亞德諾半導體 (ADI) 2012 Q3 法說會逐字稿

Good afternoon.

My name is Diane, and I will be your conference operator today.

At this time, I would like to welcome everyone to Analog Devices' third-quarter fiscal year 2012 earnings conference call.

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

After the speakers' 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, Operator.

Today, I'm participating in the call in my role as Corporate Communications Director.

Running the ADI earnings calls from here forward will be Ali Husain.

For those of you who haven't met him yet, Ali joined the team at the end of May as our new Director of Investor Relations, but he's actually been working at Analog Devices for the past eight years or more -- a little more than eight years.

So he will take over as moderator on the earnings calls, and as the primary contact for Investor Relations.

But I look forward to continuing to work with our shareholders, and also welcome Ali to the team.

Thanks, Maria.

Good afternoon, everyone.

It's a pleasure to be part of the team.

We appreciate you, and everyone joining us for today's call.

If listeners haven't yet seen our third-quarter fiscal year 2012 press release or Form 10-Q, both may be accessed through our website at Investor.

Analog.com.

This conference call is also accessible from the same page.

A recording of this conference call will be available today, within about two hours of this call's completion.

It will remain available via telephone playback for a period of time, and will also be archived on the IR website.

In addition, we have updated the schedules on our IR website, which include the historical quarterly and annual summary P&L for continuing operations, as well as historical quarterly and annual information for revenue of continuing operations by end market and product cycle.

Participating with me on today's call are Jerry Fishman, President and CEO; Dave Zinsner, Vice President of Finance and CFO; Vincent Roche, Vice President of Worldwide Sales and Strategic Market Segments; and Maria Tagliaferro, Corporate Communications Director.

For the first part of the call, Jerry and Dave will present our third-quarter 2012 results, as well as our short-term outlook.

The remainder of the time will be devoted to answering questions from our analysts and investor participants.

During today's call, we may refer to non-GAAP financial measures that have been discussed for certain non-recurring items in order to provide investors with useful information regarding our results of operations and business trends.

We have included reconciliations of these non-GAAP measures to their most directly-comparable GAAP measures in today's earnings release, which is posted on the IR website.

I would ask you to please note that the information we're about to discuss includes forward-looking statements, intended to qualify for the Safe Harbor from liability established by Private Securities Litigation Reform Act of 1995.

These forward-looking statements include risks and uncertainties, and our actual results could differ materially from those we will be discussing.

Factors that could contribute to such differences include, but are not limited to, those described in our SEC filings, including our most recent quarterly report on Form 10-Q filed earlier today.

The forward-looking information that's provided on this call represents our 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 our outlook to change.

Therefore, this conference call will include time-sensitive information that may be accurate only as of the date of the live broadcast, which is August 21, 2012.

With that, I will turn the call over to ADI's CEO for opening remarks.

Good afternoon to everybody, and welcome to our third-quarter 2012 conference call.

As you can tell from our press release this afternoon, our revenues totaled about $683 million, which was up about 1% from the previous quarter, and down about 10% from the same quarter last year; and was just very slightly below our plan for the quarter, but well within the range that we communicated in May.

Diluted earnings per share of $0.56 was at the midpoint of our earlier guidance.

The good news is that despite economic head winds and increasing uncertainty in most regions of the world, our business in aggregate remained stable during the quarter.

Our bellwether industrial business, which now comprises 47% of our revenues, was approximately flat to last quarter, remaining stable after growing very strongly in our Q2.

Our largest industrial customers indicate to us that, while their earlier growth expectations for 2012 have modulated in the past few months, they currently see very little deterioration in their business to date, and they don't expect any significant downturn for the balance of the year.

And these customers, the large industrial customers, were for the most part on plan for the quarter.

Our distribution channel, which primarily serves the industrial market, was consistent throughout the quarter and was stable in July.

In fact, in July, we saw stronger bookings on ADI from our distributors, indicating that while they, too, remain cautious, they don't foresee any deterioration in their business in the near term.

These trends are very significant for ADI, given the importance of the industrial market to our revenues and to our profits.

Our Communications Infrastructure business grew 9% sequentially, driven by wireless customers, and was in line with our expectations for new wireless base station deployments in the United States, in Asia, and also in Japan.

As I think you know, we're very well-positioned with market-leading OEMs in Europe, in Asia, and in the US, with a product portfolio that addresses both existing technology and also newer 4G deployments, which we will expect will increase ADI's content in those base stations.

Automotive revenues decreased very slightly sequentially, but was up 12% over the same quarter last year.

This was also slightly below our plan for the quarter, as European manufacturers reduced production in the summer months, in response to the uncertain economic environment, and also lackluster car sales in Europe.

Safety, including roll-over control and radar-based collision avoidance systems, energy efficiency, and infotainment, all represent great growth opportunities for ADI, and we expect the Automotive market to become increasingly attractive for us.

Our Consumer business was approximately flat sequentially, which was also slightly below our plan for the quarter.

Growth in portable media offset declines in digital cameras, while other sub-segments such as home entertainment and also computing remained approximately flat.

The good news here is that our backlog for Consumer products grew substantially during the quarter, which should provide good revenue growth for ADI in our fourth quarter.

Order rates from our end customers remained solid during the third quarter, and totaled approximately $700 million, representing a book-to-bill ratio that's greater than 1.

We're generating an increasing amount of our sales from turns orders, which are booked and shipped during the same quarter.

This is typical in an uncertain environment, and when our lead times continue to be very short.

In aggregate, there did not appear to be a lot of market momentum in either a positive or negative direction, and in the short term, our revenues will be mostly dependent by the macro economy, and to a lesser degree, new product cycles in certain end markets.

In this environment, we believe we're doing a very credible job in responding to all the uncertainty.

We continue to make trade-offs to focus our investments on the right products, the right markets, and the right customers, to maximize our long-term growth rate.

In general, our gross margins have remained very strong, and our operating expenses are under very tight control, and we continue to generate significant operating cash flow, which gives us the flexibility to enhance returns to shareholders, and we would expect very strong operating leverage as macro conditions improve.

So that's all I'm going to stay in the opening comments.

I will turn it over to Dave now, who will take you through some of the details of our financial results.

Thanks, Jerry.

As Jerry mentioned, third-quarter revenue increased approximately 1% sequentially to $683 million.

Our gross margin was 65.6% in the third quarter.

This was up 40 basis points from the 65.2% we reported in the second quarter, driven by slightly higher utilization rates.

Lead times for our direct OEM customers remain similar to last quarter, and are in good control, with virtually all of our shipments to OEMs occurring within four weeks.

Operating expenses for the third quarter, excluding approximately $5.8 million in restructuring-related expenses, were $230 million, compared to about $228 million in the prior quarter.

The slight dollar increase was primarily due to a full quarter's impact of the annual salary increases.

We continue to be very watchful of operating expenses during these periods of uncertainty, and do not plan to grow expenses until we are confident that the economic headwinds have abated.

Operating profits before tax for the third quarter, excluding restructuring-related expenses, were $218 million or 32% of sales, up 50 basis points from the prior quarter.

Our tax rate for the third quarter was 19%, lower than the prior quarter's 23%.

The lower rate was due to a change in estimates of our future tax liabilities, and some discrete tax items.

We expect our effective tax rate in the fourth quarter to be in the range of 21% to 22%, excluding any discrete tax items.

Diluted earnings per share of $0.56 in the third quarter was at the midpoint of our guidance, and up 6% sequentially from the prior quarter.

We generated 20% of our revenue, or $138 million, in operating cash flow.

Capital expenditures were $39 million, resulting in free cash flow of about $100 million, or 14% of revenue for the quarter.

While a strong result, third-quarter operating cash was impacted by payments related to variable compensation, and some income tax payments.

Our expectations for the fourth quarter is for operating cash to be significantly stronger, in the range of its historical norms of greater than 30% of revenues.

Our accounts receivable balance was up about $16 million versus the last quarter on higher sales, and our days sales outstanding remained roughly flat at 46 days.

Inventory on our balance sheet increased by 3% or $8 million, and we have 121 days of inventory on hand.

We've increased inventory to meet anticipated seasonal demand from our consumer customers in the second half of the calendar year, as well as to respond to a new product cycle.

By the end of our fiscal first quarter of 2013, we expect the business to catch up to the inventory growth, and as a result, days of inventory should be more in line with our model of 100 to 110 days.

Inventory at distribution was approximately flat to last quarter, and weeks of inventory at distribution remained flat at approximately 7.5 weeks, which is at the lower end of historical norms.

During the third quarter, we repurchased $17 million of our stock.

We also distributed approximately $90 million, or 53% of net income in dividends to our stockholders.

Our cash and short term investments, balanced at the end of the third quarter, was roughly flat to last quarter, with approximately $1 billion available domestically.

At the end of the third quarter, we had approximately $857 million in debt outstanding.

On August 20, our Board of Directors declared a cash dividend of $0.30 per outstanding share of common stock, which will be paid on September 12, 2012, to all shareholders of record at the close of business on August 31, 2012.

At current stock prices, this dividend represents an annual yield of approximately 3%.

In addition, we have approximately $580 million remaining under our Board-authorized share repurchase program.

We plan to continue to be opportunistic buyers of our stock.

Since the start of our share repurchase program in fiscal 2004, the Company has repurchased approximately 129 million shares, or $4.4 billion of Company stock.

In summary, third quarter delivered solid results during challenging times.

Our operating model turned a 1% sequential increase in revenue into a 6% sequential increase in diluted earnings per share.

At gross margins of 65.6% and operating margins of 32%, including any restructuring charges, we still have leverage ahead as sales increase, factory utilization improves, and we continue to prudently control operating expenses.

And now I will turn the call back over to Jerry to discuss ADI's outlook for next quarter.

Thanks, Dave.

Looking forward in the short term, we expect our Industrial Communications and Automotive businesses to remain stable in Q4, and be at similar revenue levels to Q3.

In our Consumer business, increased backlog and the strong product cycle leads us to plan for growth in Q4.

In total, we expect our revenues to be in the range of $685 million to $715 million.

We would note, however, that our largest distributors have indicated a wide range of possible outcomes for their quarter ending in September, which reflects economic uncertainty, particularly in Europe.

If our growth is mostly from Consumer products in Q4, and reflecting what is now planned to be lower factory utilization, we'd expect our gross margins to be in the range of approximately 65%.

We're planning for operating expenses to be roughly flat to last quarter.

Based on these assumptions, we would expect our diluted earnings in the fourth quarter to be in the range of $0.54 to $0.60.

In the longer term, we remain enthusiastic for continuing very profitable growth and cash generation, based on our better product mix, our customers' enthusiasm for working very closely with ADI to meet their toughest technical challenges, and a highly-competitive and responsive capability to meet whatever our customers ask of us.

In the long term, these attributes will determine our growth rate, but certainly in the short term, it will be mostly about the macro economy.

Thank you, Jerry.

Thank you, Dave.

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 other opportunities to ask additional questions if we have time remaining.

With that, Operator, we are now ready for questions from our participants.

(Operator Instructions)

Our first question comes from Stacy Rasgon with Sanford Bernstein.

First one on gross margins.

You had indicated, obviously, a mix and lower utilizations is taking the margins down a little bit next quarter, even on higher revenues.

I know you said utilizations went up a little bit this quarter.

Can you give me some feeling for exactly where they are this quarter?

I think they were 70% last quarter.

Where are they going next quarter?

Are they dropping lower than they were in Q2 when they were at 67%?

And can you give us a feeling for additional margin drivers as we go into the beginning of next fiscal 2013, on revenue levels that hopefully can begin to grow off of here?

Utilization was a little bit north of 70% this quarter, and we're expecting it to be in the range of the quarter you cited, which was in the kind of high 60s for next quarter.

And clearly, utilization will be one of the bigger factors in driving the gross margins up.

When we were running in the 80%s, we had 67% gross margin.

Some of that was due to mix, but a fair amount of that was due to utilization so we'd expect, as utilization does improve, our gross margins improve.

Also, we are in, I guess, a relatively tepid environment on the industrial side.

We do expect over time, as the economy improves, that to pick up.

That is our highest gross margin end market and should be accretive to gross margin, as well.

I think for us, Stacy, the encouraging thing is that even at these levels, where we're forecasting relatively strong consumer quarter relative to industrial and communications, and given the fact that utilization, we're going keep pretty low to keep the inventories down, that we can still run sort of 65-type gross margins, is a lot different than it used to be, let's say.

In a positive way.

That's helpful.

For my follow-up, a question on the common infrastructure space.

It was up this quarter, I think in line with your expectations.

Lots of folks have been looking for the potential for bigger acceleration of that market in general into the back half of the year, given some of the guidance that's out there now for some of the carriers, but you seem to be guiding it flat.

Have we seen the lift that we're going to see that in that market and we're done, or do you think there's still the prospect for further growth?

If it's not next quarter, maybe we're going down another quarter or two after that?

Do you think that there's still opportunity for further growth in that market?

Do you think that we're going to see pickups in carrier spend, and is this something that at the current levels that we're seeing out there sustainable?

I think when you factor in the -- we have two internal components to our Infrastructure business.

We've got the wireless component that's pretty dominant, about two-thirds of the overall revenue, and the infrastructure sector, and we've got a wired component, as well.

We've seen much stronger growth on the wireless side, and in spite of the fact that our customers have been suffering from the lack of CapEx spending by the operators.

But there are signs that the operators are beginning to spend money, particularly in America and in Asia, in the build-out of 3G networks.

So, I think there may be a little up side in the wireless space, in the fourth quarter.

And we're starting to see the deployment, as well of the TD-LTE systems in China.

So I expect sometime in the second half of next year we'll see the lift from that.

And we're also expecting the sixth phase of the build-out of wireless networks in China in the traditional TDS-CDMA sector.

So I think, 4Q, looking into the next fiscal year, I think we'll see some good up side, particularly in the wireless area.

Does that imply that the wired side of things is a bit of a headwind right now?

It's relatively flat.

It's been flat for the last couple quarters.

That business is comprised of enterprise networking, cable infrastructure, and it's been relatively muted over the last couple of quarters.

Thank you, that's helpful.

Your next question comes from Ross Seymore of Deutsche Bank.

Congratulations on solid results in a challenging time.

A question on the consumer side of things.

Could you give us a little more color on what's driving the up side beyond seasonality, and to the extent seasonality comes into that mix, how should we think about the duration of that business being up before it seasonally potentially rolls over?

Well, this is Jerry, I think the way to think about it is, we, a year or two ago, really tried to focus our Consumer business on opportunities that were much more sustainable, the customers were willing to pay us a fair margin for, and we've resected that product line pretty substantially.

So, I think we have a good cycle coming up, we believe, and some of the newer products that we've done in the consumer space, that we think really add new types of functionality to consumer products, that we believe are going to be very valuable.

So, of course, the Consumer business always has its ups and downs, and the fourth quarter is typically a good seasonal quarter for consumer products.

The first quarter tends to be somewhat weaker sometimes, but consumer products are still a relatively small part of our total sales.

So I think that, as we look over the next period out there, I think in the short term, our results will be much heavier, much more dependent on what happens in the macro economy to our Industrial, our Communications business.

The consumer revenues will modulate with product cycles and buildups for seasonal purchases, but I think in the next three to six months, it is going to be mostly about the macro stuff for us, when you factor everything into it, and that is going to be much more relevant to our sales than any of these cycles.

I think in the fourth quarter, we are going to get some lift from a couple of product launches in Consumer, but after that, I think it is going to be mostly dependent on the macro stuff.

Great.

One follow-up, I guess more for Dave on this one.

You mentioned about holding OpEx pretty much flat until macro shows some better positive signs of life.

As we look into early fiscal 2013 in the January quarter, are there any sequential changes that we should be prepared for, FICA taxes, bonus, merit, things like that, that pop that up even by a couple million dollars?

No.

Not really.

We'll likely have some inflationary effect some time next year, but it's relatively modest.

It adds 1% or 2% to the OpEx per year.

Our take is, for the levels that the Business is operating at now, and what we see in the near future, we've got plenty of OpEx devoted to growing this Business.

And for us, it's mostly a question of focusing that OpEx on the right stuff.

And so, is I think that's what Dave's comment is really based on.

We've got plenty of money we're spending, investing in the Business.

The real question is just make sure we put it in the right places.

That's what we're working on.

Great.

Thank you.

Your next question comes from the line of Uche Orji with UBS.

This is Parag for Uche.

Just wanted to drill down further on your Consumer business.

Are you expecting any ramp in MEMS Microphone business, and is that what is driving the up side in the fourth quarter?

We have a great MEMS microphone.

We expect the revenues in that to continue to grow.

Fair enough.

Our Consumer business, again, has 3 million components to it.

We will see a lift in all three sectors, basically in the digital imaging, the portable space, and home entertainment during the fourth quarter.

So, the Consumer area is one of the spaces that uses every piece of technology, and every type of product that we've got.

So, it's actually quite diverse.

And we'll see a general lift, I believe, in the fourth quarter, not dependent on any one product or area.

Fair enough.

And coming to the Industrial business, you indicated that the business is going to be flat.

Just wanted to get a feel of whether this is a temporary pause or you think -- what is the level of visibility into this end market beyond the current quarter?

I think, if you look at our Business over the last couple of quarters in the industrial sector, we had a very sharp rebound of 12% in the second quarter.

We held on to that in the third quarter.

From talking to customers all over the world, I think in the industrial sector, there's a lot of optimism about next year, but I think in the very, very short term our customers are being very careful, in terms of placing backlogs, building inventory.

So I think there's a very good match currently between the consumption rates and the demand rates in ADI, and I don't see that changing much, certainly, during the next three or four months.

Thank you.

Your next question comes from Jim Covello with Goldman Sachs.

I guess if I could follow up a little bit on those last comments on the industrial segment, I believe you said the distribution channel actually increased orders in the month of July, so if I heard that right, did that continue into August, and is that at all unusual, given the relatively tepid environment?

Should we read anything into that, or is that just more a function of the lean supply chain at this point?

Jim, I wouldn't read anything into that.

The weekly distribution orders on us, patterns are fairly erratic.

They go up and down week to week.

To us, it was more an indication, rather than a long-term trend going on there, that at least without being an internal pessimist on the stuff, that at least they don't see their business eroding, or they wouldn't be placing those orders on us, rather than us standing up to say that's the beginning of a trend.

I think you've got to look at the end customer bookings patterns, and I think if you look over the last six months at bookings in the OEM and [disty] sectors at the end customer level, what you will see is a tremendous consistency over that six months in every region, and across the industrial sectors.

So I think there's just -- as Jerry said earlier on, there's no momentum one way or the other.

It's just very stable.

The real challenge for us has been in trying to plan and manage Analog, is the Industrial business, which is a large part of our Business, you read all the stories, how the world is going to come apart, and you get worried about that.

So the very positive thing that we took out of really poring through all the customers and all the geographies, as Vince was saying, is that it's very stable.

I think in this world right now, stability is a good thing.

And we didn't see anything in the numbers, either through the end of last quarter or the first couple of weeks of this quarter, that indicate anything other than stability.

And like I said, in this world right now, stability is a good thing.

I would reiterate, I would be cautious about trying to say -- interpret that comment about trying to increase to the revenues as the beginning of a trend.

I hope it is, but I'm not jumping on that one yet.

If could I ask my follow-up, relative to the gross margins, to get gross margins back to sort of the more peak levels, how much of that is going to be mix dependent versus utilization dependent?

Is there one or the other of those more critical to getting the margins back to the peak levels?

Both would be helpful.

Clearly utilization would be a bigger component of the drive for margins.

And is there an algorithm, a certain of increase in basis points and utilization that's going to drive a certain number of gross margin improvements?

I wouldn't say we have any kind of specific targets, but like I said, if utilization was up a little bit north of 80%, and our gross margins were kind of running in the 67%, so that's probably a reasonable rule of thumb.

And probably it goes up, the mix will be relatively consistent so that's probably -- you could write your own algorithm to that.

Okay, thank you so much.

Good luck.

Your next question comes from Craig Ellis with Caris & Company.

Your line is open, sir.

Nice job.

You had mentioned that distributors are signaling a wide range of possible outcomes here at the end of the year.

I'm wondering, is that from a particular geography, or does that relate to a particular set of end markets?

Can you give us more color there?

Distributors tend to focus more on the industrial market.

Our overall Distribution business is very US and Europe-centric, in the mainstream of distribution.

So I think it's related to that.

And there's two big distributors that we use, and I think if you just read the commentary there, they're saying, things look okay, things look stable, but at the margin, they're packing a little more -- a parachute on the range of possibilities for next quarter, which is not surprising, given all the uncertainty out there.

But certainly is it's hard for us to get -- be more certain of the guidance when they're not very certain of their guidance, and they're not an insignificant portion of our Business.

But again, I think you could look at it two different ways.

In one sense you say, that sounds very uncertain.

On the other hand, even the range of guidance they put out indicates that they're thinking business is stable.

So, we tend to focus on that commentary as much as the precise numbers that they're putting out.

That's helpful.

Switching gears to the automotive end market, it looks like we're taking a breather after what was a real strong trailing four quarters.

How should we think about automotive's potential to reaccelerate over the next couple of quarters, and how big can automotive become as a percent of mix in the next couple years?

Automotive is currently about 17% of the Company's revenue.

It's grown a couple of digits for multiple years here, and we look to that again this year.

What we've seen the last couple of quarters, I think, is really related to the European markets and European (inaudible) factors.

So, we've seen the manufacturing output reduced in Europe due to the economic uncertainty, and I think, as well, the lackluster performance we're seeing in Europe has been offset to some extent by strength in other areas, such as Asia, where we're beginning to see some good momentum build for the Company.

Finally.

Finally.

So, in Japan, as well as China and Korea.

So, I think that momentum bodes very well, and that, coupled with the recovery that is likely to happen in Europe, I hope, anyway, next year we should do quite well.

Although the new product pipeline and the design pipeline that we have would lead to us believe that the kind of growth we've been seeing in the 12% plus area per year, we can keep that momentum going.

(Multiple speakers) geographic mix, automotive business across Asia, the US, and Europe?

Off the top of my head it's probably -- US and Europe combined are probably 70%, 75%, the rest is Asia.

I think the trend that we can rely on is, what's interesting, is that the electronic content is going up, there is an awful lot of analog and mix signal content in all of the sensors, all of the engine controls, all of the battery monitoring, all the communications links, all the safety features, cars are going to have rollover control pretty soon legislated.

That consumes a lot of gyros.

So, I think there's a lot of macro trends in the automotive market that really will help us accelerate our sales.

That will be to some degree, at least for a first approximation, much more relevant than how many more cars get sold this year or next, which doesn't change all that much.

So, I think the macro trends in the automotive market, and the positions that we're continuing to build with the largest suppliers to the automotive market, here and in Europe and in Japan recently, and in Korea recently, are such that I think we'll do very well if those trends continue.

Thank you.

Your next question comes from Vijay Rakesh with Sterne, Agee & Leach.

[Just look at the quarter with the next steps macro].

A couple of questions.

When you look at the distributor side, what are the inventory levels on the distributor side?

And the industrial, when you look at the different segments of the industrial, where do you see strength, and where do you see kind of weakness or limited visibility in that market?

So I'll answer the first.

I think Vince will answer the second.

Inventory was, on an absolute dollar basis, slightly down, and on a days of inventory, weeks of inventory, which is what we typically measure, it was about 7.5 weeks, which is consistent with what it was last quarter.

On the industrial sector, the area where we saw most weakness was the energy sector, both metrology as well as the transmission distribution part of that.

We expected some rebound in the industrial automation area.

It didn't happen.

So, most of the other subsectors of industrial were relatively flat for the quarter.

One or two a little up, but energy down.

Just looking out a little bit here, this is the last question, when you look at the January quarter, any thoughts on what seasonality typically is, and are you seeing anything out of the ordinary, in terms of trends as you look out?

Not at this point in time.

We're trying to get through the fourth quarter right now, and then we'll give you an update on what we think about the first quarter when we get through this quarter.

Right.

Thanks.

Your next question comes from Vivek Arya with Bank of America Merrill Lynch.

Thanks for taking my question.

First on OpEx growth, I'm trying to think how to conceptually model it going forward.

So let's assume your sales grow 10% next year.

With that kind of sales growth, how should we think about OpEx growth?

Well, I mean, we don't have an exact target.

I would tell you that in the near term, given a lot of the uncertainty that exists, we're trying to keep it relatively flat with where we're spending today.

If business begins to recover, we'll look likely grow expenses, but we're trying to keep it at a rate that's significantly below whatever the revenue growth rate is.

So our goal is, from the 32% operating margins that we operate today on a non-GAAP basis, our goal, if we start to see some recovery, is to see the operating margins begin to expand.

Got it.

And next one on the Wireless Infrastructure business.

I believe you mentioned good growth opportunities there.

How much does 4G or LTE contribute to that, and how much content expansion can you have as the mix shifts more towards LTE deployments?

The lion's share of the business today is 3G.

At the present time, 4G is just rolling out.

It's quite a bit less than 10% of our wireless revenue, but it will become a very significant contributor over the next couple of years.

So, I think what you will see is, our business today is composed of 2G, 3G, and now 4G, but I think in the next couple of years, you will see predominance of 3G.

I think we'll still be 3G dominated for the next two to three years, but LTE will become a significant part -- I can only speculate it could be 20%, 30% of our revenue in the next two, three years.

Certainly that's the fastest growing part of our wireless business right now.

It all depends on just how that grows relative to the more traditional 3G stuff.

The good news, we have a lot of content.

We have more content typically in a 4G system than we have in a 3G system, and all those subsystems are becoming enormously complex.

Of course, each one has got to handle the legacy, as well.

So the complexity of the silicon we're delivering increases generation by generation, and it will handle more frequencies, more bandwidth, more range.

So the value is increasing, as well, [persistent].

As these 4G systems build out we're very optimistic about revenue growth potential there.

Is there any way to size that expansion?

Is it 10% more?

15% more?

20% more as you go from 3G to 4G?

More than 20%.

Okay, great, thank you.

Our next question comes from Shawn Webster with Macquarie Research.

Thanks.

A lot of questions have been asked and answered already, but I was wondering if I could ask more on the content growth story.

You've highlighted the wireless segment, you've tried to quantify that.

I was wondering if you could quantify some of the other areas that are non-automotive related, in terms of content growth, and maybe specifically call out like industrial, control systems, or military equipment or other areas where you're also seeing a generation to generation content growth story.

Energy has been a good growth story for the Company in the industrial sector over the past five years.

And it's not a very big part of the Business, but the growth has been good, and it's a great long-term investment for the Company.

We see parts of the industrial automation sector, particularly in Asia, we've done a good job connecting with our customers and the key applications there in the Asia region, so that would be a very good contributor to the Company.

In the wired infrastructure area we've been investing heavily in building a portfolio in the observation control area, in areas like timing, clock control, timing generation, clock control, and these control circuits.

We have a dominant position in the control circuits that monitor optical systems and cable infrastructure systems.

So there are just a couple of spaces.

Automotive, of course, we took possession in power train, in infotainment, as well as safety, and all those sectors are growing at a fast clip for the Company.

I'm sorry to interrupt.

I was going to ask, is this a case of the complexity of your devices is growing, as is your price in the system, or is this you're shipping more units into a box and displacing other kinds of devices, or what's the dynamic happening within the box itself?

There's a lot of new features.

As you know, car companies are largely selling their cars on the basis of the electronics technology today.

So there's a lot of new features that we're being asked to address.

I think what to look at is the complexity of the circuits, the products that we're shipping generation to generation is increasing, and allowing us to increase our value generation and generation.

Maybe just one quick follow-up, and I'll go away.

The Consumer business that's going to be up double digits based on the math you kind of laid out for us, which would be a seasonal increase.

I'm just trying to come to grips on what's seasonal build versus some of the new product cycles you've highlighted.

Can you specifically call out how the product cycle aspect of it, the new business you're getting, is affecting your outlook for Q4?

Well, I think it's really both.

It's very challenging to try to give you a breakout of that, and say this -- half of that or a third, or whatever.

I think the only take-away is we're going get some lift in the fourth quarter.

We think we have a good product cycle.

It's a seasonally strong quarter for us, and we'll wait and see what happens after that.

Thanks a bunch.

Your next question comes from Steve Smigie with Raymond James.

Great, thank you.

With regard to your exposure in the wireline you mentioned a little content on the optical systems.

I was wondering if you could talk about, is that more centered around something like 40 and 100 G, or is that more like passive optical network type systems and to the extent you are in the PON systems, are you seeing any take up in the China build-outs?

Most of our business in the wired infrastructure area is not particularly in the data path.

It's mainly observation control, timing generation control.

Some data path solutions.

I think it's true to say that in the optical subsystem area, I think over the last four quarters we've seen just a stable -- no growth, stable pattern, same thing in the cable infrastructure market, and I think we certainly are playing in the China area.

We've seen a little growth in China.

I think, which is an offset by -- some (inaudible) largely due to ASPs.

I think if you look out longer term in the wireline communications market, I think the real opportunity for ADI is going to wind up being integration of a lot of stuff we do.

And we have a lot of the -- as Vince was saying, a lot of the stuff we do now is pinpoint products that are relatively standard products for that market, but I think increasingly as we get a much better insight into what our customers really need and want, there's an opportunity to take multiple technologies and integrate them for many of those customers.

And I think that's where the breakout opportunity in that business for us exists.

If it's just selling basically catalog products to customers, that might be picked out for usage.

I think there's an opportunity, it's not huge growth opportunity.

I think if we can accomplish some of the things that we're setting out to do now in terms of the level of integration that we can accomplish for those kind of customers, I think that's where we get an inflection point to the growth rate in that market.

Great.

Just for my follow-up, you talked a number of times about the new products in the consumer market.

Can you give us a little more detail about what's changed, or what specifically you've done that's new, what innovations you've made that are allowing to you get this big bump?

Well, I think we have a lot of different applications in the consumer market.

We sell products that are in the audio signal chain, which are real important to a lot of customers, given that audio is a more important application than it's ever been in a lot of consumer products.

We do a lot of video in the consumer area.

We have products that range from relatively simple pinpoint products to highly integrated products that go into these applications.

We sell MEMS products into consumer applications.

It's really a mixture of a lot of different things that go into our Consumer business.

The real challenge of the Consumer business for all of us, I think is developing, having products and customer relationships that last a long time, from generation to generation, and that turn out to differentiate our customers' products so that we can earn a fair return on them.

And that's where we're focusing our effort.

We're seeing some benefit of that focus coming up.

Given the lifecycles of most of the systems under which we shift in the consumer sector, virtually everything we do is a new product.

So that's both good news and bad news.

Thank you.

Your next question comes from Harsh Kumar with Stephens, Incorporated.

Great job in a tough environment.

Jerry, I think you talked about the areas in industrial that are not doing better.

That was Vince actually.

Vince is the one with the Irish accent, not Jerry.

I got you.

if you can't tell that one, we've got to get you a new phone line.

I was wondering if you guys could talk about areas of industrial that are actually doing well relative to the normal Industrial business?

Yes, well, energy was doing very, very well.

I'd say at this point in time, we've ramped up our R&D investment over the last three years in Industrial to get a much, much sharper more intense focus, areas of factory automation, process control, and it's actually done well for the Company over the last three years.

The last three quarters have been -- last four quarters have been tough, but as I said earlier, energy has been a good growth story, double-digit growth for the Company for the past four or five years.

And it's our expectation that we'd be able to get the industrial automation sector into the 8% to 10% compounded growth over the coming years.

To me, one of the encouraging parts of the industrial market right now is that when Vince goes out and visits these customers and occasionally convinces me to go with him, what you hear from those customers is that they're almost dragging us into some of these applications that we've never been in before, because they understand that they're very challenging, and they have a lot of respect for some of the core technology that Analog has, that they think is very applicable in some of these segments.

So some of them are just -- we make the highest speed and most accurate converters and amplifiers, as we always have, and some of them are actually asking to us do a lot more integration for them than we've ever done in the past.

Either for reasons of speed, performance, or cost or size.

So, I think increasingly there's -- the industrial business which, if you go back five years, used to be, we have a lot of customers that we sell a lot of products to, I think, increasingly there's an opportunity for us to really do a much more systems-oriented approach to some of these consumer -- to some of these industrial applications, and certainly we have one of the best capabilities in the world, given our core technology, to do those kind of things for those customers.

And when they look around and they look at the whole universe of companies that really have that level of technology and commitment to the Industrial business, despite all the press releases and rhetoric out there, it's a very short list of companies that could actually do that for them.

We're certainly high on their list to do that.

Got it.

That's very helpful.

Again, a question for either Jerry or Vince, I'm curious if there is anything like any kind of normal seasonality left in the Industrial business at this point in time, any quarters that are stronger than others that you have noticed in the past two or three years?

Well, I would say that our second fiscal quarter is historically, if you go back many years, in the absence of any head winds or tail winds, our second quarter is typically our strongest industrial quarter, because it has the most days in it, basically, and when a lot of the business comes through distribution, a lot of it is how many days of sales you get.

But I would say right now the dominant factor remains the macro stuff.

I continue to believe that seasonality right now is a trap for everybody, because other effects dominated much more so than seasonality.

Very helpful.

Thanks, guys.

Your next question comes from Doug Freedman with RBC Capital Markets.

Congratulations on the strong results.

If you could, Jerry, you've been through a lot of cycles, and if we look at this cycle you've mentioned that clearly macro is weighing on it.

Are there any things outside of macro that you think we should be looking towards to see when we're going to start to resume what we'd call normal semiconductor growth patterns?

I'm referring maybe to the aging chart that you guys typically have shown investors, that show the adoption of newer products in the market and the tails on your older products.

Are you seeing any changes to those product uptakes?

I don't really think so, Doug.

We look at that vintage chart every quarter quite methodically, and it turns out that all the reasons why that chart has been the way it is for the better part of 25 years, or longer, actually, I think are still in place today.

Industrial products, the average usage for application is relatively low.

The performance criteria are very high, and customers don't like to change.

Even though they develop new products, they tend to bring along a level of technology that they're familiar with.

So, I think all those factors are still very dominant factors in the Industrial business.

I think the only change, if there is one, is one of the comments I made a little earlier in reference to the industrial market is, I think there is an increasing opportunity to provide more systems-level capability in the industrial market that is more tailored products to particular segments in the industrial market and I think that's another growth opportunity for Analog that didn't exist five or ten years ago.

That's a very slow building phenomenon.

I still say the industrial market is very similar to the way it was five or ten years ago.

And I think if we continue to really win at the core technology level, in amplifiers, converters, and some of the other product areas that we're in, I think we'll continue to do extremely well in the industrial market, which values those characteristics probably more so than a lot of other markets.

That's a good segue into my next question.

Over the last five or six years, you've done quite a nice job of pruning and focusing your product segments that you're attacking.

We saw you move a little bit out of DSP.

It's sort of interesting, DSP is still holding on to a decent percentage of revenue there, a little bit better than I might have expected.

That was always the goal.

And how do you feel about the positioning of the Company now to service the new growth opportunities?

Are there pieces missing, and are you -- do you need to focus some more effort again back into power management to deliver some of those solutions?

Well, I think, there's always pieces missing in the puzzle, and we have a lot of opportunities to fill some of those pieces, either with acquisition or investment.

I think in the Power Management part of the business, I think as we've mentioned previously, we've changed our strategy quite a bit over the last couple of years to really attack Power Management, where we already control a large part of the bill of materials, than trying to compete in the broad-based power business which increasingly is getting overcrowded and there's too many competitors [in there] right now.

So I think our power management business now, we have some very talented people, but they're very focused on where we are in control of the signal processing bill of materials to add power capability.

We're getting very good take-up on that from our customers.

I think in other areas, we've just made an acquisition in the very high performance clock area, which is an area that we're very familiar with, and every -- a large part of our converters are clocked by something, and we think there's some new technologies out there that can fundamentally change the game in clocking, and that's obviously a natural thing, to sell alongside of our converters.

We've made other acquisitions that we think will change some of the dynamics in what you can deliver for what power dissipation in signal processing.

So I think there's areas that we'll continue to pick away at, where we see either new technology emerging or holes in what we're trying to do for our customers.

And I think we've done in that the past couple of years and I think we'll continue to do that in the future.

Great.

Thank you.

Our next question comes from Romit Shah of Nomura.

Maybe a question for Dave since Jerry and Vince are stealing all the air time here.

Isn't that a good thing?

Inventory days were 120 in the quarter.

Mentioned it would be down, but it's higher than a lot of your peers, which are running below 100 days.

I guess my question is, what is it about your mix that requires four months of inventory on hand, yet the implication would be that gross margins are inflated?

Well, we do carry a bit more inventory.

We generally carry 100 to 110 days of inventory.

We do that because we have a ton of different products and we are very much focused on our ability to deliver in short lead time environments.

We think that's, in a lot of cases, differentiates us from some of our competitors.

So, that's one primary reason why just generally keep a higher level of inventory, and that's quarter-over-quarter so that doesn't necessarily inflate margins.

We have built up inventory here in the near term, maybe a little higher than we would typically, coming into several product cycles within the consumer space, and we need to be ramped in order to meet that demand, so that's the other driver.

Most of that production is actually done outside.

So, we really don't get much in the way of absorption benefit from that.

So, that really didn't necessarily drive the gross margin.

It more was general factory utilization increase, which didn't have a huge impact on inventory levels in the quarter.

So lead times for the Company, would you estimate would be lower than a lot of your peers, and that ultimately translates into better revenue growth?

Is that the way to think about it?

It depends on the environment.

Right now, we're probably all in similar lead time environments, but when cycles turn up, we tend to be able to maintain our lead times within a four to six-week period.

We see a fair amount of our competitors see those stretch out, the last big cycle we had, some of them stretched out about 20 weeks.

So we don't like that, we don't think that's good for our customers so we try to control that as best as we can through just careful inventory management.

The other part that Dave didn't mention is that inventory doesn't go bad on us.

We build inventory in very long lifecycle products.

I don't remember the last time we wrote off inventory of Analog of any consequence, so I think the trade-off that we make is, we want to be able to keep our lead times short.

It makes our order patterns more predictable.

It makes the factories run smoother.

It helps our gross margins from the standpoint of keeping the loading levels that are stable.

And we think ultimately that really helps us competitively.

Thanks for the color.

We're closing in on 6.00 here, but we'll continue taking questions in the queue.

Your next question comes from Tristan Gerra with Robert W. Baird.

You mentioned earlier that the key catalyst for gross margin was going to be utilization rates rather than mix.

Did you say what your gross margin will be if your utilization rates were to go back to the 80% level, and then if we need some additional mix improvement, as well for you to get close to the 70% gross margin level, where would that mix opportunity come from?

What we said was that our utilization, when our margins were up in the 67% range, were slightly above 80%.

So, I think if our utilization was to get back over 80%, given that a fair amount of that will be mix beneficial as well, because industrial tends to drive utilization, we think our margins would be in that range.

Outside of that, our goal is certainly to improve gross margins.

We do have a number of things that we're working on to improve it.

But we don't have any set target on gross margins, per se.

Really, that's a function of why our margins are where they are is a function of our strategy of highly differentiated products in markets that we think value those differentiated and high-performance products.

Great.

Thank you.

That's it for me.

Our next question comes from Chris Danely with JPMorgan.

Vince, can you give us a rundown of the linearity of bookings during the previous quarter and why you guys feel confident in guiding for normal seasonal growth this quarter?

Were things just low during the first couple months and then stabilized in July and getting better in August or was it a step function down in stability after that?

A little color there.

Chris, it was remarkably consistent over the past two quarters month by month.

In every region and across the two major channels.

There were no anomalies.

It's remarkable in its steadiness.

And so, given the fact that you came well into the range last quarter, why guide for normal seasonal growth this quarter?

Sorry, say that again?

Given that you guys came in towards the low end of the range of guidance for revenue last quarter, and I believe you're guiding for close to normal seasonal growth this quarter, was there something that gave you some more confidence that things wouldn't erode like they did last quarter?

Well, on the -- certainly on the consumer side of things, we're expecting a lift this quarter.

We're confident about that, and that will be the primary chunk of any increase we get this quarter in revenues.

The most important thing is we have a larger opening backlog that we've already booked which we think is secure.

You never know.

The projections that we're making about next quarter are based on that backlog.

We're in a very high turns environment, so you never quite know what's going to happen in detail in distribution, but as Vince said, the trends are pretty stable, and all that's a good thing.

So, I mean, the reason there's a range there is because nobody really knows, and if we sort of had a pretty good -- if we knew, we'd say what we know.

But we're just telling what you the range of possibilities as we see it right now is.

It's based on a bunch of assumptions about most of the other businesses being about flat, which could change one way or the other.

It's based on the backlog we have at consumer which we think is good, but could change also.

So there's -- I don't think we can get away from the fact that there's a lot of uncertainty in trying to predict revenues that are plus or minus $10 million in a quarter is very challenging.

That makes sense.

Then you said the inventories were about 7.5 weeks, essentially flat sequentially.

Have you seen any change up or down from what you can tell in OEM inventory?

Well, the best way we can track it is just looking at their aggregate inventory.

We don't have visibility, obviously, into how much our product is being held on their balance sheet.

But their inventory levels, what we tend to do is pick the top customers and track their days of inventory.

It was generally consistent with the prior quarter.

Got it.

Thanks a lot.

Your next question comes from Terence Whalen with Citigroup.

Two quick ones.

The first one is that you were expecting consumer to drive the entirety of growth in the October quarter.

Is there any reason to not think that January revenues would be down sequentially then?

Thanks.

Well, I think it all depends on what happens in the macro sense.

If the macro stuff -- the consumer stuff -- it really depends on what happens with the product cycles in the consumer and the macro economy.

So one could say that might happen, but I can't say with any confidence that will happen.

We'll have to just wait and see.

But clearly, typically in normal times, without any specific product momentum, you would see the first quarter in consumer being lower than the fourth quarter.

On the other hand, some of those other businesses could go up in Q1.

So we just don't know yet.

We're not prepared to sort of get ahead of this thing and come up with a forecast for Q1 when we're in the third week of Q4.

Fair enough.

Thanks, Jerry.

The follow-up question I had was regarding your process technology announcement with TSMC and the co-development of a 0.18 process.

Can you explain the rationale in making available a jointly-developed process to competitors potentially?

Is the motivation of that to garner any sort of a royalty stream?

Thanks.

Could you repeat the first part of that question?

I didn't quite get it.

Sure.

You had a press release this quarter about a co-development of a 0.18 process with TSMC that is being made available, I believe, to some of your competitors.

I want to understand the motivation for that process development and making that available to competitors.

Sure.

I understand.

Some of the larger chips we do requires more advanced digital lithography, and so it's not a predominant part of what we do.

Most of what we do with TSMC is one or two generations behind the most advanced stuff.

0.18 is no longer the most advanced digital technology out there now.

There are many companies working at 28 nanometers.

So I would say it's a progression of what we've been doing with TSMC for many, many years.

It has not really changed.

And I think a lot of the stuff that's proprietary to Analog stays proprietary to Analog.

That's the most important thing.

Are you garnering a royalty stream for that?

Is that the motivation?

No, I don't think the motivation is a royalty stream.

Your next question comes from David Wong with Wells Fargo.

Your line is open, Mr. Wong.

This is Mitch, dialing in for David Wong.

Can you update us on your recent acquisition of Multigig in terms of your traction there for the high-end clock timing business?

At this point, we have fully integrated the team.

We're pleased with the progress that we're making in terms of incorporating the intellectual property that we've acquired from Multigig, and we're actually starting to see, from the very, very first generation of products we developed, we're starting to see some modest revenues, and we've moved them aggressively now into second-generation product design.

So at this point, we're very pleased with what we see and what we're getting.

Okay.

Great.

Then as a follow-up, Dave, in the context of today's macroeconomic environment, can you maybe talk about your expectations for ADI's R&D budget in fiscal year 2012?

And I guess should we be modeling R&D is at 17% of sales over the long run?

I think what I've said before is pretty accurate when we focus in on one of the line items within operating expenses, which is, we're looking to kind of contain OpEx in the near term given the uncertainty in the macro environment.

If things improve, and revenue starts to grow, we're like likely to grow both on the R&D and SG&A line at some level, but at a level that trails the revenue growth.

Ultimately, we probably will want to run somewhere in that 17% sales for R&D.

Okay, great.

Thank you very much.

Folks, we have a number of people still waiting to ask questions.

If we're unable to get to your questions in the allotted time, you can reach me, Ali Husain, after the call, at 781-461-3282.

And before I take the last few questions, I'd like to mention our fourth quarter earnings release scheduled for is November 27, 2012 after market close and our conference call will begin approximately 5.00 PM Eastern time that same day.

Now ready to take the additional questions.

Operator, may we have the next caller, please?

Certainly.

Your next question comes from Joe Moore with Morgan Stanley.

I wonder if you could update us on your latest thoughts on the cash balance.

I know you've been returning a lot of it to shareholders, but I know also you've been looking at options to return more.

Can you give us your early thoughts, there?

I will comment, and I'm sure Jerry will have a comment, as well.

I think we've been focused in both ways in returning cash to shareholders, both in -- through share repurchases, and dividends.

We just increased the dividend 20% a couple of quarters ago, to ramp up that part of the equation.

We have been buying back stock from quarter-to-quarter.

It tends to be a little volatile, depending on what the stock price is, and (inaudible).

We do have plenty of cash on the balance sheet in the US, which is where we would normally get the cash for repurchases.

We have $1 billion.

We also have plenty of capacity on the debt side, if we want to take advantage of that, we have a $585 million authorization to repurchase stock.

So I think you will see us be active repurchasers of stock over time.

It might change from quarter-to-quarter, depending on the environment, but over time, we will certainly be buyers of the stock.

We'll also be very committed on the dividend side, as well.

We ramped up the payout ratio.

I think we paid out at plus 50% this quarter in terms of dividend, and I think you will see us be fairly committed to the dividend.

We've talked to a number of our largest shareholders over the -- clearly over the course of years, but certainly within the last few quarters and really felt like a significant portion of them seemed to favor an increase in the dividend and we responded by increasing it a couple of quarters ago.

So that's really the goal.

Clearly we are still focused on periodic small tuck-in technology acquisitions as well, so we certainly, some portion of the cash will be used for that purpose, as well.

Thanks.

Your next question comes from John Pitzer with Credit Suisse.

I'm curious about the utilization dropping in the October quarter, just given your comments about stability in the Business.

At the midpoint, your sequential growth for the current quarter is actually going to be higher than the prior quarter.

You talked about inventories being in decent shape.

How do I read in the drop utilization?

I apologize if it's nitpicking because I know it's only going to be down a little bit, but curious if you could give me any color on that.

The increase we're going to get on the sales line, at least on the forecast right now, is primarily consumer stuff.

We primarily fabricate that not in our own facilities, so we looked at it and we say, we like to keep inventory down more towards the 100 to 110-day area, as Dave said, and the reason we like to do that more than anything else, is it gives a lot more leverage on the up side when business gets better, as compared to selling old inventory when business gets better.

So in the old days we would have just kept building it, or leaving it there, but I think now we sense keeping it down at those levels is the best long-term decision for us.

That's what we're doing.

It doesn't really indicate either our enthusiasm or pessimism about the future.

It's much more a question that we have 121 days, we want to get it down to 110 days, and most of the growth in Q4 is going to come out of stuff that we don't fabricate ourselves.

And then, guys, just as a follow-on, the cycle time through a fab is about how long?

There are 350 processes we run in those fabs.

Each has a different cycle time.

But I think they range anywhere from probably 8 to 15 weeks, depending on the complexity of the process.

Perfect.

Thanks.

That concludes our Q&A session.

We appreciate your participation and look forward to talking to all of you again during our fourth-quarter 2012 earnings call, scheduled for November 27, 2012, beginning at 5.00 PM Eastern time.

Thanks very much.

This concludes today's Analog Devices conference call.

You may now disconnect.