亞德諾半導體 (ADI) 2007 Q3 法說會逐字稿

Good afternoon.

At this time, I would like to welcome everyone to the Analog Devices third-quarter 2007 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).

Thank you.

Ms.

Tagliaferro, you may begin your conference.

Thank you.

Good afternoon, everyone.

This is Maria Tagliaferro, Director for Corporate Communications here at ADI.

If you don't yet have our third-quarter 2007 press release, you can access it by visiting our website at www.analog.com and clicking on the headline on the homepage.

I'm joined here today by our CEO, Jerry Fishman, and by our CFO and VP for Finance, Joe McDonough.

In a moment, we'll begin with opening remarks from Jerry.

I would like to take a moment, though, to comment regarding our financial results for the third quarter of fiscal 2007, which was reported today.

In accordance with GAAP, the third-quarter results include $17.2 million of non-cash stock-based compensation expenses related to employee stock options and $2.8 million of expenses related to previously announced acquisitions.

The provisions for taxes includes the tax effect of these items.

In order to provide investors with useful information regarding the financial and business trends relating to our financial condition and results of operations and to help our investors better understand how we manage our business, our comments during today's call will make reference to non-GAAP financial measures which exclude these items.

We have included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in our earnings release issued earlier today.

A copy of that is at the website.

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

Such statements include 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 noted and included in the Company's SEC filings, including our most recent quarterly report on Form 10-Q, which was filed today.

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 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, the conference call will include time-sensitive information which may be accurate only as of the date of this broadcast, August 21, 2007.

With that, we are ready for our CEO Jerry Fishman's opening remarks.

Good afternoon.

Q3 was a very strong quarter for Analog Devices.

Our revenues totaled $680 million, which were up about 2% sequentially and about 3% year over year, and that's after growing 10% sequentially the prior quarter on a comparable 13-week basis.

The revenues of $680 million were toward the high end of the range that we communicated last quarter.

Revenues from our very broad base of industrial customers were approximately flat sequentially.

But within the overall industrial category, our sales to instrumentation customers, power meter customers, motor control applications and automatic test equipment customers all grew sequentially, while our sales to medical, automotive and defense contractors declined sequentially in the quarter.

Overall, industrial sales continue to comprise about 43% of our total revenues.

Consumer revenues grew 3% sequentially and were up 24% from the same quarter last year, with this quarter's growth driven by digital cameras and home entertainment systems.

ADI's leading-edge products continue to play a very important role in consumer electronics, powering these applications that I mentioned and many others, including the newest advanced plasma and LCD TVs and best-selling videogames.

Consumer products represented approximately 20% of our revenues in the third quarter, which is very similar to the prior quarter.

Revenues from products sold to communications applications grew slightly sequentially in Q3.

Continuing strong growth in products using base station applications, which grew 13% sequentially and now represent almost 12% of our revenues, and also strong growth from networking applications were partially offset by lower sequential sales of DSP wireless handset chipsets, which declined sequentially in Q3 after increasing sequentially in Q2.

Overall, communications products represented approximately 28% of our total sales in Q3, which is very similar to the prior quarter.

Revenues from computer products grew 9% sequentially, in line with our overall stronger PC market worldwide.

Computer products represented 9% of our revenues during Q3.

In aggregate, revenues from our analog products grew 3% sequentially and were up 7% year over year.

Analog products represented 84% of our revenues in Q3.

Converter and amplifiers together represented 62% of our sales or 74% of our analog product sales.

On a sequential basis, converters and amplifiers grew sequentially by 2% and 5%, respectively, in Q3.

We also enjoyed sequential revenue growth in other analog product categories such as power management and radio frequency products.

Micromachined product sales were flat quarter to quarter, as expected, due to temporary manufacturing limits, but were up significantly from levels of a year ago.

Revenue from DSP products declined 5% sequentially, primarily as a result of a decline in sales of handset chipsets in Q3.

Handset chipsets represented 7% of our revenues last quarter.

Sales of general-purpose DSP products grew 7% sequentially and represented approximately 8% of our revenues in Q3.

Non-GAAP gross margins for the quarter were 57.8%, which were flat to the prior quarter and in line with the guidance that we provided last quarter.

Inventories declined by another five days in Q3 to 116 days, and are now approaching our model of 100 to 110 days.

Non-GAAP operating expenses grew by about 1% sequentially, in line with our plan to raise investment levels in analog products such as power management, low-power converters and MEMS, all of which we believe offer substantial growth opportunities for ADI in 2008 and beyond, while at the same time modulating expenses in many other areas.

In aggregate, the non-GAAP operating expenses are currently about 35% of our current revenues, which is well above our target of about 30%.

Non-GAAP diluted earnings per share were $0.41 for Q3, which was also at the high end of the guidance we provided last quarter.

The net cash from operations totaled $191 million or 28% of sales.

Net cash flow from operations, less $31 million in capital that was spent during the quarter, was $160 million or 24% of revenues.

During Q3, we paid out $59 million or nearly half of our net income in dividends, representing a yield of 1.9% based on today's stock price.

In addition, during Q3, we purchased $632 million of our stock in the open market, representing 5.2% of outstanding shares during the quarter.

Since we began our current stock repurchase plan in Q4 of 2004, we have purchased approximately 23% of all shares outstanding for $3 billion, and we have almost $1 billion left on our current authorization.

Our cash balance at the end of Q3 was approximately $1.3 billion.

The order rates during Q3 remained strong and increased 7% from Q2 levels.

Orders from OEM customers were particularly strong during the third quarter, and the end-customer book-to-bill ratio was above 1 for the quarter.

As a result, our backlog entering Q4 is up from 3Q levels.

As a result, we're planning for our revenues to be in the range of $680 million to $710 million in Q4.

While we have reduced our inventory from 128 to 116 days in the past few quarters, we're planning to continue to constrain production levels in Q4 to further reduce our inventory to model levels.

We also expect the product mix in Q4 to favor consumer products, as is very typical with the fall period, in anticipation of the holiday bills.

As a result, we are planning for our gross margins in Q4 to be similar to Q3.

As we reach model inventory levels of 110 days or 100 to 110 days, we plan to increase production levels to match the current levels of demand that we're seeing.

We expect expense levels to increase modestly to fund the analog programs that we mentioned earlier, as we continue to reduce expenses in other product areas.

As a result, our plan is GAAP EPS in the range of $0.36 to $0.40 and for non-GAAP EPS in the range of $0.41 to $0.45 for Q4.

We've provided a very detailed analysis of the items that reconcile the GAAP numbers to the non-GAAP numbers, and that is included in today's press release.

Going forward, we continue to focus on a few very key priorities.

Certainly, number one is to continue to fund the development of new products within the analog product categories that, in some cases, are either new categories in emerging markets or, alternatively, in existing, highly-fragmented markets where we're underpenetrated but have a very strong brand.

We are also planning to aggressively fund product development in product categories such as amplifiers and converters, where we have the number-one market share as our very top priority.

The high-performance analog market remains one of the best product categories in the semiconductor industry in which to invest in, and our brand is strong and our share remains high in some of the best product categories.

Increasingly, we're planning to focus our investments on product areas where we can earn high and sustainable returns on the R&D investments.

This implies investing in opportunities where ADI's technology is highly differentiated from competition and provides capabilities that help our customers gain advantage over their competitors in the marketplace.

Thirdly, overall, we're going to continue to focus on maximizing efficiency and lowering our overall costs throughout ADI in virtually every area of the Company.

We're also planning to continue to focus keeping our cash generation strong and our returns to our shareholders high.

Our sizable stock repurchases and increasing dividends have been financed by very strong cash flow generated from operations and a consistent reduction in our excess cash.

Fewer outstanding shares, of course, provide the opportunity for much higher earnings leverage, as sales and profits grow in the future.

We remain confident that our serviceable market continues to expand, as our technology takes on increasingly important roles in medical devices and cars, telecommunications and many, many other applications.

As a result, we continue to believe that we can grow our revenues at a compound rate between 10% and 15% per year, and that this rate is very realistic, given the growth opportunities in these markets, given our brand and reputation for leading signal processing technology amongst the market leaders and the largest consumers of that technology and our continuing and, I would say, intensifying scrutiny of product areas that have been negatively impacting our top-line growth and our earnings.

Even in areas where we already have very high market share, such as digital TVs, digital cameras and base stations, there are many excellent opportunities going forward to continuing to grow our dollar content.

As I mentioned, at the same time, we're committed to continuously improving our product mix and our overall cost structure throughout ADI, and to continue to provide a high total return to our shareholders.

So those are all the formal comments, the opening comments.

I'll turn it back to Maria.

Operator, we're ready to open up the queue for our analyst participants who wish to ask questions.

(OPERATOR INSTRUCTIONS).

Craig Ellis, Citigroup.

Jerry, I'll start off with a question on the top line.

The outlook range is pretty wide at $30 million.

Can you just identify what variances would be that would lead towards the high end of the range versus the low end of the range?

It's always complex in the second week of the quarter to try to be very accurate about the details of next quarter.

On the positive side, we're starting off with the backlog higher.

The book-to-bill ratio is above 1.

We saw generally strong order patterns for most of the quarter, and we saw those order patterns in most of the regions of the world.

We're seeing pretty good momentum on new products.

All that is a positive.

We're seeing a lot of momentum in the consumer area, which is also usually a positive, particularly in our fourth quarter, when the bills begin.

But I think, as everybody knows, there's a lot of uncertainty out there in the markets.

I don't have to tell anybody about what's been going on with interest rates and all the other things that have been the focus of attention of investors over the last couple of days.

So I think it's wise for us -- we generally start the quarter with half our sales in backlog or so.

So in the second week in a quarter, there's a large range of possibilities of what could happen that would influence that one way or the other.

I think most of the factors that we control, where we're feeling pretty good about, but there's a lot of factors that ultimately we don't control, and those are always worthy of some caution going forward.

Just a follow-up to that -- have you seen any change in order patterns from your OEM customers over the last month or so?

Or is some of the range in the outlook just conservatism, given the awareness to what's happened, particularly in the financial services area?

Well, as we have looked at the order patterns over the last month, they have remained relatively consistent.

We haven't seen any real evidence that there's anything nefarious going on there.

Then switching gears on the product side, you had a nice increase in power management -- I think, the best sequential changes seen in about the last 12 quarters.

Is that primarily related to some of the computing strength, or is it broader than that, related to some of your new products?

I think it's a little of each.

But certainly, the computer market getting better helped a little bit on that.

Romit Shah, Lehman Brothers.

It looks like you guys had a good quarter in terms of bookings.

With the orders up 7%, I guess I am a little surprised that you're not forecasting your revenues to accelerate in the October period.

Normally, this should be a seasonally stronger quarter for you guys.

Jerry, could you just provide a little bit more color on some of the end segments, particularly industrial and communications?

Are you seeing any signs of a slowdown there, or any other reason why you guys are being a little more conservative with the guidance?

Well, we provide guidance that's -- the plan is that our product lines have submitted in that range.

We don't try to shape it, really, one way or the other.

I'd say that, as I answered in the prior comments, that internally we're seeing good momentum, and there's a lot of reasons to be very enthusiastic about the segments.

Certainly, (technical difficulty) doing great in the consumer sector.

The base station business is strong, as evidenced.

That's going to probably continue.

We're doing a little bit better on the computer side.

The industrial business has been a little flat the last quarter or two but, on the other hand, going into that period it was up very substantially most of the quarters last year.

So I don't think there's anything going on in the segments that is cautionary.

It's just the overall environment is a little uncertain, and there's a lot of external factors going on out there that cause us to be cautious.

I think it's prudent for us to be cautious and to try to run the business cautiously, until we really see how all these external factors are going to play out.

But there's nothing in the way of bookings in the last 30 days that's driving some of this conservatism?

No.

If I could, just as a follow-up on gross margins, by my numbers it looks like gross margins will be flat to down for the sixth consecutive quarter in a row.

I realize that mix is always an issue.

But I'm just curious -- is there somewhat of a more permanent dynamic going on, either with competition that's making pricing a bigger factor in winning some of these sockets?

Well, I'd say the largest factor in the gross margin issue you're mentioning has more to do with mix of products than anything else.

We had a mix shift where consumer products a year ago were 17% of our sales; they are now 20%.

Those products do carry slightly lower gross margins, although the return on assets on those products tends to be very good, because we don't fab a lot of those products ourselves.

I'd say we're operating the fabs below where we would like, because we are trying to get the inventory down.

We expect that will help us going forward.

I think the way to think about the analog product line is that we have more than half our sales that we get in products to a very fragmented customer base, where we don't provide a lot to any customer or any application, and the value of our products we get paid all the time for, from our fragmented customer base.

The mix has shifted a couple of points towards consumer products, at least right now.

That's heavily based on large buildouts of games, which I think has been reported widely what we're doing there, and very large buildouts right now on TV sets, which are a vast market right now for us.

Our sense is, if you look over time, that the mix is not going to shift very hard towards that.

I know there was a lot of concern about that with some investors last quarter, that my god, we're going to become a consumer company and the margins are going to keep going down.

That's certainly not what we're planning to happen and not what any of the indications that we have say will happen.

In a lot of ways, the way I would tend to look at it is the gross margins are down a couple of points over this period from the peak, which was about 60%.

In that period, we had a big change in the mix, which we think is not going to continue to go in that direction.

We have been unloading the fabs to reduce the inventories in the fabs.

We're also not standing idle around on that stuff.

We have significant cost reduction programs going on in the Company, all over the place, to reduce our infrastructure costs and our unit costs.

In the part of the market that is a value-oriented part of the market, there's plenty of opportunity for us to get paid for the value we give our customers.

So I would say that there's been a lot of conversation about that.

We've had a lot of conversation about that, internally.

But I don't really think there's anything much going on competitively or any other way that's changing that a lot.

Clearly, there's more competitors out there, and it's always harder.

But we tend to be able to differentiate our products pretty well from competition.

So we don't get into a pricing spiral very often.

So when I add it all up, I don't think there's anything fundamental, other than the fact that we have had a mix shift.

We're working hard to balance the decline in margins that we've seen in the consumer space, with margins getting better on the other products.

So it's hard to predict, because we can't predict the mix.

But I don't think there's been anything fundamental going on with the profitability of our products.

I think when you have a product line as diverse amongst markets and products as we have, mix shifts really dominate the question each quarter, and not so much the price we get for any particular product.

David Wu, Global Crown Capital.

Good afternoon.

I have just a couple of things for the quarter that ended.

If you look at the operating expenses, those went up more than, I would say, slightly in the SG&A column.

Is there anything particular thing that happened that caused that to jump?

The other thing I was wondering is, in the last conference call, we were told that this quarter the inventory would be down sufficiently that we were going to increase utilization rates in Q4.

What stopped the inventory from getting to the target that you were looking for originally?

Well, I'll answer the inventory question.

Joe can handle the SG&A, because there were some unusual things in there that he will talk to you about.

On the utilization, we looked at the inventory at the end of the quarter.

We decided that we wanted to get it down to mobile levels this quarter or close to it because then, as business gets better, we have much more earnings leverage on the upside.

So we decided to let it go down for another quarter, and hopefully we will be down very close to our model levels and we will be able to then start building products at rates commensurate with the consumption rates of our products of our customers.

So we decided during the quarter or at the end of the quarter to let it run one more quarter and get the inventories down to pretty low levels.

Joe, do you want to handle the question on (inaudible)?

Yes.

On the SG&A, you will notice that in the second quarter there was an $8.5 million litigation settlement that, on the non-GAAP financial statements, we backed that out.

So, on the non-GAAP SG&A, I think is flat to up 1% quarter to quarter.

Just one quick question.

On the DSP side of the house, with the mix the way it is, what can you do to either make it more profitable or discard some of the less profitable activities?

I think the obvious stuff.

We're really focusing the general-purpose DSP business on the areas that have a lot of momentum and that we believe will grow the revenues, as they haven't grown pretty well the last couple of quarters on the GP side, and therefore to really zero in on the expense levels on that side of the business.

On the rest of the DSP business, as we have talked about in the past, we are working to either make that better or to figure out a way to redirect some of that investment.

So I think those are the obvious answers, and I think we can't comment much further about those things directly here.

David Wong, A.G.

Edwards.

Are you seeing any constraints in your ability to supply production to the computer space?

If you are not, are you getting any benefits from others not being able to supply demand into computers?

I really don't know exactly the answer to that.

Our sense is that we're keeping up with what our customers are asking us for, by and large.

I really don't know if we are getting any benefit from others, or if they can't supply them or not.

I'm not [familiar] -- I just don't know.

Secondly, chipset sales -- do you expect these will continue to decline over the next few quarters, or are they going to bottom out [at some point]?

Well, our forecast is that our handset chipset sales are going to increase next quarter.

Sumit Dhanda, Banc of America Securities.

I had a couple of questions.

First, on chipsets, wireless chipsets, why were they down as much as they were?

They were trending up for a couple of quarters, and there seems to have been a bit of an air pocket here.

Well, I think what happens is for us -- for people who have followed analog for a long time, our third quarter in the handset chipset business is always a nail-biter for us.

This quarter was no exception.

We had planned that it was going to go down for the quarter, and it basically did that and has gone up pretty substantially the second quarter.

It was down the third quarter.

We expect it to be up during the fourth quarter, or at least that's our current plan.

We're really at the mercy of what our customers' ordering patterns are.

The customer lists that we sell to -- that seems to be their ordering pattern, where Q2 is good, Q3 is not so good and Q4 is better.

That's sort of what the forecast indicated is going to happen this time as well.

I had a bigger-picture question on your operating model.

You are running gross margins at about 57% on a GAAP basis, operating margins at about 20%.

Your stated objective is to have a 60%/%30 type model.

Right.

So the logical conclusion here is that to get there, to bridge that 7% gap, which is something smaller -- in other words, if you want to get to a 60%/30% model, your OpEx has to ramp much more slowly than sales going forward.

Is that the right way to think about (multiple speakers)?

Well, I think there's two ways to look at it.

One is that has to happen, and the other thing we have to do is ultimately resolve businesses that have very high operating-expense-to-sales ratios and low gross-margin-to-sales ratios.

So I think part of the mix is getting a better mix of products in our portfolio, and the other part is just keeping the expense growth at a very low level relative to the sales growth.

In the early part of the year, we mentioned that on the analog part of the business that we had some initiatives that we thought were prudent to let the analog expenses go up a little bit faster than the sales growth that we were getting, and we are executing on it.

Those are important product areas that are going to be very profitable areas, growth drivers, for Analog.

So I think it's really both of those is my best answer, is that we have to, overall, just get really serious about keeping the overall momentum on the expenses down to an absolute minimum level, and at the same time, we have to continue to work hard to rationalize the product mix.

I can tell you that we're doing both of those.

Let me ask it differently.

So hypothetically, assume your mix improves, you see some good revenue growth because business is improving cyclically.

Do you think that when you ostensibly hit a 60% gross margin target, you have everything in place to allow your operating margins to ramp to a 30% number?

Or are there some things you need to specifically do, still, which will prevent that from occurring?

No.

I think that we have -- the businesses that are not helping on that are very clearly identified in Analog.

I think we have a very strong focus on trying to get that resolved.

I think, when there's a five-point level thre and you don't do it -- it takes forever to do it just by growing [this thing], keeping doing what you're doing and grow the expenses a little but slower than the sales every day.

That's not the way we're thinking about it.

You said you've chosen to keep production constrained here.

That's impacting the ability to expand gross margin in addition to the mix.

Joe or Jerry, if you were to disaggregate the impact from those two factors -- let's say you had chosen not to bring down inventory further.

Would gross margins have been up 50 basis points?

Is there a number you can put around it?

No.

I don't think it's really that simple.

The inventories are down $10 million in dollars quarter to quarter.

There's always an opportunity, if all we're interested in is what happens in one quarter, to run the factory utilization a little bit higher, and the gross margins go up.

But that's not the way that we operate the business.

We operate the business first to service the customers with a supply line that meets their expectations, and we try to balance the loadings in the factory in some sensible way over an extended period of time, so that we don't run the factories up one quarter and way down the next quarter.

As we had been saying for the past few quarters on the conference call, the inventories and days had gotten quite a bit above our model.

So we're converging back toward our model, which is 100 to 110 days, and we are not very far away from that.

At the same time, we're working with our external foundry partners, with our back-end assembly and test partners, to continually focus on the costs of everything that we're doing.

We're working within the product line organizations and the engineering organizations to design products and redesign products in a way that they are more cost-effective.

We're working in the manufacturing organization, to look at all the manufacturing costs internally and continue to identify the areas where we can reduce our costs.

The combination -- and we're working with the sales group not to leave a few pennies on the table when we are negotiating with customers.

So it's all those that are enabling us to earn the gross margins we have today, which may not be where we want them to be, but they are very high relative to the semiconductor industry, and they are indicative of the fact that we do deliver value to the customers, and the customers are willing to pay for it.

But we can do better.

Could you also quantify how much the backlog was up this quarter?

Hold on one second.

The backlog at the end of this quarter is -- the 13-week backlog is $414 million.

It was $403 million last quarter.

Steve Smigie, Raymond James.

Just to follow up a little on some earlier questions, it looks like you are pretty close to getting internal inventory back where you want it.

So it would make sense that this quarter it would be back to where you want it, or would you have to run it again, potentially, a further quarter?

No, I think it will start to converge this next quarter.

There always is the question of the mix of business that is either manufactured internally or externally.

Maybe you could talk a little bit more about the converter product line?

I think you gave the general growth rate, but some sense of your expectations for growth in converters over the next year, and it if there were particular drivers there, both on an end-market side and a product side?

I think, first of all, one of the important aspects of the converter products is we seel them to probably 10,000 or 20,000 different customers, and we probably have 2,000 different products that we sell.

So it's a very fragmented product line that sells many products to many, many thousands of customers.

So generally, our growth in converters is not dominated by any new particular product that we sell, or any particular product a competitor tries to duplicate on with analogs.

I think our converter business, as you, I think, can see -- it's on the back of our financial statements -- has been a very solid grower over a lot of years.

I think there's no reason to believe that that shouldn't continue.

It's a vital technology in the markets we're serving.

Converters ultimately determine a lot of what the image looks like or the audio sounds like, or anything that people really can differentiate one product versus the other on.

I think that that means that, typically with converter products, we can get paid in the marketplace for what we do.

So we have the all-time best brand in converters, and that's real important because a lot of people that -- a lot of our customers that buy converters depend on us to design the right products, apply them right, support them right, and brand makes a big difference in that business.

I think it has been the case, and that's why we have such a high percentage of the market and why, despite a lot of competitive noise out there, our share is very, very high and we expect it will continue to.

So I think it's probably the most important (inaudible) in analog.

It's a high-margin business.

It's a good growth business.

Converters are always going to be the bridge between the analog and digital world.

The analog world is not going away anytime soon, given that images, temperatures and sound are always going to be audio.

So I think it's a great product lines.

Of all the product lines in the analog business, it's probably the best product area to be in.

Because it really is the one the differentiates what the system does, ultimately.

So we invest in that business to continue to be a very large market share holder in that business, and we haven't seen anything out there that is worrisome about that not coming through.

We always look at competitors.

There are a lot of good competitors out there.

They introduce products.

But at the end of the day, our share remains very, very high.

Our goal is certainly to keep it there.

Is there anything, though, about the nature of where you see the mix going that would make you think it would grow more or less than the corporate average?

It's hard to say, because converters are used so prolifically through every application.

In industrial applications, we sell very, very high-resolution converters.

In consumer applications, we sell very high-speed converters.

In audio applications, we sell very low-power converters.

So some of them are application-oriented, but there's just a large mass of the market where, if you have the best, the highest performance, the highest resolution, the widest dynamic range, the highest speeds, you just sell products to thousands of customers.

That's how they [buy them in], and that's the importance of branding in that part of the business.

So I'd say, for argument's sake, at least the way we think about the world, I think it will be about the same as it's been.

Maybe because of some new consumer applications, the overall growth rate of those products can go up, but to a first approximation -- at least, our planning assumptions -- they are going to stay about the same.

If you look at your guidance, can you give some sense of what the analog growth might be sequentially versus DSP?

No, I don't think we have that handy.

Would you expect one category to grow a little bit more than the other?

Well, I say, to a first approximation, about the same.

John Pitzer, Credit Suisse.

Jerry, just a quick question.

What do you think consumer will represent in percent of the mix in the October quarter?

It was about 20% in the quarter just reported.

How much higher can it go?

I don't think very much higher.

I think it might trend up a little bit seasonally, but as we plan the model for the business, we don't plan that consumer is going to begin to dominate the mix of our sales.

The industrial business is 40% to 45%; it's going to stay there.

There's opportunities in the communications market for some products to grow a little faster; some will wind up growing slower.

So I don't think the mix of our business is going to change drastically in the coming quarters.

When you look at that 60% target gross margin, if the leverage point isn't really utilization or inventory and it's more mix, when you look at the product divisions, is it really the power management division that gives you the best leverage to get to that 60% gross margin?

I think there are a couple of opportunities around the Company.

That's one of them.

Can you help me understand the lifecycle in that business?

When might we expect to see some incremental socket wins for you guys there?

I think we have had some good socket wins in that business to date.

We'll see the results of that probably in 2008 in our sales.

But we've got some pretty good momentum with some pretty important customers in that business, and we have a good team out there continuing to crank out new ones every day.

So right now, that's not a business that's enhancing our gross margins, let's say.

I think there's opportunity as we create more value in the products that we begin to sell.

As some of these new products into the mix begin to move into the mix, there's every opportunity for that to help the overall gross margin of the Company, rather than being below the average gross margin of the Company right now.

Jerry, if consumer stays at about that 20% level, is the 60% target margin still achievable?

I believe so, yes.

Louis Gerhardy, Morgan Stanley.

I just want to ask you, first, on the status of your MEMS production, both your ability to expand your own capacity there as well as to ramp up some third-party manufacturers.

We have very limited ability to ramp up our internal production above the levels -- plus or minus a few million dollars a quarter, we don't have much ability to do that in the short term.

But once some of that production is being outsourced to Taiwan, we have virtually unlimited upside production to do that.

So I think, for the next couple of quarters it's going to be production limited, and I think after that we're going to be out there beating on the salesman to get more business.

(multiple speakers) that you're qualifying at customers, or are you still waiting for that?

Pardon me?

Do you have parts back from these foundries that you're qualifying with some of your customers, or is that still too early?

It's a little early for that.

Just a question for Joe, in terms of the significant share repurchase.

Could you just give us a guidance range, maybe, for fiscal Q4 on both share count and other income?

I can give you some pieces of it.

We don't know the stock price, so it's a little hard to be sure.

But the other income, the non-op line -- I think, if you were thinking in the range of $14 million of non-operating income, that probably would be the right range.

The tax rate, probably in the 23% range and the earnings per share -- the shares somewhere in probably [320] -- a lot of that is an average.

It's factored in as a result of the repurchases that we did in the third quarter, they come into the share count reduction in the fourth quarter.

Uche Orji, UBS New York.

Are you able to quantify your utilization rates, just so that we understand what your average utilization rate is now and for as long as you [keep concerning up] production, when you then finally start increasing production, just for me to get a sense of how much headroom there is there?

The utilization is different in different factories.

As Jerry said, in the factory that produces our MEMS products, we're basically at 100% capacity.

But I think, overall, it's approximately the same as it was last quarter, which is in the 70% range.

In the fourth quarter, the utilization will probably go up a little bit, but not meaningful.

Jerry, if I circle back to following up on the previous question on MEMS, when do we expect to see the outsourced production start to contribute?

Are you giving up any business at the moment?

Do you see yourself losing business just because of your inability to supply at this point, just for me to get a sense of --?

Well, right now, our current plan says that we should begin to see something that would be meaningful by about the first of the year.

That could go -- we're working hard to get that sooner, but until we really see what the stuff that comes out of Taiwan is, it's hard to be very precise about that.

Fiscal year.

Yes, beginning of our fiscal year.

But I'm saying that could easily -- it probably won't come a little forward; it could easily slip a quarter.

It's just too early to tell right now.

The early signs in the relationship that we have on that, and the amount of effort that's going into it from our manufacturing partner side as well as Analog Devices is extremely high, since you can imagine the pressure that we're getting and also the opportunity that we have on that.

I'd say that, to date, that really hasn't cost us any business.

It's really that we have a lot of customers that would love to start going down that path with us that we have sampled, and we've given them an idea of when it is we think we could respond to that.

These are generally new products and new applications, and it turns out for the kind of things that we're able to accomplish in some of those products, there really is no other person that can do it.

So what happens is the end products tend to get delayed a couple of months until we can supply them.

Now, of course, we can't rely on that being the case forever.

Eventually, people learn how to do it.

But I think we are well ahead of what most people can build that would go into a product where most of the demand is on that.

But certainly, if we could get more sooner, that would help us.

We have our sales guys on idle on this thing, almost, until we really start to see some stuff back from Taiwan.

We have a lot of interest in these products.

I think there really has been an inflection point, and the breadth of applications that the technology is applicable for, with the publicity on the Nintendo Wii game, which it really was, pardon the expression, a game changer -- I think there's an awful lot of people recognizing that it can really differentiate their products and change the experience.

That's how market shares in that business change a lot.

So I think it's gotten a lot more visibility than we ever thought it would.

When you listen to the people who use it, everyone is very excited about that technology.

It's really moving [already] out of the just automotive applications, although that's still a large source of our business and will continue to be, into all these other applications that none of us ever imagined.

I guess that's the big advantage when you invest in this core technology.

You never quite can tell what's going to happen, but it does.

So as we get production capacity into that business, it should become a very important business for us.

Do you think that the margins will be better when you outsource to the foundries, eventually, than when -- than the internal (multiple speakers)?

Yes.

Certainly, that's what our plans indicate, that first of all, the technology base that we're going to put those -- particularly the consumer products on is a very standard semiconductor process, where the real art form on that is still the beam technology.

Right now, we're building it with a relatively expensive internal process that is a very unique process.

So I think, as we get that on a more standardized process, I think there's opportunity for us to make higher margins than we are today, fully recognizing that it's a consumer product, and those tend to always be harder to get margins on than industrial products.

But I think we can certainly do better than we're doing today, through external sources.

That's certainly what the plan that we have in place today indicates.

Let me circle back to industrial.

It looks like the seasonality works such that the first-half calendar year is better for industrial.

Let's assume that seasonality holds as we go into early next year.

Will that be a key factor in driving your margins back up?

Certainly, whenever we have a strong industrial quarter, the margins react very favorably to that.

There's no doubt about that.

Even within that category, it's 43% of our sales, but we have seven or eight different product categories.

Some carry extremely high gross margins, some carry very high gross margins and some just carry high gross margins.

So it really depends on the mix that we get, even within the industrial business.

But typically, when the industrial category as a category goes up, the gross margins respond positively to that.

On wireless, Jerry, we've seen this announcement about TD-SCDMA.

Is that contributing in any way to revenues yet?

Can you tell us what's going on with this technology, given your pole position within this technology?

I'd say, certainly on the infrastructure side, on the base station buildout side, one of the reasons our base station business -- although certainly not the only reason -- has been extremely strong is buildouts in China.

Our products are very well-designed into the leading base station manufacturers in China.

So on the infrastructure side, we have already begun to see the improvements due to that buildout.

On the terminal side, it's still very low-volume, and we don't know much more about when the volumes of that are going to pick up than you do.

There seems to be a lot of momentum gathering.

But certainly, we haven't seen a lot of that that's moving our needle very much, on the terminal side.

[Are we] expecting that in early fiscal year, this year, or (multiple speakers)?

We have the products available.

We have a very good relationship with the infrastructure providers that are going to -- and many of the Chinese customers that are going to build those types of products.

So I think we are in good position when it comes, but we don't know much more than you do about when it's going to come.

Michael McConnell, Pacific Crest.

Jerry, if we look at Q1 of next year or next fiscal year, January quarter, things should be lining up, though, here from a gross margin standpoint.

You have industrial now working in your favor.

Can you talk about, on the inventory you were holding last quarter from the recently closed California facility, have you sold all of that down?

Should we also see a benefit in the January quarter as that lower-margin inventory is sold through and you start filling the factories up with the higher-margin inventory?

I'll divert that question to our esteemed CFO.

I think that's pretty fine grain, in terms of looking at the inventory.

The buffer stocks that we did build up -- probably a lot of them have been sold off.

But I don't think that's the major component of our gross margin.

I think what we have done is we have significantly reduced our manufacturing cost structure over the past year, as a result of the shutdown of that factory.

We're continuing to look for other opportunities to reduce our manufacturing cost structure.

That's all one part of the gross margin equation of running a business that has a 60% gross margin.

But everything else doesn't stay still in the world.

As Jerry mentioned, there are products where we are able to maintain our prices, we're able to maintain our margins, in some cases we can improve the margins.

There's other product areas, primarily in the consumer space, where the customers are always looking for price reductions and we're always looking for ways to improve the performance of the parts.

That's the balance that winds up with a portfolio of businesses that today has approximately a 58% gross margin.

We're only 2 points away from the 60% goal.

I think the gross margin is a little bit overdone, in terms of the focus on those 2 points.

I guess, if we were going to look at the January quarter, just with the consumer decline and industrial picking up, maybe the California fab inventory, as you said, is not a big driver.

What's the Company's confidence level that fiscal Q4 is indeed the bottom for gross margins and we'll start to see expansion, as we typically do, in the front half of the fiscal year?

I think we'll come in on the first quarter, next quarter.

At this point --

I mean, all the factors --

At this point, the world has a lot of uncertainty in it out there, and we have to take that into consideration.

It certainly affects the economies of the world and could affect the industrial base as well.

The industrial business has been relatively flat now for three or four quarters in a row for us, although we have seen pockets, such as the ATE business, that have been growing, which is a good sign for our industry.

So you can look at the data, and you can find reason to be very optimistic.

You can look at the things you read in the newspaper every day and find reason to be pessimistic.

So we're trying to run the business in a way that is able to respond to the opportunities that are presented to us, but cautious enough so that if things change we are prepared for that as well.

All the factors you mentioned are factors that tend to help the gross margins.

There's probably a whole and equal list of ones that could go against us during the quarter.

So I think it's just very early for us.

We don't have our plan for fiscal 2008 put together in detail yet, that within 50 or 100 basis points on the gross margins, we have a lot of to say on it.

But I think we'll have a lot more to say about it as we get through this quarter and we begin to see how it's shaping up, and we begin to see what's likely to be the mix of products that we're going to ship in Q1 and how the economy is doing.

I think, in a month or two we'll be a lot smarter.

I think today all we can do is just speculate.

We sort of hate to do that long in advance.

Simona Jankowski, Goldman Sachs.

This one is either for Joe or for Jerry.

You guys usually keep very, very close tabs on the inventory at your distributors, and probably have some of the best disability out there as to what's going on.

Can you just give us a broader perspective of how you view inventories at your various customers, both looking at distributors, EMS customers and OEM customers, and also if you're sensing any desire by them to carry a little more inventory into the seasonally strongest part of the year?

Or are people still pretty cautious about that?

Joe, maybe you could talk about the first part, I'll talk about the second.

Well, the distributor inventory levels are roughly the same at the end of the quarter as they were at the beginning of the quarter.

We think they are in line with what they should be for the levels of business that they are doing.

There's no real significant data in that, I think.

I think the other answer is what are the OEM customers thinking, and how do we see what they are -- are they aggressive or conservative on the inventory?

I still believe they are relatively conservatively watching their inventories.

I think everybody is doing that right now, and I don't see any -- there's always one customer here or one customer there that tries to get ahead of a wave.

But I think customers are managing their inventory responsibly.

We don't see they're buying ahead a lot.

We don't see they're laying back, waiting for the last possible moment to buy, either.

I think it's one of the few times where it looks like it's relative equilibrium.

I think you mentioned your OEM book-to-bill was above 1.

Can you also comment on your distributor book-to-bill?

Also, if you can maybe give us the specific numbers?

I'd say, if you looked at the total of OEM and distributor end-customer bookings, which is the only thing that matters, both the aggregate of that was above 1, and I think each of them were above one -- although, Joe, you should correct me if I'm wrong on that.

The overall end-customer book-to-bill ratio was about 1.05, and that's the aggregate of the OEM and the DSD, which is the one that we look at.

Because what that is, is looking at the distributors on the bookings that they receive from their customers and aggregating it with the bookings that we receive from our OEM customers.

And it was positive both going for the DSD channel and direct?

Yes.

Chris Danely, JPMorgan.

This is [Scott Jones] calling in for Chris Danely.

I had a question on the base stations.

Last quarter, you guys showed pretty good growth there, and I wanted to know if there was an opportunity there for this continued growth, and if that was one to become a larger part of your percentage of revenues and if you can give a little background on it?

Is that a product that adds to your gross margins and helps you get to that target, or something that could basically keep you about where you are at?

I would say, typically, we achieve very good gross margins on the base station products.

They tend to be relatively low-volume.

In a typical base station, we might sell 50 or more different products into a base station.

So those tend to be products where the gross margins are good.

The strength of the base station market has been helping us a little bit, and actually, that business outperformed a little bit what we thought it was going to do this quarter.

So that's a good business for us.

We have a very strong position, and there's no indication that that position is going to get any weaker.

So it really just depends on how vital those buildouts remain.

Right now, they look pretty good.

I was also going to follow up on a comment on the power management segment.

It seems like you guys had the first good growth there in a couple of quarters.

Can you tell me how you guys are looking there versus your historical view of that segment?

Is it about getting back to where it should be, or do you think it's maybe turning the corner for heading for some growth?

I think we've tried to say that we expected to really see momentum on some of the new products, either late this year or early next year.

It's probably going to be early next year, at the rate that -- based on what I've seen.

We have a bunch of older products that are winding down, still.

So I think, as we look at that business, we remain convinced that it's a good business for Analog.

It's a highly fragmented business.

There's no one manufacturer or competitor that has a very large share in that business.

It's very, very -- there's many product segments, and a lot of those customers are buying our other products and will be happy to buy power management products from us, if we have good technology.

I keep pretty close tabs on that business, and I'm very satisfied with the output of new products from that group.

It's always hard to tell.

If you look at it from 60,000 feet, there have been a lot of comments about, well, you're a small share holder, how can you ever get any [wares]?

Well, we're also a small share holder in the overall Analog business, but we have very strong positions in various product segments.

In some converter segments we have no share.

In other converter segments we have high share.

In amplifiers, we tend to have very high share in the very high-end, certain list of products, and a very low share in the low-end, which is another list of products.

I think the same thing is true in power management.

I think, if you try to look at the overall category, you get very confused about what we should do and how likely it is that will be successful doing what we do.

If this was a market where there were two manufacturers that had 40% of the market each, and the market was very highly concentrated amongst a few customers, and we had established competitors in those customers, we would have to have our heads examined to invest the kind of money we are investing in that business.

But I think, in many ways, it's just the antithesis of that.

There's many customers, there's many segments, there's no one large market share holder in many of those segments and certainly not in the aggregate.

So therefore, there's no reason on Earth that we can't carve out a profitable, good-growth businesses selling products that somehow are related to managing power.

I think that's the way I think about it.

On your margins for next quarter, looking at seasonality, it looks like consumers are going to be up a good bit.

We've already stated industrial and communications will be down.

So do you think the (multiple speakers)?

I don't think we said industrial and communications are going to be down.

I think, seasonally, they are a little weaker?

I think we said the handset business will probably be up, base station business will probably be up in the industrial business -- it's too complicated to predict within a couple of percent at this point in the quarter.

But we didn't say -- I don't remember saying any of those segments was going to be down sequentially.

We did say the consumer should be strong.

We said the consumer thing should be strong, or at least that's what the forecast we have indicates.

So that's where you will get your balance out, is with the gross margins with consumer coming up and lowering the mix a little bit?

We literally don't know the gross margin within tenths of a point.

All we're saying is that we believe it's going to be in the same neighborhood, as it is this quarter.

It's really something that we have to wait until it's over to find out what the gross margin margin is.

Or at least mostly over.

It's just that we believe it's very good, at 58%, in the semiconductor industry.

That's the sign of a good portfolio of products.

We also believe that there's an opportunity to sort of work that a bit and improve it.

The timeframe for getting to our 60% -- we have not commented on that, at this point.

I think it will be very dependent on either the way the market moves towards any particular segment or the actions that we take to deemphasize products with very low gross margins.

So there's a lot of things that converge to come out with that number, which is why we're always reticent about making predictions on that upfront.

There's just too many moving parts.

So all we can do is say we've added it all up, it looks about flat.

We'll know more as we report the quarter, and we will give you a lot more color on that as we report next quarter.

Doug Freedman, AmTech Research.

Thanks for taking my question.

A lot of them have been -- a lot of good questions asked and answered.

Are you sure I can't get you to apologize for the 58% gross margin?

Well, Joe is not going to apologize.

I don't feel so good about it.

Joe and I have these conversations all the time.

But no, I think that we have the opportunity, with the markets we're serving.

We determine the product mix.

We determine where we invest the money.

We determine how we price the products, and I think there's every reason that we should push the Company toward that objective at an aggressive pace.

That's what I believe as the CEO of the Company.

Joe, I think, in his mind looks at all these different things, and he worries about it a lot.

That's good, because his worry pushes people to get these numbers done.

So I think there's no backing off the concept that I believe this business ought to run 60 points of gross margin.

I've been consistent on it.

We don't feel like we ought to be apologizing every day for 58%, given the shift in the business.

But the real goal is growing our EPS, and there's two ways to do it -- get gross margins up and get the operating expense ratio down.

We are working hard on both of those.

So I have by no means backed off on the goal of getting this company to 60% gross margins.

I think that's what we need, that's what our entitlement is, and I think we have the wherewithal to do it with our technology base and our pricing power.

So that's my opinion.

I'm not going to disagree with you.

We look forward to it.

So do I, so I don't have to answer this question anymore.

My two questions are really keyed at if you could give us a sense of what you are seeing from the order patterns.

I take it that they haven't really changed very significantly.

However, it looks like your orders were stronger, percentagewise, than backlog 90-day [group].

Are we seeing a little bit more visibility, even if lead times haven't moved?

[Can you let us in on] sort of what lead times look like?

I don't really know.

We tend to look at the order rates weekly.

We look at a lot of aggregate numbers, and I've been happy with what I've seen.

Last quarter came out just about the way our sales guys predicted it would, maybe a little bit better.

We've seen no fall-off in that business.

Given that part of that is July -- we tend to always get nervous about July and early August -- we've seen the order rates being okay.

So maybe that will change.

Every time we say that, the next week goes to zero or something.

But right now, it looks like the order rates are good, and there's not a lot of reason for being negative about that now.

We'll see.

We're going into a period that once we get into December and October, generally that's a strong order period for us.

My last question is regarding the restructuring actions, and whether the present turmoil in the financial markets has really changed any of those outlooks or possibilities.

Has it caused you to sort of redoubled your efforts or look at things any differently?

I think, if anything, more uncertainty causes more pressure to get things done.

I think that's true.

But I think we've been on a pretty solid review process for quite a while about what we're going to do.

Sometimes doing it takes a little bit longer than we all would like, but I think we're pressing on that pretty hard, and I'd say that the margin, if anything, all the turmoil out there makes you press a little harder, not back off on that.

Terrific.

Thanks so much, and nice results on the quarter.

We are just coming up -- we have been on the phone about an hour and 10 minutes now.

We only have a few questions left in the queue, though, so we're going to go ahead and take these last questions.

Joseph Osha, Merrill Lynch.

I was looking at the rate at which you've grown the business since the end of the bubble, which is about 9%, which is consistent with the target that you talked about, 10% to 15%.

Yes.

Over that point in time, you've hit 60% gross margin a couple of times, and you've managed to load up your business and hit that target.

Pretty much each time you have, though, it has not been time to celebrate; it has been time to run for cover.

So I guess my question is not, can you get to 60%, because I know that you can.

My question is, what's the normalized -- sort of, through this cycle, not peak, not trough -- what is kind of the normalized, sustainable gross margin for this business, if we kind of a lop that top off that we know you can get to, probably, at the cost of overrunning your business?

Do you think it's 58%?

59%?

I would say it really depends on the mix of business that we have.

Our gross margin is certainly not homogenous across our product lines.

We have certain product lines that are substandard gross margin by any measure, and we have other businesses that are very high gross margins.

So I think, if we were saying that the only vehicle of getting to 60% is just the normal -- the fab loadings, and when you're hot, it's easy; when you are running a little bit less than hot, it's hard.

I think that would be -- I would come to one conclusion about the sustainability of that.

I think, though, that at the same time we're going to have that bouncing up and down a little bit base on utilization, we are really working hard to get a better mix of business within Analog Devices.

That tends to be more sustainable then just the ups and downs of how loaded your fabs are.

So I would say, to the extent we're successful in doing that, 60% -- it's hard to protect plus or minus a point, but in that range should be where we stay.

Maybe when we unload it, it's a little bit lower; when we load it -- we can't predict it that closely, unless we have a very clear idea of the mix of business, which is in transition right now.

So your contention is that we shouldn't think about this 60% the way the past 60% numbers have been hit?

I'm saying, to the extent that the product mix changes and we force the margins toward higher-margin products, I think there is something different this time than last, is what I'm saying.

The other factor that we consider pretty heavily internally is that 55% of our revenue comes from products manufactured inside Analog Devices -- those typically have very high gross margins -- and 45% are manufactured externally and have lower gross margins, but still very decent gross margins.

The return on the assets of the latter group of products is actually very good, because we have virtually no asset base.

The earnings per share leverage that we get out of the growth of that part of the business is actually pretty strong.

So we're trying to balance a business where we can really grow the earnings per share, and the gross margins are just one element of that.

I'd say the other factor that really is underway that we're thinking about some of these things is to we used to believe that we had to carry around a lot of excess capacity in our analog business because -- in our internal businesses, rather, because the volatility -- a lot of the very high-volatility products were still being built internally, and it was very, very hard to predict when any customer was going to want them.

I'd say that the positive side of a lot of those products moving to outside of the Company, in terms of fabbing, is that the product mix that we're going to build inside is a more predictable product mix than it was without the volatility of some of the very high-running, high-volatility products that are built on the outside.

So I'd say that we've also begun to conclude that we don't have to lug around as much internal extra capacity to respond to that volatility as we did when those products were built internally.

One of the reasons that we had the guts to close the fab in California was because we have a much tighter view of what -- that we won't get into trouble by cutting it a little narrower than we used to in terms of upside capacity, given the less volatility.

That's certainly a factor in our thinking going forward, which is a little bit different than it used to be in the past.

Does that make sense?

Yes, it does.

That addresses my question.

Thanks a lot.

Sumit Dhanda, Banc of America Securities.

Jerry, just one philosophical question here.

In terms of how you are approaching your share count, you have been taking it down fairly meaningfully.

Should we just think about this as just direct share repurchases as the mechanism by which you are giving back cash to the shareholders?

Or should we think about an accelerated repurchase program here at some point over the next couple of quarters?

Well, I can give you my view.

Joe can give you his view.

We talk about this a lot.

We think we have been doing a pretty good job of taking shares off the market in an orderly way.

I think I mentioned we took almost 25% of the shares off the market since we started this thing.

We have been aggressive buyers of our stock for quite a while now.

The exact format where that -- we've taken down the excess cash from $3 billion to $1.3 billion.

So I think we've done a responsible job in getting rid of some of the excess cash to date.

We have a lot of appetite to remove some more for the future.

There's lots of different ways to do that, and I think that the only thing that we can say is that we look at all the different options and figure out the best possible way to get shares off the market, that results in the best returns for the shareholders.

There's lots of different theories about how to do that.

There's lots of different ways to do that.

So far, we have chosen to do it with very, very aggressive purchases on the open market on our own.

Whether that's the way we go forward and do that or we use other vehicles to accomplish that purpose, I think we'll just have to wait and see.

I think that's the philosophical part.

Do you have anything you want to add on that, Joe?

No.

Then what kind of net cash position are you comfortable with at this point?

There's a lot of different ways to look at that.

We still have $1.3 billion.

We still have a lot of firepower around the $1.3 billion.

We have a great amount of cash generation capability that allows us to borrow money if we want to.

So I think -- why don't we just keep going for a while?

We'll tell you what we're doing when we do it, and we'll see how that goes in the future.

We've still got plenty of cash that we can devote towards whatever purpose we want.

That's the best way to say it.

Uche Orji, UBS New York.

My question has been answered.

Thank you.

Okay, well, that concludes our call for today.

I'll just remind folks that our fourth-quarter conference call is scheduled for Tuesday, November 20th.

Thank you all very much for your time this afternoon.

This concludes today's Analog Devices conference call.

You may now disconnect.