亞德諾半導體 (ADI) 2013 Q4 法說會逐字稿

Good afternoon.

My name is Rashanda and I'll be your conference facilitator.

At this time, I would like to welcome, everyone to the Analog Devices fourth-quarter and fiscal year 2013 earnings conference call.

(Operator Instructions)

Thank you.

Mr. Husain, you may begin your conference.

Thanks, operator.

Good afternoon, everyone.

This is Ali Husain, Director of Investor Relations.

If listeners haven't yet seen our fourth-quarter and FY 2013 press release for our Form 10-K they can be found on ADI's Investor Relations website at investor.analog.com, where you can also access this conference call.

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

It will remain available via telephone playback for two weeks and will also be archived on our Investor Relations website.

We've also updated the financial schedules on the IR website, which includes the historical quarterly and annual summary P&Ls for continuing operations, as well as for revenue from continuing operations by end market and product type.

Participating with me on today's call are Vincent Roche, ADI's President and CEO; Dave Zinser, Vice President of Finance and CFO; and Maria Tagliaferro, Director of Corporate Communications.

During the first part of the call, Vince and Dave will present our fourth-quarter and FY 2013 results, as well as our short-term outlook.

The second part of our call 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 adjusted for certain nonrecurring items in order to provide investors with useful information regarding our results.

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 our IR website.

Please note that the information we are 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 that we filed earlier today.

The forward-looking information that is 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 today, November 26, 2013.

So now I'll turn the call over to Vincent Roche, ADI's President and CEO, for his opening remarks.

Thanks, Ali.

And hello, everyone.

Thank you for joining our call today.

As you've seen from our press release, revenue for the fourth quarter totaled $678 million, up about 1% from the previous quarter, and within the range we had provided.

Diluted earnings per share excluding special items was $0.62, up 9% from the previous quarter and about the high-end of our range.

Business conditions during the quarter were generally stable worldwide in spite of the US government shutdown in the early part of October.

So, while we did not see precipitous declines in our business as a result, we believe that the uncertainty created by such an event impacts our business, particularly in our industrial and communications infrastructure businesses which together make up over 60% of our sales and are highly dependent on capital spending.

Let me take a moment to talk about our performance for the full year of 2013, reflecting the uncertain economic and political climate during the year.

Revenue declined 2% to about $2.6 billion.

Overall, virtually all of our end markets were flat to down in fiscal 2013, with the exception of automotive which grew 4% over the prior year.

It was really a tale of two halves in fiscal 2013, with the second half of the year showing some good momentum, and our industrial automotive and communications infrastructure markets combining for 8% growth in the second half as compared to the first, which is a positive sign.

For the year, gross margins of 64.3%, operating margins of 30% excluding special items, and diluted EPS of $2.15 on the same basis were incredible results in what was a challenging environment.

Our operating cash flow was over $900 million, or 35% of sales, and free cash flow totaled $789 million, or 30% of sales.

In addition, we enhanced shareholder returns with dividends and share repurchases that totaled over $460 million or 59% of free cash flow.

And our total shareholder return for the year was 28%.

Turning to our performance by end market, during the fourth quarter our growth was led by the automotive segment.

Now, revenues in this segment were better than expected, increasing 9% sequentially and 19% on a year-on-year basis on strength across infotainment, safety and powertrain applications.

Revenue was bolstered from new infotainment platforms that are moving to production and the ramp of our next generation safety platforms including ADAS radar that are seeing higher adoption rates.

In powertrain, our stop-start battery monitoring technology gained wider traction in more mainstream higher-volume vehicles, further fueling potential growth.

As the electrification of the car continues to gather momentum, ADI is aligning investments to provide increasing levels of content that enable lower emissions and higher fuel efficiency.

The automotive sector continues to be a very good growth business for ADI with a three-year revenue CAGR of 13%.

This business totaled 19% of sales in the fourth quarter.

The industrial sector represented 46% of sales and grew 2% over the same quarter in the prior year, and was flat sequentially.

The overall flat sequential performance matched showing positive trends within industrial.

Our automation and process control business saw a third consecutive quarter of growth, driven primarily by customers in North America and Asia.

As we projected last quarter, our defense and aerospace business recovered in the fourth quarter, growing by more than 10%.

The instrumentation business, after growing strongly in the second and third quarters, declined sequentially due to lower revenue from automated technical equipment customers, primarily in the areas of smartphones, tablets, and other devices with wireless connectivity.

The remainder of our instrumentation business, serving a broad customer base, was flat sequentially.

Instrumentation was, however, stronger in the second half compared to the first, as was our total industrial business.

We're confident about the myriad opportunities within the industrial sector, as customers take advantage of ADI's high performance signal processing technology and system domain knowledge to create more intelligent, connected and energy-efficient systems, including robotics, textures and other factory and process automation systems.

We believe these trends, in addition to the opportunities still ahead in areas like healthcare, smart grid and motor control, should result in higher growth rates in our industrial business in the future.

Communications infrastructure, after growing 13% in the prior quarter, was flat in the fourth and represented 21% of total sales.

In wireless infrastructure we saw modest sequential growth tied to deployments in North America and Asia, which was somewhat offset by inventory reductions at some base station customers.

As a result, overall wireless revenue was flat sequentially and represented approximately two-thirds of our total communications infrastructure revenue.

We continue to be optimistic about our prospects for our wireless infrastructure business.

And we expect growth to resume in 2014 as US capacity deployments accelerate, China builds out its 4G network, and the European communications market, which is showing signs of a recovery where the CapEx catchup accelerates into 2014.

Our wireline business was also flat after a strong third quarter.

We saw good performance related to the 100 gig optical systems for transmission in metro networking infrastructure, as well as backhaul systems for LTE networks, which was offset by declines in products sold into lower-speed networks.

Longer term, the buildout of cloud connectivity and backhaul connections, in response to high-bandwidth data demands, should drive good growth for our wireline business where ADI's focus on precision control and timing is a key enabler of high-performance optical systems.

This, together with our strong high-speed signal processing solutions delivering next-generation cable solutions, should also drive strong growth opportunities for ADI.

And, finally, our consumer business, which was 14% of sales in the fourth quarter, decreased sequentially as a result of declines in areas within consumer where we no longer focus.

We've spent many years refining our mix within consumer and refocusing our investment dollars.

For example, during the fourth quarter we completed the divestiture of our microphone product line.

Notably, consumer revenue outside of the microphone area increased sequentially.

I believe there are many good opportunities ahead for ADI in consumer where we can leverage our existing core technology into applications that make a demonstrable difference to the user experience.

Our design activity is strong, particularly in the portable space, though the timing of revenue for ADI would primarily be a function of our customers' product cycles rather than seasonality.

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

Thanks, Vince.

And good afternoon, everyone.

Fourth-quarter revenue increased about 1% sequentially and declined 2% year over year to $678 million.

Our gross margin was 65.6% in the fourth quarter.

And this was up 110 basis points from the third quarter, primarily on higher factory utilization.

We continue to carefully manage production in our facilities.

Utilization increased from the mid-60%s in the third quarter to the high 60%s in the fourth quarter.

On a days basis, inventory increased by two days to 111 days in the fourth quarter, and is in good position relative to our model.

On a dollars basis, inventory on our balance sheet declined by $1 million and is now at its lowest level in 11 quarters.

We started the fiscal year by dropping our utilization rate down to the low 50%s.

And over the course of the year average low 60%s utilization rates, bringing our inventory on a dollars basis down by $30 million or 10% compared to the same time last year, while maintaining solid gross margins of 64%-plus and continuing high service levels to our customers.

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.

We plan to decrease utilization to the mid-60%s in the first quarter, which should keep our inventory on a dollars basis approximately flat to fourth-quarter levels.

Inventory distribution on a days basis was slightly above seven weeks, which is lower than the prior quarter.

Total end customer orders decreased in the fourth quarter compared to the third quarter, and our book to bill was below 1 in advance of our seasonally lower first quarter.

During the quarter we recorded a $16 million restructuring charge redirecting resources to areas we believe have better ROIs.

Excluding this charge, operating expenses were $229 million, up $2.5 million from the prior quarter.

Operating profits before tax for the fourth quarter, excluding the restructuring charge, were $216 million, or 31.8% of sales, up 90 basis points from the prior quarter.

Other expense of approximately $3 million in the fourth quarter, excluding any special items, was flat to the third quarter, and reflects the ongoing run rate of our net interest expense at current debt levels.

During the quarter we reported an accrual of approximately $37 million related to our pending petition with the Tax Court.

While we believe our tax position is appropriate, a recent Tax Court ruling in a matter not involving ADI required recording of this accrual.

Combined with the taxes related to the gain on the sale of our microphone product line, this has a result of a tax rate of 29% in the fourth quarter.

Excluding these items, our tax rate in the fourth quarter was approximately 8%, which reflects an adjustment of our annual tax rate from 14.5% to 12.9%.

Based on current assumptions we expect our tax rate in the fiscal 2014 year to be approximately 13%.

Diluted earnings per share, excluding the special items I mentioned, was $0.62.

And $0.04 of it related to the fourth-quarter tax rate adjustments that I mentioned.

For the year, diluted earnings per share, excluding special items, were $2.15, up 1% from the prior year.

Cash flow in the fourth quarter was very strong, with operating cash flow representing 42% of revenue, or $282 million.

CapEx was $49 million, resulting in free cash flow of $234 million or 34% of revenue.

For the year, CapEx was $123 million.

And our fiscal 2014 plan is for CapEx to be around $150 million.

Two-thirds of that relates to ongoing capital spend and about a third of it is for new facilities.

Our cash and short-term investments balance increased by about $233 million during the fourth quarter, and now stands at $4.7 billion, with $1.3 billion available domestically.

At the end of the fourth quarter we had approximately $870 million in debt outstanding, resulting in a net cash position of $3.8 billion.

We also distributed approximately $106 million in dividends to our shareholders.

And on November 25, our Board of Directors declared a cash dividend of $0.34 per outstanding share of common stock.

And that will be paid on December 17 to all shareholders of record as of December 6. At the current stock price this dividend represents an annual yield of 2.7%.

During the fourth quarter we repurchased $43 million of our stock, with most of the repurchases occurring later in the quarter as a more aggressively tuned stock buyback program responded to lower stock prices.

During the year we increased our dividend 13%.

And in the fourth quarter our combination of dividends and share repurchases represented 64% of our free cash flow.

So, in summary, fourth quarter and fiscal 2013 delivered solid results in a pretty tough macroeconomic environment.

We believe the portfolio and productivity actions we have taken during this cycle set us up for significant leverage as sales increase, factory utilization improves from current levels, and we continue to control operating expenses.

So, now I'll turn the call back over to Vince who will discuss ADI's outlook for the next quarter.

Thanks, Dave.

We're starting the first quarter with lower opening backlog, and order trends, while stable overall in the fourth quarter, were lower than in the prior quarter.

In addition, many of our largest customers have plans for shutdowns during our fiscal first quarter to coincide with the Christmas and New Year's holidays.

And plan to reduce inventories heading into their December year ends.

As it turns out, as well, the Lunar New Year in Asia falls in late January, which is also within our fiscal quarter.

In our distribution channel, the story is also quite similar, with our largest distributors calling for a seasonal or marginally down performance for their December quarter end.

We are therefore planning for our sales in the first quarter to decrease in the range of minus 5% to minus 10%, which at the midpoint is in line with how our business has performed over the last three years in the first quarter, even when accounting for differences relating to the divestiture of our microphone business.

Based on this expectation of lower sales, we plan to reduce production levels in the first quarter, which we expect will reduce gross margins to between 64% and 65%.

We plan to manage our expenses, as always, very carefully, and as a result we expect our operating expenses to decline about $3 million to approximately $226 million in the first quarter.

We're expecting our tax rates in the first quarter to be approximately 13%.

So, given these assumptions, our diluted earnings per share should be in the range of $0.44 to $0.52 in the first quarter.

Our largest customers are approaching 2014 with guarded optimism about their growth prospects.

Our industrial customers are talking about an impending upgrade cycle in automation and process control systems.

In addition, as the secular growth opportunities in automotive and communications infrastructure continue to unfold, we also expect to benefit here.

Now as we close out fiscal 2013, I also think it's important to reflect upon our performance over a longer period of time.

The last three years have been a slow growth environment, as you all know, with demand being constrained by deferred capital spending decisions.

For ADI, where much of our business is tied to some form of capital spend, this has a very real impact on our revenue performance.

While we cannot control the macroeconomic environment, we can certainly control how we run our business relative to it.

Over the past three years we've been very busy at ADI refocusing our R&D investments in technologies that target the most attractive growth opportunities, pushing the cutting-edge of our signal processing technology also.

We've been a deepening and broadening our customer engagements, while ensuring supply chain agility to respond to changing business conditions.

For example, in fiscal 2010, automotive made up only 12% of our sales.

In 2013 we exit the year with automotive now making up almost 20% of our total sales as we have continued to gain share of market in this space.

Conversely, in 2010 our consumer business made up 22% of revenues compared to only 14% now, thus significantly improving the mix of our overall business.

In addition, in our just completed quarter we sold our microphone business, which was primarily focused on consumer applications, so that we can focus our [men's] investments on higher-growth opportunities in industrial and automotive applications.

On the manufacturing side, we have efficiently managed the production levels in our fabs and responded quickly to business conditions, ramping utilization rates as high as the low 80%s in the second quarter of fiscal 2011, at greater than 67% gross margins, both dropping utilization rates down to the low 50%s in the first quarter of fiscal 2013, while still maintaining greater than 62% gross margins.

During this time we've maintained exceptional service levels for customers, and kept inventories under very tight control.

We have not allowed this period of slow economic growth to slow our returns to shareholders.

Earlier in the year we committed to returning an average of 80% of our generated free cash flow to shareholders over the next five years.

Which is a significant increase from the 60% of free cash flow we had averaged in the prior three years.

In addition, in that period of time we've grown our dividend at a 16% CAGR, and our total shareholder return is 17% on a three-year compounded annual basis.

All this puts ADI on a strong platform on which to build our future.

At ADI we've a deeply talented and committed workforce across all the functions in the Company.

We possess the broadest and deepest signal processing technology portfolio in the industry that we're bringing to bear on our customers' greatest engineering challenges each and every day.

As many of you know, we hold leadership positions in the foundational technologies for signal processing, mainly converters and high-performance linear products.

Over two-thirds of our overall sales come from these two product areas where we are continuing to gain share.

The conversions of pervasive sensing, cloud and mobility we expect will create a strong growth opportunity for ADI in the future.

We continue to align our portfolio choices with the most attractive opportunities.

And we continue to work hard to broaden and deepen our customer relationships.

We remain flexible so that when the world recovers from its current malaise, ADI will be better positioned than ever to drive top-line growth, strong operating leverage and earnings growth, and higher returns for our shareholders.

Thank you, Vince.

During today's Q&A period please limit yourself to one primary question and one follow-up question.

We'll give you another opportunity to ask additional questions if we have time remaining.

So with that, operator we can start taking questions now.

(Operator Instructions)

Steve Smigie, Raymond James.

Congratulations on the strong cash flow and gross margin in a very tough environment.

I was hoping you could talk a little bit about the guidance in terms of the divested business.

Vince, I think your point you're saying it would have been down about seasonally what you've been seeing over the past few years.

So, if you added back in that microphone business, can you talk about what that would be down, and if that would even be potentially above seasonal when you add that back in?

Probably the easier way, Steve, to talk about it is to talk about how that impacted our guidance rather than what would have happened had we had the business, because now we have visibility and the fact that we sold it already.

I think that we would have been 1% better had it not been for the fact that that business went away.

So the guidance was 5% to 10%.

It would've been like 4% to 9%.

Okay, great.

I was hoping you would talk a little bit about the comm market, as well.

I think there's been some fits and starts with some of the China rollouts here.

I was just curious if you could talk about your dollar content.

I think, let's say you have several hundred dollar content on a particular base station, even at 200,000 base stations, at least in this first phase, would that really be enough to significantly move the numbers here?

Or is that just a piece of the puzzle and you've really got to have continuing 3G buildouts, you've got to continue to have other regions build out to give you the opportunity for revenue growth over, say, 2014?

Steve, maybe the best way to answer that question, the ASP, the system ASP for the content that ADI provides into a 4G system, where the radio architectures are very, very complex, more complex than the prior generation, we're getting about 20% more ASP.

That varies from customer to customer, and how many channels are in the system, and so on and so forth.

But an average of 20% more ASP.

Now, obviously the ultimate result depends on -- there is a certain amount of replacement value, of course, replacing 3G systems.

We believe that will move from something like 4G in our 2013 year business, and fiscal 2013 being about 20% of the share, to about 40% towards the end of FY 2014.

So, if the unit volumes even stay flat with FY 2013 on a system-level basis, just given the ASP increase, we will expect some level of uplift in our numbers.

Okay.

Great.

Thank you.

Romit Shah, Nomura.

Just based on the guidance you've given us, it looks like fiscal 2014, at least at this point, is on track to be flattish, maybe not show much growth unless we get better than seasonal growth in the remaining quarters of the year.

So, given that backdrop, first, I'm curious if you guys are more optimistic about next year.

And, second, under that assumption how are you thinking about OpEx growth again in fiscal 2014?

First, I probably would challenge that assumption.

If you take away -- the first quarter last year had a pretty meaningful amount of microphone revenue in there.

If you strip that out, I'd say at the midpoint of the guidance, which is a tepid quarter for us, the first quarter will be up mid single digits.

And over the rest of 2013 the microphone business slowly became de minimus.

So, I think the likely conclusion is that we probably will have a growth year in 2014, although early to call what the magnitude of that is.

From an OpEx perspective, I think, as Vince talked about, CEO on down we've got a pretty hard rein on the OpEx level.

And we're going to manage it pretty tightly until we start to see some revenue growth.

And I think we've got all the dials in place to be able to do that.

We did take a restructuring charge this quarter.

It freed up some expense to enable us to double down in the areas we wanted to and not have a headwind in terms of expenses.

On top of that we sold the microphone business.

That certainly carried some expenses.

And we'll utilize that capacity to be able to manage through this without too much trouble.

So I feel pretty confident that we're going to be able to manage the OpEx to get leverage through the year, assuming revenue has some growth to it.

Let me add just one other comment to that, Romit.

I would say, looking into 2014, unless we had some major turbulence on the geopolitical or events out of our control, my sense is 2014 will be a year of growth.

That's my own sense from talking to our customers, just looking at the cycles of our business.

We've actually gone through two sequential years of revenue decline, and that's extraordinarily, very unusual in our business.

We've been in this business almost 50 years, so what we've seen is the macro malaise just dampening enthusiasm and people's willingness to spend CapEx.

But my own sense is 2014 we'll see an improvement barring some geopolitical turbulence there.

Did you have a follow-up, Romit?

Yes.

Thanks for that, Vince.

Just within OpEx, drilling into R&D, as a percentage of sales, I'm sure you've probably noticed that R&D's about 7 to 8 points above your largest competitor in analog.

Does TI have economies of scale for being larger?

Or do you guys feel like the investment you're making in R&D actually positions you for better growth looking out over the next 12 to 24 months?

We believe that superior innovation brings superior results.

We have the best signal processing story on the market.

We have the broadest technology base and we are pushing the edge like hell to allow us to have the best building blocks, to allow us to have the best ability to integrate into complete signal processing solutions as we need.

And my belief, as well, is that we will get -- we've been making a lot of choices over the last three or four years in terms of the products that we've picked and the markets that we really care about.

And we're going to see the benefit of those choices, I believe, over the next year or two years.

I think if we can get this business into a 6%, 8% (technical difficulties)-- which is our expedition, by the way, 8%-plus, I believe is possible, in that kind of spend, we're spending because we believe in the growth possibilities.

And we stick with that thesis.

Aashish Rao, Bank of America.

Dave, within your January quarter guidance of down 5% to 10%, I don't think I heard you say this on the call, but could you provide some relative color on sales expectations in the four different end markets?

I think Vince talked about it in his outlook that we expect expected all end markets to be down sequentially.

I'd say usually every end market is down in the first quarter sequentially, at least it has been over the last few years.

So, pretty consistent with the normal seasonal patterns we see for all end markets.

Do you have a followup?

So you're basically saying everything is down roughly in that 5% to 10% range?

Yes.

I think consumer will be a little bit weaker because it definitely has a bigger seasonal headwind in the first quarter.

But they all will be down.

Got it.

John Pitzer, Credit Suisse.

Dave, just as a follow-up to that question, if you look at the seasonal pattern over the last three years, you guys are guiding this January quarter about in line with seasonal.

If you go back further, seasonality was a little bit better for you guys, i.e., down less in January.

So when you look at the guidance for January, are you characterizing this as normal seasonality?

Or do you think some of the macro issues that you've talked about are also weighing in the guidance?

Three years is a pretty good history.

And I think we were down 10% the last two years.

And the year before that I think we were down 7% or something, or 5%.

So it's in the range of what we would normally expect.

Clearly, the cyclical tailwinds and headwinds have a big impact at times.

And right now there doesn't feel like a big updraft in our businesses.

Typically in the second quarter we do see a lot stronger environment because of the industrial space.

So, we'll wait and see how it happens.

I think we guided last year down 6% to 12%, so down 5% to 10% is better than that.

I think the year before we guided 5% to 10%, so it's relatively consistent with our guidance from the year before.

So, this is all, plus or minus 1% or 2% is in the norm.

Perfect.

And then, Vince, maybe a little bit longer term, you guys talked about your industrial and communication exposures being reasons why the growth has been somewhat lackluster.

But a lot of your peers have similar type exposure, albeit you might be a little bit on the high end.

If I look at the data, you continue to under-grow the analog industry and many of your peers.

I'm curious as to why you think that is.

And, more importantly, what's the catalyst to get you guys back into a position of outsized growth relative to peers?

I think you've got to take the measurement window into account.

Nothing moves -- let me tell you, share doesn't move rapidly in the industrial space.

And many of our competitors, by the way, lump a lot of different subsectors into industrial, such as automotive, for example.

We separate automotive and focus our discussions always on the component parts of our industrial business, automation, instrumentation, aero, and energy.

We have a growing position with our key customers.

We've put a lot of focus over the last five or six years into not only the long tail of our business across the 50,000, 60,000 customers, but also committing R&D to applications and programs that the larger industrial customers care about.

So, as I said earlier, we're starting to see the benefit of the design and pipeline in those areas with a lot of new products that we put in place over the last three or four years.

And I think we will see, as we've said before, there are some longer-term trends around energy efficiency, smart machines, smarter energy that we will see the benefit of over the long term.

So, I think for us it's both a focus on the customer, on the application, on the product, and focusing our investments very heavily at being able to grasp the opportunity there.

And, again, in communications infrastructure, it depends very much on the window you're taking to make the measurements.

But in the core areas, the core technology areas of converter and linear, we have gained share in the communications infrastructure space year over year for the past several years.

I think it's really been a case of the environment being muted from a macro perspective and CapEx being dampened that has hurt sales.

Thanks, guys.

Chris Danely, JPMorgan.

Bit of a longer-term question here.

You're giving out the seasonals over the last few years and the overall not just semi environment but global demand environment has sucked for the last few years and it doesn't seem like there's any change coming.

So my question is, you have a fair amount of cash offshore, actually a lot of cash.

What's the desire, the thoughts around using that cash in some way, shape, or form to help either grow the performance of the stock, either bring it back and just pay the tax penalty, or lever up and do something with that, or make some sort of acquisition or something else?

Can you just give us your thoughts on that and if there's any urgency there?

Yes.

So, loaded question.

First of all, we have $1.3 billion domestically.

We have plenty of options with the cash we have on the US books.

If we plough through that, then we'll decide what to do beyond that.

The priorities for that cash are, of course with our cash flow from operations generated in the US, we utilize most of that to pay the dividend.

And then the excess we're looking to either buy back stock or do some small tuck-in M&A deals to help amp up the growth rates.

And I think both of those you're going to see over the foreseeable future.

You saw the beginnings of our share repurchase program start to kick in.

I would tell you that we had -- perhaps we out bought ourselves a little bit and had perhaps not quite the aggressive structure we wanted to put in place in order to get stock buybacks to start percolating.

We recognized that, obviously, and in the fourth quarter, towards actually the tail end of the fourth quarter, we tweaked the model to make sure we did buy back stock.

That's starting to take effect and I think you'll see that going forward.

And we continue to look for opportunities to do M&A.

We're very selective in what we look at.

We have a high bar for what we're going to utilize our cash reserves for.

And so, they will be sporadic in nature, for sure.

But there will certainly be, I think, the opportunity for us to grow the top line through M&A, and the bottom line through a combination of M&A and taking shares off the Street.

Ross Seymore, Deutsche Bank.

The first question is a near-term one, the second one is a longer-term one.

On the near-term one, was there any change in linearity?

And specifically, did the latter part, the month of October, get weaker to lead to the guidance that's clearly below what the Street is, regardless of how we want to define seasonality?

I wouldn't call it significantly weaker.

But we track orders on a weekly basis on a 13-week rolling average, and they came out of July pretty strong.

So we had the benefit of that going into August, looked pretty good.

I'd say it did modestly trend downward over the course of the three months.

And so that did perhaps, for us at least, change the dynamics of what we thought about for the first quarter.

Having said that, we can't quite understand exactly why the Street had us down at the level that they did because if you go back in history it's pretty clear that we decline in the 5% to 10% range typically most years.

So we were a little bit surprised that that had gotten disconnected.

But we guide on a quarterly basis.

And so we're updating you guys to let you know that, yes, indeed, it will be more of a seasonal pattern for us in the first quarter.

My longer-term question, on the follow-up side, is on the comm side of the equation.

Any number of companies have talked about that being a great growth opportunity going forward because LTE, et cetera.

But yet any number of those with that telecom exposure have continued to disappoint and ask investors to just wait until the goodness comes, it's just one quarter beyond the horizon, over and over again.

Do you believe there's any aspect where we have a substitution effect going on, where 3G spending's going down at the same time 4G's going up?

And so we all focus on the 4G side but the 3G side is something that's missed?

Or what would you use as the explanation as to why that segment -- maybe not ADI specific -- but overall has continued to be a relative challenge versus investor expectations?

Ross, the replacement cycle has been going on for two decades now between 1G, 2G, 2.5G, 3G, so on and so forth.

So there's nothing new there.

And, of course, as the technologies become a little more mature, customers get what they call productivity from year to year.

So, that's been a facet of the business.

There's no question there is some replacement of 3G with 4G.

But I think there are dynamics happening.

Every system, from generation to generation, the complexity increases.

And the amount of technology that a supplier has got to have, to be able to address the more integrated solutions that are taking place from generation to generation, is a competitive differentiator.

And we've been investing heavily over the past five years to bring out the most sophisticated radio architectures to allow our customers to build more complete transceiver technologies and to extend from the base band right into the RF.

So, I think there's a significant technology differentiation that you'll see the benefit of, and we will see the benefit of, in the years ahead.

I think, also, on the customer side there's a consolidation taking place.

The bigger suppliers will become bigger and I think the smaller bit players will fall off the edge.

And partnering is becoming a more distinct part of the activity between ourselves and many of our customers.

And also, when you augment, you complement those comments with the fact that 4G systems are going to allow people to do things in terms of moving social media, mobile video data in a much more user-friendly way, I think the future looks good, at least from a technology and customer perspective, really, or from a market perspective.

Folks, we're closing in pretty hard on the 6:00 hour here.

We have quite a few number of callers here still on line.

So I'd ask you at this stage please limit yourself to one question.

If you have a follow-up question you can reach our investor team at 781-461-3282.

And I'd take this quick opportunity here to also remind everyone that our Q1 FY14 earnings call is scheduled for February 18, 2014 at 5:00 PM Eastern time.

And, operator, with that, we'll go to our last few caller.

And one question, please, at this stage.

Thanks.

Tristan Gerra, Baird.

Just as a follow-up to the LT question, I think recently 3G revenue was about 70% of your mix on the communication infrastructure side.

Is that 3G portion of revenue declining?

And specifically, since we are assuming LTE is less than 10% despite a 20% increase in content that you mentioned earlier on the call, is it fair to say that 3G decline could actually at least upset that LTE ramp currently?

Clearly 4G is growing as a portion of the overall total.

The 2G system builds are very small now.

So it really is a case of our wireless communications infrastructure business being driven by 3G and 4G deployments.

My sense is who knows exactly how the share will tally at the end of 2014.

But I believe that -- today we're around 20% in terms of our total mix being 4G -- I think by the end of 2014 we'll see 4G being somewhere between 30%, and probably closer to 40% of our total.

David Wong, Wells Fargo.

With the planned production levels you have for the coming quarter, what will your utilization rate be?

And what percentage of products will be manufactured at foundries?

I think we're going to be in the mid to low single 60%s, in terms of utilization.

I'm sorry, David, what was the other question you said?

And with that, what percent of your total product will be manufactured at foundries in the coming quarter?

Probably about 50% will be manufactured in foundries.

Great, thanks.

Blayne Curtis, Barclays.

I just want to follow-up.

You talked about inventory reductions and base stations.

That's obviously after the strong July.

Was that China mobile related?

And then if you could just talk about whether you're getting any indications of when that will work through.

I don't know specifically what region of the world they were selling it to.

It was really one OEM.

And they expect it to be done -- I think their goal is to have it cleaned up, in their minds, by the end of the calendar year, probably for reporting purposes.

So, my expectation is we will be done here pretty shortly and they'll be back to normal pretty quickly.

Craig Hettenbach, Morgan Stanley.

Vince, following up on the 4% growth in autos last year and your comments on start-stop, just anything from a design perspective what you're seeing as we go into fiscal 2014 and what you're thinking for automotive growth?

I believe it will be a growth year.

What we saw this year was strength gaining throughout from quarter to quarter.

The second half was quite a bit stronger than the first half.

And our fourth quarter saw a 19% gain over the fourth quarter in the prior year.

We're seeing good strength overall in all the sectors of powertrain, safety, and infotainment.

We have a lot of exciting things happening in terms of being able to drive that growth further.

We're seeing -- I think if you look over the last three or four years, each of those three sectors has been growing in the double-digit compounded rate.

And I think over the next few years we can probably look at a 10% growth rate for that business given that the denominator is as big as it is now.

But I think we have a lot of new programs that are coming into play.

We've got a lot of exciting new technologies that are at the early stages of production.

And as I've mentioned before, as well, our business has been very centered, at least in the early stages very centered, on European and American customers.

So we've been able to complement that over the last couple of years with good design in activity and design traction in Asia, as well -- Japan and Asia.

So, I'm very optimistic given that car companies still differentiate their offerings with electronics technology, of which semiconductors is the foundation.

More and more sensing, all good stuff for ADI.

And I feel optimistic this year coming, as well as over the longer term.

Terence Whalen, Citi.

This question has to do with the comment that you made about Chinese New Year and the January 31 date.

I was wondering, to what degree, quantitatively, in terms of percentage of revenue, do you think that's an impact versus, say, if we got a later Chinese New Year in mid February?

Thanks.

I have no idea, Terence.

It would be a complete guess.

Certainly that whole area shuts down for a good solid week.

And certainly some part of our revenue spills directly into Asia.

But a lot of our customers, even in North America and Europe, are shipping into Asia and can be impacted by that.

It's not insignificant.

It's a meaningful impact.

Jim Covello, Goldman Sachs.

Dave, relative to your comment before about why the Street was modeling what it was modeling, you guys have been under-growing your peers overall somewhere between 5% and 10%, and in industrial specifically between 10% and 15% this year.

Should we be modeling a catch-up or should we just assume that's gone and we should be modeling in line with peer growth here?

I think that catch-up dynamic was some of the reason that folks might've been modeling more than what would have been seasonal.

Thanks.

I think if you look at this over a couple years, I don't think there's any difference between any of us, quite honestly.

There may be in the short term some perturbations because of revenue recognition and the period of the quarter we're talking about.

A lot of these guys, obviously, report as of the end of September.

We report at the end of October, and so there's some dynamics around that.

There's no way market share changes in the industrial business.

The cycle over 20 years, nothing, very little comes off in any one year.

It's just not possible.

Now, on a more aggregate basis, as you look at ADI versus other peers out there, we have made a concerted effort to shift away, to some extent, from the consumer market.

And there is no doubt that has caused a headwind in our business.

We will definitely acknowledge that fact.

Those investments have been put forth into areas in the industrial space, in the wireless space, in the comm infrastructure space more broadly, in the automotive space, and so forth.

And a lot of those do have three- or four-year design cycles.

So it takes a while for the design effort to show up on the revenue side.

So, could there be that dynamic in there vis-a-vis the consumer?

I certainly acknowledge that fact.

But I think on the industrial space, relative to the peer group, that's all just timing around quarters and how companies recognize revenue and so forth.

Stephen Chin, UBS.

Vince, I just wanted to follow-up on the comment you made in your prepared remarks regarding investments in the consumer area.

Did you mention portables?

And if so, is that just in reference to computers or is that smartphones and tablets?

And talk about the thinking behind that and the timing of when some of those investments might pay off.

Thanks.

Yes.

So we made a very determined move out of PC several years ago.

And we have no dependence on PCs at all as far as revenue in the consumer space.

So, when we talk about portable we're really talking about smartphones, and tablets in particular.

It's fairly modest relative to the overall spend, but nonetheless we have a pretty significant spend in developing audio subsystems, sensing subsystems, and some other particular functions that are devices that make a big, big difference in the user experience.

And we've made very good progress, as Dave said, in terms of getting the products, getting the underlying technologies and products ready.

And we have a heavy -- we've got some good design-ins, and we have good design activity taking place.

So, I think we'll start to see the benefit on the portal side over this year and into 2015.

Craig Ellis, B Riley.

Vincent, you had remarked in a question that was asked by Romit that you thought fiscal 2014 could be a year of growth.

Can you identify what gives you confidence that the year can be one of growth, whether it be things that you're seeing on an end market basis, a geographic basis, or a channel basis?

Thank you.

When we talk to industrial customers, for example, we have a customer roster of 50,000 or 60,000 total.

I spend a lot of time talking to our largest customers, in particular, from all different regions, all different market segments.

I think if you talk to industrial customers, they see, as I said on the automation side, actually, we've seen some decent growth over the past couple of quarters.

And our belief is that will continue.

There will be an upgrade cycle as capacity is expanded in industrial machines and plants.

There's a lot of, as you know in America, for example, there's a lot of activity in gas exploration and energy in general.

We're benefiting from that, I believe, in the process control sector.

Instrumentation -- ATE is doing well.

ATE has become a notoriously cyclical business.

It's got basically two line cycles in a given year.

So, I think between what we read in terms of our design activity at our larger customers, where our large customers are telling us about their beliefs in terms of the economics of their businesses and the demand for the technologies they've got, we think that will be a contributor to growth in 2014.

As I said, I believe automotive will continue to grow.

I don't see any reason why, for a number of reasons, unless there's a big slowdown in the demand for cars there.

But in communications infrastructure, the buildout of 3G and 4G in China, China and America, and the upgrade cycle in Europe I believe will contribute to growth in 2014.

So that's the lion's share of ADI these days, those three businesses I described to you.

That's around 90% -- 88%, 90% of our total business.

Stacy Rasgon, Sanford Bernstein.

I want to revisit the guidance again briefly.

I want to put aside questions of share gain or under-growing or over-growing the competition.

But this is the ninth quarter in a row that you guys have guided your forward revenue below expectations.

And I know you said you were surprised at where the Street was this quarter, but again this is nine quarters in a row.

Is this just a continual problem with managing Street expectations?

Or has something else changed versus where it used to be in terms of more accurately forecasting?

I'm just trying to figure out what's different now versus where the Street has been on this.

Thank you.

We don't give guidance past one quarter, so what you guys put in your model is what you put in your model, first of all.

Second of all, I think in an environment where it's been tepid, I think that most of the Street wants the world to be a better place, and so I think they create guidance that has some expectation around wanting it to be a better place.

And it's just not.

The macro world is not improving that much.

It's growing at a very tepid rate right now.

And so I think that that's the fundamental challenge.

I think you guys want to believe that things are off to the races, and the macro world is just not there yet.

I hope in 2014 that environment does get better and industrial companies start to spend some capital, and the communications companies start to invest in infrastructure.

And if that happens, it's going to be a very good year and we'll be doing the opposite, we'll be beating your expectations.

But at the moment that hasn't happened, so we can't give you any visibility into a brighter day.

But I think at some point it does have to get better and we're going to plug along.

We're going to continue to invest in the areas that we think have the best opportunity of growth.

And I think over time you'll see that work out for us.

Vijay Rakesh, Sterne Agee.

Just looking at ADI's comm side, if you look, wondering what your exposure is for telecom versus enterprise.

And as you look at January quarter how do you see those two sub segments trend?

Most of our sales would be into telecom, as you call it, rather than enterprise.

I don't know what the exact split is, but I imagine it's 80% or greater in telecom, metro and transmission networks, edge networks, and a much smaller proportion into enterprise.

But I really don't know what the split is.

How it's going to perform in the first quarter, I really don't have any idea of that.

Ambrish Srivastava, BMO.

Dave, I'll take the accolade.

I was one guy who was living in a dark world for the quarter.

(laughter)

I don't know if I should congratulate you or not.

I have my moments.

But just on the consumer side, you guys have been very forthcoming over the last several quarters on how you are deemphasizing it.

But just looking out ahead, I'm not able to understand why chase after the portable market.

The world is full of people.

Look at Maxim and their focus there.

You get a design win.

And you guys had that yourselves.

A few quarters ago you got that win.

Why not just walk away from that segment and stick with your really sticky businesses where you're doing a great job?

We're definitely -- you can jump into, Vincent -- I think we are certainly focused a lot in other areas that are stickier.

But our fundamental premise is about innovation.

It's about areas where we think we can innovate way better than anybody else in the industry.

And, believe it or not, there are pockets within the consumer space where that can happen, where the innovation is so mind blowing, let's say, that really no one else can do what we can do, and we can be in for generations.

Now, can we be in the generation for eight different versions year in, year out?

Maybe not.

But I think if we can be in a consumer application for several generations, doing something fairly innovative will make a good ROI on that.

And a lot of times we take that capability and we learn from it and pour it back into the other markets, and that also has some leverage opportunities.

So that's why we keep our toes in the water, I think, in the consumer space.

I don't know if you have anything else.

Let me just add one other comment there.

There's another part to our consumer business.

One part there is portable.

But we have a business in consumers in areas like broadcast studios, high-quality enterprise audio and video.

And in those areas, the life cycles of those products and the margin structures of those products actually look a lot like a horizontal business in the industrial space.

So, that's really the foundation of our consumer business.

And as Dave said, if we can find certain areas to supplement that business in the portable space where our technology, we believe, makes a real difference, and we can make that difference for several generations, then we'll invest.

So it's really a segment with two very different businesses within.

We're very careful about how we spend our money and where we select the investments in both places.

William Stein, SunTrust.

I'm hoping to address the normal seasonal view one more time, if I might, especially relative to the last three years.

If we look at just that timeframe, there's been approximately zero growth.

And so, if we hone in on that to calculate our view of normal seasonal for the rest of this coming fiscal year, I don't think that the result is consistent with your growth view longer term.

So maybe either help us understand what management believes the typical seasonality pattern would be later in the year, or maybe you could give us an updated view on the long-term revenue growth opportunity.

I think Vince talked about that his goal is to have 8% or there in the zip code growth.

And he's got the teams behind him on that.

So, that's our goal.

I think what happens is the second quarter generally has got a pretty good growth environment to it.

It's up in the high single digits.

And then what we need to see, in order to have year-over-year solid growth, is we're going to have to have a couple quarters in the back half where it's sequentially better.

The other thing, which I talked about in one of the prior conversations is that, for the last several years, we have been deemphasizing parts of the consumer business.

And that has been a headwind.

And we divested one of the key parts of the business, which is the microphone business.

I think we think that that's pretty much behind us, and that we've leveled off.

And we think we have some opportunities in the consumer space that will drive some growth.

The timing of which is a little uncertain, but we have pretty good confidence that there will be designs won here in the not-too-distant future.

So, we think that once that's no longer a headwind, that fact might be a tailwind for us.

The other businesses, we have some investments in that we think, from a design viewpoint, look pretty good for the rest of the year.

And if the macro does okay, we should have a really solid 2014.

I think it's early to say.

We're not even a month into 2014.

We've got to see how it goes.

We'll update you in the quarter and let you know how things are progressing.

Ian Ing, MKM Partners.

I've got a non revenue question for David.

A $3 million OpEx decline in January.

Could you talk about contributions of shutdowns at the factory or Company level.

And even less holidays in April, should we expect some related increase effort after that effort?

I think the reduction in the OpEx has not as much to do with shutdowns as it does to do with just the variable component coming off and our normal operating expense management in the first quarter given its tends to be a little bit slower period.

There is certainly a benefit on a spend level in the manufacturing, because we are shutting down the factories, and that helps us, because obviously we expect our wafer production to be down, and this way we can reduce some of the overhead costs by shutting them down for some period of time.

So that had some benefit, the magnitude of which I'll have to go back and pencil out.

I'm sorry, was there another part of the question?

Doug Freedman, RBC Capital Markets.

Dave, if you could give us a sense of what range of gross margins the Company presently has.

And given the lower growth, what's it going to take for you to have utilization move up by about 10 points?

Is there a way to do that with your factory base?

As you might expect, we have a fairly wide range of products in the portfolio, and so we certainly have margins up into the 90%s with certain products.

In certain cases we have products in the 50%s.

And I'd say that's generally the range.

There's probably some outliers to that spectrum, as well.

I think in, I can't remember exactly the period of time we were earning that, but I think we were, in the mid-2012 range, running in the mid-70%s in terms of utilization.

And we were in the upper 600s for a sustained period of time, probably shipping at a little bit of a higher level, inventory was being built to distribution.

It wasn't too long ago that we were actually 10 points above.

In the right environment, where the growth is back into that range, you could see the utilization start cranking up.

One of the things we did this time around, which I'd say in previous, probably mini cycles, we didn't do is we really took an active effort to reduce the inventory levels.

I think I mentioned in the prepared remarks that we'd reduced inventory by $30 million.

That had a pretty painful impact on our margins and we still had 64%-plus margin in that period.

But the good news is we really cleaned the deck so, as the demand starts to go up, the production is instantaneously moving up, as well.

We should see margins move up pretty quickly along with that.

I think we've set ourselves up on a gross margin basis to have really good leverage.

Thanks, Doug.

I believe you were capstoning our evening here.

So I think we all did a pretty good job of keeping the time.

Just a reminder, our first-quarter FY 2014 earnings call is scheduled for February 18, 2014 beginning at 5:00 PM Eastern time.

Thanks again, everyone, for tuning in, and have a good night.

This concludes today's Analog Devices conference call.

You may now disconnect.