Analog Devices, Inc. (ADI) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Maxim Integrated Products Fiscal 2013 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Venk Nathamuni, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome, everyone, to Maxim Integrated's Fiscal First Quarter 2013 Earnings Conference Call. With me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer, Bruce Kiddoo. During today's call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge. Now, I'll turn the call over to Bruce.

Thanks, Venk. I will review our first quarter financial results. Revenue for the first quarter was $623 million, up 3% from the fourth quarter. Our revenue mix by major market in Q1 was approximately 47% for Consumer, 24% Industrial, 15% Communications and 14% Computing. Our Consumer business was up strongly due to smartphones. Industrial was down due to broad-based weakness. Our Communication business was down to our Fiber Optics business, and Computing was down due to our notebook and peripherals businesses. Gross margin, excluding special items, was 63.4%, up from 63% in the prior quarter. Special items in Q1 gross margin were intangible asset amortization from acquisitions. Operating expenses, excluding special items, were $213 million, down slightly from the prior quarter. The one month impact of our annual compensation adjustment was offset by spending controls. Special items in Q1 operating expenses included the normal acquisition-related charges, plus a minor impairment charge for buildings held for sale. Q1 GAAP operating income, excluding special items, was $182 million or 29% of revenue. The Q1 GAAP tax rate, excluding special items, was 21%, compared to 20% in the prior quarter. GAAP earnings per share, excluding special items, was $0.47, up from $0.45 in Q4 due to higher revenue and gross margin. Turning to the balance sheet and cash flow. During the quarter, cash flow from operations was $137 million. This is lower than normal levels, as we pay our annual employee bonus for the prior fiscal year in Q1. Inventory was 103 days, up from 99 days in the prior quarter, as we focus on improving delivery performance to our customers. Inventory in the channel, excluding catalog distributors, declined from 53 days to 51 days, well below our target of approximately 65 days. In dollar terms, channel inventory declined by 2%. Net capital additions totaled $57 million in Q1, down significantly from Q4, as we are completing investments in long-term manufacturing capacity and new facilities. Share repurchases totaled $65 million in Q1, as we bought back 2.5 million shares. Finally, in Q1, we paid $70 million in dividends to our shareholders. This is a 9% increase over the $64 million paid in the prior quarter. Overall, total cash, cash equivalents and short-term investments decreased by $31 million in the first quarter to $925 million. Moving on to guidance. Our beginning Q2 backlog increased to $400 million. Based on this beginning backlog and lower expected turns, we forecast Q2 revenue of $595 million to $625 million, or down 2% from Q1 at the midpoint. Q2 gross margin, excluding special items, is estimated at 60% to 63%, down from Q1 due to lower utilization. Q1 fab utilization was down as expected, due to a process technology transition impacting both Q1 and Q2 gross margin. Q2 test utilization is expected to be down, due to lower revenue and planned inventory reduction due to the uncertain environment. Other variables that may influence Q2 gross margin include product mix and inventory reserves. Special items in Q2 gross margin are estimated at $8.5 million, primarily for amortization of intangible assets. Q2 operating expenses, excluding special items, are expected to be up around 2% sequentially. The increase in OpEx is due primarily to higher compensation costs for the full quarter impact of our annual merit process. Special items in Q2 operating expenses are estimated at $4 million for amortization of intangible assets. This excludes potential items that may occur during the quarter. Our Q2 in fiscal year '13 tax rate, excluding special items, is estimated at 20% to 22%. For Q2 GAAP earnings per share, excluding special items, we expect a range of $0.39 to $0.43. Capital expenditures in Q2 are expected to increase slightly over Q1 due to investments in new technologies. Finally, our Board of Directors has approved payment of a cash dividend of $0.24 per share, approximately a 3.7% yield at yesterday's closing stock price. I'll now hand the call over to Tunç to discuss our business.

Thank you, Bruce, and thank you all, for joining our call, and good afternoon. Let me start by highlighting 3 key September quarter financial results: One, revenue came in above the midpoint of the company's guidance despite the tough macro environment. This was driven by continued strong growth in our mobility business. Two, gross margin was near the high end of the target model of 61% to 64%. Gross margin increased 40 basis points from the prior quarter to 63.4%. Three, the company continued to control operating expenses, given the uncertain macro environment and held OpEx roughly flat. As a result, operating margin rose 150 basis points quarter-on-quarter to 29%. We delivered higher earnings per share than projected. Let me next turn to our just-completed quarter and give you an overview of lead times and bookings. During the September quarter, our delivery lead times remained steady, but customer order lead times declined slightly from the prior quarter. Bookings increased nevertheless, resulting in a book-to-bill ratio of 1. Our guidance reflects our forecast of the normal, end-of-the-year inventory adjustments at our top customer, as well as the uncertain macro environment. I will next provide some color on our major markets. Let me start with Consumer. We expect this market to be flat, as Maxim's increased dollar content in Galaxy S III and ramp of other smartphone models at our top customer is offset by their typical end-of-the-year inventory adjustment. As we stated during our recent Investor Day event, we sell our Power SoC chipset for the Galaxy S III which provides all power management, charging and USB multiplexing requirements, as well as the power management for the applications processor and in some models, the baseband processor. Beyond smartphones, we continue to gain significant traction at multiple customers in tablets, as recent wins for battery management, USB multiplexing and power management are expected to be ramping up in production during the December quarter. Finally, we won new designs for our sensor and display power products across several smartphone and tablet models at multiple customers. These products will also be starting production in the current quarter. Second, let me discuss the Industrial market. We project December quarter Industrial revenue to be down, driven by broad-based market weakness. Industrial has a broad customer base, buying predominantly through the distribution channel. Inventory in the distribution channel declined sequentially, with days of inventory at 51 days at the end of the September quarter, well below our target model. This market tends to be highly correlated with macroeconomic trends and is thus experiencing weakness at this time. As discussed during our Investor Day meeting, we're executing our strategy of analog integration in select industrial end-market segments. One example is in the smart metering segment. Here, we introduced our Zeus system-on-a-chip, or SoC, which combines highly accurate measurement, multiple layers of security, and processing horsepower to support multiple advanced communications protocols. Zeus provides a platform for any embedded smart grid equipment that needs to measure, to communicate and to do it securely. We continue to expect long-term growth in the smart meter segment, as more meters convert from using discrete solutions to using SoC solutions. In the Medical segment of our Industrial business, we announced we will be demonstrating at Electronica a vital signs monitoring shirt that enables lower cost and more convenient heart monitoring. While we are not selling medical shirts, this shirt does showcase our ability to define and then provide system solutions with medical partners. It measures 3 lead electrocardiogram signals, body temperature and activity levels and transmits this information to smartphone -- to a smartphone using a Bluetooth connection and is powered by a rechargeable battery. All diagnostic tools are packaged in this shirt that is comfortable to wear. According to industry research, the market for wearable devices will reach more than 100 million units annually by 2016. These devices will enable greater detail of tracking, monitoring and care, often through connections provided by mobile phones. Third, let me cover Communications. We project revenue to be flat during the December quarter. We expect a slight uptick in business from the base station in femtocell end markets, offset by weakness from traditional telecom. Longer term, we expect strong adoption of small cells, as most major operators are either deploying, or committing to deploy femtocells, with small cells expected to be rolled out starting in 2013. Maxim Integrated has a leading market share in femtocells due to high integration and high-performance transceiver offerings. Our strategy is to leverage our success in femtocells to the small cell market. Our Communications customers' customers, who are the network operators, care about delivering a next-generation network that has improved coverage, capacity and consumes less power in the process. Our capability to deliver highly integrated solutions across a broad range of technologies, such as power management, optical, and RF transceivers will help drive system-level benefits that enable these networks of the future. Fourth, in the Computing market, revenues will be down significantly with a decline in notebook computers. In closing, we're undoubtedly in a period of uncertainty in the macro environment, in which we have no control. We will focus on levers we do have control over at Maxim Integrated. First and foremost, deliver products and technologies that provide highly differentiated solutions to our customers; and second, control spending during periods of softness, but not at the expense of future growth. I will now turn the call back to Venk.

Thank you, Tunç. That's the end of our prepared comments. We would now welcome your questions. Please limit yourself to one question with one follow-up. Operator, please begin polling for questions.

[Operator Instructions] Our first question comes from the line of Romit Shah from Nomura Securities.

Bruce, could you talk a little bit about smartphones in Q4? You mentioned that Samsung would burn inventory this quarter. I'm curious how your other handset customers are performing?

Sure. In the December quarter, our smartphone business is going to be up slightly and fundamentally, that's -- Samsung is going to go through its normal inventory correction, but that's being offset by strength for their current products and some new offerings this quarter. Our other smartphone customers are going to be up slightly this quarter.

Okay, that's helpful. And then just switching gears. Tunç could we get some more color from you on the rollout of small cells next year, which regions specifically are you seeing the rollout and could you give us a sense of how much content Maxim has in one of these devices?

Sure. So let me give you a little bit of a background on femtocells as well. So most major operators are deploying our -- or committing to deploy femtocells. And we expect small cells models, essentially technology-wise, to be pretty similar to femtocells. And we expect initial rollouts starting probably towards the end of 2013 and I'm talking about calendar year here. And maybe broader deployment starting in 2014. And we think that the small cell is -- they're expected to be trialed in Asia first, in Korea and Japan, and then eventually get deployed in those regions in 2014. In Europe and North America, rollouts are likely to be trialed a little bit later, maybe in the 2014 period, and possibly go into production in 2015. So that's kind of a landscape of it. It's really too early for us to talk about what our content is going to be in these things. But essentially, we're pretty confident this is going to happen in small cells. Because we already know that in femtocells, we're already in production and shipping these products, and customers are deploying them, essentially mostly to hang on and protect their customer base.

Our next question comes from the line of Steve Smigie from Raymond James. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Just to follow-up on smartphone. Can you talk about new wins? How many of those wins are you getting sort of multiple sockets with the PMIC. So you, I think, at the Analyst Day, you said you could get from 1 to 3, are you finding that you're getting multiple PMICs per phone or is it more just very customer-specific still?

So from a design win standpoint, there's a high level of dependency on the model. And this is true for many customers, not just our top customer. And in some regions, we get multiple PMICs. There may be up to 3 and then there's maybe a little -- a few more other sockets that are small. And in some regions, depending on what baseband is being used, for instance, we might get one PMIC. So it really varies from model to model, and obviously, from customer to customer. Beyond that, we really prefer not to report on how many wins there are and how many wins per socket. And I think I'm going to leave it at that. So it really depends on each model. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, great. As I look at your guidance here, I think it's fairly good relative to most of the folks out there. Can you talk about how that impacts seasonality as you look into the calendar first quarter? Normally, you're -- we're seeing a lot of folks guide down pretty significantly and then maybe that sets them up for an up quarter, but can you talk about your seasonality now in context of the current environment and also in context of your success?

Sure. This is Bruce. So I think when we look at our guidance for the December quarter, it's basically a reflection of the current market conditions that we see across all our end markets, right? Where we're seeing Consumer is basically flat. We see Communications flat as well. And then we see Industrial and Computing are down. And so overall, we're down 2%. And if we looked at just kind of the past 4 years, 3 out of those 4 years were down as well. So from that point of view, we're actually pretty close to, if you'd call it, normal seasonality. But how you get there is very different. And I think when we look out to the March quarter, I think it's very difficult, at this point in time, to predict what's going to happen there. I think we know that we haven't been able to rely on normal seasonality for probably 2 or 3 years at this point in time, given that we constantly seem to be in this period of uncertainty. So I think from our point of view, our guidance for the December quarter, and I think you know this, Steve, but, I mean, we guide to what we think is the most likely outcome, right? We're pretty -- history says we're pretty good at it. That said, we guide to a range for a reason, because there is uncertainty out there, but I don't think there's anything in our December guidance that will influence our March guidance. We're going to ship what our customers want in December and we'll ship to what they want in the March quarter as well.

One thing I want to reiterate, I think we've said this before, when you look -- when we analyze the seasonality data, when you look at the data, when you look at the results, you will see that the standard deviation is bigger than the mean. So when you have that, essentially, it's really tough to predict the next quarter. You can say what it was in the past, but since the variances are larger than the means, it's really difficult to be able to predict the future from that.

Our next question comes from the line of Vernon Essi from Needham & Company. Vernon P. Essi - Needham & Company, LLC, Research Division: I was wondering if you could elaborate a little more on your sensor offerings that you're shipping right now. At your analyst event, you didn't get too deep into what you're doing in there. I'm just wondering what those products are right now?

Yes. Okay. So essentially, what we -- and I mentioned in the prepared talk that we were getting some more production ramps for our sensor products. Most of these products are either optical sensors, some of them are a new technology called gesture sensing, for example. And in that mix, there are also some touch sensor wins that we have that are relatively small, frankly. So those are the basic sensors type products that we have. These do not yet include our gyro or MEMS sensors. Those products are still in the pipeline, in the development pipeline, and we're getting ready to introduce them next year. But in essence, it's those, touch, optical, proximity, as well as gesture sensing type products. Vernon P. Essi - Needham & Company, LLC, Research Division: Okay. So it's fair to say that these were sort of exclusive to the SensorDynamics assets?

Correct. These are the products that we developed at Maxim on the non-motion side of sensors. Vernon P. Essi - Needham & Company, LLC, Research Division: On the sensor side, are they -- do any of these optical sensors integrated right now or are these mostly standalone?

Most of these products are not integrated into other PMICs. They're standalone. But in some cases, we have multiple sensor functions on a single piece of, either package or silicon. I mean, it's easier to integrate, obviously, gesture or proximity with light sensing and so on. And typically, these products are hard to integrate into the PMIC because they need to be on the phone. They need to be somewhere on the top and close to the glass, which doesn't work out for the rest of the chip. So that's why they're separate right now. Vernon P. Essi - Needham & Company, LLC, Research Division: And Bruce, just a quick follow-on here, you gave a couple of reasons for the gross margin guide being down sequentially, utilization, mix and a few other things, what would be the top ranking reason behind that?

Yes. It's, by far, the primary reason is the utilization. When we look at that, right, we knew our Q1 fab utilization was going to be down as we transition from S4 to S18. It was down and that has an impact both on Q1 and in Q2. And then in the back end, in our test facility in the Philippines, we're seeing lower utilization there, both just due to the lower revenue and just a desire to take down our inventory a little bit. And so -- and that, the back end, primarily is -- about 75% of that hits the current quarter from a variance point of view. So it's really utilization.

Our next question comes from the line of Blayne Curtis from Barclays.

On the Comm business, I mean, the data points have been kind of all over the place. You're faring better, base stations are actually growing for you. I was wondering if you could talk about just kind of the health of the wireless base station market and where you're seeing opportunities, maybe if you could break out geographically, may be the easiest, or by technology or any way you could describe it would be helpful.

Yes. On the base station market, you're right, I mean it's going to be -- we're projecting it to be up slightly in the current quarter. It is and it was pretty much flat in the last quarter. So there are really not very strong signals here. And frankly, base stations is kind of in the mid-single digits level of business for us. So we're really not a good bellwether to be able to give feedback or any indications of which markets are strong and which markets aren't. I think those questions are probably better suited for some other FPGA companies.

Blayne, and so where we're seeing actually, when we talk about being up slightly, that uptick is probably driven more by our femtocell business right now, which is we're seeing some quarter-over-quarter increases there.

So it's not really the infrastructure side.

Got you. And then Bruce, I think you mentioned that you factored in fairly low turns, but I can't remember if you mentioned what it was, but if you can talk about what you baked into this guidance and then kind of what gets you to the high and low end of there, where you see the most variability within your segments?

Sure. The backlog as a percent of the $610 million midpoint is at 66% right now. Just last quarter, it was 63%, so we were assuming a little bit higher turns last quarter than this quarter. The reason we're expecting those a little bit lower turns is, one, as we know, our biggest customer has inventory correction and they actually do that in the month of December. And so you don't see as much turns as you normally would in a quarter because of that. And then also, we're just being, kind of recognizing the uncertain environment, and are people going to take the opportunity at year end to do factory shutdowns, et cetera. And so we just kind of built that into our guidance and our lower turns assumption as well. As far as the range within that, it is dependent on, clearly, what people's expectations are as far as how does the cell phone market do in the quarter and do you start seeing any confidence in the distis to restock or do we start seeing any pickup in the Comm side from the infrastructure side.

Our next question comes from the line of Terence Whalen from Citi.

The first part of the question is, relative to the distribution of your clients within smartphones, specifically, how confident are you that your smartphone business, outside of your #1 customer, will grow in aggregate in 2013?

How confident are we? So, I mean, we do know that we have design wins at multiple, maybe every single customer that's out there. The difficulty we have is really in being able to tell which model and which customers are going to be successful. So it's really difficult for us to give a confident type of reply to that. All we can do and all we've done is make sure that we've got some level of penetration and design wins at customers other than our current top customer. So I think time is going to show, but it's really difficult to say from now which phones will sell really well. And we have a similar situation with tablets as well, I mean, we've got -- we've had wins. And if you think back 2 years ago, we said we had 40 or 50 design wins. And we knew we had the wins, and if at that point you'd ask me, are you confident you're going to get all that revenue? I would have probably said yes. But it turned out that only one customer was successful. So that's why I'm a little bit gunshy in saying how much confidence we have, in order to be able to tell which models are going to succeed and what our content is in each one of those.

Okay. As a follow-up, this one is in regards to the Korean market in particular. Obviously, a lot of focus on vertical integration at the Korean OEMs and also sort of nationalistic [ph] use of indigenous suppliers. What gives you confidence that you're in a good position to continue to grow in Korea despite some of these other smaller secular trends that might actually provide headwinds in future years?

Well, we already compete today with a lot of power management IC suppliers, as well as chipset providers. And we know from history that this really is a very competitive business. And it is -- it's realistic to assume that we will not win every single socket at our customers, including our top customer, frankly. But we have built a successful mobility business, and I attribute this to a combination of 3 things. We do have a very broad IP portfolio, number one. Number two, we are structured internally to be able to develop these products faster than others, and this is something that we notice by looking at our competitors. And we have the deepest analog integration experience. We're organized by market, we got common manufacturing platform, we believe, better design automation tools, et cetera. So we really intend to maintain or to extend, whenever possible, our lead, in order to provide these highly differentiated products and put as many barriers as we can. But having said all that, we know from history that it is competitive. And some competitors are going to be able to do some of these functions. So we have to fight for every socket.

Our next question comes from the line of John Pitzer from Crédit Suisse. Ryan Carver - Crédit Suisse AG, Research Division: This is Ryan Carver in for John Pitzer. So just looking on the smartphone market, you talked about potentially your integration capabilities within this space. What other functions, thinking about sort of a standard smartphone or a standard tablet, but what other functions could you guys integrate into your current offering near-term and how much of that integration is driving your growth plans going forward in this business versus sort of unit increases within the market underlying it?

So if I look at the smartphone market and smartphones, we have opportunities -- we also have opportunities where we do differentiate about selling products like I mentioned, for sensors, for example, which are, are not really generating a lot of current revenue, but we do see that as an area where we can differentiate and make better products than our competitors. And one of these examples is actually in gesture sensing, which is a good area, we believe, for us, because we've come up with some pretty clever solutions in that field. Inside of -- but I think your question was more about the PMICs or power SoCs. But if it's about that, then there are possibilities, depending on how customers are configuring their systems. We've always talked about touchscreens as another possibility. We also see opportunities in making -- integrating in functions like sensor hubs, for example, as another area. And clearly, we've invested in, by buying a company, the ability to make motion sensors or gyros for these applications. So that's another area where we can participate. And obviously, when you talk about analog, there's also audio possibilities for the company, both in terms of really special speaker drivers, as well as being able to do codecs and so on. So it's an amazingly rich analog content, there's amazingly rich analog content in smartphones. And I hope I was able to relay to you some of them that we see today. And I don't know what tomorrow's going to bring. But it seems like these smartphones are kind of becoming a hub for people, where they're trying to do much more than we're traditionally used to. And I bet there's going to be applications that we don't even know about yet that are going to have some kind of analog requirement. Ryan Carver - Crédit Suisse AG, Research Division: It sounds like you guys have some good upside from a content increase in those -- in that market. I guess another question, going back to sort of the Comm sector, and maybe I'll ask a different way, I think. If you look at sort of the base station market today, and you said it was a relatively low percentage of your revs, is that because that the unit volume within that market is low and you guys have a high level of penetration? And I guess thinking of it that way, when you look at the growth potential in the Comm space, how much do you foresee small cells being able to outpace, sort of, the large cell from a unit perspective. I mean, is it simply a matter of the units are so much larger in small cells versus base station? Or are you guys actually getting increased content in these areas in terms of share content?

Okay. So let me see if I can answer that in a short period. So our share of all the analog content in the infrastructure base stations is actually not that high. The biggest analog content there is most likely in data converters. And we don't have much content there. So our revenue per base station module or RF board, I don't know what you want to call it, is really not that large, frankly. Most of our content is in some RF products. It's in power. It's in monitoring and control functions. So they're not really -- most of it is not in the signal path area. So that's why we're not really a good bellwether for that market. Now, we believe that in small base stations, small units, first of all, we think that the volumes are going to become higher. And we have more opportunity there because we're not trying to displace incumbents that already have pretty good positions with the main customers. And we have the ability to integrate many of these analog functions that are in the signal path. And that will enable us to get a larger share of market on the RF transceiver side. So that's really what our focus is, mostly in these small stations. There will be other smaller opportunities for power supply and so on. But 2 things will happen, the unit volumes, we predict, are going to be higher in terms of base station count. And we will be getting a bigger share -- it's a virgin territory, we're not really fighting with incumbents.

Our next question comes from the line of Craig Ellis from Caris & Company. Craig A. Ellis - Caris & Company, Inc., Research Division: Bruce, the first one is a clarification. When you talked about managing for a lower inventory in the quarter, are you referring to on-hand inventory or channel inventory or both?

That statement was in reference to on-hand inventory. So from our point of view, we were at 103 days. Our target model is 100 days, kind of plus or minus a few days in order to really maximize delivery performance for our customers. But at 103, we're sort of at the high-end of that plus or minus, and so we like to bring that down a little bit and so, I think, so we're really talking about internal. I think in the channel, we're at 51 days. We actually think we would like for that to go up. We think it's at too low of a level. But that's not in our control, that's the distis. And to date, they haven't felt the confidence in order to begin restocking. Craig A. Ellis - Caris & Company, Inc., Research Division: Okay. Thanks for that. And then, Tunç, my follow-up is for you and it's more on the product side. You had mentioned in prepared remarks, you're seeing some good tablet design wins. Can you talk about whether those design wins are with existing customers or if they're with new customers. And when I say existing, I'm really referring to your smartphone customer base. And then can you also provide some follow-up color on the PC/Computing business. I thought, for Maxim, that was much more of a financial terminals-centric business, but it sounds like the notebook business is a bit of a headwind as you look out to the fourth quarter.

Okay. So your first question on tablets, the design wins that I talked about are -- I'm looking at my notes here, and most of those are actually with other customers other than our top customer. So they're really either newer design wins or they're products that are -- have started production last quarter. And I can't -- even though I can't give specifics, I think we're going to have to wait until teardowns for you to be able to tell where we're at. I think it's fair to say that they're not with the existing customer, top customer that we have right now. Your other question, I think, was about weakness in the computing field, right? Craig A. Ellis - Caris & Company, Inc., Research Division: Yes, that's correct. I think you mentioned notebooks and computing, but I thought for Maxim, computing was more financial terminals-centric, ATM and point-of-sale devices, et cetera.

Yes. So in that segment, we have various markets and obviously, you have servers and financial terminals, we have storage and notebook as the primary areas in that field. And what we're really seeing is that if you looked at the prior quarter, I mean from Q4 to Q1, these other markets, like terminals and storage, were up and when you look at the quarter we're in, just like looking at what our order rates have been and so on, what we're seeing is that those markets that were up, they're going to be slightly down from the prior quarter. But on average -- the average of the 2 quarters are probably about flat. So that's some color on segments other than notebook/PCs.

And Craig, our Computing was about 14% of revenue right now, so it's definitely our smallest market. And within that, the notebook/PC is about 5% of revenue. So it's a very small amount, but it's actually still the largest of -- because those other markets Tunç mentioned are all less than that. So to the extent that there is still weakness in notebook/PCs which we're seeing, now that will be the kind of the key driver that kind of pushes down our Computing business in the December quarter. And then as Tunç indicated, in some of these other markets where we had a good Q1 for financial terminals and data storage, we're seeing a little bit of an offset in the December quarter.

Our next question comes from the line of Jim Covello from Goldman Sachs.

This is Gabriela Borges on behalf of Jim Covello. I want to ask about linearity in the quarter. Could you talk about what you saw going through September and then also what you've been seeing quarter to date?

So I think from a linearity point of view, it was normal. I don't think there was anything unusual. It's not a big driver for us within the quarter. Our business is pretty broadly diversified. And so we don't have real distinctive linearity within a quarter. But both in the September quarter and what we're seeing so far, quarter to date, there's nothing unusual about the linearity and I think that to the extent that our order pattern today is reflected in the guidance that we're seeing, specifically around how the Consumer and Communication businesses are probably going to be around flat and the Industrial and Computing businesses are going to be down in the quarter. The order flow reflects that.

That's helpful. And as a follow-up, if I may. Nice job on the cost controls in the quarter, could you give us an update on how we should think about modeling OpEx going forward and what your priorities are for R&D?

Sure. I think we indicated that the December quarter will be up about 2%, and really that's at, say, roughly $4 million. $3 million out of that $4 million is just the full quarter impact of our merit process. I think in this uncertain environment, we're going to work very hard to continue to control OpEx and have any increases, try to match or be under revenue changes quarter-over-quarter. We will continue to invest in our growth businesses, absolutely that's -- and from an R&D point of view, we think that's critical to maintain our growth, long term. That said, we're going to be very active, I think, continue from a portfolio management and really look at where we're investing and follow the invest, harvest and divest strategy. You saw a little bit of that in our last fiscal year and that's something out of the 60 to 70 product lines that we have, we're always looking for those that are -- the returns are not what we originally thought and are there opportunities to reduce investment there.

So we're maintaining our long-term model of being in the low 30s for OpEx and, obviously, it will go up and down depending on how the business goes, but that continues to be our long-term model.

Our next question comes from the line of Chris Caso from Susquehanna Financial.

I wonder if you could talk a little bit about the gross margin profile into 2013 and obviously, that's going to depend on business conditions and where the revenue run rates are. But I know you're moving some products within the fabs and you could perhaps talk about some of the structural things that could create headwinds or tailwinds for gross margins as we go into next year?

Yes. So our long-term model, 61% to 64%, I think we've done a very good job managing within that model. Though really, the only thing that moves it materially over 100 bps is utilization. And currently, we're running at some lower levels right now. And so from that point of view, we've guided to the low end of that range at the midpoint. I think going forward to the extent that, long term, the business grows and our utilizations will increase, I think that will help us maintain our margin model while we continue to invest in high-growth markets. So I think long term, I think the fact that as utilizations go up, as we continue to drive into our 300-millimeter fab, our fab partner, which was about 30% of manufacturing activity in the second quarter -- excuse me, in the first quarter, was 300-millimeter. And we continue to drive integration, right? I think that's another big area where, to the extent that we can add value to our customers, right? And we differentiate our products. We're able to capture value, capture margin with those highly integrated products.

Right. And as a follow-up, on the topic of utilization, I mean, a lot of your customers that, I guess, aren't doing as well as you guys are, over the last cycle, who do have a lot of excess capacity and obviously would like to be aggressive. Does that matter to you guys? I mean, historically, it hasn't been an issue for you, but do you see any changes in the competitive landscape going forward by some of the changes that are going on in the market right now?

You said customers there, but I assume you meant competitors.

I'm sorry. I meant competitors. Yes.

So hopefully all our customers are doing well, that's what we want to happen. In terms of the competitive -- the areas that we compete with other competitors, where we really can't differentiate our products is where most of the pressure comes in, in terms of pricing, for instance. And our strategy has been and is going to continue to be to find product areas where we have enough barriers to entry, so that we can make a different product that's more desirable from our customers and be able to control our pricing that way. And we have a product portfolio that's highly proprietary and especially in the recent years, we've been able to distance ourselves from almost all of our competitors in terms of being able to make these solutions instead of making really discrete building block complement-type products. And that enables us to be able to have better control of our pricing. So our general strategy really is not to be the price leader in our markets. And we really want to be the value leader in our markets. And that really enables us to be able to compete very well in the marketplace by having these highly valued products for our customers.

Our next question comes from the line of JoAnne Feeney from Longbow Research.

I was wondering if you could go back a bit to the Industrial discussion and if you could perhaps give us a break out, if you do, between your sort of traditional investor opportunities, automotive and then perhaps, somewhere in the energy group. The reason I ask is because I'm trying to compare what you guys are seeing and experiencing in terms of orders and outlook versus others that are more exposed to traditional Industrial. So if you could first put that in perspective, that would be a great help. And then secondly, perhaps compare your opportunities versus what the industry might be able to do as a whole?

I'll take the first half and I'll let Tunç take the second. So overall, for the quarter, Industrial was 24% of revenue. As far as kind of the, some specific markets there that we've called out: Automotive, we talked before is about mid single-digit; and then the utility and then smart meters is just a little bit less than that, probably in the 3% to 4% range. Beyond that, it's a lot of general-purpose industrial, right? Control and automation, security, electrical, military, other industrial and so those are the big parts of our Industrial markets, which do go through distribution. And so really, when we look at sort of the automotive, smart meter, I think that's where we've been able to outperform on the Industrial side. I think in the general-purpose industrial that goes through distribution, I think it's much harder there to outperform the industry and I think our results have been basically in line with what we've seen from many of our peers.

Yes. And if you -- the second part of your question was longer term. What is different about our strategy than others? So first of all, this is a market which really very highly values the performance of the products, and really, to service that need from customers, which are usually pretty small in size. And they kind of are forced to use standard products or component-level products in many of their system designs. We have strategy from several business units to make products that are general-purpose and in areas of interface, in power management, in data conversions and so on, that are what you would call traditional, standard analog products. Now, to supplement that, and that market grows at a certain rate, to supplement that, what we've done is we found areas in Industrial, and Bruce mentioned a few of these, like in the smart meters, in medical equipment, we found these places where we can actually provide products that are more highly integrated and be able to satisfy the needs of most of the customers and be able to provide solutions for them to make their design, their job a lot easier, and then be able to make their solutions sizes smaller and so on. So our long-term strategy is really twofold: One is to continue to make these products that are building block type products, because, A, they sell on their own, and B, they provide us with the IP that's required to put into our highly integrated products. And then find select markets inside the industrial space, select segments, where our high integration strategy works and basically that's the true -- the two-prong strategy that we're using. And I named a few of them, did I miss any that, Bruce, you can remember? Smart grid, medical, those are the big ones. Automotive is another one, I did miss one. Where we can put together these highly integrated solutions that the customer really values.

Right, great. Given that nice summary, I'm wondering if you have the visibility of design wins today, given the weak macro environment, that you think will allow Maxim to outperform the industry, say over the next 12 months, or you feel like macro situation is really going to have to improve more substantively for those efforts you've been making to allow you to outgrow?

This is a fairly slow-moving market. And if you look at design win activity, it seems like we're going to win these designs, because these companies really have to think long term. And if you really want to understand if these macro environments are having a big impact on what's happening currently, I think you'd have to look at whether these end customers in these big industrial markets, for example, or meter market and so on, are downsizing their R&D. That would give you an indication whether there's less projects or less possibilities. But we really have not seen that. So I think our opportunities are still there. And they're going to continue to be there because the world needs more products. They need more solutions to solve big problems as we spoke about at our Investor Day.

And we have time for 2 more questions. Our next question comes from the line of Craig Berger from FBR Capital Markets. Craig Berger - FBR Capital Markets & Co., Research Division: I want to ask one on the handset space, just based on what you've said your split is between integrated and nonintegrated. It seems like you could be servicing close to 200 million cell phones this year. Is that in the right area and can you also explain whether your integrated products address midrange and low-end handsets. Do you have lower-cost versions? How much of the handset market can you address?

Okay. I'll take the first. So we find it, actually, very difficult to actually know the denominator there, as far as the exact number of handsets that we're selling into. Because in many cases, you may sell 1, 2 or multiple chips within to a single model. And so we haven't found one chip that goes into every phone, and therefore we can determine what the kind of total number of units are. So from that point of view, and we've actually worked hard to try to figure that number out, but that's not one that we can determine easily.

So by the way, I don't think we actually said what our highly integrated chip percentage was. So in the smartphone market, we think it's in about mid-60s percent or so. And the second part of your question was about, what about, smartphones extend all the way from really high-end phones to all the way to now phones that are kind of borderline between a feature phone and a smartphone. So we call that the low, low end of smartphones. So we are winning more low-end smartphones. But we really are careful about which, where we have to invest our R&D. Because obviously, in a very low-end smartphone, there are fewer analog functions. We, again, at the investor conference, we showed there were 80-plus analog functions in a high-end smartphone. That number is much less in a low-end smartphone. And the value we can add and the ASPs we can get per phone, are far less. And we are limited by the number of engineering resources we have in terms of being able to support all the needs for our customers. So we try to pick and choose the ones that really are areas where we can add the most value to the customer, whether it's in a low-end phone or in a high-end smartphone, that doesn't matter that much for us. But if you did look at our profile, most of our business is going to be in the high-end phones, in smartphones, not in the, what I call the low, low-end smartphones. Craig Berger - FBR Capital Markets & Co., Research Division: Great. Just as a quick follow-up, can you -- we're running out of time, so I'll let the next person ask.

Our final question comes from the line of Chris Danely from JPMorgan. Sameer Kalucha - JP Morgan Chase & Co, Research Division: This is Sameer Kalucha calling for Chris Danely. I'm curious, if you could remind us, on the inventory, you mentioned a decrease in the channel, 51 days. I'm wondering where did it bottom in the '08, '09 timeframe? And then maybe as a follow-up, what is your -- what are your thoughts on how the customers are reacting to this low inventory environment? They are planning to keep it low given the uncertainty or do you think there's a possibility of a snapback like we saw in the '09 timeframe?

Yes. So it's actually interesting. We hit our low point from a channel inventory, actually during the recovery, when we were -- when business came back very strongly and we were supply-constrained. And I think it got down to about 52 days, kind of the low 50s. So it's kind of where it is at today. I think, long term, they're clearly going to restock, all right? Our target model is 65 days. Whether they get all the way back up there, maybe that goes or comes down to 60 or something like that. It's certainly going to be something higher than the 51 days that we're at today. However, I think, given the uncertain environment and given the fact that we all have short lead times right now, I don't see a lot of conviction on the, by the distis in order to start restocking. And so I think until they get more comfort with the macro environment, I don't think you're going to see that restocking. And then when they do, we'll just have to wait and see whether they kind of follow old behavioral patterns, where they try to restock very quickly, or whether they are more conservative this time. It's very tough for us to predict their behavior.

And remember that this is a very broad customer base and we don't speak with them directly. So it's hard for us to be able to interview them, so to speak, and figure out what's going on through their minds. So frankly, for the broad market, the mix that we look at is the PMI. So you're not getting a lot of lead time on what's happening and when it's going to happen.

Thank you, operator. This concludes our conference call. We'd like to thank you for your participation and for your interest in Maxim Integrated.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program, you may now disconnect. Good day.