亞德諾半導體 (ADI) 2012 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Analog Devices' fourth-quarter and fiscal year 2012 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.

Mr. Husain, you may begin your conference.

Thanks, Samantha.

Good afternoon, everyone.

This is Ali Husain, Director of Investor Relations.

We appreciate you joining us for today's call.

If listeners haven't seen our fourth-quarter and fiscal year 2012 press release or our Form 10-K, 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 it will also be archived on the IR website.

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

Participating with me in today's call are Jerry Fishman, Chief Executive Officer; Vincent Roche, President; and Dave Zinsner, Vice President of Finance and CFO.

In the first part of the call, Jerry, Vince, and Dave will present our fourth-quarter and fiscal year 2012 results, as well as our short-term outlook.

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

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

We've 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'd 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 the 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 annual report on Form 10-K filed earlier today.

The forward-looking information that's provided in 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 November 27, 2012.

And with that, I'll turn the call over to ADI's CEO for opening remarks.

Good afternoon to everybody, and thanks for joining our call.

As the press release said, our revenues for Q4 totaled about $695 million, which was up approximately 2% from the previous quarter and down about 3% from the same quarter last year.

These results were within the guidance range that we provided last quarter and are a relatively strong result in what has turned out to be a very challenging environment.

The diluted earnings per share were $0.58, which was slightly above the midpoint of our earlier guidance.

For the full year of 2012, revenues declined just under 10% to about $2.7 billion, which was a reflection of a poor economic environment for most of our fiscal year, coupled with unprecedented global uncertainty, which severely constrained capital spending in virtually all of our served markets.

The only exception was our Automotive business, which actually grew 11% year-over-year.

But even in Automotive, we showed some signs of a slowdown in the second half of 2012.

Vince, our newly appointed President, will describe in much more detail the current trends and the outlooks that we see in each of our end markets.

Despite the lower revenues and the uncertainty throughout the year, ADI still produced a very credible result for the year, with gross margins of approximately 65%, operating margins of approximately 31%, and operating cash flow of over $800 million, or about 30% of sales.

In addition, we enhanced shareholder returns, with dividends and share repurchases that totaled over $500 million during the fiscal year.

We also ended the fiscal year with net cash, or the gross cash we have less our debt, at over $3.1 billion.

Today, it's still a very challenging environment in virtually every region of the world.

During Q4, the overall orders decreased at ADI as customers became increasingly more cautious and our distributors reduced their inventories.

We believe at Analog today that our current order rates are below the consumption rates of our products.

Our book-to-bill for the quarter fell below 1, and we're entering Q1 with lower opening backlog than we had when we entered Q4 of 2012.

Given the continuing uncertainty out there, we've taken many actions around the Company to protect the downside, while ensuring that we'll be ready for a snap-back in order rates, which typically occurs with very little notice in our business.

First, we began reducing our production levels in Q4, and we're planning to reduce them further in the first quarter to keep our inventory at appropriate levels.

While operating our factories well below capacity, we will certainly reduce our gross margins in the short term, it will provide significant upside leverage, as it has in the past, when revenue growth resumes.

During the last down cycle, when our factories were being utilized at about 67%, our trough gross margins were about 63%.

During the upturn, when utilization rates approached 80%, we achieved gross margins of over 67%.

We're confident in our ability to achieve these gross margin levels as business conditions improve, as factory utilization increases, and as our product mix reverts to more typical and traditional levels for ADI.

Just as in the previous cycle, we are keeping our lead times very short, providing very high service levels to our customers, and remaining ready for any changes in market momentum.

Secondly, we've taken action throughout Analog Devices to reduce our expenses corporate-wide by moving resources to the most strategically relevant programs and away from those programs with less long-term potential.

We're also planning to gain efficiencies with our new organization, which more closely aligns our product development programs with our customers requirements.

We're also planning a corporate-wide shutdown over the holiday period to give all of our employees around the world a very well-deserved rest after a very challenging year, and this will provide temporary expense relief for Analog during the first quarter.

Thirdly, our variable incentive program that is operating for all Analog employees, which is directly tied to our growth rate and our operating margins, will normally modulate expenses in down cycles, as it did in the last down cycle.

In addition, for 2013, we've increased the margin thresholds for incentive payments to levels more consistent with what we believe the Business is capable of producing on the average.

So therefore, for the same levels of performance, the bonus or incentive payments will be slightly lower.

The effect of this change will likely to be to reduce incentive payments in 2013 beyond what would be typical and normal in previous times.

We believe that these actions will be responsive to the downside while also preparing us for the upside, which invariably follows in every cycle for ADI over many, many years.

So, now I'd like to turn the call over to Vince for some more detail on our performance and the trends in some of the end markets that we serve.

Thanks, Jerry, and good evening, everybody.

As expected, our strongest sequential growth was in the consumer end market, which grew by 28% in the fourth quarter.

The increase in consumer revenue was broad-based in what was a seasonally stronger consumer quarter, coupled with a strong product cycle for ADI.

Our results were particularly good in audio and imaging applications in the portable space.

Consumer was about 20% of total sales, up from 16% in the prior quarter.

Communications infrastructure grew by 3% sequentially and was higher than our plan coming into the quarter, which is a very good result, especially after a 10% sequential increase in the prior quarter.

Wireless infrastructure that drove the growth this past quarter, that combination of consumers who are buying LTE- or 4G-ready smartphones from companies such as Apple, Samsung, and others, and ongoing wireless network build-outs and developing economies is leading service providers upgrade their networks.

US providers are advertising, as you know, their LT networks and announcing increased CapEx spending plans.

We also saw activity in the fourth quarter among our base station customers as they began to respond to China's announcement of TD-SCDMA Phase 6 and the 120,000 sites planned, which is twice the 2011 rollout.

While GSM and 3G in particular are the largest portion of our wireless revenue today, LTE or 4G is growing quickly and will be a very significant growth driver in the coming few years.

Communications revenue was 20% of total sales, consistent with the prior quarter.

While the first quarter is expected to be steady to the fourth quarter, we expect wireless infrastructure deployments to more meaningfully impact our results toward the end of 2013.

Industrial revenues, which we expected would be stable in the fourth quarter, actually declined 5% sequentially, in line with lower industrial production worldwide as dictated by the ongoing macro weakness, and also as a result of continuing reduction in inventories by our industrial customer base.

This market represents myriad small and mid-size customers primarily served through our distribution channel, as well as many of the world's largest industrial equipment makers, and none of these customers had immunity from the decline.

Most industrial application areas declined sequentially, including process control, instrumentation and measurement equipment, and medical imaging.

Regionally, we saw the most pronounced declines in Europe and Japan.

Defense and aerospace and medical instrumentation were ultimately flat sequentially.

The industrial end market represented 44% of total sales in Q4, down from 47% in the prior quarter.

On the automotive side, revenue declined by 4% sequentially, mostly as a result of lower unit sales of automobiles in Europe, and in line with widely reported factory slowdowns in automotive manufacturers.

While the declining revenue reflected the general weakness in automotive, we saw continued strength in newer products for advanced driver assistance and powertrain efficiency systems, as our customers continue to deploy our innovative products in these growth sectors.

Overall, automotive represented 16% of sales, compared to 17% in the prior quarter.

On an annual basis, automotive was an obvious bright spot, growing 11% during fiscal '12 compared to FY11, the third consecutive year of double-digit growth.

All major automotive application areas grew year-over-year.

Our mix of business in the fourth quarter was anomalous compared to the rest of fiscal '12, as seasonal growth in consumer was further accelerated by new product adoption of key accounts.

Beginning in the first quarter, we expect the business to shift to a more typical revenue mix.

So with that, I'll hand you over to Dave, who will take us through the details of our financial results.

Thanks, Vince.

As Jerry had mentioned, fourth-quarter revenue increased approximately 2% sequentially to $695 million and decreased 9.8% for the year to $2.7 billion.

Our gross margin was 63.8% in the fourth quarter.

This was down 180 basis points from the 65.6% we reported in the third quarter and down very slightly from the same period last year, when revenues were higher.

While an anomalous mix was the key factor, as Vince just described, we also made a decision to further reduce production levels mid-quarter in response to lower industrial and distributor orders, which reduced utilization below our original plan.

Utilization decreased from 74% in the prior quarter to 67% in the fourth quarter.

Inventory on our balance sheet remained approximately flat to last quarter in dollar terms and was down on a days basis from 121 days in the prior quarter to 114 days in the fourth quarter.

Weeks of inventory and distribution was down by 0.5 week and stood at about 7 weeks exiting the quarter, down from approximately 7.5 weeks in the prior quarter, which is a very significant adjustment in a short period of time.

Channel inventories are now well below historical levels.

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 fourth quarter were $228 million, compared to $230 million in the prior quarter, excluding restructuring expense taken in the prior quarter.

The decrease was primarily due to tight control over expense, and also due to our variable compensation model, which is linked to our year-over-year sales change in quarterly operating profits.

Operating profits before tax for the fourth quarter were $215 million, or 31% of sales, down 100 basis points from the prior quarter, excluding restructuring charges taken in the prior quarter, and a solid result in the current environment.

Other expense of $3 million in the fourth quarter was flat to the third quarter and reflects the ongoing run rate of our net interest expense.

Our fourth-quarter tax rate was approximately 16%, which represents an adjustment of our annual tax rate from 22% to 20%.

We continuously look for efficiencies in our tax structure, and based on current assumptions, we expect our tax rate to be approximately 18% for each quarter in fiscal 2013.

Diluted earnings per share of $0.58 in the fourth quarter was above the midpoint of our guidance and up 4% sequentially from the prior quarter on a 2% increase in revenue.

For the year, diluted earnings per share was $2.13.

We generated very strong cash flow in the fourth quarter at 34% of revenue, or $236 million in operating cash flow.

Capital expenditures were $38 million, resulting in free cash flow of approximately $200 million, or 29% of revenue for the quarter.

Our accounts receivable balance was down about $6 million versus the last quarter on lower shipments, and our days' sales outstanding decreased to 45 days from 46 days in the prior quarter.

During the fourth quarter, we purchased $21 million of our stock and distributed approximately $91 million, or 51% of our net income, in dividends to our shareholders.

For the year, we repurchased $161 million of our stock and distributed $345 million in dividends to our shareholders.

We plan to continue to be opportunistic buyers of our stock and to enhance returns to our shareholders.

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

We have approximately $560 million remaining under our Board-authorized share repurchase program.

Our cash and short-term investments balance increased $135 million during the fourth quarter and now stands at $3.9 billion, with approximately $1.1 billion available domestically.

At the end of the fourth quarter, we had approximately $822 million in debt outstanding, so net cash on a per-outstanding-share basis was slightly above $10.

On November 26, our Board of Directors declared a cash dividend of $0.30 per outstanding share of common stock, which will be paid on December 18, 2012 to all shareholders of record at the close of business on December 7. At current stock prices, this dividend represents an annual yield of approximately 3%.

(technical difficulty) fourth quarter and fiscal 2012 delivered solid results during what turned out to be a very challenging period.

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

Thanks, Dave.

Our current expectations for Q1 revenues is for a decline of between 6% and 12% sequentially, which is certainly a larger decline than we'd normally anticipate in a typical Q1 for ADI.

The most significant sequential decline in Q1 is likely to be in our Consumer business, where our typical Q1 sales decline is exacerbated by inventory draw-downs after our customers pre-release inventory build in Q4.

Based on the current forecast from our largest communications customers and our largest automotive customers, we expect Q1 sales in those market segments should remain relatively flat to Q4 levels.

So certainly the big swing in Q1 will be Industrial sales, which span a broad customer base in every geography.

While the United States and Europe still comprise the bulk of our Industrial sales, China is becoming a more important component of industrial sales over the past few years than it's been historically.

Over many, many years of observation in our Industrial business, it's very clear to us that Industrial capital spending continues to drive our Industrial business.

And certainly those trends have been and are today being negatively impacted by economic and tax uncertainties in the United States and in Europe and government actions in China.

In addition, many of our largest customers have announced extended factory shutdowns in late December and early January in the holiday period and are continuing inventory reductions.

And lastly, our distributors have predicted less-than-seasonal forecasts for their fourth calendar quarter, of which two months overlaps our first calendar quarter.

On the other hand, if you want to look at the glass as half full, which some of us do, inventories at our Industrial customers and our distributors are at extremely low levels, and our larger customers report that their business levels are stable and in some cases improving.

And that would suggest that they're going to begin to restock.

But on balance, we believe that this juncture with the information we have as of now, it's prudent to be very cautious about what ADI's industrial sales are going to turn out to be in Q1, and we're planning for a sequential decline in this market segment in Q1.

I think it's very important to note that we could get surprised in this segment, but it's more likely than any real upturn in our Industrial business would occur in Q2 rather than in Q1, although it's still early to predict that.

In response to the weak demand environment that we experienced in Q4 and that we're planning in Q1, we're planning to further reduce factory operating levels in our production facilities, as I mentioned in my opening comments.

In Q1, we're planning our factory utilization to drop from 67% in Q4 to the mid- to high 50%s in Q1 and for inventory dollars to be down, for days of inventory to be about flat given the significantly lower sales in Q1.

As a result, we expect gross margins to be approximately 62% in Q1, which hopefully will be the low point of this cycle.

It's important to note, I think, that while changing inventory levels at our distributors don't affect our revenues, since we account for revenues worldwide on a sell-out methodology, when our distributors do start to restock to more traditional levels, it does positively impact our factory loadings, and therefore positively impacts our gross margins.

Given the strength of our position and the high market share that we enjoy in the Industrial end markets, we'll be ready when a snap-back in Industrial does occur, as it always does.

This will drove a better product mix.

It will drive higher factory utilization, and it will drive extraordinary operating leverage, as we've demonstrated in previous cycles.

We're planning for our operating expenses to be down approximately 2% in Q1 based on the actions that I outlined in my earlier comments and earnings to be in the range of $0.40 to $0.48 for the quarter.

In the longer term, we have an increasingly unique position at ADI in the analog and signal processing market.

We have very strong core technology, particularly in converters, in RF components, and other linear functions, in MEMS, in power, and in digital signal processing, and a very broad customer base, which provides great stability, but also provides the ability to leverage and bundle this technology into much more complete and integrated solutions for a customer base that more and more depends on ADI to become their partner.

We're now engaging with customers at much higher levels than in the past, and we get consulted and involved in their architectural and system needs at a very early level.

And this will certainly pay off in terms of sales growth and higher margins as business levels stabilize in the future.

The diversity of our end markets and our 60,000 customers around the world, where no customer represented more than 5% of our sales in 2012, provides some measure of insulation from economic headwinds and product cycles, and also at the same time provides the prospect of above-industry growth when the external world stabilizes.

We at Analog, the management team and the employees of Analog, have been through difficult periods many times in our history, and we continue to make the necessary tradeoffs to position ourselves to respond when the market turns, as they always do.

Structural improvements that we implemented in previous years give us an added advantage in navigating difficult periods and allow us to protect the downside while standing ready to capture the upside when conditions get better.

Every time we've gone through one of these cycles, we come back better, and we come back stronger, and I expect this time will be no different.

Great.

Thank you, Jerry.

Thanks, Vince, and 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 another opportunity to ask additional questions if we have time remaining.

So, with that, operator, we are now ready for questions from our participants.

(Operator Instructions)

Terence Whalen, Citi.

The first question is related to gross margin.

It seems like based on the utilization numbers that you've given, up mid 50%s for next quarter, it's a fairly pronounced action you're taking in the fabs.

My question is what's the motivation of that, given that inventory isn't too high?

Is it more to just set yourself up for a trajectory of expanding gross margin in the April quarter?

And if revenue were to grow in April, say 4% or 5%, would gross margin also bounce back then?

Thanks.

I'll take a stab at it.

Jerry can add color if necessary.

Yes, we're bringing our utilization down to mid-50%s levels, and that is different than what we did last year at this time.

We had a similar decline in revenue, but we allowed our days of inventory to push up to 121 or 122 days last year.

This time around, we're really trying to focus on keeping the days of inventory relatively flat, bring the absolute dollars of inventory, both on our balance sheet and the balance sheets of our distributors, down.

This is a bit different.

The idea is to get the inventories well balanced and then be ready to get the leverage when the business returns to growth.

And as you point out, if we had a big turn-up in revenue in the second quarter, we would have a pretty quick acceleration in the gross margin, quickly back to the levels you saw us operate in back in a few quarters ago.

I'd say the other comment, Terry, is that we monitor the order input quite frequently.

And just like last quarter, as we monitored the orders, we turned the factories down a little harder than we had anticipated.

If the order input justifies it -- we don't make these decisions once a quarter.

We make them more frequently.

If the orders begin to turn up and we see anything that we believe is sustainable, we can ramp very quickly.

With the levels of inventory that we're carrying, we can respond extremely quickly to any upside our customers provide to us.

So I think it's all those phenomena.

We're saying we want to manage the inventory responsibly, but we also at the same time want to make sure that when business does pick up that we can respond to whatever our customers ask us for, given that on incremental sales, particularly on the stuff that we build internally, the gross margins are extremely high.

We don't want to miss any of those sales, and we don't want to hang any of our customers out to dry.

Those are our objectives, really, to keep the inventories under good control and yet be flexible enough that we can respond very, very quickly to any input order-rate increase that we see.

Crystal clear.

As a quick follow-up, really on the OpEx line, you guys did a terrific job in the prior cycle, really reducing OpEx to help improve the operating margin.

But when I look over the past eight quarters, on a revenue that's about down 15% from where it was two quarters ago, you're right at the same OpEx bogey.

So we've seen OpEx creep back up the past couple years.

What's the message to investors in terms of OpEx discipline here, as we've seen OpEx creep up relative to sales over the past couple years?

Thanks.

It did creep up a little bit in the third and fourth quarter on a relative basis, but I think if you go back 8 to 12 quarters, we probably were averaging in the low $220s, $220 million in terms of OpEx.

That's where we're going to go to, roughly, in the first quarter.

So I think what we're doing is prudently reacting to a little bit more difficult environment.

I think we've done at least -- maybe this would be my perception of this, but we've done a very good job just closely managing OpEx to make sure that it doesn't get away from us while revenue is coming off.

So I think in the rest of the year, we'll manage it very closely.

Jerry mentioned a number of actions we're taking in the first quarter.

We'll continue to look at it every quarter and not allow it to escalate until we see a big recovery on the revenue side.

I think the other perspective on that is that if you look at the OpEx over the last two years, for last year and -- our OpEx is the same now on a running rate basis as it was two years ago.

One of those years had a lot of growth, and one had decline.

So I think what -- the way that we're looking at it, it's hard to look at these things quarter-to-quarter because the revenues fluctuate a great deal.

But I think we have very significant operating expense controls in the Company and that the evidence of that is that the operating expenses through a lot of different parts of the cycle have been flat for the last two years, roughly.

Great.

Thank you.

Ross Seymore, Deutsche Bank.

Thanks for the first question.

You'd mentioned about the variable comp and how that will be a little bit lower, or the threshold to have it kick in will be a little bit higher.

In general, should we think of at a given level of revenues, now you're going to have a lower level of OpEx, is the first clarification?

And then the second part of the question is with the shutdowns that you're having in the January quarter, what sort of OpEx increase should we look at in the April quarter, assuming the shutdowns don't repeat themselves?

The shutdown is relatively modest.

It's $2 million, and I think we have pretty good control over the OpEx, that we won't allow it to go up unless the revenues start to grow.

And even if it does grow, it will grow at a fairly modest rate.

At a given revenue level, there are some other things that crept in that offset some of the decline we'll see on the variable comp piece.

So some of it's a wash, and I think OpEx, we're generally trying to get business to operate in the low 30%s, 30% to 31%, 32% of revenue.

And that's what we're trying to target to get back to as business grows.

As my one follow-up, on the cash flow side of the equation, can you remind us what your expectations are for CapEx in the first quarter, and then for the full fiscal year '13?

We're targeting to be somewhere in the neighborhood of $25 million for the first quarter.

We have a general goal to be in the $100 million to $125 million for the year.

It obviously depends on how the business operates.

If we see more of a flattish environment, we'll probably be more towards the $100 million.

If things start to grow a bit, we'll probably be closer to $125 million.

Great.

Thank you.

Aashish Rao, Bank of America.

(technical difficulty) my question.

Dave, typically ADI's gross margins are more a function of utilization rates than product mix, but you noted the analogous mix due to the shift towards consumer.

Could you help quantify the impact of both these factors on the gross margin softness in both 4Q and fiscal first quarter?

Relative to the prior quarter, or -- ?

Yes.

I'd say most of the margin shift from the fourth quarter to the first quarter is going to be loading-related.

Very little of it is going to be related to mix.

It's slightly beneficial actually to mix.

But given that industrial will be down roughly what the corporate average is down, we're expecting that mix won't be a big factor.

So that's fairly, for the most part, mostly loading-related.

The gross margin shift from the third quarter to the fourth quarter was pretty much a 50/50 split between mix and loading.

Okay, cool.

Then one question, Jerry, I wanted to talk about one of the businesses that doesn't get much attention, and that's DSPs.

Your DSP sales have held up fairly well for the last several years and have outperformed your large competitors, embedded division, where sales are down 10% to 15% over the last year.

What do you think are some of the reasons why your DSPs are holding up better?

Any color on that would be helpful.

I think one reason, I believe, is that we have our -- we don't look at DSP as a separate business onto itself.

We're a signal processing Company.

We look to gear our DSPs towards integration of digital and analog signal processing into more integrated solutions for our customers.

I think that selling standalone DSPs -- and we've talked about that with investors a couple years ago -- is a very, very tough strategy in the market right now.

The real value of DSP for us -- we still sell plenty of individual DSPs, but we also -- and the thing that's really kept it at the levels we need, is we're able from a market segment and a customer standpoint to provide more complete solutions of analog and DSP together.

And that gives us a great advantage relative to most other players in the market.

The DSP business is we've gotten down to the right expense levels, and I think the group that manages that business have done a pretty good job doing that, commensurate with what we see the opportunity to be.

But we see many, many applications that have developed and will develop in the future, where integrating DSP and analog, very high performance analog together, provides a very compelling solution to our customers.

Do you have any other comments on that, Vince?

Just maybe one other piece of color.

In terms of the predominance of the segments in that DSP product revenue base, really industrial, which is very steady.

It's very, very diverse in terms of the number of customers that we serve.

We've also -- in terms of raw growth driver, automotive has been the primary push there.

So they are the two primary markets that comprise the sales of DSP.

We're pretty well matched, I think, with both of them in terms of the, as Jerry said, a more standard product approach in the industrial space and a more targeted match between our DSP and analog technologies in more complete solutions in automotive.

Cool.

Thanks a lot.

Jim Covello, Goldman Sachs.

(technical difficulty) my question.

I appreciate it.

If I could follow up, Jerry, on your comment about -- I think you called the order pattern increasingly more cautious.

Was that a function of orders went down a lot in the beginning of the quarter and then stabilized, or did you see a steady decline in the orders over the course of the quarter and into the month of November?

We saw the orders decrease early in the quarter, and they did stabilize at those levels for the rest of the quarter.

That's the general trend that we saw, and I think I'd make the same comments about November.

Okay.

You made the comment that you thought recovery in the industrial segment was more likely in Q2 versus Q1.

Is that a function of seasonality or what your customers are telling you, or was there anything to read into that?

I think it's all those things.

It's that in Q1 for us, particularly with -- the industrial business is 60,000 customers or something [like that], so there's a lot of customers that shut down.

It's really a days of sale business for part of that in the broad base and key account business with the large accounts.

Typically what we see in first quarter, given that there's less sales days, is we see a decline in the first quarter, and we see a rebound in the second quarter since it's a quarter that's fully -- there's every day and every week are being worked by our customers.

Also, I think given the inventory levels that the distributors are carrying and the customers are carrying, and the amount that our industrial business is down relative to where it was, it's got to snap back.

The only question is when it's going to happen, and if historical is a good representation of the future, which in the absence of any information, it is, we could see a snap-back in that business in the second quarter.

That's what we saw last year when first quarter was down quite a bit.

In the absence of any other information, at least that's the planning assumption that we have right now in running the business.

Very helpful.

Thank you so much.

Planning assumptions are just assumptions, but that's our assumption.

Thanks again.

Christopher Danely, J.P. Morgan.

Thanks, guys.

A follow-up on the bookings question that Jim asked.

Is there any sort of common theme or common reason why your customers are telling you that the bookings are falling off?

Is it pure inventory?

Is it demand?

Is it a combination?

Is anybody mentioning anything about the fiscal cliff or any other economic problems?

I think it's all those things.

You go out to see the large customers -- and it was interesting this morning.

There was -- the CEO of Honeywell was on TV yesterday or something, and he's sort of indicative of the kind of things that we are hearing from customers, that their business levels are not bad.

They're relatively stable.

Some are even forecasting some growth next year, but there's so much uncertainty out there in Europe and the United States based on the same things, about government tax policy, all of the stuff that's going on in the economies, that people are just standing still.

And that impacts their capital spending budget.

In a similar way to it's impacting the capital spending budget at Analog Devices, that at the margin people just stop spending money until they get some certainty.

And that's just not rhetoric, that's what CEOs around the world are doing right now.

But the part that's encouraging to us is that when we visit those companies, number one, they're really, really excited about our technology.

Number two, they want deeper levels of engagement with Analog as a technology provider and a partner.

They are saying that their businesses are not declining.

They are either stable or getting just a little bit better.

So all those things say there's nothing fundamentally wrong with that business that a good dose of courage out there in the political environment wouldn't solve.

Thanks, and my follow-up is probably for Dave.

Dave, do you remember when your utilization rates were this low, I think you guys said somewhere in the mid-50%s?

And what were your gross margins at the last time utilization rates were this low?

And do you have any figure on incremental gross margins as sales start to pick up?

I think the last time we had utilization at this level was actually 2009, so gross margins were in the mid-50%s.

There was a little bit of a different environment, because we had a lot more capacity and business had really fallen off.

Absent that, this is an historic low for us outside of the period of time where it was really difficult.

Usually, for every 10% improvement in utilization, we get about 100 basis points of gross margin improvement.

It can vary depending on -- based on mix.

There's also loading that we get on the back end, which can be incrementally beneficial, so it has a little bit of a magnifying effect when business conditions improve.

But on a rough order basis, I'd say it's at least 100 basis points.

Got it.

Thanks, guys.

C.J. Muse, Barclays.

Yes, it's C.J. Muse.

Thank you for taking my question.

First question, was hoping to dig a little bit deeper on the operating leverage side.

First part, as you think about the higher threshold on incentive pay and some of the other actions that you're taking, what kind of incremental savings should we be thinking about looking into calendar '13?

And as a part of that, how should we think about your target in terms of what incremental operating margins should look like in a more normalized recovery period into calendar '13?

We're roughly saving probably in the neighborhood of $20 million a year with the new bonus structure.

At equivalent level.

At equivalent level.

Of course, there are other things that go in different directions.

I would if I were modeling OpEx, I think what I would model is very carefully managed OpEx growth, assuming business recovers in the second quarter, which is one scenario.

Then if the business continues to improve, we'll be fairly modest in our growth on OpEx.

So we should see leverage on the OpEx side during a recovery.

Our operating margins when we were at peak performance on a revenue basis were up over the 35% level.

I think at its peak, we were up above 37%.

Assuming we get back to business levels like that, our operating margins will be at similar levels.

It's just a matter of dependent on when the revenue moves in that direction.

That's very helpful.

If I could ask a follow-up, in terms of the 18% tax rate guide for fiscal '13, I guess what has changed to enable that to be lower?

Are you assuming a greater mix outside of the US, or is that a tax strategy on your part, or reduced expectations for fiscal '13 top line?

We're assuming a similar mix of income domestically versus internationally and internationally within each region.

This really has to do with just some tax planning that goes on all the time, and some of the benefit of that tax planning is showing up in next year's numbers.

At least we expect it to.

Good stuff.

Thank you.

Tristan Gerra, Baird.

Hi, good afternoon.

Where do you think LTE could be as a percent of mix a year from now?

I understand it's probably still below 10% currently.

And any views on the trends within infrastructure, specifically between base station and small cell?

I'd say in the second half of '12, the proportion of our wireless infrastructure business that was LTE or 4G was around 15%.

I think as we get to the second half of FY13, that number will probably move to 25% of total.

Given that we have increased content to the tune of 20%, 30%, depending on the customer, from 3G to 4G, that should bode well in terms of revenue upside for the Company.

Let me see.

Your second question was regarding?

Base station, small cell opportunities.

I think the thing to remember when you look at macro versus small cell, both are going to co-exist in the network, and our expectation is that macro will continue to grow.

That's what our customers tell us.

That's what the carriers tell us.

Basically, to help densify the network, to fill the network out, particularly in terms of being able to supply data needs in urban environments, what we'll see is a pretty steep increase in the deployment of small cell.

What we're looking at is a homogenized network that will have co-existence of macro and small, more point-to-point units, and obviously more backhaul optical and cable networking as we have to be able to support the movement of data worldwide.

That's pretty much it as we see it.

I think what you'll see is a huge increase in the number of radios that get deployed.

What we sell into the small cell area is a trickle-down from what we develop from macro cell and have been developing for many, many years now.

There's tremendous leverage as small cell becomes more prevalent in the network.

That's very useful.

Thank you.

I think there's one color comment on that, is that the ADI content in 4G is quite a bit higher than it is in 3G.

So we have a number of people still waiting to ask questions here.

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

But we will continue and try to get to all the calls we can.

Before we take the last few questions, I'd like to mention our first-quarter 2013 earnings release is scheduled for February 19, 2013 after market close, and our conference call will begin at approximately 5 PM Eastern Time that same day.

So we're ready to take the additional questions now.

Operator, may we have the next caller please?

Doug Freedman, RBC.

Great.

Thanks, guys, for taking my question.

Could you guys give us a look at the real-time business conditions?

I imagine lead times are low right now.

Could you give us an idea of what the demand looks like for the month of December, given we're about to start that month?

That would sort of be predicting the future.

We're not in -- we don't know what demand is going to be in December.

We're cautious, particularly in the industrial business, because there will be a lot of shutdowns, as I mentioned earlier.

I think our sense and our internal plan is to treat Q1 and be very cautious about what's going to happen because of the holiday period and all of the things I mentioned earlier.

So we'll have to just wait and see what happens in December.

We just don't know.

On the lead time side of the story, we're shipping -- within six-week lead times, we're shipping virtually 99% of the entire portfolio to on-time customer requests.

I think the important thing that we're communicating around Analog, and I think is worth mentioning tonight, is that in the last cycle when we managed the inventory well, we managed our capacity well, and we did very, very well on the upside relative to many of our competitors who got stuck and couldn't deliver stuff.

So I think that's the mantra around Analog, is that whatever we do -- and we know we can't predict demand, particularly in these tumultuous environments.

But the one thing we can do, and that we will do, is make sure that we have supply when customers need it.

And that's what we're going to do.

We can't predict in the short term what's going to happen in any month or any week or any -- it's even hard to predict what will happen in the first quarter, and that's why the guidance range is so wide and there's so many different factors that we enter into it.

That's very typical in these cycles, because customers know they don't have to give you a lot of lead time.

So most of the business you get is turns business.

That's just the way it is.

It's been like that, as you know, for 100 years.

It will be like that for the next 100 years.

All right, Jerry and Vince.

I'm sorry.

I'm a little confused by that answer, because if lead times are six weeks, you would have visibility for the month of December, and that's what I was asking for.

I wasn't asking for --

Are you talking about shipments?

I was asking for what you're seeing.

Are you asking about shipments in December, or orders in December?

Shipments.

What you're seeing from a demand perspective for shipments in the month of December.

I think what we're seeing is commensurate with the guidance that we've provided for December.

We don't see anything anomalous to the guidance we've provided.

That's how we calculated that.

What I was commenting on was the order rate, not the shipment rate.

Okay, understood.

If I could, for my follow-up, Jerry, if we look back at the year and we go out to the 30,000-foot level, this cycle was not like anything that we've seen in any of the past semiconductor cycles.

Can you offer some of your commentary on what you think changed over the last year or two that has made it that we really didn't end up with what we would call a normal inventory cycle this year, only really seeing one seasonal quarter this whole year?

I know.

It's confusing at best.

Most of the cycles in the semiconductor business are, over many, many years, have been based more on supply than demand.

And there's always -- the semiconductor industry is always trying to catch up either to the upturn or the downturn and always misses it.

So many of the cycles are based on how much capacity is there, shortages, double-, triple-ordering, and then reaction to that.

Those cycles are pretty straightforward, and we've seen those many, many times.

I think the big difference in this cycle that we've seen is staggering uncertainty in the customer base, based on partly economic conditions, but also policy issues, and tremendous uncertainty of what people are going to do about capital spending, which partially is related to their business level, but is also related so nobody can figure out what's going to happen in those areas of policy.

I think that that's the difference in this cycle, that I think, which is why it got shortened from what we'd normally see and why it was very, very hard to predict in the short term what's going to happen.

I continue to believe if the uncertainty gets cleared up and people understand the environment, whatever it is, good, bad, or indifferent, I think things will get better.

That's our sense of what's going on with the market, based on what our largest customers and the senior executives at our largest customers are telling us.

It's not just an internal theory of Analog.

We spend a lot of time out there talking to very senior levels, particularly to our industrial customers, and that's what they're telling us.

So that's what I believe.

Great.

Thanks for the color.

Sumit Dhanda, ISI.

Quantitatively on the turns required for the quarter, is it similar to what you registered in the October quarter, higher, lower?

I think you cut off just a little bit, Sumit, but basically we don't typically quote turns.

We don't even calculate them internally, because a lot of our backlog is associated with orders from distributors, which don't translate into revenue until the distributors ship out the product to their end customers.

But I think qualitatively, I think it's safe to say that we're in a high-turns environment with limited backlog going into the quarters.

That's been relatively consistent over the last few quarters.

Okay.

Then some more detail on the consumer outlook for the January quarter.

Is the big hit that you're taking in, call it the audio business, or the imaging business, or is it not distinguishable in terms of the impact from one versus the other in the January quarter?

With multiple segments, or sub-segments under the consumer banner, and we typically see a seasonality decline in the 15% to 20% area.

What you're going to see this particular quarter is something similar.

It's going to be all segments, and there's nothing really anomalous there.

Okay.

That's all I had.

Thank you.

Steve Smigie, Raymond James.

Great.

Thanks.

Steve Smigie.

With regard to your comments about your wireless infrastructure business, you said that you expect them to be more meaningful towards the end of 2013.

I'm just wondering is that suggesting there's going to be some softness in the middle of the year, or are there some specific programs you expect to ramp in 2013 that makes it specifically stronger?

(multiple speakers) Yes, sorry.

My comment on the infrastructure and comparing the second half of '12 to the second half of '13 is really in relation to the proportion of our business that is 4G, which I expect to increase and ramp during FY13.

That was really the comment there, more so than the particular order of demand patterns across the infrastructure market in general.

Okay, great.

That's all I had.

Thank you.

Craig Ellis, Caris & Company.

Thanks for sneaking me in.

Jerry, I just wanted to take a step back and look a little bit longer term.

As you look out over the course of 2013 calendar and you think about the underlying dynamics in ADI's different businesses, industrial, communications, auto, et cetera, and the products that you have and the programs that you're involved in, where do you feel most confident that ADI can drive year-on-year growth in the coming year?

That's a real challenging question, given where we are and where we are coming from.

I think in each of the areas, in each of the market segments that are now strategically important to us, industrial and automotive and communications, and even parts of the consumer market where we could add real value, we're expecting that each of those is going to get better through the year.

We'll see how it goes.

We're starting off at a very low level, but I think in the long term, there are certain market segments, as I mentioned, that we're committed to strategically that we think we can change [these] or experience, get paid for what we do.

Customers value us.

I think that those are the segments we're investing in.

The ones that we've come to a conclusion don't meet those criteria, we don't invest in.

I think we've shown that over the years.

I think each year we go back and reassess what's the good, what's the bad, what's the ugly, and we make changes in the portfolio mix each year and sometimes more frequently.

It's very hard, sitting where we're sitting today, to say which of the segments are going to drive growth.

Each of the segments has great opportunities.

The real question is how does the market unfold during the year, mostly on the economic side rather than on what product we have side.

I think we're very confident about the product portfolio we have and the relations we have with our customers.

So that part, we're consistently and increasingly confident about it.

You can't predict what's going to happen with aggregate business levels and sentiment out there, and that's the confusing thing out there.

In the absence of that, we would be very aggressive on what we could achieve in 2013.

Okay, and then the follow-up for Dave.

Dave, channel inventories are at below-normal levels.

As you think about where you'd like to manage them in a more normalized environment, how should we think about where inventories would likely normalize as we move through the year next year?

Inventories, as I mentioned, are down close to seven weeks, which is definitely below our target levels.

I think we would like to see them be more in the range of 7.5 to 8 weeks.

I think probably we'll be at the lower end of that, certainly, in the early part of the year, but as we push forward through the year, I would expect us to normalize back to that level.

Thanks, guys.

Good luck.

So we are -- we still have a few callers here.

Okay.

So we're going to keep going.

Operator, can we have the next caller please?

Steven Eliscu, of UBS.

Yes, that's Eliscu.

Thank you.

First of all, on automotive, you -- if we look back at calendar 2011, you're growing in excess of 20% year-on-year.

That's settled down, and now it looks to go negative.

Should we think of a rebound as we go through the coming fiscal year, back to the 20%-plus type growth rate, or was there something unique in terms of an inventory build or a set of end products that aren't necessarily selling as well going forward?

The automotive business has grown very fast in the Company over the past five years.

In the last three years, the compounded growth rate is somewhere in the region of 14% or 15%, and automotive is now a much bigger portion of ADI's revenue.

It's a bigger number.

But I would say the way to look at this thing is that the growth impact is more about the market and declining or muted car sales, more so than the adoption of technology.

If anything, I would say the rate of design-in of our products across the three areas of safety, powertrain, and infotainment is stronger than ever.

We're penetrating in regions -- our customers in Asia, now that we have not been so successful as in the past in a completely different way now, which bodes very well for the future.

My sense is more really about the market demand at the consumer level rather than the demand for ADI products.

Okay, that's helpful.

As a follow-up, in the base station market, you talked about a 20% to 30% content increase as we go to LTE.

Trying to understand, is that a one-time increase in content, because it is showing in your growth rate?

Or is there something more long-term, secular increase in content as we go to LTE advanced and small cells as we look out to the middle of the decade?

Between all of the evolution from generation to generation, from 2G to 3G to 4G, we've typically seen a 20% to 40% increase in the value of the products we sell into those applications, partly because the complexity or sophistication of the products we're providing is greater.

The performance increases from generation to generation.

And also, we've been expanding our footprints in all these radio applications.

So for example, we're providing a lot more radio frequency technology than we did say, five or six years ago.

We're beginning to meaningfully deploy clocking technology as well for timing generation of control.

In areas like cable and optical infrastructure, we've have tremendous market share and growing in observation and control circuit.

I think it's really a function of the complexity of the products commanding a better ASP and also ADI expanding our [bomb] footprint in each of the applications.

Great.

Thank you.

Shawn Webster, Macquarie.

Hi, yes, thanks a lot.

Dave, on the change in the tax structure, does it have any impact on your operating cash flow that's generated domestically?

And can you remind us what that is?

It does not have any impact on our cash flow for domestic cash flow.

It runs -- it can vary depending on the quarter, but it's probably on a rough order, about one-third of the total cash flow is generated in the US.

Okay, thanks.

On the military part of the business, can you remind us how much of that it is a percent of sales and what your outlook is for there?

It's marginal.

It's in the mid-single digits.

It's roughly about 6% to 7% of the Company's revenue depending on when you measure, and it's been relatively steady over the past year.

Okay.

Thank you very much.

Great.

That concludes our Q&A session.

A couple of folks that we will get to after the call.

We appreciate your participation and look forward to talking with all of you again during our first-quarter 2013 earnings call scheduled for February 19, 2013, beginning at 5 PM Eastern Time.

Thank you very much.

This concludes today's Analog Devices conference call.

You may now disconnect.