亞德諾半導體 (ADI) 2006 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good afternoon.

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

  • At this time, I would like to welcome everyone to the Analog Devices second-quarter 2006 earnings conference call.

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

  • After 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 of Corporate Communications

  • Thank you.

  • Hello.

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

  • If you don't yet have our second-quarter 2006 release, you can access it by visiting our Web site at analog.com and clicking on the headline which is displayed on the homepage.

  • The conference call is also being broadcast live on the Internet, and a recording of the call will be available within about two hours of its conclusion, and we will leave that available via telephone and on the Internet for playback for about one week.

  • Participating in today's call are Jerry Fishman, our President and CEO, and Joe McDonough, Vice President for Finance and CFO.

  • We've scheduled this call for about 60 minutes.

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

  • In fact, analysts participating in today's call can press *1 beginning right now to queue up for questions.

  • There is an important announcement I would like to make today and point out to those of you listening and those of you who have access to our financials on the Web today, that the results for the second quarter for fiscal 2006 reported today are in accordance with GAAP and include a gain of $13 million related to the sale of our DSP-based DSL ASIC and network processor product line, $17 million of stock option expense, and expenses of $6 million associated with the previously announced restructuring actions related to the closure of our California wafer fab.

  • In order to help investors compare current results to our history and thereby better understand the underlying trends in our business, our comments during today's call will at times make reference to results which exclude these items.

  • We have included, in our press release, details of these stock-option expenses and restructuring-related items for all quarters from the fourth quarter of fiscal 2005 through the second quarter of fiscal 2006.

  • We've also provided estimates for these items and other items for the remaining two quarters of fiscal 2006.

  • Investors may also download this information in spreadsheet format from the Investor Relations page of our Web site.

  • In addition, please also note that the information we are about to discuss includes forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

  • Such statements involve risks and uncertainties.

  • The Company's actual results could differ materially from those discussed herein.

  • Factors that could contribute to such differences include but are not limited to those items noted and included in the Company's SEC filings, including our most recent quarterly report on Form 10-Q.

  • The forward-looking information that is provided by the Company in this call represents the Company's outlook as of today, and we do not take any -- undertake any obligation to update the forward-looking statements made by us.

  • Subsequent events and developments may cause the Company's outlook to change.

  • Therefore, this conference call will include some time sensitive information which may only be accurate as of the date of this broadcast, which is May 11, 2006.

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

  • Jerry Fishman - President, CEO

  • Well, good afternoon.

  • As you can tell from our press release, our second fiscal quarter was a very strong quarter for ADI.

  • Our revenues totaled approximately $644 million, which was up 4% sequentially and 5% sequentially for the continuing businesses that we have.

  • Our strongest growth came from industrial and also from consumer customers.

  • I think notably in Q2 our sales to our broad base of industrial customers increased [$0.07] sequentially and were up approximately 13% year-over-year.

  • The strongest performance came from our diverse base of industrial instrumentation, measurement and medical customers, who together accounted for 26% of our total sales.

  • Other major portions of our industrial customer base included automatic test equipment, which was approximately 3% of sales in Q2, automotive, which was 8% of sales, and defense electronics, which was approximately 5% of sales in the second quarter.

  • Overall, our sales to industrial customers represented 42% of our total sales.

  • We believe that this growth is the result of continuing strength of our core analog and DSP technology and continuing strength in the worldwide economy, which is stimulating higher capital spending, industrial capital spending, worldwide.

  • Our sales to consumer customers grew 14% sequentially and were up 13% year-over-year, fueled by digital cameras -- had a broad array of audio and video product sales to leading consumer customers.

  • In aggregate, consumer products represented approximately 17% of our sales in Q2.

  • We remain very well-positioned in digital cameras and flat screen TVs and high-end audio products, all applications where our signal-processing technology enhances the consumer's experiences.

  • For example, many of the recently introduced high-definition DVD recorders and players rely on chips from ADI's audio and video portfolio.

  • Our high-performance analog and DSP products are found in upwards of 20 sockets in new high-def DVD systems.

  • Another example of how ADI's signal processing technology is transforming the consumer experience is the recently introduced Nintendo Wii game console that was just announced this week in the press.

  • The controller replaces traditional pushbutton commands with real-time, live-action motion sensing using our newest MEMS devices with integrated analog circuitry included on those.

  • We expect that customers will continue to innovate the link between consumers and electronics and that ADI's signal processing technology will continue to be a key enabler of their ideas.

  • In the communications end market, strength continues from our wireless infrastructure products, which delivered the strongest sequential growth amongst the communications end markets.

  • Wireless handsets also grew during the quarter.

  • As expected, networking revenues declined the quarter, as we completed the sale of our DSP-based DSL ASIC and network processor product line, as we reported last quarter.

  • Revenues from these products totaled approximately $3 million in our second quarter, compared to approximately $11 million last quarter and $14 million in the year-ago quarter.

  • As a result, the revenues from communications customers were essentially flat in Q2 on a sequential basis and represented 29% of our total sales.

  • Computer revenues declined sequentially in Q2, in line with industry trends, and represented approximately 12% of our sales.

  • During Q2, analog product sales, which represented 84% of our total sales, increased 5% sequentially.

  • Converter products increased 8% sequentially, amplifier products increased 9% sequentially, and other analog product categories declined sequentially by 3%.

  • The combination of converters and amplifiers represented 63% of our total 2Q revenues.

  • Recently, market research firms have begun publishing 2005 marketshare statistics for amplifiers and converters.

  • In converters, ADI continues to lead industry by a wide margin.

  • According to Dataquest, ADI's 2005 marketshare in converters was approximately 43%, approximately flat to last year and up 10 full points over the last five years.

  • ADI's share remains over 3X that of our nearest competitor, who incidentally shared declines last year, according to this report.

  • Our amplifier share also remains high, driven by our investments in the high-performance sector of the amplifier market.

  • Revenues from DSP products represented 16% of our sales in Q2.

  • Among our DSP products, a 6% sequential increase in general-purpose DSP revenues, combined with increased handset DSP revenues, somewhat offset the $8 million sequential decline that resulted from the sale of our DSP-based DSL ASIC and network processor product line.

  • As a result, overall, our DSP revenues declined 4% sequentially in Q2.

  • During Q2, we experienced significant increases in orders from both OEM customers and distribution customers for both our analog and our DSP products.

  • As a result, our backlog for shipment in the next 13 weeks grew significantly, improving our visibility into Q3.

  • This sets the stage for what we believe will be a strong Q3 for ADI.

  • As Maria described at the beginning of the call, during Q2, we incurred expenses related to previously announced restructuring and a one-time gain on the sale of the product line I mentioned earlier.

  • We also have charges related to the expensing of stock options.

  • In my remarks this afternoon, I will refer to results which exclude these items, because believe it will help investors compare our current results to our history and thereby better understand the underlying trends in our business.

  • Gross margins rose to 59.1%.

  • Stock option and restructuring expenses impact the Q2 gross margins by 1.1%.

  • Excluding these items, gross margins reached 60.2% of sales in Q2, up from 59.2% of sales in Q1 on the same basis.

  • Gross margin expansion was driven by improved factory utilization, given the increased demand for our analog products that we build in our internal fabs.

  • We also maintain strong DSP margins, aided by a now-improving DSP product mix.

  • Inventory grew to approximately 125 days from 118 days last quarter, which was in line with our plan for the second quarter.

  • We built additional inventory in anticipation of the planned shutdown of our California wafer fab and in preparation for planned sales growth in Q3.

  • We're planning for inventory days to decline over the next few quarters.

  • We believe the total inventory of ADI products throughout our supply chain is reasonable.

  • However, spot shortages already reported by external foundries and back-end subcontractors have impacted the leadtimes for certain ADI products.

  • Nevertheless, of the 17,000 products that ADI offers for sale, 83% of those products are available with less than eight-week leadtimes, which (indiscernible) coincidence with what our customers need.

  • Of our top 500 products, 72% are available with less than eight-week leadtimes also, which is clearly within the expectation of our customers.

  • As result of higher gross margins and continued expense control, operating margins increased to 23.5% of sales, which includes stock option and restructuring expenses of approximately $23 million.

  • Excluding these items, operating profits for Q2 were 27.1% of sales, up from 25.7% of sales on the same basis in Q1.

  • Diluted earnings per share were $0.39, and the (indiscernible) stock option and restructuring expenses along with one-time gains on the sale of our DSO products resulted in $0.02 reduction in earnings per share.

  • Excluding these items, earnings per share were $0.41 for the second quarter, up from $0.37 on the same basis in Q1.

  • Our balance sheet remains very strong.

  • Second-quarter cash flow from operations totaled $205 million or 32% of revenues.

  • Capital spending totaled 29 million, producing free cash flow for the quarter of $176 million or 27% of sales.

  • Accounts Receivable was up to 51 days from 47 days last quarter, primarily as a result of a disproportionate amount of shipments in the last month of the quarter, as many of the supply issues we had earlier in the quarter got resolved.

  • We're planning for Accounts Receivable to decline to approximately 48 days this quarter.

  • Our cash balance at the end of Q2 totaled approximately $2.7 billion, after we repurchased 6.2 million shares of our stock for $238 million and we paid $44 million in dividends.

  • As we announced in March at our annual meeting, in June, we will pay a dividend of $0.16 a share, up from the $0.12 we declared in Q1.

  • Based on the order patterns and all the demand signals we're getting from our OEM customers and our distributors, we're planning for a strong Q3 for both our analog and our DSP products.

  • In aggregate, we're planning for revenues to be in the range of 675 to $685 million for Q3.

  • We're planning for gross margins to be approximately the same as Q2, and we're planning to limit expense growth to a few percent sequentially, primarily to support higher employee-profit sharing and commissions, as our sales and our operating margins continue to grow.

  • These results are planned to produce EPS in the range of $0.38 to $0.39 for the quarter, and we're planning for stock option, previously announced restructuring, and acquisition expenses to reduce diluted earnings per share by approximately $0.06 for the third quarter.

  • So excluding these items, our plan is for diluted earnings per share in the range of $0.44 to $0.45.

  • Our revenue growth plan for Q3 represents a 16 to 18% year-over-year increase.

  • This is in the ballpark of what we believe to be the long-term growth opportunity for ADI, given that virtually all types of electronic equipment found in homes, in cars, in offices, in factories and telecommunications infrastructure and in medical applications is now and will continue to be enabled by our signal-processing technology.

  • Maria Tagliaferro - Director of 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.

  • Operator, we are ready to begin.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Bill Lewis, JPMorgan.

  • Bill Lewis - Analyst

  • Great.

  • Thanks for -- (technical difficulty).

  • Maria Tagliaferro - Director of Corporate Communications

  • We can't hear you.

  • Jerry Fishman - President, CEO

  • Can you speak up a little, Bill?

  • We are having a hard time hearing you.

  • Bill Lewis - Analyst

  • Can you hear me better now?

  • Jerry Fishman - President, CEO

  • Yes, that's much better.

  • Maria Tagliaferro - Director of Corporate Communications

  • (multiple speakers)

  • Bill Lewis - Analyst

  • Great.

  • Thank you.

  • I guess my question is related to the outlook you provided.

  • Could you talk about, you know, kind of what your bookings growth was this quarter, if you can quantify how much that grew and specifically relative to the comments you made last quarter where I think, at the time, you saw bookings growth that was a little bit ahead of consumption?

  • Could you talk about maybe how that played out and how that actually translated into maybe better bookings growth even though I thought that might have impacted your bookings growth this quarter?

  • Joe McDonough - VP Finance, CFO

  • Yes, this is Joe McDonough.

  • The bookings growth, the book-to-bill ratio was about 1.1, so we had about 10% growth in bookings.

  • We had backlog that began the quarter at $400 million and ended the quarter at 471 million.

  • That's the 13-week backlog and those bookings are the bookings that we've taken from both our OEM customers and from our distributors. that doesn't, as we've said in the past, represent the end customer bookings or backlog on our distributors; it's indicative of the demand patterns that the [disties] expect to see.

  • At this point in the cycle, as we've seen in other times when business is building and the demand is growing, we do see backlog in bookings starting to grow ahead of what we expect to be able to ship or realize in revenue.

  • We recognize revenue, as you know, only when the distributors ship the product to their end customers.

  • We also have another demand signal that comes from our OEM customers, and that's their forecasts.

  • Some of our customers give us forecasts rather than bookings, and those forecasts turn into orders and shipments during the quarter.

  • That demand pattern is also increasing this quarter from last quarter.

  • So, we have signals that would suggest that they are ahead of what we're looking at in terms of the revenue guidance for next quarter.

  • But we think the guidance that we are giving is consistent with the plan that we have for the quarter, regarding the product that we he plan to build and -- (multiple speakers) -- be able to ship.

  • Bill Lewis - Analyst

  • That's helpful.

  • As a follow-up to that, just in terms of the revenue outlook, can you maybe talk about the composition of the revenue and where you see the growth coming from, maybe analog versus DSP level and any other end market-related commentary?

  • Jerry Fishman - President, CEO

  • Well, I think to (indiscernible) approximation, the revenue growth that we are anticipating (indiscernible) analog and DSP business is about the same.

  • I mean, that could vary, given that we don't have all the orders that we're going to ship yet, but based on what we're seeing, the trends in the markets and where analog and DSP products go, to a first approximation and for the second week of the quarter and looking forward, we see about equal growth rates.

  • You know, we expect the industrial business to stay strong.

  • The consumer business is good.

  • We expect sequential growth in the handset business again.

  • We expect the infrastructure business to be good.

  • Probably we will pick up a little in the computer business as a result of some new products and also a better product cycle coming up for us as Vista operating systems start to get deployed.

  • So I think our best guess, from looking at the backlog and what the customers are seeing, is that we should see reasonable performance pretty well across the product lines.

  • Bill Lewis - Analyst

  • Thank you very much.

  • Operator

  • Michael Masdea, Credit Suisse.

  • Your line is open.

  • Maria Tagliaferro - Director of Corporate Communications

  • I guess we can come back to him.

  • Let's take the next caller.

  • Operator

  • Steve Smigie, Raymond James.

  • Steve Smigie - Analyst

  • Thank you.

  • I was just wondering if you could comment a little on your power business.

  • It sounds like it was a little bit weaker this quarter and I was just wondering if you could talk about when that might recover and specific areas (indiscernible) portable power other than notebooks that you might go into going forward.

  • Jerry Fishman - President, CEO

  • Yes, I mean that's true.

  • We've been talking about the desktop parts of the business have been declining.

  • That's mostly intentional.

  • The portable stuff is growing.

  • I think, next quarter, we are counting on that business being up sequentially and certainly in the quarters following.

  • But we think we are getting towards the point where the new stuff is growing faster than the old stuff is declining, and I think, in Q3 at least, our plan is that that will begin to show up next quarter.

  • Steve Smigie - Analyst

  • Okay.

  • Could you comment a little bit on some areas outside of the notebooks where you are hoping to gain some traction?

  • Jerry Fishman - President, CEO

  • Well, you know, there's power management in a lot of different areas that go along with our products.

  • In any vertical where we are in, cameras or any other consumer product, they also carry power-management products.

  • That's one of the reasons we are very interested in that business, because we command a lot of the building materials already and our customers really want us to be there.

  • So, I think, over time, that business will be sort of in the applications or vertical businesses, but also a lot of those same architectures will be very relevant in some of the horizontal markets as well.

  • But I think, initially, most of it will be in the verticals because that's where the revenues are right now and that's where most of the growth is possible in the short-term.

  • But over time, there is no reason we can't build that out and have it be very similar to the other product areas where we're very strong, like amplifiers and converters.

  • You know, it's been a long haul for us as the desktop stuff has been declining now for the better part of a year and a half, and the other stuff has been increasing but not at the rate the other stuff has been declining.

  • But I think, as I said, I think we are pretty well past that right now, at least that's our plan and our hope.

  • Steve Smigie - Analyst

  • It was a very nice quarter.

  • Just quickly before I jump off, could you comment on linearity throughout the quarter?

  • Jerry Fishman - President, CEO

  • Well, the linearity -- I mean, it was a typical quarter except for the fact that early in the quarter, we had some supply constraints from the foundries, and there was a whole bunch of wrapping around with the subcontractors over there in terms of leadtimes.

  • But so, we had a good July but we had a good May and June also.

  • Steve Smigie - Analyst

  • Thank You.

  • Maria Tagliaferro - Director of Corporate Communications

  • (multiple speakers)

  • Jerry Fishman - President, CEO

  • I'm sorry. (LAUGHTER) Wrong month!

  • You know what I meant.

  • April, May and June -- right. (multiple speakers) -- June is right.

  • That's what I said!

  • (multiple speakers).

  • February, March and April -- that's what I meant!

  • Operator

  • Adam Parker, Sanford Bernstein.

  • Adam Parker - Analyst

  • I shouldn't ask you what day is today, Jerry!

  • Jerry Fishman - President, CEO

  • Monday?

  • Adam Parker - Analyst

  • I'm a little surprised by your guidance for the flat gross margin sequentially, given the really good revenue growth.

  • So, maybe just a little bit what are the pushes and pulls on the margins?

  • It would seem that higher utilization would help.

  • So can you help a little with that?

  • Do you expect maybe margin expansion beyond October quarter, beyond as whenever issues are out here (indiscernible) flush out?

  • Joe McDonough - VP Finance, CFO

  • Yes, this is Joe McDonough.

  • The gross margins, as we have been saying for the better part of a year, that our plan was to get that up to 60%.

  • There have been a number of actions that have been underway there.

  • And there were couple elements of that; some of them are just fundamental cost reductions, other (indiscernible) issues.

  • Our gross margin is mostly influenced by mix in any particular quarter.

  • That's always much more difficult to predict in the cost side of the equation.

  • So what we have seen in this past quarter, and it was what we had planned, was for the utilizations in the back rooms to go up.

  • They are now running above 70%, somewhere between 70 and 75%.

  • We saw the benefits of some of the cost reductions.

  • We saw some shifts in the mixes of the products and so, overall, we ended up where we had planned, which was in the 60% range, actually a little bit ahead of that at 60.2%.

  • Now, looking forward, we still do have the actions underway to move the production from our California fab to our other fabs.

  • That fab will shut down at the end of the fourth quarter; the production will transfer.

  • We've been building some inventory in anticipation of that transfer.

  • We obviously have to sell that inventory before we get -- sell the inventory at a little bit lower prices in the new fabs, and that will occur during the early part of the next fiscal year.

  • During that whole period of time, we would expect to see continued shifts in the mix of the business, and some product sell with very high margins, some with slightly lower margins.

  • Very few products sell below 50% margin.

  • So the gross margins, the way we have been modeling our business is to run a business that can run 60% gross margins.

  • We think that's a good business and that's the target that we've had, and we believe that's realistic.

  • Now, in any quarter, we certainly can be a point ahead of that, we can be a point below it, we could even be 2 points ahead of that.

  • But we are not prepared, at this point, to reset the model.

  • We do have to, as time goes on, recognize that there's stock-option expense that's being absorbed in the cost of sales as well, since our employees that are in the manufacturing organization receive options.

  • We do want to run this company with an operating margin that absorbs the stock-option expenses and has a 60% gross margin and a 30% operating profit.

  • Adam Parker - Analyst

  • All right.

  • So I guess, if I'm boiling that down, first of all, the 60% margin target is a pro forma one, not a GAAP one.

  • Second of all, the guidance -- you said a first approximation -- or Jerry did -- that you seem to have equal DSP and analog mix.

  • So even in that notion, there is some negative mix effect going on in the July quarter that's going to -- (multiple speakers).

  • Joe McDonough - VP Finance, CFO

  • In the July quarter, there's actually (indiscernible) margin growth of DSP product than analog products in that plan for next quarter.

  • But even within the analog products, we build some of those products in our own fab; we build some of the products in foundry.

  • The consumer products tend to have slightly lower gross margins than the products that we build in our own fabs.

  • When you look at variable margins, certainly that is true.

  • Adam Parker - Analyst

  • Okay, so -- I will leave (indiscernible).

  • The second question I had was on the operating expense growth, and the few percent I guess dollar terms sequential increase you expect.

  • You know, can you talk about, you know -- were there changes made to your profit sharing or commission structures, or -- you know, I wasn't expecting a big gap-up like that until you more attained the operating margin goals of 30% as opposed to on the way.

  • So I'm just trying to model the OpEx going forward after that few percent increase in July.

  • So if you could help there, that will be great.

  • Joe McDonough - VP Finance, CFO

  • Well, we pay a normal bonus to our employees and we earn 25% operating profit.

  • So, we have been, over the past few quarters, moving quite nicely through that.

  • As we move up toward the 30% range, I think that's a 1.5 bonus.

  • So we certainly have to pay those bonuses; we pay commissions to salespeople.

  • That has been part of our expectation as we've gone along.

  • Adam Parker - Analyst

  • So those are all based on pro forma numbers?

  • Joe McDonough - VP Finance, CFO

  • Right, right.

  • Now, back to the question you asked about the GAAP/pro forma on gross margins and operating margins, just so I don't leave any confusion, as we are talking about the 60.2% this quarter and similar gross margins next quarter, those are pro forma.

  • But as we look forward into 07/08, the expectation is that the world will evolve, we have to evolve, we certainly are changing our own compensation programs to recognize that we're going to have to be able to make those kind of margins and absorb the equity-related expenses.

  • That will be a transition; it won't happen -- (multiple speakers).

  • Adam Parker - Analyst

  • Okay, so ultimately, if you do reset it, it would be toward GAAP targets at the same level as the pro forma -- (multiple speakers)?

  • Joe McDonough - VP Finance, CFO

  • Yes, so obviously we have 2 or 3 points there we have to absorb.

  • Adam Parker - Analyst

  • Right, well, sorry -- one last thing.

  • In the earnings guidance, what are you assuming for the share count?

  • Do we assume the same repurchase rate you just did or how should we figure in your share count or your share repurchase in the July quarter?

  • Joe McDonough - VP Finance, CFO

  • Well, this quarter, we had 377 million shares within the calculation.

  • Our plan would be for 374 million next quarter.

  • The way that works is it's on an average number of shares outstanding during the quarter.

  • So, we're buying shares throughout the quarter and benefits tend to lag a bit.

  • Operator

  • Douglas Freedman, AmTech Research.

  • Douglas Freedman - Analyst

  • If you could briefly discuss the acquisition of the TTP Comm assets and what your long-term goal and strategy there is going to be.

  • Jerry Fishman - President, CEO

  • Well, I mean it's not a big deal.

  • It's a situation where TTP provided most of the software that went alongside our chipsets and handsets.

  • I think, increasingly, our customers had the interest to have one vendor do the whole thing.

  • I mean, customers don't want to fuss with that and get in the middle of what they are doing and what we're doing.

  • So you know, we had an opportunity to acquire those assets at a quite-reasonable -- on quite-reasonable terms, and we thought it would be a very strong help with us with our customer base, particularly in Asia.

  • I think, at the end of the day, the cost of that and what we get out of it, about neutral to the P&L.

  • So it's just really a question of getting control over the software, which enables us to interface and interact at a different level with our customers.

  • Douglas Freedman - Analyst

  • All right.

  • Then if you could, has there been any change to the expected cost savings from the fab closure in California?

  • Joe McDonough - VP Finance, CFO

  • No, that's on schedule and the cost savings are the same.

  • Operator

  • Rohit Pandey, HSBC Securities.

  • Rohit Pandey - Analyst

  • Thank you, two quick ones -- how much of the utilization improvement was driven by the inventory buffer build-up in inventory to prepare for the fab closure versus demand?

  • Is there a way to quantify it?

  • Joe McDonough - VP Finance, CFO

  • Well, the fab closure buffer stock was about $6 million of the inventory growth.

  • Rohit Pandey - Analyst

  • Okay.

  • When I look at your OpEx on a per-employee basis, it's about US$90,000 compared with, let's say, about US$70,000 for companies like Linear.

  • So, I know these numbers can be different given a different cost structure, but do you think there are parts in your cost structure that you can further optimize, like outsourcing more (indiscernible) testing or other line items, or other things that you could elaborate on?

  • Jerry Fishman - President, CEO

  • All right, if I understand your question is why can't we get our costs lower?

  • Is that the question?

  • Rohit Pandey - Analyst

  • Yes.

  • Jerry Fishman - President, CEO

  • You know, I think we constantly, as we have last year, look for opportunities to do that.

  • And we try to balance them with trying to grow the Company at a pretty good rate here.

  • You know, we believe that if you have a business that's running 15%-plus gross margin and 30%-plus operating margin and growing at a pretty good clip, producing 28, 30% of your sales and free cash, buying stock back, paying a dividend at pretty good rates, having a high yield on the dividend, one of the highest in the semiconductor industry, it's a pretty good business.

  • I think that there's always a trade-off there between growth and profits in the long-term, and we are always looking to fine-tune that balance.

  • Rohit Pandey - Analyst

  • Okay, thank you.

  • Operator

  • Tom Thornhill, UBS.

  • Tom Thornhill - Analyst

  • Joe and Jerry, if you could, looking at the orders and growth trends, looking beyond the book-to-bill this quarter and the ending backlog for the current quarter, on a qualitative basis, can you talked a little bit about your customers' forecasts, your conviction level in this longer-term growth rate in this 15, 16, 18% range?

  • Jerry Fishman - President, CEO

  • Well, I think you really have to -- (technical difficulty) -- down.

  • A lot of what we are seeing has been stimulated by industrial capital spending.

  • You know, I think there's a widely held view most factories around the world are going to start running out of capacity, so people are trying to add capacity.

  • I believe that's sort of a long-term trend that's helping us, and particularly in the industrial business where the signal-processing content keeps going up and up and up.

  • So, I mean, I think that's okay.

  • You know, from what the customers are telling us, you always have to discount that a little bit, which I think you can translate some of Joe's comments that you never quite believe all of the backlog and all of the order rates and I think people are trying to get ahead of themselves a little bit.

  • But the kind of growth that we're talking about for this year and the kind of year-over-year growth rates that we are looking forward to over the next couple of quarters seem indicative of what we believe the long-term growth rate has been and should be able to provide.

  • So you know, I think it's very different than when you look back at some of the bubble periods where we and other companies were reporting these 40% year-over-year numbers and you had things that were really over the top and you knew it.

  • I think these kind of year-over-year numbers are rational, given the expectations in the markets and therefore, I think a little bit more believable than other periods where things were so far over the top that either the world had changed fundamentally, which it turns out it never does, or they were overheated, which it turns out it was.

  • So I think, when you are seeing these kinds of sequential numbers that increase at these rates -- at least what we're going to ship in these rates -- and you look at the year-over-year growth rates and they are in that range, I mean that all sounds to us like that's sort of about where it should be.

  • Now, there will be years that it will be higher and years it will be lower as the fundamental consumption rate modulates with order patterns, but I tend to believe -- you know, we've said 15, 16, those kind of numbers, 18 maybe sometimes, some quarters.

  • I mean, that is what this business should be able to grow in the long-term, and so we don't think, in that sense, it's terribly overheated right now. (multiple speakers)

  • Tom Thornhill - Analyst

  • Looking at the order book and the backlog going into the third quarter, your turns business should run about what it was in the quarter you just finished, or --?

  • Jerry Fishman - President, CEO

  • Well, you've always got to be a little careful about that because the more backlog you have, the less your turns business (inaudible).

  • So that's what happens in this part of the cycle.

  • Now, it was -- a while ago, it was all turns business.

  • Now, people are placing backlog on these, so the turns business -- (multiple speakers) -- exactly but that's what happens at this part of the cycle.

  • Tom Thornhill - Analyst

  • What percentage of your turns business last quarter were you able to ship?

  • Jerry Fishman - President, CEO

  • Joe, do you have any idea?

  • Joe McDonough - VP Finance, CFO

  • Well, the turns business was somewhere about half of our business.

  • But at this point, we really don't even look at that internally from week to week, or we put that information together to respond to this call.

  • But it isn't really the way that we manage the business because once you start to get the kinds of backlog and forecasts that we have, and a lot of it comes from the distributors and the distributors have some different numbers from their end customers, you start to approach some demand signals that look almost like the entire next quarter.

  • What really happens is there's a lot of shifting that starts to go on as customers recognize what they need immediately and what they want to push out a little bit, and so the backlog and the turns orders and everything are not terribly great signals for the future.

  • So, we go and we have business unit meetings a couple of times during the quarter; we have input that come from the sales organization and their contacts with the customers.

  • We put together business unit plans that are founded from the bottom up at the product level; we look at it from an end market situation and we put together a business plan.

  • So we don't start with the backlog or the forecasts from the customers in the aggregate; we start with a lot of detail.

  • Jerry Fishman - President, CEO

  • I mean, I think what all that says, Tom, is a higher backlog makes you feel better.

  • I'm not sure it changes the dynamic a lot other than you have a little better sense of what to build than you would if you had a lot of turns business.

  • Tom Thornhill - Analyst

  • Thanks, Jerry.

  • Operator

  • Romit Shah, Lehman Brothers.

  • Romit Shah - Analyst

  • Thanks.

  • In terms of the long-term gross margin target, I think you mentioned last quarter that you would be disappointed if ADI's margins peaked out at 60%.

  • Now it sounds like you're backing off that.

  • Is the Company taking a view that the competitive -- you're looking at the competitive landscape, where it seems there appears to be increasing pressure from both the high end and the low end that, if they want to grow, if ADI wants to grow its top line at an above-average rate, then 60-plus% type gross margins is not a realistic target?

  • Jerry Fishman - President, CEO

  • Well, I think, first of all, maybe -- what Joe was saying earlier is that, you know, the target at 60% ultimately is going to include -- going to be a GAAP target, and that's a couple of points higher than the pro forma target, so I think I want to clarify that, number one.

  • Number two is having said that, I think -- I keep going back to this -- that if you have a business that's running 60 points, particularly if it includes all this other stuff in it, that's a pretty damn good business when it generates the kind of returns ADI does.

  • So, I think there is somewhat of a trade-off there.

  • I think trying to force to gross margins up at the expense of growth with the kind of returns we're getting probably isn't all that smart for us.

  • You know, you make a list of all of the companies doing 60% reliably or a little bit higher, or if you include the GAAP number, the pro forma numbers, it's a pretty short list of companies that do that and grow.

  • Romit Shah - Analyst

  • Okay, my follow-up -- I may have missed this but it sounded like there were some changes in terms of personnel in your Power Management division.

  • Can you just discuss what catalyzed those changes and I guess looking out over the next 12 to 18 months, which applications do you see as the high runners in that businesses?

  • Jerry Fishman - President, CEO

  • Well, I think what really precipitated that is we've been working on this business a while.

  • We have some very talented engineers in that business that are working on some great products.

  • We came across an opportunity to rehire a guy that used to work for us that we know is a tremendously talented guy, and we took that opportunity.

  • I think the combination of his experience in understanding that business with sort of the tremendous engineering talent we have put in that business over the last year or two I think will fundamentally improve our performance in that business.

  • It's sort of an interesting thing, as I mentioned earlier, that it's crazy because the customers have been after us to produce these products; they really want to buy them from us, as I said earlier, and particularly the customers where we are already selling them a reasonable part of the bill of materials.

  • So I think we will start off, as we have been, focusing on some of the places where we already sell our products and ultimately, our goal is to broaden out that franchise to a much larger customer base.

  • Romit Shah - Analyst

  • Which applications do you see as the higher -- (multiple speakers)?

  • Jerry Fishman - President, CEO

  • (multiple speakers) -- a lot of products are going to the consumer space; a lot of products are going to the communication space.

  • You know, anything that's portable obviously is where the opportunities for us lie in power management, and you know, portable power stuff is all over the place.

  • So I think it will be in virtually all of the verticals that we serve, particularly as I said, those where we already fly a lot of other analog and DSP stuff.

  • Operator

  • William Conroy, Sanders Morris.

  • William Conroy - Analyst

  • Thanks for taking my call.

  • Jerry, could you just talk a little bit about the sustainability of the improvements in the industrial side that you're seeing?

  • My sense is this would be a relatively sort of a long and slow but steady -- and I'm not asking you to prognostic about whether we get a worldwide recession or not, but just your sense of is this a type of business that could lend itself to big POPs or more of this kind of low, up and to the right?

  • Jerry Fishman - President, CEO

  • I think it's the latter.

  • The reason for that is that it's spread out amongst tens of thousands of customers.

  • So I think it's more the kind of thing that if industrial capital spending keeps moving up to the right, which it seems like it has and will continue to, that business should continue to be good.

  • I don't expect it will be a business that all of a sudden you will see a blowout quarter on.

  • If we did, I would start to worry about it, frankly.

  • William Conroy - Analyst

  • Just a quick follow-up, Joe, one for you -- with the different sort of moving parts that you've described vis-à-vis inventory and your expectations going forward, can you give us any sense of what you would anticipate factory utilization to be in the current quarter?

  • Should it be about flat?

  • Joe McDonough - VP Finance, CFO

  • The factory utilization in the current quarter will be slightly up.

  • You know, now we are in 70-75% range, so it will start to move up a little bit.

  • But in our business, we never get to 100% and when we get up 80, 85, 90%, that's quite a bit.

  • We have a lot of headroom, though, in terms of with modest capital expenditures, we can increase the production within those factories, shift the production around in terms of what kind of products are produced and what dollars they sell for.

  • So there's quite a bit of flexibility we have there as well.

  • William Conroy - Analyst

  • All right, thank you very much.

  • Operator

  • Michael Masdea, Credit Suisse.

  • Michael Masdea - Analyst

  • I guess, Jerry, you said (indiscernible) this part of the cycle when you are referring to this part of the cycle, and typically when you hear about backlog growing almost 20% and you hear about, you know, (indiscernible) not fully believing what's going on in the channel somewhat, it's always a little bit scary.

  • So tell us why it's not a peak and what you think it's sustainable.

  • Jerry Fishman - President, CEO

  • Well, I think the primary reason is is that the sequential rates that we're putting out on the sales front -- I mean, orders go up and down and they are always magnified on the upside and magnified on the downside.

  • But I think the kind of year-over-year numbers that we're talking about and we are putting up are indicative of a fairly typical year and not -- I mean, I think we are both old enough to remember the last big cycle here where we and other people were putting up 30, 40% year-over-year increases.

  • I don't think we're seeing that right now, and I think that gives us confidence that what we're seeing is mostly about consumption.

  • You know, the order rates and the disties, that's sort of irrelevant because that's just a question of what kind of inventory levels and what kind of safety stocks they want to run.

  • So we don't pay much attention to that, as I think we've been saying.

  • We don't ship it to them; we don't pay much.

  • I mean, it's just part of the noise out there in the channel.

  • So you know, our goal is to try to keep leadtimes low.

  • We're trying to have customers that are -- (technical difficulty) -- order what they really need and that's sort of feels right now like it's sort of normal.

  • As I said, the order rates, I mean, they go up and down.

  • I don't think any of us pay much attention to that; that has been around a while.

  • You know, we are just not seeing in any really segment of our business on the verticals (inaudible) the industrial companies a frenzy going on.

  • We are just seeing them try to order what they need, and our leadtimes are within what they really want.

  • I think, you know, with the margin, they are trying to get ahead of that a little bit because they are afraid of shortages, but not in a big way.

  • I mean, that's why I think Joe keeps harping on this part about what the backlog increases -- when you read some of the headlines out there, the orders, and all that stuff -- not very relevant.

  • Maria Tagliaferro - Director of Corporate Communications

  • Mike, are you there?

  • Michael Masdea - Analyst

  • Can you hear me?

  • Maria Tagliaferro - Director of Corporate Communications

  • Yes.

  • Jerry Fishman - President, CEO

  • Yes.

  • Michael Masdea - Analyst

  • Okay, the consumer piece was pretty strong in the first quarter.

  • Is that something very specific to ADI in terms of the penetration, or is there something going on here to grow that kind of strength in this time of the year?

  • Jerry Fishman - President, CEO

  • The consumer part (indiscernible) in the second quarter for us?

  • Michael Masdea - Analyst

  • Yes.

  • Jerry Fishman - President, CEO

  • No, I think there was nothing extraordinary.

  • I think when you have -- it's mostly related to -- the kind of stuff we're doing is selling well; it's not so much a question of the seasonality for us in that business.

  • It's that we are in a whole bunch of new products.

  • You know, we mentioned one of them, the high-def DVD players, which was all of a sudden the important product out there.

  • So it's much more the proliferation of the kind of stuff we're doing at the end markets than it is a seasonal part of that business.

  • Michael Masdea - Analyst

  • Great, thanks a lot.

  • Operator

  • Sumit Dhanda, Banc of America.

  • Sumit Dhanda - Analyst

  • I wanted to go back.

  • Joe, I wanted to go back to your outlook on gross margins going forward.

  • You said that the 60% long-term gross margin target incorporates like 2 to 3 points of impact from stock options.

  • But this quarter I think, if I run the math, it's only about 70 basis points.

  • So do you expect that ESO impact to increase, on a dollar basis, significantly from here or --?

  • Joe McDonough - VP Finance, CFO

  • Yes, let me clarify that.

  • The goal that we have in running the Company is to run a company that has a 30% operating margin, including -- so that's an operating margin -- including the impact of option or equity compensation going forward.

  • We are running a company today that has 27% on a pro forma basis, and we are about 3 points lower than that on a GAAP basis with the equity accounting.

  • So, we have a fair amount of leverage that we've got to get out of the business in order to get to the 30% operating margin.

  • We have a lot of work underway in other parts of the operating expenses to try to get that leverage.

  • On the gross margin, most of the leverage that we've been looking for has already been achieved.

  • That's not to say that there isn't some leverage left in the gross margin, but from quarter to quarter, the mix of the business we do in a particular quarter will be probably more determinative of the gross margin than getting the utilization of the factory up from 50% to somewhere in the 70s.

  • So, the place that we're working the hardest is in operating expenses to get the leverage in order to get the operating margins of the Company to, first, 30% operating margin without the equity costs of compensation and then to 30%, including those.

  • Sumit Dhanda - Analyst

  • I guess I had a couple of follow-ups as it relates to that.

  • First, my understanding was that you were planning to keep operating expenses relatively flat on a dollar basis for at least the first three quarters of the year, but it doesn't seem like that's necessarily the case.

  • Now, I'm curious as to how are you going to get the operating leverage that you're talking about -- (multiple speakers)?

  • Joe McDonough - VP Finance, CFO

  • Well, somehow, there seems to be two misunderstandings, one that we expected we would just be disappointed if the gross margins didn't go above 60%, and second that the operating expenses would be held flat.

  • We have always indicated that our compensation programs have elements in it that are related to the success of the Company, that we have to pay out more bonuses and we obviously have to pay out more commissions, and everything in the world doesn't stand still in terms of product development and a lot of other things.

  • So, we have to make a lot of decisions internally within the Company in order to constrain the operating expenses, even as we've been doing now, and that's what we're trying to do.

  • Beyond that -- (multiple speakers).

  • Sumit Dhanda - Analyst

  • (multiple speakers) -- another 600 basis points in operating margins, unless it's just purely leverage from a much higher topline growth.

  • Joe McDonough - VP Finance, CFO

  • Well, we certainly expect to have leverage from higher topline growth and we do not expect for the operating expenses to grow at the rate of the topline.

  • But holding them dead flat as never been anything that have we intended to communicate as our objective.

  • Sumit Dhanda - Analyst

  • As I try to follow your thesis over and over again, but as I try to boil it down, is it that you are just expecting a much faster topline growth as the primary driver of operating leverage, or is there something specific you can really point to where you think there's operating cost benefits that you just haven't seen in your company yet?

  • Joe McDonough - VP Finance, CFO

  • Our operating expenses, for quite a long period of time, have been growing at a lot slower rate than the growth of the earnings -- of the sales.

  • That's a result of a lot of actions that we've taken internally; it's a cumulative effect of a lot of small things.

  • We intend to keep working on that.

  • But we don't -- (multiple speakers) -- we don't expect to being on the telephone discussing every single item that we do in a company the size of Analog Devices.

  • Sumit Dhanda - Analyst

  • The other question I had, Joe, relates to the consolidation efforts that you're undertaking here.

  • If memory serves me right, you talked about $45 million in savings associated with that, and my understanding was that a lot of that would impact costs.

  • First of all, is that correct or incorrect?

  • Joe McDonough - VP Finance, CFO

  • Yes, that's correct.

  • Sumit Dhanda - Analyst

  • Does that still hold?

  • Joe McDonough - VP Finance, CFO

  • Yes.

  • Sumit Dhanda - Analyst

  • Then I guess my question is, why don't gross margins benefit more from that consolidation activity?

  • Joe McDonough - VP Finance, CFO

  • They will benefit from it and at the same time, there will be business that will be produced externally from external foundries that will have gross margins that are below 60%.

  • Our belief is that a 60% gross margin semiconductor business is a great business.

  • Sumit Dhanda - Analyst

  • One final housekeeping question -- the tax rate, do we just model it at -- what do we model it at going forward?

  • Joe McDonough - VP Finance, CFO

  • It was at 23% this quarter.

  • Our expectation is that it will be between 22 and 23% next quarter.

  • Sumit Dhanda - Analyst

  • Thank you.

  • Operator

  • Tore Svanberg, Piper Jaffray.

  • Jeremy Kwan - Analyst

  • Yes, good afternoon.

  • This is Jeremy calling for Tore.

  • Joe, I believe, last quarter, you mentioned the internal fab usage was about 57%.

  • Can you give us an idea of what that was, if that changed very much this quarter?

  • Joe McDonough - VP Finance, CFO

  • Yes, the utilization this quarter was between 70 and 75%, and last quarter it was in the 60s.

  • Jeremy Kwan - Analyst

  • I'm sorry, the internal versus external --.

  • Joe McDonough - VP Finance, CFO

  • Oh, the split.

  • Let me look that up for you.

  • In the first quarter, yes, it was about -- internal was about 57% this quarter and 55% last quarter.

  • Jeremy Kwan - Analyst

  • Do you have an idea of what that was on the back-end?

  • Do you -- sort of like -- (multiple speakers) -- and packaging?

  • Joe McDonough - VP Finance, CFO

  • No, we don't break that out.

  • That's -- we do a lot of the assembly at subcontractors and a fair amount of the test in our own factories.

  • Jeremy Kwan - Analyst

  • Okay.

  • Are you seeing, with I guess the overall semiconductor markets kind of picking up, are you seeing any indication from your foundry suppliers or foundry partners that things are tightening up a little bit for them?

  • Is that a concern for you?

  • Jerry Fishman - President, CEO

  • Well, yes, I think the foundries are getting pretty overheated right now.

  • Demand has picked up, and I think we are seeing the results of that.

  • You know, we have a spectacular relationship with our (indiscernible) foundry partner, and they generally provide what we need to us as our expectations change.

  • So, I think, so far, that's mostly been okay.

  • They got a little behind early in the quarter but I think, as we go forward, my expectation is that they will provide what we need.

  • Jeremy Kwan - Analyst

  • Isn't it more a little bit in the extension of leadtimes versus pricing?

  • Is that a fair way to put it?

  • Jerry Fishman - President, CEO

  • Pardon?

  • Jeremy Kwan - Analyst

  • Is it a fair way to put it that (indiscernible) capacity has shown up to you in the form of extended leadtimes versus pricing?

  • Jerry Fishman - President, CEO

  • Yes, it really isn't pricing.

  • You know, the margins, the pricing always stiffen a little bit; resolve always stiffens at these points in the cycle, but that's not a significant factor.

  • Jeremy Kwan - Analyst

  • Great.

  • Finally, Jerry, just looking to your analog business, has anything there changed in terms of the product lifecycles?

  • Has it been consistently high, or has something changed in terms of whether it's end market mix that could change the product lifecycles?

  • Jerry Fishman - President, CEO

  • Well, I think, in the horizontal business, which is the part of the analog business where one product might sell to 1000 or 2000 customers, that those lifecycles are the same as they've always been.

  • You know, in some of the much higher volume vertical analog businesses, the lifecycle is a little bit shorter.

  • But the architectural lifecycles are still very long.

  • Even though they might go from one fashion of product to another, generally the architecture or the base of the product stays about the same.

  • Some of the features or forms of the product tend to change a little bit faster.

  • But by and large, the lion's share of our analog business is still typically extremely long lifecycles.

  • Jeremy Kwan - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Louis Gerhardy, Morgan Stanley.

  • Louis Gerhardy - Analyst

  • Good afternoon.

  • Your incremental operating margins were 64% on a pro forma basis, so nice job there.

  • But if we think about this in the context of your October press release, where you mentioned a number of refocusing initiatives, how should we think about the benefits on the operating margin perspective over the next couple of quarters?

  • I'm trying to get at were the benefits of those initiatives, which you are executing upon now, were they front-end loaded?

  • Are they going to be spread out over the next two quarters?

  • Then also maybe related to that, I know it's probably tough, given that there's a number of initiatives underway, but can you give us a percent complete on the initiatives that you announced in October?

  • Jerry Fishman - President, CEO

  • Well, that's a little hard because there are a number of different items that for the most part had been completed except for the fab shutdown that I think I've discussed before.

  • I guess the easiest way, if you are just trying to get to what might we get out of incremental revenue dropping down toward operating margins, I tend to think in terms of if we got 50% down at the operating margin line, that would be pretty good and that's what we're trying to do.

  • We will probably be a little bit above that in some quarters, a little bit below it in other quarters, primarily as a result of the mix of the business that we have in any particular quarter.

  • But we're running a business now that is generating a pretty good running rate of earnings per share.

  • We are lugging around $7 share of cash; we're trying to deal with that, and I think the actions that we've taken are indicative of the sensitivity we have to that to the shareholders.

  • So ex-cash, our stock is trading at $28, and we are earning, we think, pretty good earnings per share, and we are moving forward in the direction that we've been saying that we're moving.

  • So, beyond that, I don't think we want to get into all of the details of all the actions that are underway within the Company, other than to the extent that I've discussed it before.

  • Louis Gerhardy - Analyst

  • Okay, great, thanks for that.

  • Then just a product-related question -- of the next three, or the three next generation gaming platforms that are out there now, can you talk about the range of dollar content that you would have in all three of those collectively?

  • Would you expect to sell the MEMS devices into more than just one?

  • Jerry Fishman - President, CEO

  • Well, I don't really know that number, Louis.

  • I'm sorry for that.

  • You know, clearly, that technology is very relevant in games.

  • The only thing that we can sort of talk about is what's been publicly announced, given that this is a unique feature that is very important to those game manufacturers.

  • But I think there's lots of other opportunities in those games beyond MEMS, so all of a sudden, these games are just chock-full of signal processing stuff in there.

  • So it's not a huge part of our consumer business, but hopefully that's going to be a larger part in the future.

  • Louis Gerhardy - Analyst

  • Okay, nice quarter.

  • Thank you.

  • Operator

  • Seogju Lee, Goldman Sachs.

  • Seogju Lee - Analyst

  • Jerry, we just got back from Dallas at the Texas Instrument Panelist meeting, and they talked up their DSP products.

  • So I'm wondering just if you could talk about your products in terms of competitive positioning in particular related to consumer and communications infrastructure market.

  • Jerry Fishman - President, CEO

  • Well, I think our DSP product portfolio now that we have up there selling is highly competitive by every measure of the technology of those products.

  • They take a long time to get out there and get sold, but I think the progress that we're making that I just reviewed is pretty good.

  • So I think that if you take -- if you look outside the handset business, I have no idea what got said anyplace and (indiscernible) (indiscernible) our competitors say about that, but I think, outside the handset business. our DSPs have done extremely well and I think we will continue to get even better in the future.

  • So, I would say the roadmap is good; the products are good.

  • The real challenge is to really just get our sales up in those to cover the expenses in that business, and we are working hard to do that.

  • Other than that, I don't know what TI said and I couldn't comment on it.

  • Seogju Lee - Analyst

  • Okay, thanks.

  • Operator

  • Ross Seymore, Deutsche Bank.

  • Ross Seymore - Analyst

  • Actually, a similar sort of question -- down at TI where most of us were the last couple of days, they put up a lot of slides about their HPA business taking a bunch of share.

  • I'm not sure you would exactly agree with that, given your comments on the converter and amplify market.

  • But if you were to look back and say where you might have loss some HPA share over the last year and give us some color on that, and then what your belief is on how ADI will hold or grow or lose share over the next year?

  • Any sort color there would be very helpful.

  • Joe McDonough - VP Finance, CFO

  • Well, I guess the data that we have at this point that we've been analyzing is this Dataquest marketshare report that Jerry alluded to that came out just recently in April.

  • That indicates that we had 43% marketshare in 2005 and 43% marketshare in 2004 and that TI was second with 15% marketshare in 2004 and 14% marketshare in 2005, and Maxim was third with 10% marketshare in both years.

  • So between the three of us, we have roughly two-thirds of the converter market.

  • As you know, that's our largest product category with 43%.

  • If you go back to 1999, our share gains have been about 10 percentage points;

  • I think our compounded growth rate in that, according to the Dataquest study, was about 17% for converter growth since then.

  • So, we have a hard time understanding how we are not doing pretty good against our competitors certainly in converters; amplifiers looks like it's similar, although we don't have the data broken out because our amplifier sales tend to be concentrated in the higher-performance portion of that market and the market statistics aren't broken out that way.

  • Ross Seymore - Analyst

  • So I guess one explanation could be that the power management subsegment of the analog market grew faster than converters or amplifiers?

  • Jerry Fishman - President, CEO

  • Yes, I think that's what happened last year and that's why we've been investing heavily in that business and we've made some changes to get the growth rate of that business up.

  • But you know, any of the statistics out there about the converter products is, as Joe was quoting, eventually you have to go to the statistics instead of the chatter.

  • I think that the statistics indicate that our share in converters is very strong; it's been strong; it's a lot stronger than it was five years ago and every one of our competitors -- there isn't one of them that is a major competitor that has gained any position against our converter, by any published data.

  • So beyond that, I don't know how to answer that question.

  • Ross Seymore - Analyst

  • I think you just did.

  • One follow-up on that, in the power management area -- you've made some new hires in that area; you're definitely investing organically.

  • One of the new guys to enter the market got in through some relatively sizable acquisitions and has taken about five years to do it.

  • Given that you have the $7 per share in cash on the balance sheet, is there any sort of thought about (indiscernible) your time to market by doing some acquisitions, or is that something that you would rather just build organically?

  • Jerry Fishman - President, CEO

  • Well, we look at a lot of companies, and we are always looking for the intersection of who is really good and how much are they worth in terms of accelerating the path on that.

  • But certainly, we would consider that to accelerate the growth if the right opportunity came along.

  • Ross Seymore - Analyst

  • I guess I have one quick follow-up in the wireless infrastructure market that you pointed to as being strong.

  • Could you give us any color on where you actually saw the demand?

  • Was it 3G, 2, 2.5G?

  • Anything like that would be helpful.

  • Jerry Fishman - President, CEO

  • Well, it's really a combination.

  • You know, in the EDGE stuff and the GSM stuff, there's just a lot more volume that they are trying to pump through there, so they are buying more bay stations and I think a lot of the carriers now are starting to build out 3G infrastructure.

  • That's certainly true in many locations, including China.

  • So, it's really a combination of more capacity on the existing (indiscernible) bay stations and new capacity for new types of service going on, you know, 3G and TDS CDMA.

  • Maria Tagliaferro - Director of Corporate Communications

  • We have a lot of people remaining in the question queue and we are already past our time, so we're going to take one last question.

  • I would just ask anyone who we haven't gotten to just call back here to the office at 781-461-3282 and we will take your question.

  • Also, for your calendars, just to remind you that our third-quarter earnings call is presently scheduled for August 10, 2006 after the market closes.

  • So Operator, can we get our last question please?

  • Operator

  • Craig Ellis, Citigroup.

  • Craig Ellis - Analyst

  • A question and a follow-up -- the question is, Jerry, with the foundry capacity tightening that you mentioned earlier, are you seeing any impact on the gross margin line as you look out and give guidance for the coming quarter?

  • The secondly, you have the Atlas product refresh on the low-end in the digital baseband late last year.

  • Is some of the momentum you're seeing on the handset DSP side related to that product?

  • How should rethink about how that could play out over the course of this year?

  • Jerry Fishman - President, CEO

  • Well, on the first question, I think I tried to answer that a little earlier by saying that, you know, as the market and the prices and the foundries stiffen a little bit and they are a little harder on not dropping the prices at the rate that we would like them to always.

  • But I think this -- it's really diminimus, at least right now, relative to the gross margins that we are reporting.

  • You know, on the average chipset, the take-up of that has been good.

  • It turns out we made good gross margins on that even though it's a thing at the low-end of the market.

  • There's many other products that are selling, particularly some of our larger customers that are more high-end products, so it's really a combination of things.

  • But certainly the take-up on that has just been good so far.

  • Maria Tagliaferro - Director of Corporate Communications

  • Is that it, Craig?

  • All right, well, I think that concludes our call for this afternoon.

  • We thank you all for participating, and we look forward to reporting our third-quarter earnings on August 10, 2006.

  • Thank you.

  • Operator

  • This concludes today's Analog Device conference call.

  • You may now disconnect.