analyst
So DSP gets better?
You are not suggesting analog is going to get worse?
Jerry Fishman - President and CEO, Corporate Division
No.
I think the analog business is going to get better.
Adam Parker - Analyst
So by converging the DSP has to materially improve?
Jerry Fishman - President and CEO, Corporate Division
Well, I think it's going to materially improve.
That's certainly what we are after doing here.
Adam Parker - Analyst
Did I see you signed on for five more years as CEO?
Jerry Fishman - President and CEO, Corporate Division
Yes.
Adam Parker - Analyst
Can you handle 20 more conference calls?
Jerry Fishman - President and CEO, Corporate Division
Well, it depends on if you are on them or not.
Adam Parker - Analyst
I would hope not.
Operator
Louis Gerhardy, Morgan Stanley.
Louis Gerhardy - Analyst
I wanted to ask you -- you have described the potential for some additional actions in fiscal '06 as you continue to raise the bar.
Are those actions required to get to that 60/30 model that you've mentioned a couple of times, or would any new actions take us above those levels?
Jerry Fishman - President and CEO, Corporate Division
Well, that's a hard question, because we don't really know what the mix of business will be.
But one way to think about it is we are running 58 and change in gross margins right now.
And we are running that with 60% utilization.
So I think that ought to be a goal that we can achieve even without that.
I think as we get a richer mix of products and we get to 60%, we will take another hard look at what the gross margin can be.
But I personally wouldn't be satisfied with all the things that we are doing, if that was as high as we could get.
Time will tell.
We have a lot of work to do, and there's a lot of actions, and we don't exactly know the mix of business that we have going forward.
That's just my personal thinking on the subject.
Louis Gerhardy - Analyst
What would your utilization be now, if you had the Sunnyvale products in Ireland?
Joe McDonough - VP of Finance and CFO, Corporate Division
Sunnyvale products are actually moving to a combination of our fab in Wilmington and the fab and Ireland, and I don't have that number for you.
We looked at the utilization rates in the context of the demand that we are expecting as the year goes through, so we have operating plans that are a combination of the growth in demand, plus when we get into '07, the transition (technical difficulty). (Multiple speakers).
I think the major point here is that there are a number of things that we have done.
We are focused on this goal of 60% gross margin, 30% operating profit as the next step that we want to achieve.
You can look at it any way you want; you can look at it as sales growth, you can look at it as achieving that goal.
We could achieve the goal almost immediately if we didn't have some part of the business.
But that isn't the way to really get the growth of the earnings per share to the maximum level that accelerates the growth of earnings per share, which is really what we're trying to achieve.
Jerry Fishman - President and CEO, Corporate Division
I think what you can take away is that we have a lot of commitment in analog to improving the mix.
And sometimes, these things take a little longer than some people would like.
We're trying to do the best job we possibly can at moving as fast as we can on these things and doing the prudent thing.
The easiest thing in the world would be to just bail out of some of these things.
We don't think that's the smartest way to get at some of these things.
So we are going to be -- we're not going to lose sight of the objective of improving the product mix, and we're going to try to do it at the rate that is most expeditious that we can, all things considered, given our customers.
Louis Gerhardy - Analyst
And then, just for December quarter, can you remind us how large was DIFD (ph), at least in the September quarter.
And then for DIFD analog and DSP, are you expecting all those channels to be flattish, or what are your expectations for each area in the December quarter?
Jerry Fishman - President and CEO, Corporate Division
Joe is looking up the spreadsheet here.
Joe McDonough - VP of Finance and CFO, Corporate Division
In October, the split between OEM and DIFD was roughly the same as it has been during the past few quarters.
It's roughly 50/50.
That's likely to stay at (ph) a similar ratio.
Louis Gerhardy - Analyst
And how about analog and DSP for December?
Jerry Fishman - President and CEO, Corporate Division
Probably about the same ratio.
Operator
Ross Seymore, Deutsche Bank.
Ross Seymore - Analyst
Just a couple questions on the restructuring.
I'm looking for a little bit of granularity.
We talked about the California one a bit already, but the OpEx costs, the 16 million in annual savings -- when do you expect those to fold in, and roughly what line should we be looking for those to hit on the income statement?
Joe McDonough - VP of Finance and CFO, Corporate Division
That is through the year, beginning a little bit in the first quarter, more in the second quarter.
And those items, which are roughly $4 million a quarter -- during the second quarter, we have normal pay raises that go on in the second quarter.
We're kind of hoping to pay higher bonuses as we go through the year, in response to the improving profitability.
So to some extent, those savings are offsetting other expenses which are coming forward.
But they are reducing the level of expenses that we would otherwise have.
Ross Seymore - Analyst
So does that mean the OpEx in dollars goes down, or it just stops it from going up?
Joe McDonough - VP of Finance and CFO, Corporate Division
On a first approximation, I think the best assessment is that it mitigates the rise in operating expenses from the actions that we've taken so far.
Ross Seymore - Analyst
And then, on the California side of things, the 45 million in annual savings -- just roughly, how do you expect that to be split between COGS and OpEx?
Is that going to be 75% COGS-related?
Joe McDonough - VP of Finance and CFO, Corporate Division
This is on factory savings?
Ross Seymore - Analyst
Yes, and the California closure.
Joe McDonough - VP of Finance and CFO, Corporate Division
That's all cost of goods sale.
Ross Seymore - Analyst
All COGS?
Okay.
And then a final question -- when you guys talk about your 60/30 targets for gross and operating margins, was that inclusive of option expensing or exclusive?
Jerry Fishman - President and CEO, Corporate Division
That is exclusive of the option expensing, but the option expensing, as we indicated, is about $20 million a quarter, $0.04 earnings per share.
And we put up a spreadsheet on the website that would indicate how that would spread out over the next year, what our estimates are for both stock option expensing and for the restructuring expense.
But I think, as we look forward and we get beyond '06 and we start looking at the operating performance of the Company, we do need to be able to incorporate those expenses into the same goals that we have of 60% gross margin and 30% operating target.
Ross Seymore - Analyst
So you think that's achievable; it just takes a little bit longer because of that roughly 10% hit?
Jerry Fishman - President and CEO, Corporate Division
Yes.
Obviously, that's coming at us in the first quarter.
So if you view that as a setback against that, then it will take a little bit longer.
On the other hand, that expense is a product of simply looking backward at options that were granted a long time ago that were priced using (inaudible) assumptions that are different than what we use today and what's in the marketplace today.
So in many ways, there's a substantial flaw in the accounting that has determined that option expense.
We've got to get beyond (inaudible) its way through, and then we have to get into the new world of the compensations (ph).
Operator
Nimal Vallipuram, Benchmark.
Nimal Vallipuram - Analyst
First of all, let me congratulate you on a great quarter.
Jerry, this is a question for you.
We have discussed this in the past a couple of times.
As far as ADI is concerned, ADI has gone through this view of how to position the Company as a predominantly horizontal analog DSP company.
Should you invest more money on some high-growth vertical markets?
For the last couple of years it looks like your horizontal business has done much better than some of your vertical business.
But if you look at the fourth-quarter numbers, some of your vertical markets where you have invested in the past very prudently is starting to do exceptionally well -- for example, your communication market and consumer electronics market.
Given that, is there going to be any change in strategy going forward, or can you just discuss as how you are thinking in viewing the horizontal and vertical market model as for the ADI as a whole?
Jerry Fishman - President and CEO, Corporate Division
Sure.
I think, first of all, as we think about that, the differentiation of what is horizontal and what is vertical is a little confusing.
Our current definition of the way we think about that is horizontal is something where you sell sort of the same product to many, many thousands of customers.
And vertical is something where you might sell it to 30 customers or 10 customers or 100 customers, or however large or wide that segment is.
I think there's any doubt that the vertical customers, by that definition, are a large part of the served available market.
And a lot of the very high growth is going to come from those markets, and it also tends to amortize some of the R&D we do for the horizontal market.
So I'd say that, to a first approximation, a large part of our R&D strategy is aimed at horizontal customers.
And from time to time, and in areas like you have pointed out, be it consumer products or automotive products or, increasingly, even some things that people have thought of as horizontal but are really vertical, like cat scanners and ATE and a whole bunch of other things, that we take that R&D and aim it towards those kind of customers, and that gives us great leverage on the R&D.
So I don't think you can be a $2.5 billion company trying to get to 4 or $5 billion by just serving customers that buy hundreds of parts at a time, even though that will be and continue to be a very important part of our franchise.
So I'd say, cautiously, and probably with the scars of the past on our back on some of those things, we are going to be in some of those vertical markets.
And we've showed in many of those vertical markets that we can do very well.
And we can make good margins, and we can amortize the R&D, and we can get Tier 1 customers.
And those are the standards that we look at some of those vertical markets; that's the lens we look at it through.
Nimal Vallipuram - Analyst
Especially (ph) the restructuring you announced recently works towards that goal, in terms of if there is risk involved in the vertical market, that tends to get played down going forward, in terms that where you don't have a longer-term fixed cost investment in any of those vertical markets.
How is that all possible?
Jerry Fishman - President and CEO, Corporate Division
No, I don't think that's true.
I think we have less of a fixed-cost investment than if we started with a clean sheet of paper to develop the core technology that would go into those verticals.
But clearly, we have investments in those vertical markets in R&D; it's just a lot less than it would be than if we started from scratch -- not only a lot less, but a lot less risky.
Operator
Tristan Gerra, Robert W. Baird.
Tristan Gerra - Analyst
We are seeing a few companies now offering DSP architectures for the digital TV market.
What is your strategy in this market, specifically on the DSP side, that you could talk about?
And is this something that falls into your definition of shallow vertical market that you could expand into other applications such as set-top boxes?
Jerry Fishman - President and CEO, Corporate Division
I would say, to date, most of our market focus on the digital TV business has been on the analog side of the business.
Now, I think there's opportunities for DSPs in some of the peripheral functions in some of those TVs, like audio and some other functions.
Right now, most of the TV manufacturers use a large digital engine to do the digital processing, and that's not something that our R&D is directly focused on today.
Tristan Gerra - Analyst
And also in analog, some of your competitors obviously pushing toward a higher end, some of the competitors focusing on very low-power applications.
Is there a focus in terms of where your R&D spending is going for 2006 in analog that you could talk about?
Jerry Fishman - President and CEO, Corporate Division
I think probably the easiest way to describe that -- it hasn't changed very much.
The number-one part of our R&D in the whole company, and certainly in the analog business, is in the converter space.
And I think that goes across a wide myriad of products from low-power to high-speed to wide dynamic range.
The essence of that business is its fragmentation of products.
So we are very active in converter R&D across virtually every segment of the converter market, perhaps with the exception of very low-end stuff that is not the kind of stuff that we focus on.
But I'd say from low-power to high-speed to wide dynamic range, to other characteristics -- they are all part of our focus in analog R&D.
Operator
Joe Osha, Merrill Lynch.
Joe Osha - Analyst
I'm trying to make sure I understand your position here correctly.
Are you, over the next 12 months, going to get out of the vertical DSP market or not?
Jerry Fishman - President and CEO, Corporate Division
No.
Joe Osha - Analyst
No?
Jerry Fishman - President and CEO, Corporate Division
If your question is, generically, are we going to get out of every vertical DSP market, as we define vertical DSP, the answer to that is no.
Are we going to try to go upmarket?
Are we going to try to focus those efforts into things that we can make better profits in?
Absolutely, yes.
Joe Osha - Analyst
I guess, then, in your conversation with Adam, you alluded to the kind of months-not-years waiting period before we would see some type of action.
Could you explain to me what that action is going to be, then?
Is that just focused at the handset market?
Jerry Fishman - President and CEO, Corporate Division
No.
I would say that, as far as the specific actions that we are working on, we will comment on those when we make those decisions public.
But until then, we just can't be speculating on that stuff. (Multiple speakers).
Joe Osha - Analyst
That's fair enough.
I just want to understand, make sure, because I can't quite get my brain around this.
Is it, then, that there will be some withdrawal from some of the vertical markets that you compete in?
Is that what we might fairly anticipate?
Jerry Fishman - President and CEO, Corporate Division
I think what you should anticipate is we're going to have much better focus in our DSP business going forward than we have had in the past.
Joe Osha - Analyst
And the commitment is -- obviously, it's not a hard commitment, but the objective is to achieve this change at some point over the next 12 months?
Is that a reasonable thing (multiple speakers)?
Jerry Fishman - President and CEO, Corporate Division
Well, I'd say -- we said over the next couple of quarters, that's what we still believe.
Joe Osha - Analyst
And last, given --
Jerry Fishman - President and CEO, Corporate Division
Just so you understand, Joe, just to clarify what I'm saying, our goal was to get a richer mix in the DSP business -- richer and less volatile.
That's our goal.
Joe Osha - Analyst
In terms of your target revenue for the January quarter, can you share with me what the sort of DSP and analog components of that might be?
Are you expecting analog to grow, and maybe this big DSP growth to reverse a bit, or --?
Jerry Fishman - President and CEO, Corporate Division
I think, to a first approximation, we're expecting both businesses to perform approximately the same.
Joe Osha - Analyst
You've returned a great deal of cash to shareholders.
The buybacks, unfortunately, haven't done that much good.
Has there been, perhaps, any change in thinking of how you might weight that return in cash to shareholders between buybacks and dividends, or how that might change?
Jerry Fishman - President and CEO, Corporate Division
I'll tell you, to a first approximation, Joe, we think both are good vehicles to return cash.
We raised the dividend by 20% this quarter, because we have a lot of investors that really want increased dividends, and the yields start getting up to actually realistic levels.
We have other stockholders that think the best way to do it is to buy a lot of stock back.
And as you can tell, in the fourth quarter, we really accelerated our buybacks.
So I think they are both valid and legitimate ways to return money to stockholders, and we're going to continue to use both of them, I would say.
Joe Osha - Analyst
For the record, I think the dividend yield should be 2.5%.
Jerry Fishman - President and CEO, Corporate Division
Are you a stockholder that wants that?
Joe Osha - Analyst
I know lots of stockholders that do, yes.
Jerry Fishman - President and CEO, Corporate Division
2.5%?
Okay, I'll write that down.
Joe Osha - Analyst
Just a thought.
Operator
Romit Shah, Lehman Brothers.
Romit Shah - Analyst
Now that inventories appear to be close to target levels, should we assume that incremental gross margins going forward could be in the 70% range?
Joe McDonough - VP of Finance and CFO, Corporate Division
Well, some of that is dependent on the mix each quarter as we go forward, because we obviously have a large portion of our sales that are manufactured internally and other portions that's manufactured externally.
That balances off the risk profile correctly, in terms of the financial risk that we're taking.
And so, it's difficult from quarter to quarter to expect a sustained incremental margin.
Jerry Fishman - President and CEO, Corporate Division
I think one way to think about that is that we so the gross margins moving in the right directions, even with very low levels of utilization and the inventories declining from 130-some-odd days to 115 days.
I think that bodes well for the future in gross margins.
Romit Shah - Analyst
I was going to say, just given what you have done in terms of restructuring and the fact that your utilization is at 60%, assuming you guys can grow your business in 2006, 65, 70% incremental gross margin seems like a slam dunk.
Jerry Fishman - President and CEO, Corporate Division
Well, we will have to wait and see how it turns out.
Joe McDonough - VP of Finance and CFO, Corporate Division
That's certainly possible.
Jerry Fishman - President and CEO, Corporate Division
Joe says it's possible.
That's good.
Operator
Seogju Lee, Goldman Sachs.
Seogju Lee - Analyst
I'm wondering if I could get clarification on gross margin expectation for Q1?
Joe McDonough - VP of Finance and CFO, Corporate Division
The question is about the clarification on the gross margin expectation for Q1.
The guidance that we've provided -- and it's based on our plan for Q1, which, as we indicated, was basically for sales to be in a similar range to 4Q and for earnings, excluding the impact of the stock option expensing and the restructuring expense, to be similar to Q4.
So that suggests that everything else is more or less in line.
The gross margin, within a couple tenths of a point, is pretty hard to tell.
The expenses within a few million dollars are pretty hard to tell.
So we're just trying to put out the best guidance that we can, which is roughly flat, excluding the impact of the stock option expense and the restructuring.
Now, the gross margin is impacted by some of these restructuring costs during each of the quarters during the next year, since we are required to accelerate depreciation on that wafer fab in California that we're going to be closing down at the end of the year.
And all that is in the spreadsheet that I referred to, which we put up on our website, the investor relations portion of the site.
Seogju Lee - Analyst
I think at one point, you said you expected utilization to be down a little bit in Q1?
How should we (multiple speakers)?
Joe McDonough - VP of Finance and CFO, Corporate Division
I don't think you should take that as a negative to gross margin.
The utilization typically in Q1 is adversely affected by the holiday season.
And the utilization is running in the 60% vicinity, and that's roughly where we expect it to run in the first quarter.
Seogju Lee - Analyst
And what was the mix between internally manufactured products and externally?
Joe McDonough - VP of Finance and CFO, Corporate Division
Let me look that up for you.
It's roughly the same as last quarter, somewhere in the 55 to 60% range for internal.
Closer to 55.
Operator
Sumit Dhanda, Banc of America Securities.
Sumit Dhanda - Analyst
A couple of questions, first on -- you talked about strength in bookings in Q4.
Could you give us a sense, if you have already not alluded to this, a sense of how bookings have trended so far here in the month of November?
And then, any shutdown planned for the fiscal first quarter?
Jerry Fishman - President and CEO, Corporate Division
(Indiscernible).
Let me mention the bookings.
I think bookings are strong.
They were strong most of last quarter.
We've only had a couple of weeks; we tend to report our quarter pretty early.
And bookings look just fine.
Joe McDonough - VP of Finance and CFO, Corporate Division
The shutdowns -- we don't have anything significant to announce related to shutdowns.
There are always different aspects of the business that react to the holiday season, but nothing unusual.
Operator
William Conroy, Sanders Morris.
William Conroy - Analyst
A couple of questions.
Jerry, could you give us a little bit more detail on the industrial space and specifically the impact that either ATE or automotive hand on both bookings and revenue in the quarter?
Jerry Fishman - President and CEO, Corporate Division
I think, to a first approximation, it didn't have much of an impact on either automotive or ATE.
At the margin, we've seen the ATE businesses getting a little bit better.
The most encouraging part of what we've seen on the ATE business is that some of our large customers have reported that their bookings have gotten better, and that usually takes a quarter or two to translate into our bookings.
In the automotive space, the orders tended to be pretty good.
But it's always hard to tell.
Automotive is one of those things that we're a little worried about the first-quarter seasonality, as well, because the plants start shutting down over Christmas and so on.
So I'd say the automotive thing -- it's 7% (ph) of our sales.
I would pay attention to that more as a growth engine for the future than I would as a short-term growth engine for the Company.
As I said, we have so many things designed in so many cars that we get very excited when we look out over time on that.
But the time to revenue is long, and on the other hand, once you get it, you get it forever.
So I don't think that's going to be a sort of short-term accelerant, but I think as you get out sort of second half of 2006, 2007, it will start more meaningfully impacting our results rather than last quarter or next quarter.
William Conroy - Analyst
And to change gears a little bit on you, but following up on something that you mentioned earlier, does the R&D allocation across applications -- how well does that dovetail with the mix that we see laid out now and others?
I guess what I'm asking you is do you allocate more R&D resources to some of these emerging areas like automotive or power than what we would see your revenue mix lining up to be?
Jerry Fishman - President and CEO, Corporate Division
Yes.
I'd say that in markets where our position is low and we are trying to get it to be high, they do attract a disproportionate amount of R&D, relative to the current sales.
But I think it's interesting than none of them have a disproportionate amount of R&D relative to each other.
There's a lot of different things we're doing, and some things we do, it sticks and we get great revenues.
Some things we do, we don't, and we change what our strategy is.
But certainly, in the emerging markets, we tend to spend a little bit more R&D than in the existing business.
Operator
Manish Goyal, Crest Investments (ph).
Manish Goyal - Analyst
My question is about wireless.
Jerry, what are your aspirations in the 3G market?
Do you expect some design wins in coming quarters, and at what point do you expect?
And maybe you can elaborate on that.
Jerry Fishman - President and CEO, Corporate Division
Well, I think that we certainly have expectations in the 3G market.
We have a lot of momentum in China, and we are anxiously waiting for the Chinese government to approve those licenses.
We've heard different theories about what that would be, from early this year to late this year, into next year.
It's always hard to tell what's going to happen on those things.
We also have a very strong 3G product offering for the rest of the world, and so I think 3G will be a natural extension of what we're doing in EDGE and 2.5G, and we'll have some good products and we'll have some good customers and the like.
And I don't know what more I can say about that.
Manish Goyal - Analyst
So are you just looking for TDS-CDMA?
Is that the reason why you are looking so much for China, or do you plan to also participate in WCDMA and UMTS?
Jerry Fishman - President and CEO, Corporate Division
Well, we are trying to do both.
The reason I mentioned the Chinese thing is because our position in China is very strong, and they are not wedded to any of the local manufacturers.
So I think our opportunity is best there, but we certainly have opportunity in other locations with more standard 3G stuff.
Just so you don't ask again, I'll mention it.
This is a relatively small percentage of our sales.
Okay?
Operator
Craig Ellis, Citigroup.
Craig Ellis - Analyst
First of all, just on capital expenditures, Joe, how should we think about CapEx?
Joe McDonough - VP of Finance and CFO, Corporate Division
I think, in 2005, we spent $85 million on capital expenditures.
That was 4% of revenues.
And a more normal number is probably 5 or 6%.
We'll probably be closer to the low end of that range next year.
Craig Ellis - Analyst
And will that be pretty linear through the year, or will you start off at the low end and move up over the course of the year, as revenue (multiple speakers)?
Joe McDonough - VP of Finance and CFO, Corporate Division
I think the best assumption is it's relatively linear.
Craig Ellis - Analyst
And then, just a follow-up.
I know it's a small piece of the business or relatively small piece of the business, Jerry.
But on the handset side, was the increase in revenues as a percentage of total reflective of a new customer win, or was that just increased share of wallet in the customer base that you have had?
Jerry Fishman - President and CEO, Corporate Division
I think it's mostly related to the customers that we have.
We've announced some of the largest customers we have.
One in particular had a real problem in Q3 with getting production up.
He's now back online, and doing quite well in the market.
The Chinese handset manufacturers have put out a lot of new products; they were sort of dormant for a while, but they are doing a little bit better.
But I don't think it was anything extraordinary.
It was mostly that Q3 was anomalous and Q4 sort of returned to the kind of levels that we would expect.
Craig Ellis - Analyst
And then, just lastly and more longer-term, as we think about fiscal 2006 revenue growth, it would seem that, given your DSP objectives that analog and the general-purpose DSP business would be better revenue growers than the vertical DSP business.
And I'm wondering if you can confirm that, and then also maybe just comment on anything in particular you see that would be an incremental revenue growth driver in '06 versus '05 -- for example, a recovery in automated test and equipment, or anything else (multiple speakers)?
Jerry Fishman - President and CEO, Corporate Division
Sure.
Well, I think your conclusion about the DSP business is correct.
Those parts of the DSP business should be the faster-growing parts of the DSP business.
Certainly, we expect that as the semiconductor industry continues to recover, our ATE customers will continue to (ph) our market share in that business is extremely high.
That certainly hurts us on the way down, and it helps us outgrow the market a little on the way up.
Beyond that, it's sort of hard to tell, because we have so many different things up here in so many different new product areas; it's always hard to say.
We've been surprised a little on the upside on the TV business this year.
The price points have been down, the volumes are going up well beyond what we would have thought earlier in the year.
If that continues, that's a good sign.
Some of the automotive stuff that we have been working at patiently has started to really help us towards the end and the middle to the end of the year.
So in a business that's as diverse as ours, it rarely is one thing that really stands out as revenue generation.
The only market where that really happens to us mostly is the ATE market.
Craig Ellis - Analyst
Then lastly, any commentary on share buyback potential from here, given the amount that you bought back in the prior quarter?
Jerry Fishman - President and CEO, Corporate Division
I think probably the best news is that our cash-generation capability is actually now quite extraordinary.
We have a lot of confidence of that going forward.
So I think our appetite is pretty good.
Maria Tagliaferro - Director, Corporate Communications
We have actually come up on our 60 minutes, but we still have a few people in the queue.
So we'll go ahead and run a little bit longer and take the last four colors there.
Operator
Jeremy Kwan, Piper Jaffray.
Jeremy Kwan - Analyst
Just a question first in terms of how much you outsourced physically to (ph) analog.
Is that -- did I tackle (ph) it right at 45% on the manufacturing side?
Jerry Fishman - President and CEO, Corporate Division
No.
Well, Joe has the numbers here.
Joe McDonough - VP of Finance and CFO, Corporate Division
Let me look up -- the internal sales, the sales from internally fabbed products in the fourth quarter, were around 56%. (Multiple speakers).
So that means 44% were external.
Jerry Fishman - President and CEO, Corporate Division
Yes, but that includes our analog business.
I mean, our DSP business.
Joe McDonough - VP of Finance and CFO, Corporate Division
(Multiple speakers) of our total business.
Jerry Fishman - President and CEO, Corporate Division
So 19% of the business was DSP, so you've go to subtract those two, to see what percentage of the analog business we are doing the fab outside on.
So it's sort of that 44 less 19, roughly.
Is that right, Joe?
Joe McDonough - VP of Finance and CFO, Corporate Division
Yes.
Jerry Fishman - President and CEO, Corporate Division
So it was about 25%.
Jeremy Kwan - Analyst
Looking at 100% of analog, would that be 45% of analog?
Jerry Fishman - President and CEO, Corporate Division
Yes.
Oh, well, of Analog Devices.
Jeremy Kwan - Analyst
No, I'm sorry -- of analog products.
Jerry Fishman - President and CEO, Corporate Division
Oh.
Of analog products, based on the math I just did quickly, it would be about 25%.
Joe McDonough - VP of Finance and CFO, Corporate Division
25 to 30%.
That's typically what it is.
Jeremy Kwan - Analyst
And is this concentrated in any one product segment more than the others?
Jerry Fishman - President and CEO, Corporate Division
Well, a lot of our consumer products are on -- any of the analog products that we build on fine-line CMOS or very advanced CMOS, we outsource.
That tends to be some of our consumer products, but also some of our general-purpose products, as well.
So it really depends on the performance level and what it is we're trying to achieve with the product of whether it belongs on an internal process or we outsource it to TSMC.
So there's no general rule you can follow on that.
As Joe said, it's 25, some quarters it's as high as 30% of our analog product business.
And I don't see that changing dramatically in the short term.
Jeremy Kwan - Analyst
In terms of how does this affect -- I think, Jerry, you mentioned earlier that you can double or almost double revenue with very minimal spending. (Multiple speakers) assume a pretty constant outsourcing trend?
Or outsourcing split, I should say?
Jerry Fishman - President and CEO, Corporate Division
Well, again, it's hard to tell because of the revenue mix.
But we expect to get continuing growth in our internally manufactured products, and the real question is what's the growth rate of those versus the external ones?
And I think it's very hard to call that.
Jeremy Kwan - Analyst
And maybe just one final question.
Can you give us a quick update on your power management strategy, and maybe any particular areas that you're seeing strength in, relative to the rest?
Jerry Fishman - President and CEO, Corporate Division
Well, I think for analog, the -- for ADI;
I want to be careful what I say on that.
For ADI, a lot of the emphasis is on products or with customers that we are already selling many other analog and DSP products to.
I mean, those are the ones that are the most natural customers for us.
It's where we have a good brand and we have a good insight into their future architecture.
So we tend to focus a lot of our product development at those places where we sell the other stuff.
And I think that has moved us from heavily doing desktop stuff years ago to a lot of the R&D now is going on to the portable side.
And that, not coincidentally, is where we have a lot of our other analog and DSP products, as well.
Operator
Louis Gerhardy, Morgan Stanley.
Louis Gerhardy - Analyst
I just wanted to follow up a tax rate for fiscal '06.
Joe McDonough - VP of Finance and CFO, Corporate Division
The best assumption at this point is that the tax rate will remain in the vicinity that it currently is in.
Jerry Fishman - President and CEO, Corporate Division
Not this quarter (ph).
Louis Gerhardy - Analyst
Yes, it was a little bit lower.
Joe McDonough - VP of Finance and CFO, Corporate Division
In the 22, 23% range.
Operator
Alex Jones (ph), Catalyst Investment Management.
Alex Jones - Analyst
This morning, Agilent announced a 2.7 billion modified Dutch auction buyback.
With such strong cash flow as you guys are predicting, or it seems that you have and will sustain, you have 2.7 billion in cash on your balance sheet now.
If you used 2.5 of that and did a similar modified Dutch auction here, between 37 or 40, with a range like that, this could be quite accretive, over 20% accretive and could push your stock to a new high, as it did Agilent this morning.
Do you have any thoughts on that, or have you talked about that?
Jerry Fishman - President and CEO, Corporate Division
I'll turn it over to our Chief Financial Officer.
Joe McDonough - VP of Finance and CFO, Corporate Division
I don't think we can comment on our buyback activities.
Alex Jones - Analyst
Okay.
Joe did have a good point on the 2.5% dividend yield;
I think that is interesting, also.
I think that Agilent's actions this morning are worth maybe investigating.
Jerry Fishman - President and CEO, Corporate Division
Sure.
We appreciate your comments.
Operator
Seogju Lee, Goldman Sachs
Seogju Lee - Analyst
Asked and answered, thanks.
Maria Tagliaferro - Director, Corporate Communications
Okay, great.
So that's everyone for today, and we appreciate your being with us on today's call.
Just to remind you that our first-quarter conference call is scheduled for Thursday, February 9th at 4:30.
The press release should be available at 4:00 Eastern time.
Goodbye.
Operator
This concludes today's Analog Devices conference call.
You may now disconnect.