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Operator
Good afternoon.
My name is Janice, and I will be your conference facilitator.
At this time, I would like to welcome everyone to the Analog Devices fourth 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.
- Director Corporate Communications
Hello, everyone.
This is Maria Tagliaferro from Analog Devices.
If you don't yet have our fourth quarter 2007 release you can access it by visiting our Web site at www.analog.com and clicking on the Home page.
This conference call is being broadcast live on the Internet also and from analog.com if you go to the Investor Relations page you can highlight the microphone icon for instructions on listening via the Web.
We'll also provide a recording of this call that will be available later today within about two hours of the conference call's completion and that will remain online available by telephone or Internet playback for about a week.
Participating in today's call are Jerald Fishman, our President and CEO, and Joe McDonough, our Vice President for Finance and Chief Financial Officer.
We have scheduled about 60 minutes for today's call and in a moment we'll begin with Mr.
Fishman's opening remarks.
But before proceeding to that, I do have a few things I would like to clarify for folks regarding today's press release.
First of all, during the fourth quarter, we signed a definitive agreement with MediaTek to sell our wireless handset baseband chipset and radio transceiver business.
This has been accounted for as a discontinued operation during 4Q and all prior period financial statements have been adjusted to this basis.
The transaction is expected to close during 1Q.
We expect to report an after-tax gain of approximately 150 to $160 million in the first quarter, assuming the transaction closes as contemplated in the agreement with MediaTek.
During 1Q, we signed a definitive agreement with ON Semiconductor to sell our CPU voltage regulation and PC thermal monitoring business.
This will be accounted for as a discontinued operation beginning in 1Q and this has been reported with continuing operations during the fourth quarter which we're here to discuss today.
We expect to report an after-tax gain of about 52 to $60 million in the first quarter and, again, assuming the transaction closes as contemplated in the agreement with ON Semiconductor.
In addition, in accordance with GAAP the fourth quarter results include $25 million of expense related to restructuring actions and $4.4 million related to a one-time tax adjustment related to the IRS examination for our fiscal years 2004 and 2005.
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 two items.
It's also important to note that our non-GAAP results are adjusted only for one-time, or non-recurring items.
We are not excluding either stock compensation expense or amortization of acquisition related intangible assets.
These items totaled approximately $18 million, or about $0.04 of diluted earnings per share during the fourth quarter.
Now that is a change from our prior quarters when our non-GAAP results excluded these expenses.
We have included reconciliations of these non-GAAP items to their most directly comparable GAAP measures in our earnings release issued earlier today and, of course, a copy of that is, as I said earlier, posted to the Investor Relations section of the Web site.
In addition, also on the Investor Relations section of our Web site we have posted eight quarters of historical data showing the effect of treating the wireless handset baseband chipset and radio transceiver operation as a discontinued operation.
This worksheet also shows the reconciliation of the non-GAAP items to their most comparable GAAP measure.
In addition, please note that the information we are about to discuss includes forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform 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 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 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 live broadcast which is November 27, 2007.
With that, we're ready for some opening remarks from our CEO, Jerry Fishman.
- President, CEO
Good afternoon to everybody.
Certainly, a lot has changed at ADI during our fourth quarter and our early first quarter which creates a lot of moving pieces that may make it a little bit more complicated than usual to understand our Q4 results, and I think, even more importantly, the outlook for the future both strategically and operationally.
So in my opening comments this afternoon, I'm going to try to summarize the most important actions that we've taken and, more importantly, the implications of those actions going forward.
Joe McDonough, our CFO, after I finish my comments will also take you through the many charts and reconciliations that we provided with our press release this afternoon and provide as much clarity about the impact of all these changes as possible.
I'll also try, in my comments this afternoon, to give you a little more color on Q4 and also discuss why we are enthusiastic about what's going to be happen at Analog during 2008.
So first I'll discuss the rationale and the implications of our planned divestiture of the handset radio and baseband chipset operation and also the CPU voltage regulation and PC thermal monitoring operation.
As Maria mentioned and we reported in September of this year, we signed a definitive agreement to sell our wireless handset chipset business which represented about $50 million of sales in Q4 to MediaTek for $350 million.
We're planning an after-tax gain of 150 to $160 million when the sale is completed.
And as Maria mentioned, we're going to account for this operation in Q4 in discontinued operation which provides more clarity about our continuing businesses.
The decision to divest the wireless handset radio and baseband operations positively impacted both our gross margins and our operating margins.
In the fourth quarter after accounting for discontinued operations, gross margin improved 140 basis points.
Operating margins, excluding $25 million in one-time items, improved 160 basis points.
In November we also signed a definitive agreement to sell our CPU voltage and PC thermal monitoring product lines to ON Semiconductor.
The sales of those products during Q4 totaled approximately $25 million and the sale price was approximately $185 million which includes a one-year prepaid manufacturing agreement.
After accounting for the manufacturing agreement, the assets included in the sale and other costs, the deal is expected to result in an after-tax gain in Q1 of somewhere between 52 and $60 million.
In the first quarter of '08 this business will also be accounted for as a discontinued operation.
Under the manufacturing agreement ADI is expected to manufacture these products for approximately one year.
The activities associated with this manufacturing agreement will also be accounted for in discontinued operations and are expected to more or less breakeven each quarter going forward.
To give you a yardstick to measure the impact of this divestiture we estimate that in our fourth quarter if we had excluded the CPU voltage regulation and PC thermal monitoring operation through our results as we planned to in Q1, gross margin on a GAAP basis would have reached 60%, or 160 basis points higher than we reported.
Excluding the $25 million restructuring charge operating margin as a percentage of revenue would have been approximately 70 basis points higher, or 23.3% of revenues from continuing operations.
There'll be no material change to the diluted earnings per share.
While the financial rationale for divesting these businesses is very important and it's certainly non-trivial, the improved strategic clarity this brings to our ongoing investment decisions is equally perhaps more important.
As you know and we've talked about in previous calls, we've been working to better focus ADI on opportunities that can produce high and sustainable margins, a good return on R&D investments and higher return on assets and on equity.
Despite a competitive product portfolio and a capable organization at ADI for both product areas, we believe that the investments required to grow and sustain these products were not commensurate with the returns that we at Analog could generate.
By selling these businesses we provided a good path forward for our customers, a good opportunity for our employees and much better returns for our investors.
In the wireless handset market we plan to focus our investments in products where we offer technology that is differentiated and provides stainable value to leading handset manufacturers, products that improve energy efficiency, sound quality, picture quality and the overall user experience.
Our analog non-baseband handset revenues are growing rapidly and we believe we can earn good margins by differentiating our customer's phones and the user experience.
Further, this decision has provided more clarity for our ongoing DSP business.
After a strategic rebalancing and reallocation of our DSP investments, we now believe that our general purpose DSP business is correctly sized to translate the already high gross margin, which are comparable to our analog product gross margins, into accelerating operating profits for future quarters.
In power products, our refocused strategy really had three key areas.
The first is part of an attach strategy to ADI's core business and high-performance amplifiers and data conversion products.
This market is characterized by very high margins and moderate growth rates.
A portfolio of building block, high-performance power management, supervisory and monitoring components will be the mainstay of this segment of our power management strategy.
The second key area of our power management strategy is to engage closely with selected lead customers in specific markets for more application specific power management products.
We started to develop strong relationships with leading infrastructure customers, both wired and wireless.
These customers will continue to push new technology development while offering relatively fast product ramps and good margins.
And the third prong of our power strategy is our portable strategy which is aimed at the world's largest consumers of electronic components, the market leaders for cellular handsets and high-end consumer products such as digital cameras.
Power management is a key differentiator of those products with better power system resulting in a very noticeable user benefit of longer battery life.
ADI has a wide range of technologies being applied to the portable market with many opportunities for power products coupled with audio, with MEMS and with data conversion products that we already produce and sell.
The portable market space provides perhaps the fastest revenue ramp opportunities in the power business.
As a result of these actions, we enter 2008 with a much better balanced product portfolio capable of good growth and also far better clarity of where to invest our R&D dollars going forward.
Now I'd like to move some of my comments to our Q4 performance where my remarks will mostly reflect the continuing operations unless I say otherwise in my comments.
I think by most measures Q4 was a very solid quarter for ADI.
Revenues for our continuing operation grew 2% sequentially to $649 million and grew 6% year-over-year.
We recorded a total of $699 million in revenues in Q4 when we included the $50 million in wireless handset radio and baseband products that we sold during the quarter.
For the full-year product revenues from continuing operations grew 7% to $2.5 billion.
Our sales growth for 2007 compares favorably to industry growth rates and the growth rates of our closest competitors.
In these comments, by the way, I excluded the one-time payment of $35 million that we received in Q1 for granting a license of certain intellectual property from the product revenues that we talked about to make the comparisons more suitable.
Within the fourth quarter if you look at our revenues by end market we experienced the strongest growth from PC customers and from consumer customers.
Revenues from computer customers grew 13% sequentially which I think is in line with what most of our competitors reported as general strength in the PC industry during Q4.
During Q4 our consumer product revenues grew 11% sequentially.
We saw a very strong growth from product views in digital cameras where we continue to serve generation after generation of cameras sold by the largest market shareholders in the digital camera market.
Our sales also grew sequentially in advanced TV systems where we're providing audio, video and connectivity solutions to the market share leaders in that business as well.
Audio, video receivers and digital video recorders also contributed to our growth during the fourth quarter.
As a note for the year, video games showed the highest growth in our consumer business.
Revenues from our industrial customers were approximately flat sequentially in Q4.
Within the industrial category revenue growth was strongest in the automotive and defense markets and weakest in the semiconductor automatic test equipment market.
Our revenues from communications customers in Q4 declined 7% sequentially.
Within the communications category wireless handset revenues from analog products increased sequentially and year-to-year during the quarter.
Bay station revenues declined sequentially after significant growth earlier in the year.
Networking revenues also declined sequentially while revenues from all other communications applications increased in Q4 compared to the prior quarter.
I think the comparisons are more useful for the full-year.
For the full-year industrial revenues grew 7%, communications revenues also grew 7%, consumer revenues grew 23%, computer revenues declined 17%, primarily due to our strategic decision earlier in the year to begin to transition our power management portfolio away from products used in PCs.
In Q4 our analog revenues grew 1% sequentially and represented 90% of our total revenues.
Also in Q4 our DSP revenues grew approximately 7% sequentially.
For the year of 2007, our strongest revenue gains were from converter products which grew over $80 million year-over-year, or 8% year-to-year, and also from other analog products such as RF products and MEMS products.
The category that we call other analog products also grew $80 million year-to-year, or 27% year-over-year.
The gross margins for our continuing operations in Q4 were 58.4% of sales, which was down 50 basis points sequentially on a comparable basis.
In Q4 we recorded stronger PC and consumer product sales ahead of the holiday period, flat industrial sales and lower communications infrastructure sales.
This led to a higher mix of consumer product sales, which generally have lower gross margins below the Company average, and a lower mix of bay station and automatic test equipment sales which generally carry gross margins that are above the Company average.
Operating expenses increased very slightly during the quarter and operating margins were 22.6% of sales which was equal to third quarter on the same basis meaning only continuing operations.
These results now include stock compensation and amortization of acquisition expenses which totaled $18 million, or 2.8% of our revenues and we can attribute $0.04 of diluted earnings per share to those categories in Q4.
So in total, our diluted earnings from continuing operations on this basis were $0.39 for the fourth quarter.
We enter our first quarter of 2008, which began in November, with backlog for continuing operations that's approximately flat to where we began Q4 and up approximately 8% from the same quarter a year ago.
As a result, we're planning for our first quarter sales for continuing operations to be in the range of 610 to $635 million, which now will exclude the power revenues and that adds up to somewhere between plus 2 and minus 2% sequentially relative to Q4.
We're planning for a more favorable mix of business in Q1 which should allow gross margins to improve slightly in Q1.
Operating expenses for continuing operations are planned to decrease slightly, therefore, we're planning for earnings from continuing operations to be in the range of $0.38 to $0.42 for the quarter.
The discontinued operations are planned to more or less breakeven.
As we look ahead to 2008, we're planning for 2008 to be a good year for ADI with a better product mix and many of the ingredients in place for a very strong profit leverage as sales grow.
First, our high-performance analog performance portfolio which now represents 90% of our revenues is in very good shape.
The high-performance analog market remains one of the best product categories in the semiconductor industry in which to invest and our plan is to continue to invest in areas where we have very high market share which are amplifiers and converters.
These two product categories now represent 66% of our sales, provide an attractive blend to steady growing long life cycle products and also products that offer compelling technology to very fast growing markets like digital TVs, communications and medical electronics just to mention a few of those markets.
Our market share in these product categories has been growing over the last several years and our brand is very strong in virtually every region of the world.
As we talked about on earlier calls, we decided in 2007 to significantly raise our investment levels in new analog product categories to raise our growth rate in these products going forward.
We added investments in RF technology, primarily aimed at telecommunications infrastructure, where we already sell many other analog products to the leading manufacturers of infrastructure in the U.S., in Europe and in Asia.
We added significant investments in power management which is a very fragmented analog product category, and which we described what our strategy is in that business in some of my earlier comments.
We added investment to the low power converters to support our portable consumer product strategy.
And finally, we substantially raised investment levels in MEMS products where we believe the market is experiencing an inflection point in growth as many new application are developing at new cost points.
We've already begun to see results on these investments and these products should continue as growth drivers in 2008.
We're also poised to very strong operating leverage as revenues increase.
Our profit margins in 2007 were impacted by a number of factors, slower overall industry growth that we all forecasted in the beginning of the year, a higher mix of consumer products, slower industrial market growth after three years of above trend growth, ADI's decision to reduce our inventories for its model levels and our decision to stick with our plan to raise investment levels in our analog business to capture future growth opportunities despite the fact that industry growth cooled off in the second half of the year.
As we look at 2008 we believe we have margin tailwinds as compared to 2007 headwinds.
In 2008 our product portfolio includes a richer mix of faster growing high margin products.
Additionally, by mid 2008 we expect to be in volume production of consumer MEMS products in Asia which will allow significantly lower cost and much more scalability than products currently being built in a relatively small fab here in Boston.
Our inventories are now approaching model levels which will remove the gross margin drag that we experienced from inventory reductions in 2007.
We've also taken actions to reduce the cost of our manufacturing infrastructure.
We've closed our fabs in California and we focused our fab, we are focusing our fabs in Ireland on 8-inch wafers only and we'll be closing our 6-inch lines in Ireland's by mid 2009.
Earnings per share leverage comes from both a richer product portfolio and also our buyback program.
To accelerate the growth rate of earnings we bought back nearly 20% of our shares outstanding over the past three years, providing earnings leverage as sales and profits grow.
We finance these purchases from our very strong cash flow and also from reductions in our excess cash.
So in summary, ADI begins 2008 in a very strong position.
Over the past few years we took actions that provide a lot of leverage.
We increased our investment in analog products.
We divest the two businesses at the right time for our stockholders, our employees and our customers and we bought back over 25% of our shares outstanding.
These actions were intended to provide very good sales growth while sustaining 60 points of gross margin.
Our plan for 2008 is to constrain spending to approximately half the growth rate of our sales which positions ADI to grow earnings per share as much or as fast as twice the growth rate of our sales.
So with that, I guess, I'll turn the conversation over to Joe who's going to make a few comments about all the complexities that we included in our press release.
- VP Finance, CFO
Hello, this is Joe McDonough.
As Maria and Jerry have mentioned, we had a number of non-recurring events this quarter, therefore, we provided a lot of information in our press release to help investors understand both these events and the results of operation.
We've also posted, as Maria said, a schedule on our Investor Relations portion of our Web site, analog.com, to provide additional help.
I'll take just a few moments to step through the information which is attached to our press release.
After the written description of our results you'll find several tables labeled Schedules A to H.
Schedule A is the Generally Accepted Accounting Principles income statement.
In 4Q, the wireless handset baseband chipset and radio transceiver operation is shown on a single line, net income from discontinued operations.
This is an after-tax reporting.
During 4Q we generated $1.5 million of net income from this operation.
During the full fiscal year 2007, this operation incurred a loss of $3.8 million.
It generated $33 million of net income during fiscal year 2006.
Earnings per share are also split between continuing operations and total ADI.
The wireless handset chipset operation had little impact on earnings per share in 2007 and contributed about $0.09 of diluted earnings per share in 2006.
A more detailed P&L for this discontinued business is shown on Schedule B and a worksheet is included on our Web site, analog.com, reconciling these items.
Since the definitive agreement for the sale of the CPU voltage regulation and PC thermal monitoring business was finalized during 1Q, this operation will be treated as a discontinued operation in 1Q.
It is included in continuing operations during 4Q.
As mentioned, stock-based compensation is no longer being excluded in calculating non-GAAP measures.
These amounts are shown on Schedule A as Footnote 1.
On Schedule C, we provide balance sheet data.
Assets and liabilities related to the discontinued wireless handset chipset operations are classified on separate lines.
Since the products in our wireless handset chipset operations are all manufactured externally, the assets are primarily accounts receivable and inventory.
The balance sheet remains strong even after repurchasing over $3 billion of stock over the last three years.
We ended the year with cash and short-term investment balance of approximately $1.1 billion and no debt.
Days cost in inventory declined to 118 days in 4Q from 133 days a year ago.
Days sales and accounts receivable were 47 days in 4Q, an increase of one day from a year ago.
Schedule D is the cash flow statement.
As a percent of revenue, net cash provided by operating activities continued strong during 4Q at 28% of sales.
For the year, we paid $228 million in dividends and bought back $1.6 billion of stock.
Our dividends yield is 2.3% at current stock prices.
Schedules E and F provide the revenue trends by end market and by product.
These have been commented on in both the press release and during Jerry's comments.
A year ago we instituted this detailed quarterly breakdown of our sales to give our investors insight into the performance for our business.
On Schedule G we reconcile the GAAP to non-GAAP measures.
We no longer exclude stock-based compensation or amortization of acquisition related intangibles which totaled approximately $18 million in 4Q from our non-GAAP measures.
Only one-time or non-recurring gains or expenses are excluded.
In 1Q '08 the gains from the closing of the planned divestitures will be excluded from our non-GAAP measures.
The final schedule is Schedule H, which outlines guidance for 1Q of fiscal year '08.
We're giving guidance for 1Q based on continuing operations, which I remind you, will exclude the planned divestiture of the CPU voltage regulation and PC thermal monitoring business.
Therefore, on this schedule we provide information to help investors establish a comparable basis from the 4Q results to the 1Q guidance.
Now we're ready for questions.
- Director Corporate Communications
Everyone, this is Maria, again.
During today's Q&A period, please limit yourself to one primary question and no more than one follow-on question.
We'll give you an opportunity to ask additional questions if we have time remaining through a second round.
Operator, we're now ready for questions from our analyst participants.
Operator
(OPERATOR INSTRUCTIONS) Your first question comes from the line of Steve Smigie with Raymond James.
- Analyst
Great.
Thank you.
A lot of moving pieces here but I just curious on the success of some of the growth in the quarter, I was hoping you could talk a little bit about the major drivers in consumer and also if you could talk a little bit about the factory that's going to be available for the MEMS production?
- President, CEO
Well, in the consumer business, there's a couple of different segments all of which experienced pretty good growth.
We've enjoyed a very strong position in the camera business for many years and we're fortunate to have a very high share of the largest shareholders in the camera business.
So that business continued to grow for us.
We have a growing business or presence in the TV business, both in plasma and flat panel, and we have products going to audio, video and some of the connectivity features that these types of TVs have.
We have very strong relationships in that business also with very large shareholders in that business, particularly in the mid to high-end of that business.
And, of course, we have a very good position in the game business.
Right now in Q4 that business was mostly capped by our capacity and will remain so for the next quarter or two but, certainly, the demand for those products was pretty good into Q4.
So it was a fairly broad based increase in products with some very good customers that are selling extremely well.
- Analyst
Okay.
My follow-up is just can you talk a little bit about how the transition to that new, I guess facility for MEMS if I understood that correctly?
- President, CEO
Yes, we begun that process somewhere around four to five months ago and as of the last look at that it was right on schedule.
- Analyst
When would we expect to see that fully ramped?
- President, CEO
Well, I think some time in the middle of the year we should begin to see output from that.
- Analyst
Thank you.
Operator
Your next question comes from the line of John Dryden with Charter Equity Research.
- Analyst
Jerry, the markets were very uncertain this time last quarter on your call like they have been the last month.
Can you comment on how orders have changed versus just last quarter, particularly in your two largest end markets?
- President, CEO
Well, I think the order rates were good most of the quarter and we saw good ordering patterns from the customers we mentioned, or the market segments we mentioned.
The industrial business, the revenues were flat, they were up in some areas, down in some others.
But broadly, I think the markets behaved pretty much the way we thought they would and we didn't see a lot of evidence of any real contraction in any of the end markets for the quarter.
I mean when we really looked at it relative to what we had thought for the quarter, it sort of came out about the way we thought.
- Analyst
Okay.
And then as a second question you talked about having a tailwind at you for earnings going into FY '08.
Could you comment on specifically low power converters and power management with respect to revenue opportunities above your growth in expenses in those two areas?
- President, CEO
Well, I think the way to think about next year and the way we're thinking about next year is we have a core business that's sort of the horizontal business that we talk about which has shown very good growth over the last couple of years.
And you can see that when you look at some of the product category data that's on the Web site and it's been in a lot of the press releases that we put out over the last couple of quarters.
In a very tough year last year our converter business grew 8% which is a pretty number, the amplifier business grew about 5%.
So I think the, and the industrial market over the last couple of years has grown at a very good clip.
So we have a core business which grows pretty well on the average, some years a little bit more than others if there's an economic headwind or tailwind but that's sort of the core.
I think one of the things that we're excited about for 2008 is we really up the investment levels over the last year or two in the analog business.
And as I mentioned, we invested a lot of money in our RF technology and power and low power converters for portable consumer applications and a few others, and the plans that we have in place for 2008 indicate those investments we have good expectations for on top of the base line.
So this year is a little unique I think compared to some previous years in that if the base line stays healthy, time will tell how the economy treats all those products, but assuming that we don't get at least a headwind on those products, I think the other stuff should accelerate the growth rate and that's why we're pretty enthusiastic about the growth rate that we can achieve in 2008.
- Analyst
Thanks for taking my questions.
Operator
Your next question comes from the line of Sumit Dhanda with Banc of America Securities Sumit Dhanda, Banc of America Securities, your line is open.
- Director Corporate Communications
We will come back to him.
Operator
Your next question comes from the line of Chris Danely with JPMorgan.
- Analyst
Thanks, everybody.
Can you talk about how you expect your gross margins and operating margins to trends after fiscal Q1 and what the drivers would be there?
- VP Finance, CFO
This is Joe McDonough.
We, if you look at the gross margins and the mix of business that we have this quarter, as Jerry mentioned, we had a very strong growth in the consumer business and we had a strong growth in the computer business and a decline in the bay station and automatic test equipment business.
As Jerry mentioned, the bay station, the automatic test equipment business are products that tend to have gross margins that are above the Company average, the consumer and the computer business have gross margins that are below the Company average.
So we had a mix of business this quarter that dragged the gross margin, really, more than the half a point decline that shows up in the financial statements.
And I think some of the result of what was actually a stronger gross margin than we might have expected with that mix of business was a result of some of the cost actions that we've taken over the years, we're seeing some of the benefit of that.
We would expect to see that as we go through the year next year.
We also would expect to see the mix of business shift back into a more favorable direction as we go through the year.
The industrial business has been flat for sometime.
We would expect to see that start to grow.
So we think that there is more of a, as Jerry calls it, a headwind on the gross margin from the mix of business;
- Director Corporate Communications
A tailwind.
- VP Finance, CFO
We had a headwind and we have a tailwind going forward and so that should help the gross margin.
And then as we get into 2009 we should start to see the benefit of the Ireland manufacturing facility, which is part of the restructuring charges.
We're transferring the production there from our 6-inch line to our 8-inch line.
That will happen during the second quarter of '09.
So looking forward we're starting off with a gross margin that is 60% in the fourth quarter if you subtract out the portion of the power business that we plan to sell during 1Q and, therefore, we would expect -- and that's on a GAAP basis.
So we think that there is some upward opportunity on the gross margin.
I think we shouldn't get carried away with thinking that we can run a business that's significantly above 60% but there certainly is some upward potential there.
As Jerry mentioned, we're also planning to hold the growth of operating expenses to half the growth rate of sales.
So that has the potential to grow the earnings at twice the rate of sales growth as we go forward.
- Analyst
That sounds pretty good.
And then as my follow-up, how do we think about the current mix of business, i.e., are you guys looking at other product lines to rationalize or jettison or are we pretty comfortable with the current mix of business right now?
- President, CEO
Well I think right now, we always look at business and decide whether they're good or bad for us over a long period of time.
But I think right now we're relatively happy with the portfolio we have.
- Analyst
Okay.
Thanks a lot, guys.
Operator
Your next question comes from the line of Robert Burleson with ThinkEquity Partners.
- Analyst
Yes, good afternoon.
Thanks for taking my question.
Just a couple of quick things.
On your describes business are you guys seeing any changes in kind of your, the orders that you're receiving from your distributors that indicate any kind of increasing or weakening confidence level on their part?
- President, CEO
I don't think so.
It bounces around weak to week and so on but I think it came out about the way we thought.
And our revenues, as you know, don't reflect what's going on with distribution inventories.
I mean, our sense at least in the comments that we got from the sales, our sales guys, is that the inventories look like they're in reasonable balance and the orders seem to be reflecting end demand and we didn't see any major trends one way or the other during the quarter on that.
- Analyst
So is your sense that if, if it isn't the end of the world and we're going to see normal seasonality and kind of steady levels of demand, that distributors would need to maybe build a little bit of inventory here, at least hold it flat?
- President, CEO
I can't tell what they'll do for the universe of semiconductor companies but I think the inventories seem to be in reasonably good balance.
I mean, they're being cautious because they don't know what's going to go on either in the future but I don't see there's any large disconnect, at least for our products, between what their demands on us is and what their demand of their customers is on them.
- Analyst
Great.
And just quickly, as we look at the different end markets going into this, I guess, would be calendar '04 or a fiscal Q1 for you guys, is there any kind of a change that you're seeing on the communications infrastructure front?
Any kind of firming you're seeing there?
And also automated test equipment, is there any kind of firming that you would expect in those end markets?
- President, CEO
Well, I think in the infrastructure market, there were a lot of buildouts of infrastructure equipment in the first half of the year and it sort of tailed off in the second half of the year given the above trend numbers that we experienced at least in the first half of the year.
So, I mean, the conversations that we've had with those customers indicates that they're expecting 2008 to be a good year.
They did make some inventory adjustments in the, particularly towards the end of the year, which is why our sales to those customers in Q4 were down quite a bit, but I don't think there's anything generically that's going on with those customers that's a bad thing.
They bought a lot in the first half, they didn't buy a lot in the second half.
So we didn't really, I think those are just normal buying patterns what happens in the infrastructure market.
So we don't see anything remarkable there one way or the other.
It's been a strong business for us.
It's a very important business for us.
We have a large part of the analog content in bay stations in Europe and Asia and America.
So I think we're in good shape there and I think as the call volumes keep going up and people keep deploying new infrastructure that business should do well.
- Analyst
And in testers?
- President, CEO
Testers have been weak.
I think that's not news to anybody if you look at the comments that the test equipment companies have made.
I think that business will go as the semiconductor business goes next year, if the semiconductor business starts picking up I think the ATE business turns on a dime in that they go from feast to famine very quickly as they did last quarter.
So we'll have to see how that goes.
Again, I think our position in that business is good.
The customer base we have is solid but I think that business swings with a lot of volatility.
And, certainly, last quarter it swung negative.
The future we'll have to wait and see how that goes.
- Analyst
Thanks a lot.
Operator
Your next question comes from the line of Simona Jankowski with Goldman Sachs.
- Analyst
Hi.
Thanks very much.
Jerry, I think you mentioned that the linearity of your orders was pretty good during the October quarter.
Can you give us a sense of how orders have been so far in November?
- President, CEO
I think there's no anomalies in here, let's just say, we don't report our results for the first couple of weeks because it's very hard to extrapolate that in the future.
We haven't seen any anomalies in the order rates at all one way or the other.
- Analyst
Okay.
Thank you.
And if I can just have a follow-up on your guidance as well.
I think when you talked about your gross margin for the quarter that just ended you're saying that if did you not include the CPU power management business it would have been about 60% which is what you are guiding for next quarter as well.
So it seems that your expectation is for margins is to be flat but it seems that you're going to have a better mix next quarter so I'm just wondering what's offsetting that?
- VP Finance, CFO
The guidance for next quarter on Schedule H in the financial statements is for gross margins for continuing operations to be slightly above 60%.
- Analyst
Okay.
Got it.
Okay.
Thanks a lot.
Operator
Your next question comes from the line of Romit Shah with Lehman Brothers.
- Analyst
Thanks.
As I look back historically the January quarter has been one in, I guess, good years it's up and in bad years it's down.
Can you, Jerry, just comment on the backlog, I guess, entering the quarter?
Is it flat for the continuing operations?
Can you give your perspective on that, please?
- President, CEO
Yes, I think the seasonality of our business changes with the economy, there's no doubt.
Typically we see the consumer products have a very good buildup in Q4 and they go soft in Q1.
Whether that happens this year I think will partially depend on what happens at Best Buy over the next couple of weeks, so that's very hard to tell.
And typically we see in our Q1 the industrial business getting a little bit better particularly in January.
So it's really mixed seasonality.
We don't really see when you look at the mix of business we have, profound seasonality quarter-to-quarter anymore.
The only quarter that we really see usually very strong seasonality is in our Q2.
But the other quarters bounce around a little bit a couple of percent and I don't think there's anything more than what you said earlier, good quarters in good economic times, in bad economic times, they're not so good.
But I don't think we have the same seasonality given the mix of business that we had many, many years ago.
- Analyst
It sounds like your perspective on inventories is that the channel and your OEMs are carrying a low level of supply of ADI parts.
Does that give you a lot of comfort that ADI is probably not going to see a sharp downtick in their business next year?
- President, CEO
Well, I mean, as we look at the business, we go through our planning process like everybody does before the year begins.
And we went through a pretty extensive planning process in October and, to try to understand from our sales guys, who are the guys out there calling on the accounts and our product people who are the guys that have to make these decisions, and the numbers converged on a good growth number for next year.
So I mean that's sort of an indication that integrates what the customers are saying, what the sales guys think, what the marketing guys think.
And I think it's, as I described earlier, a mixture of just that the basis should do okay and some of the other areas should give us a little bit of a growth kick in next year and I think those two things are making our field guys feel okay going into the year.
We'll just have to wait and see how the year unfolds.
- Analyst
So I guess your view is that whatever's going on with the overall macro investment you guys have yet to see that impact, at least your customers willingness to order components.
- President, CEO
We haven't seen, you know, there's always ups and downs each quarter based on things that happen in each market or each geography.
But when you add it all up we haven't seen much of an effect of that at all.
- Analyst
Thank you.
Operator
Your next question comes from the line of Sumit Dhanda with Banc of America Securities.
- Analyst
Hi.
Sorry about the last time around.
First question for you, Joe, you know, op ex down slightly in the January quarter, is this more a function of just (inaudible) typing in your existing base business or is there benefit associated with the divestitures and will that continue to percolate through the model in the upcoming quarters?
And if that's the case can you quantify some of that benefit?
- VP Finance, CFO
The $25 million restructuring charge that we took this quarter was comprised of $14 million related to the transfer of production to Ireland's from 6-inch line to the 8-inch line and, as I mentioned, the benefits of that are out in 2009.
The other $11 million was related to infrastructure that are in all different parts of our business, selling, marketing, G&A, engineering, cost of sales, and that is related to the fact that we have divestiture of the handset business or the baseband business planned for the first quarter.
And the benefits of that come some in the first quarter and some during the second quarter.
- Analyst
The fact that your lower op ex guidance for Q1 is reflecting that benefit as opposed to anything else?
- VP Finance, CFO
Yes.
You asked a question about how will that continue during the year, as we mentioned, our plan is to hold the growth of operating expenses to half the growth rate of sales.
And when we're talking about operating expenses, we're talking about the engineering, selling, marketing and G&A.
Most of the restructuring that we did is in the overhead categories and that shows up as benefits in the first and second quarter.
During the second quarter that typically is seasonally a good quarter for us.
It's also the quarter when we have our raises, our annual raise cycle comes into effect in the beginning of the second quarter.
So that's a quarter that seasonally, typically, has a pick up in revenues and an increase in expenses related to the annual raise cycle.
Then as the year goes on we don't have any more of those events such as an annual raise cycle and we do have a plan to, as Jerry said, we think 2008 should be a decent year and so we do have a plan to grow the operating expenses during the year in response to the sales growth, but are trying to limit those, that growth to half the growth rate of the sales.
- Analyst
And I'm assuming that there's not much meaningful savings from the divestiture of the CPU power business or is that also incorporated in this outlook that you gave for operating expenses for 2008?
- VP Finance, CFO
Yes, the savings from the Limerick manufacturing facility are all cost of sales related.
And I think it's important to make it clear that the products, the power products that are being sold to ON Semiconductor, part of that planned transaction is a one-year prepaid manufacturing agreement.
Those products are manufactured in that same Limerick, Ireland fab on the 6-inch line that we plan to shut down in, around 2Q of '09.
So the manufacturing of those products, if it all goes according to plan, will stop, the manufacturing of the products for ON Semiconductor will stop, and we'll gain the benefits of the cost that we were incurring in manufacturing those products.
- Analyst
I had a separate question.
You've guided gross margins slightly higher than 60% based on better mix.
Your inventories are where you want them to be at.
My recollection is last quarter you thought that you would start to rebuild some inventory in the January quarter.
Is that still the plan and if that's the case, is there some benefit associated with that, the gross margins that we should be thinking about?
- VP Finance, CFO
The plan for the first quarter is for inventories to be roughly flat to maybe down a little bit.
We're still a little bit above our model for inventories but not much.
We've converged on our goal.
1Q tends to be a quarter that we do have the holiday season there and that does affect output typically in the factories during the holidays.
And so typically 1Q is a quarter where the manufacturing output is seasonally off a little bit and so that has a little bit of a drag on the gross margins.
On the other hand, we have a pick up, we think, from the mix and we probably have a little bit of a benefit, as you say, from the fact that we're getting close to our inventory goal.
- Analyst
Okay.
Thank you very much.
Operator
Your next question comes from the line of Craig Ellis with Citi.
- Analyst
Thanks, guys.
I jumped on late so I'm sorry if you addressed these issues already.
First, Jerry, can you just talk about how much potential there is to pare back or to really streamline the business now that you've made the desktop power announcement with ON?
- President, CEO
Well, I think the, that announcement is really trying to focus the power business on the places where we think we can make returns that are commensurate with our model for that business.
So as you do those things, I think Joe mentioned a little earlier, you look around for that business was absorbing overhead in addition to their direct expenses.
Of course, the direct expenses go to ON and we've taken the opportunity over the last couple of months as we were preparing for these divestitures to reduce the infrastructure costs on the Company and that's part of that restructuring reserve that Joe mentioned earlier.
So I think what we've really done here, Craig, is we've built ourselves into a cost position and a model where when the revenues starting to go up or continue to up, and the gross margin stabilizes maybe, as Joe was saying, gets a little bit better through the year at 60 or slightly higher, and we constrain the operating expenses substantially relative to the sales growth, if you go through the math, the operating margins move up at a pretty good clip towards the kind of model numbers that we've talked about for quite a while for the business.
So, I mean, that's what we're trying to do.
I mean, all the actions we took last year from the handset business to the power products, to being very aggressive, purchases of our stock, are all geared towards getting the operating margins towards our model numbers and I think we made some good steps on that.
If the world doesn't fall apart on us during the year and we get the kind of growth we think, I think, we'll make a lot of progress on that in 2008.
And that's what we've been trying to do, that's what we've been working on pretty hard for the last year and that's what our plan is for 2008.
That's probably the best guidance I can give you on that.
- Analyst
Okay.
So it sounds like they're probably, if I'm hearing you correctly, there's not other businesses that are meaningful that you might be able to pare out but, too, it does sound like you think you can get into your target operating range by the end of the coming fiscal year.
- President, CEO
Well, I'd say that we'll certainly make a lot of progress towards that.
It'll depend on what the sales growth rate is for the year.
So we'll have to see how that unfolds but we can make meaningful progress on that in the kind of range Joe was talking about each quarter as the revenues grow.
And whether we get to that target in Q4, we get to it in 2009 if the revenue growth rates lower, time will tell.
But we're certainly going to make, we now for the first time, I think, and it's important to say that, have visibility on how to get there.
Given that the gap was very large last quarter and that rattled a lot of people, how do you ever get to where you getting to with where we are?
And I think we've got part of the way there with these moves that we've made and we see our way clear to getting the rest of the way there with what's going to happen in 2008.
So I mentioned earlier that we have now a good mix of products.
I think Joe mentioned earlier that that mix is now creating 60 points or so of GAAP gross margins which include stock option expenses.
I think now one of the objectives that becomes very important is to make sure we get the revenue growth here, too.
- VP Finance, CFO
Let me just clarify the target.
We've talked in the past about 30% operating margin and that has not included the stock option expense or the amortization of these acquisition intangibles and so we've just absorbed 2.8%, I think, of sales.
And so I think it's reasonable to think in terms of the first step we've got to get to is about 27.5% which correlates to the 30% we talked about in the past.
But the second point is that we've always talked about the growth of earnings per share as our principal objective and the margins as just a means to that end.
And so as we've commented, we think that we have a mechanism to grow the revenues and grow the earnings close to twice as fast as the sales.
The third point that I think is important is in the process of looking at the balance sheet and buying back the stock, we also have focused on the return on equity that we have from the business.
And so I think if you were to look back into 2006, you'd find that our return on equity was something in the 15% range, it's moving up more in the 20% range today and as we go forward, we can see 30% return on equity.
So we find the margin just a means to these other ends but it's the growth in the earnings per share and the return that we can get on the equity that we've got in the Company that are the principal financial goals.
- Analyst
Okay.
That's helpful.
On the last call I think one of the issues the Company identified was some constraints on the MEMS manufacturing site.
What's the status of MEMS manufacturing and the port over to TSMC?
- President, CEO
I think somebody asked that a little earlier.
The program is on track.
We're still constrained, of course, as we said we would be on the upside right now but I think as we get out to mid 2008, if it continues to go as well as it's been going I think we should be in good shape.
- Analyst
Okay.
And then lastly, I was surprised with the year-on-year change in the amplifier business.
I thought that would be a grower for you, it wasn't.
Anything in particular that accounts for the decline that we saw?
- President, CEO
Well, it was up 5% year-to-year.
I mean, in a market like we experienced particularly in the second half of the year, that's not a number that's bad.
We're in a business where it was up 8% year-over-year.
So those are numbers in the context of the market that --
For the full-year.
Those are numbers that in a market that existed last year and look at the competitive numbers that the competitors have posted, it's a pretty attractive number.
- Analyst
All right.
Thank you, everybody.
Operator
Your next question comes from the line of Uche Orji with UBS New York.
- Analyst
Thank you very much.
Jerry, let me just ask you about your sense of the pressure you may be facing from competition around your core business of converters and amplifiers.
Given that you've divested (inaudible) non-core businesses, how have you been able to kind of respond to some of the comments we've heard about competition in converters?
If you can just talk to us about your positioning in this market and on your (inaudible) market position that would be helpful.
- President, CEO
Sure, well, I mean, certainly, there's competition out there.
It's a large product category.
It's probably the most, the single most important product category in the analog business.
It turns out the only product category that one manufacturer has very significant market share.
If you look at amplifiers, you look at power management or any of those product categories you see the market share being a lot more fragmented.
So given that the market is more concentrated with ADI representing such a large part of the market it's not surprising that we're going to have competition.
I think when we look at all the statistics and we visit all the customers, I mean the key to that business is still innovation.
And we got great some people in the Company that for 30 years have been innovating in the converter business and our job is to stay ahead of all the other guys out there.
And that's challenging work.
We have good competitors that are trying to design products like that.
But our job is to stay ahead of them and I think we're doing a good job of doing that.
- Analyst
Just a couple of small follow-ups.
On the MEMS you still talk about being constrained.
It looks like that would not be for another couple of quarters that we would start to see products out of Asia.
- President, CEO
Yes.
- Analyst
Can you, within (inaudible) the customers you have in MEMS are you still the sole supplier to the main controller for the Wii or do you think business, given the constraints you're facing, they have gone to somebody else, are you sharing that main controller business with somebody else given the constraints you're facing?
- President, CEO
I mean, we have a very strong, I mean, the only thing I'd say is we have a very strong position with Nintendo on those products.
We have a very good road map going forward with Nintendo and I think other than that I'm not going to comment on what Nintendo's sourcing strategy is.
- Analyst
All right.
Fair enough.
And just one last question.
Joe, if you can about in terms of the turns business you require or in terms of looking at your guidance (inaudible) within the normal range of turns business you require (inaudible) higher in this quarter?
- VP Finance, CFO
No, it should be basically the same which is a reasonable level of turns.
We're entering the quarter with the same level of backlog on the continuing businesses.
- Analyst
All right.
Great.
Thank you very much.
Operator
Your next question comes from the line of John Dryden, a follow-up question from Charter Equity Research.
- Analyst
Joe, could you comment on future buybacks, a comfort level for working capital versus your current $1.1 billion cash given the $200 million after-tax coming in the January quarter and greater than 150 free cash flow?
- VP Finance, CFO
I can't comment on the buyback program in the future.
We do have some $600 million of remaining authorization.
We have, I think, a track record of pretty substantial purchases.
We do run a program and we put that program in place and keep it in place.
That's about all I can really say.
- Analyst
Thanks.
Operator
Your next question comes from Mike McConnell from Pacific Crest.
- Analyst
Thanks.
Joe, could you just quantify the backlog on (inaudible)?
- VP Finance, CFO
Well, that's, all of our systems that track sales backlog and quarters are for the entire business which includes the discontinued operations and so it's been a challenge here to pull pieces apart to report them the way that we need to and I don't think our 10-K will have any backlog reporting for the continuing business that we'll have in 1Q.
So I really am hesitant to comment on that other than to say the backlog is flat quarter-to-quarter.
There's nothing unusual about our backlog.
As we have said in prior quarters, there's not a lot of meaningful information in it because our backlog includes the orders we received from our distributors.
It does not include the orders they get from their customers which are what drive our revenue range and when they ship product out to their customers.
And our OEM customers, some place backlog and some place forecast.
So the most meaningful information is that there's not too much of a change that has happened quarter-to-quarter.
- Director Corporate Communications
And that's, just to clarify, that's no change when we take a look at the continuing operations that'll exist in 1Q.
So we have looked at it without the wireless handset and without the CPU voltage regulation businesses.
- Analyst
But then, I guess, maybe for our purposes for estimating, then, we should just kind of assume the same amount of turns requirement?
(inaudible)
- VP Finance, CFO
Yes, that's right, and that's why we tried to give a range on the revenues of plus 2%, minus 2% for the continuing operations.
- Analyst
And those terms requirements are somewhere in the mid 30s?
Is that correct?
- VP Finance, CFO
I think it's more in the low 40s is what it was this quarter and that's fairly typical.
- Analyst
Okay.
And then book-to-bill, what was that in the quarter?
- VP Finance, CFO
Well, it's pretty close to one.
- Analyst
Okay.
Thank you very much.
- Director Corporate Communications
Okay.
Well, if, I think we've gotten through the message queue.
If there's anyone else that missed the second round of questions and wanted to go into the queue again, you can press star one to do that now, otherwise it looks like we're completed.
Operator, is anybody else in the queue for us here?
Operator
We have one more question.
James Borgeois with Guilford.
- Analyst
It's Guilford Company.
Thank you.
Looking at your industrial end market, (inaudible) the industrial economy and domestically has been very strong, internationally very strong.
Could you explain where the disconnect occurs between that observation and your experience in your industrial business last year?
- VP Finance, CFO
Well, I think if you look at a couple of years in the industrial business, you look at it over a couple of years, the industrial business grew at very significant rates for a couple of years and I think a couple of the product categories in the industrial business were slower during 2007 than they were in 2006.
But I think it's important to realize they grew 7% year-over-year which for the industrial business is a very good business.
There were a couple of years where it grew 15% which I think is a little more atypical.
And there's a lot of different segments in there that sort of move in different directions.
But if the industrial business for analog devices grows at 7 or 8% a year for the next couple of years, we'll be in very, very good shape.
If it grows higher we'll be in even better shape.
So there's actually nothing wrong with a 7% growth in industrial products after a couple of years that we experienced.
And that's a good result, not a bad result.
- Analyst
Yes, good.
And did I understand your comments, though, that you expect stronger industrial growth in '08 than in '07?
- President, CEO
Well, in '08, even though it was (inaudible) from the year it sort of flattened out through most of the year and I think all the feedback we get in the absence of a big recession or other things that can impact us substantially is that we ought to start seeing some growth in Q1 and certainly into Q2.
- Director Corporate Communications
And it's worth clarifying, also, that this industrial group is a very fragmented group of applications across things that include for ADI, certainly, instrumentation that you find in factory automation, process control, medical imaging, the automotive market we include in our industrial numbers, the automated test equipment market that serves the semiconductor industry, defense applications, aerospace applications, so all that goes into what we describe as our industrial group.
- Analyst
Many of which you had a very strong year.
- President, CEO
Yes.
- Director Corporate Communications
Absolutely.
- President, CEO
And I think that was reflected in our numbers.
- Analyst
As a second question, I hear a lot about Rich Tech as being a emerging or stronger competitor, rapid sales growth.
Could you characterize their nature as a competitor of yours?
- President, CEO
Well, I think exiting the power and PC business makes us a lot less of a direct competitor with RichTek than three months ago.
I mean we've seen a lot of concentration of companies like RichTek in the motherboard PC business, and that's a business that we're invest divesting because it doesn't fit in our product mix as well.
So I think, I mean, Asian companies are always competitive risk.
They tend, so far at least, to be mostly in the segments that are single product, very high volume that are very closely aligned with manufacturers in that region.
For example, the motherboard manufacturers in Taiwan.
So that's a business, as I said, is less relevant to us than it was a few months ago.
- Analyst
Thanks very much.
- Director Corporate Communications
Thank you.
And I think that was our last question.
So I want to thank everyone for joining our call today and look forward to speaking with you again at the end of our first quarter 2008 earnings.
That quarter will end in the end of January -- I don't remember the exact date, actually.
I'll have to look at that.
Thanks again, everybody.
Operator
Ladies and gentlemen, this concludes today's Analog Devices conference call.
You may now disconnect.