Analog Devices, Inc.
Q1 2008 Earnings Call Transcript

Published: 21 Feb 2008

[Operator:]

Good afternoon. My name is Eva, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices First Quarter 2008 Earnings Call. (Operator Instructions) Ms. Tagliaferro, you may begin your conference.

[Maria Tagliaferro:]

Hello, everyone. This is Maria Tagliaferro, Director of Corporate Communications for Analog Devices. If you don't yet have our First Quarter 2008 Release, you can access it by visiting our website at analog.com and clicking on the headline on the homepage. This conference call is also being broadcast live on the Internet from analog.com. If you select "Investor Relations" and follow the instructions shown next to the microphone, you can listen via the Internet. A recording of the call will be available today within about two hours of the conference call's completion and will remain available via telephone or Internet playback for one week. Participating in today's call are Jerry Fishman, our President and CEO, and Joe McDonough, our Vice President for Finance and Chief Financial Officer. We have scheduled the call for 60 minutes and will begin in a moment with Mr. Fishman's opening remarks. The remainder of our time will be devoted to answering questions from our analyst participants. Analysts participating via telephone can press "*" "1" on the telephone at any time beginning now to queue for questions. I would like to point out that under the provisions of the Private Securities Litigation Reform Act of 1995, this conference call will include forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Risks factors which may affect our future operating results are described in the company's most recent Annual Report and Form 10-K filed with the Securities and Exchange Commission. Also this conference call will include time sensitive information that may be accurate only as of the date of this live broadcast, which is February 20, 2008. With that, let's begin with Jerry's remarks.

[Jerry Fishman:]

Well, good afternoon. As we previously reported during our first quarter, we completed the divestitures of our wireless handset modem chipset business and our PC voltage regulation and thermal monitoring business for total after-tax gains of approximately $247 million. These businesses have been reported, as we've previously mentioned, as discontinued operations, and comments today from the management team and my self will be focusing of course on the continuing operations of the company. Our Q1 2008 sales from continuing operations totaled about $614 million, which was up 4% from a year ago and down about 1.5% sequentially from last quarter. On an equivalent 13-week basis, since the first quarter of last year was a 14-week period, our sales were up 12% from the same period last year. Overall our revenues from customers in the industrial end market grew slightly in Q1. Within the industrial market as a whole, product used in work-based instrumentation, factory automation and defense applications grew sequentially during the quarter. Automotive products declined sequentially and ATE product revenues declined significantly albeit on a relatively low base. The ATE declines were, of course, in line with negative semiconductor capital equipment trends that have been well reported. We're very pleased that our industrial end market, which in aggregate represents thousands of products sold to more than 10,000 customers and now after the divestitures represents 49% of our sales, continues to grow in what turned out to be a tough seasonal and cyclical period. Revenues from communications customers grew 6% sequentially. Within the communications market, our strongest growth came from base stations, particularly in Asia, and also from analog products used in wireless terminals or in the newest microphone preamps, lens drivers, power management products and screen and keypad touch sensing products which all add substantial new functionality to the latest mobile devices. Communications customers represented approximately 23% of our revenues last quarter. Consumer customers represented 22% of our revenues in the first quarter. Revenues from consumer customers declined 12% sequentially after a similar increase in the prior quarter, which included much of the Christmas season. This pattern is very typical each year and we expect to see revenues from the consumer end markets increasing in our Q2 based on the recent Customers Forecast that we've seen from the largest consumer customers' reports. Revenues from computer customers also declined in Q1, after good growth in prior quarters building up to the holiday season. Computer customers represent only approximately 6% of our revenues last quarter. On a geographic basis, our revenues grew in China and other parts of Asia and declined sequentially in North America and in Japan in line with the decline in our consumer business last quarter. On a product basis, our analog products represented 90% of sales and DSP brought up 10% of sales during the quarter. Converter revenues declined sequentially in line with our overall product revenues but increased 15% year-over-year on a normalized 13-week basis. Amplifier revenues were essentially flat sequentially and up 7% year-over-year on a normalized 13-week basis. Together converters and amplifiers represented more than two-thirds of our total product revenues during the quarter. Power management, radio frequency products and MEMS products, each grew sequentially and year-over-year. General purposes DSP products were down slight sequentially and up year-over-year on a 13-week basis. Very interestingly, our sell-through to our broad base of customers that are service-through-distribution was very linear during the quarter, with the exception of the two weeks over the holiday period which were lower. Our sell-through in January remained strong and was consistent with November and early December rates. The gross margin for continuing operations in the first quarter was 61.2% which was up from 60% the previous quarter. The sequential improvement was mostly the result of a favorable mix of revenue from products used in industrial and communications infrastructure applications which generally have higher gross margins than products used in consumer and computer applications. Excluding the $25 million restructuring charges that we recorded in the prior quarter, operating expenses were relatively flat sequentially. As a result operating margins from continuing operations increased sequentially to 23.8% and that of course now includes the expenses of stock options. Diluted earnings per share from continuing operations were $0.40. The leverage in our business model is demonstrated by the fact that our earnings grew faster than our sales. Our earnings on a continuing basis grew 5% sequentially relative to a slight decline in our sales for the quarter on a sequential basis. On a year-to-year basis, earnings were 9% on a 4% increase in sales. Our results for continuing operations reflected in our richer mix of fast growing high margin products. Our focus is on serving a very diverse range of applications where ADI can deliver innovative solutions that give our customers a competitive advantage. We continued to invest heavily in the talented engineering at ADI that fuels these innovations. At the same time, we're continuously optimizing our manufacturing infrastructure to maximize our return on asset. Our cash balance and cash flow remains very strong during the quarter. Operating cash flow was $177 million, or approximately 29% of our sales. Capital expenditures were about $40 million. In Q1, we repurchased approximately 12 million shares or 4% of shares outstanding for $359 million. We've repurchased a cumulative total of 28% of the outstanding shares from the start of the program through the end of the just recently completed first quarter. We have approximately $306 million remaining of the total four $4 billion that have been previously authorized by the Board of Directors. Cash dividends paid to shareholders in Q1 totaled $54 million which represented 44% of income from continuing operations, 31% of cash from operations, and a yield of about 2.6%. This yield is above the average for our peer group and also the average of the S&P 500. Overall, order rates were strong during Q1, higher than in Q4. Looking at end customer ordering patterns, which means the total of orders that we received directly from customers plus the orders placed by end customers on our distributors, total customer orders also increased sequentially. Our end customer book-to-bill ratio was slightly above 1 in Q1 compared to slightly below 1 in the previous quarter. Our opening backlog entering Q2 was higher than the start of Q1 and represented about two-thirds of our second quarter sales plan. We're planning for our diverse product market and geographical mix of businesses to provide ADI with good stability during all these economically uncertain times for four particular reasons. Number one, our orders and revenues in the industrial end markets have held up well through the January period and are poised for seasonal growth as we would typically expect in our Q2. Even though we are planning for more unit growth in the U.S. in Q2, our industrial business is strong than in most other regions of the world. Secondly, we expect to increase Q2 levels from our consumer customers for advanced TVs, cameras and home entertainment products, which are entering a stronger seasonal period in Q2 compared to Q1. We're very well positioned in many of the newest exciting and popular consumer applications that we've discussed at great length in previous conversations. Number three, we now have relatively minor exposure to PCs and to low-end handsets which are both currently the most volatile markets and are being negatively impacted by seasonal economic patterns and a much more competitive landscape which impacts unit volumes and price. And lastly, as I mentioned earlier, our opening backlog is up from last quarter and so far in Q2 the weekly order rates remained consistent with Q1. As we integrate all these variables and balance these against the uncertain economic conditions we're all facing, we're planning for revenues in Q2 to be in the range of $615 million to $640 million, which is from flat to up 4% sequentially. We're planning for gross margins to remain approximately flat at about 61% with a higher mix of revenue from consumer applications, balanced by continuing growth in industrial and communications revenues. We're planning for some small expense growth in Q2, mostly as a result of annual salary increases which became effective at the beginning of this quarter, Q2. Other than that, we're keeping very tight control of all discretionary expenses until we get a much clearer picture of the second half of the year. So with these assumptions, we plan the GAAP earnings from continuing operations to be in the range of $0.39 to $0.42 in Q2.

[Maria Tagliaferro:]

Thank you, Jerry. During today's Q&A period please limit yourself to one question and no more than one follow-on question and if we have time remaining, we'll give everyone an opportunity to ask an additional question. Operator, we're now ready for questions from our analyst participants.

[Operator:]

(Operator Instructions) Our first question comes from Christopher Danely with JPMorgan.

[Venk Nathamuni:]

Hi, good afternoon. This is [Venk Nathamuni] in for Christopher Danely. Thanks for taking my question. You had talked about your gross margin trends and operating margin trends for Q2. Can you give us some additional color on what do you expect the gross margin and operating margin trends to be beyond fiscal Q2?

[Jerry Fishman:]

Well, I think on the gross margin side we've talked about in the past that a lot of that depends on the mix of products we have and the higher the mix stores industrial and some of the high-speed communications product, the higher the gross margins and the more we get on the consumer side, that impact of gross margin negatively even though the return on assets for those products tends to be very good because we don't manufacture a lot of those products or sales, we don't carry any assets, and we can lower inventories. So I think it really is mostly dependent on what the mixes of the business. On the expense side, we are trying to get operating leverage on the expenses by letting the expenses grow more slowly than the sales, and that's still our plan for the balance of the year after we absorbed the salary increases that we're going to absorb in the second quarter. Beyond that we expect to be able to grow the revenues at a rate faster than the expenses and get some leverage on that in the second half of the year.

[Venk Nathamuni:]

Right. So the follow-up, do you expect higher mix of your higher margin industrial and communications products for the rest of the year?

[Jerry Fishman:]

Well, it varies a lot quarter-to-quarter, and I think in this uncertain world, it's very hard to make that prediction. Certainly in the second quarter, we understand what is most likely to happen. We're likely to get a run-up in both the industrial products as well as consumer product, but every quarter it will be different, so it's very hard to be precise about that for now.

[Venk Nathamuni:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of David Wong with Wachovia.

[David Wong:]

Within your guidance, can you give us some feel whether you are expecting better-than-seasonal or less-than-seasonal growth from any of your end-market segments in the April quarter?

[Jerry Fishman:]

Well, I think the way to think about our guidance for the next quarter is that we haven't really seen a lot that makes us very negative at all about the outlook. We've listened very carefully to what many people have said about this quarter. Our trends in the industrial business have been good, which is half our business. So, I think part of the conservatism a little on the outlook for the quarter is, we just don't know what's going to happen going forward. The fact that the industrial business have sold up, it's a good sign. The fact that our large consumer customers are forecasting good quarter this quarter, it's a good sign. The fact that, we are not in some of the most-volatile markets, they are causing many of our competitors to be very guarded in their outlook, I think that's a good sign for us. But I think at the end of the day, we have to wait and see what happen, we don't see any very negative trends in those major end markets that comprised the largest bulk of our sales. So, I think to our first approximation at least our planning process, and our products lines and our sales force expect roughly a seasonal quarter for us and the reason we are a little more hesitant on the guidance is, we just don't know what the world is going to throw at us, given all the uncertainties out there. So, we are a little bit cautious on that.

[David Wong:]

Great, thanks.

[Operator:]

Our next question comes from David Wu with Global Crown Capital.

[David Wu:]

Good afternoon, Jerry.

[Jerry Fishman:]

Hi, David.

[David Wu:]

Can you talk a little bit about typically in a normal year, your second quarter is your strongest quarter of the year because of the industrial exposure?

[Jerry Fishman:]

Right.

[David Wu:]

This year, you're basically expecting revenue growth in the second half to meet expense growth. If I go by historic standards the next two quarters in the second half tend to be on revenue basis, very flat with your Q2. Does that mean that your expenses are going to be flat on the sequential basis also in the second half?

[Jerry Fishman:]

Well, first of all, I think our product mix is a little bit different than it used to be or was really dominated by the industrial business. But typically we see a little bit of growth in the third and fourth quarter in our industrial business, we see more growth in the end of the year in the consumer business, that's a larger portion of our sale. So our historical ratio, the historical growth quarter-to-quarter is a little bit different than it used to be. But I think that the only real expense that we're going to let bad right now are the expenses for the wages until we're uncertain or a lot more certain of what the revenue pattern is going to be in the second half of the year. So we're going to keep that under a very, very tight foot on the expenses until we really understand the revenue growth so we can get in Q3 and Q4.

[David Wu:]

Okay. With this MEMS come in from TSMC to help your consumer business?

[Jerry Fishman:]

I think that will happen in the second half of the year pretty much is the way we've been describing, we've seen samples of that and everything about it looks okay so far. So I'd say we'll start to see in Q3 and will see more of it in Q4 and that's been our plan.

[David Wu:]

Okay, thank you.

[Operator:]

Your next question comes from John Dryden with Charter Equity Research.

[John Dryden:]

Hi, thanks for taking my questions. First, for power management up Q-to-Q

[Jerry Fishman:]

I would say in aggregate we've very good traction at some good accounts for our power products. The sales growth in that it takes a little bit longer after the designs are done, but we will begin to see that in the second half of the year, and the quality of the designings that we've, we're very pleased with. So there has been a long hope for us, but based on the early indications in that business, now I expect we'd see some contributions from that business in second half of the year in a way that we've been planning for.

[John Dryden:]

And then a question for Joe, a follow-up on gross margin. Is it for the rest of the year any update on improved utilization despite the increased inventory days this quarter for the remainder of the year? And is there any benefit from ASP lift?

[Joe McDonough:]

Well, there is some benefit from the ASP actions that we've taken. Certainly, the factory utilization can improve in the out-quarters once we reduce the inventory a bit. But I think the other side of it is, there is the mix of the business, which is always heavy part of the gross margin. And so some of the growth that will likely be experienced will be in some other parts of the business where the gross margins on that business might be a bit lower. So I think it's a first approximation, 61% of gross margin is a pretty good gross margin for the business we're in. And that's what we'd like to run the business in a way that we can maintain that.

[Jerry Fishman:]

I think most of the answer about that turns out will be very dependent on the mix.

[John Dryden:]

Thank you.

[Operator:]

Our next question comes from Steve Smigie with Raymond James.

[Steve Smigie:]

Thank you. I was hoping you could talk a little bit about what was responsible for the very nice year-over-year growth in the communications that can be base looks like up 27% and will you expect this trend to continue this year?

[Jerry Fishman:]

Well, I think the largest part, it's a very diverse business in communications. There is some business that's in so many large end markets like phones, particularly phone infrastructure, networking product and the like, and some of that just general purpose communications applications and just a wide variety of applications that some of which we service through a broad base of distribution that we have. But I tell you specifically in the larger markets, the base station business for us remains very strong. As I mentioned earlier during the quarter, a lot of that trends was in Asia as compared to the U.S. But nevertheless, that's very strong business for us, and our competitive position is very strong there with largest people that make base stations, in fact virtually anyone who makes base stations uses our products on those in the analog side. Interestingly, we saw a good growth in the handset market x, that's not the digital base band in radio part, which is the competitive part. But in analog products that sell to those kind of customers. For those types of products, our customer base is much, much richer than the customer base we had on the digital base trend, which was always one of our problems which caused us to divest that business. So, we have some new functionality in the analog side. A couple of areas I mentioned earlier that really do increase the functionalities of firms in a very important way as well as some other products and the power business is that, that really do, give compared to our customers a competitive advantage over what they had to buy. So, it's really a combination of the base stations, handsets, networking products any kind of high-speed communications or infrastructure. It's really a very varied group of different end markets, all of which are doing very well for us.

[Steve Smigie:]

And this is a follow-up, assuming that macro-environment doesn't completely rollover, is it reasonable to assume, you could get a similar magnitude of growth this year, continue to penetrate, continue to offer good product etcetera or is that a little more suspect?

[Jerry Fishman:]

Well, I mean, it's very early to make that prediction. There are some businesses there that tend to bounce up and down a little bit. So I think we'll have a better chance to the year after the end of the second quarter.

[Steve Smigie:]

Okay, thank you.

[Operator:]

Our next question comes from Ross Seymore with Deutsche Bank Securities.

[Ross Seymore:]

Couple of quarters in a row you had given the exact breakout by the product types converters, amplifiers etcetera, this time you talked about that more in your prepared monologue, is it something that we're going to get a breakout on, or you kind of go back kind of just talking to it?

[Joe McDonough:]

This is Joe McDonough. The breakout of the product groups over time gets a little tougher because some of the integration that goes on and some of the product-development efforts. And so it seems more appropriate to talk about it during the quarterly comments rather than to provide the details on an ongoing basis. We started that practice when we had our DSP business and the analog business, and it was kind of hard to understand the handset baseband business, and it was hard to understand analog devices without that breakout. Now we've a company that for the most part is analog product-based company, and the product discussion I think is best left to the narrative.

[Jerry Fishman:]

One good example of that is we've been selling recently into the medical market, where new scanner product that has many, many dozens of A/D converters integrated on it, which now fallen to the category of other analog because it not only includes converters but a whole bunch of other single-processing. So the demarcation between other analog and both amplifiers and converters each quarter gets very complicated. On a quarter-to-quarter basis, you don't really get a lot of information as that. So, the way that we came to that conclusion, what Joe just said is, we started getting into a lot of internal conversations about which category is that going. And as soon as you connect those kinds of discussions, you'll realize that it's not a good measure to put out each and every quarter because there is not a lot of information in there. So that's a primary region for doing it, we will make relatively specific comments about in the commentary but there is not of specific data there because of the integration of many of these components. It's a more complex, system-level products.

[Ross Seymore:]

Okay. And then I guess switching over to the end-market breakdown that you give, that's very helpful as well. You talked a lot about the end-market mix impacting the gross margin. Consumer, of course being less gross margin coming and industrial being more. Give us an idea of just the deviation around the average just so we can get an idea of how big the mix can be. Should the good side grow faster, the bad side grow slower, etcetera?

[Jerry Fishman:]

The thing that makes that hard to really be very quantitative about is even within each of those product segments, there are wide variations in gross margins. In the industry business, we put in product likes automotive products and we put in products like process-controlled product, just a deviation between those products can be quite a bit on the gross-margin line, and the same is true with consumer products. So, I don't think we're real comfortable in being very quantitative about that beyond just generally saying that the gross margin is a little bit lower, and those products there, they are certainly gross margins in many of those products that most semiconductor companies would be very happy to have the average. So these aren't really low gross-margin product; they have no value, they are just, when you are comparing them to the industrial product, which have extraordinary gross margins, somewhat lower. But I don’t think we are comfortable going into a lot more detail about that.

[Ross Seymore:]

Okay, thank you.

[Joe McDonough:]

I think the other part that's important is the return-on-assets calculations. We have the gross margins that would be lower than the company average typically are on products that are manufactured externally at foundries where the foundry has the asset base and is achieving a return on its assets and we're getting return on the design that we've added there. And other businesses, they are internally manufactured, and we're getting the return on those assets.

[Jerry Fishman:]

The other way to look at this thing is with a much richer mix of consumer products. Even last quarter, we're putting up 61% gross margins, which is pretty good number.

[Ross Seymore:]

Yes, I am not questioning the margins at all; they are very, very good. I just wanted, if mix is the reason I things get better or worse and deviate, just trying to get an idea of how to calculate that going forward and forecast it?

[Jerry Fishman:]

Well, what we're trying to do -- I think as Joe alluded to -- is that we have a complex mix of businesses. We think the kind of gross margins that we're putting up are sustainable going forward. We've looked at the mix, we looked at the cost structure, and certainly that's what the goals of the company are. And whatever the mix is to get there, I think we're going to, that's where we're putting the money to invest. So, we're trying to keep, we don't like the gross margin and aggregate that vacillates heavily quarter-to-quarter, although I think everybody would allow for the fact that from quarter-to-quarter could go up or down little bit. We don't expect to see large variations in gross margin relative to the mix of business in a particular quarter.

[Ross Seymore:]

Okay, thank you.

[Operator:]

Our next question comes from Tristan Gerra with Robert Baird.

[Tristan Gerra:]

What is your inventory day target for this quarter, and what is the impact of any potential inventory reduction in the quarter on the gross margin guidance?

[Joe McDonough:]

Is the question what is the expectation for inventory for the second quarter?

[Tristan Gerra:]

Correct and also what will be your gross margin guidance excluding for any change in inventory as such any change in utilization rates?

[Joe McDonough:]

Our operating plan for the quarter is for inventory levels that in dollars are approximately equal to where they ended up at the end of the first quarter and for the days in inventories to decline somewhat during the second quarter. The gross margin we don't really think it that way inventory has an affect on gross margin. We think if inventory is available to service the demand of our customers and though it's not a gross margin issue.

[Tristan Gerra:]

And as a follow-up, are you planning, what direction in should we expect in terms of utilization rates this quarter and what was utilization rate in the January quarter?

[Joe McDonough:]

The utilization rates during the quarter that just ended were approximately the same as they were during the prior quarter.

[Tristan Gerra:]

And for this quarter?

[Joe McDonough:]

More or less the same.

[Tristan Gerra:]

Great, thank you.

[Operator:]

Our next question comes from Craig Ellis with Citigroup.

[Craig Ellis:]

Thanks for taking the question. First, just a clarification looking at the increase in inventory days and the reported quarter and then just the mix dynamics. Was there anything that happened in consumer that might have caused consumer to be a little bit lighter than what you expect it going into the quarter?

[Jerry Fishman:]

Well, I don’t think there was anything in particular rather than consumer demand was little weaker than we thought during the quarter, but by a lot and certainly not anything that's really impacted our customers forecast for this quarter. I mean typically, we see a decline after the October month, which is where we stop really shipping for Christmas, and typically in the quarter we see that going down a little bit, it went down a little bit more. Now we thought, I think it's the consumer-customer has probably got a little more cautious during the quarter. But, if they are forecasted rates for next quarter, we want to see that go back up. But I don't think there is any big news worthy there that we saw.

[Craig Ellis:]

Okay, thanks Jerry. And then, a separate question and more of a bigger picture question for you. As you look at the portfolio now, given the number of divestitures that you've had and lot of that is really, looks like getting the portfolio back to its high-performance, analog roots. Are you happy with where the portfolio is now positioned, or do you see either other areas of potential divestiture or areas where you think the portfolio is deficient where you would need or want to be that up?

[Jerry Fishman:]

Well, I think the largest concerns we had were in the big spend business, of course in the competitive dynamic there and the things, it was true for some of the power stuff that we sold. So I think that we have certainly a better mix of business than we had before. I don't think that's ever a static thing, we are always reviewing our portfolio to see what we liked and what we don't like. But I think the most important part of the portfolio that we wanted to get better resulted in those two transactions. But we always look at it, we look at it every year, we look at it more frequently in certain businesses to make sure that's the case. But right now, those two divestitures were very important ingredients in getting our mix better, which you can tell by the gross margins and other characteristics in the business.

[Craig Ellis:]

And as a follow-up to that, do you think you can grow the power management business to the scale, but you'd like to have organically, or is there potentially a role for acquisitions there?

[Jerry Fishman:]

I think there is a role for both potentially under the right circumstances.

[Craig Ellis:]

Thanks, Jerry.

[Operator:]

Our next question comes from John Pitzer with Credit Suisse.

[Deepak Sitaraman:]

This is Deepak Sitaraman for John. Joe, you commented about strong orders in Q1 that have continued into the current quarter as well. Can you give us any additional granularity in this trend, whether it’s largely broad-based or whether you are seeing particular strength from either (inaudible) or OEMs or EMS and so on?

[Jerry Fishman:]

Well, I think to a first approximation, we had a very broad-based solid order book in Q1, the distribution business both in terms of its sell-through and the order rates that came in were good. The interesting part in distribution was that the orders that our distributors placed on us, which as we said we don't pay a lot of attention to, were stronger even than orders that the customers placed on the distributors which means that the distributors at least for our products believe that the next couple of months, at least they are thinking they are going to be okay. So, the areas of weakness, last quarter I mentioned and the only one that looks like it’s sort of sustaining weakness, although we will have to see how that goes is the ATE business which, is in a cyclical depression here for us and our products are good and competitive situation hasn't changed very much. But the large ATE customers haven't placed lot of orders. We've got the anecdotal evidence from them that their business is getting a little bit better, but we'll have to wait and see how that comes out. So, there is nothing any points in the mix with all the diversity we've that, so if anything other than the ATE is really weak or really stronger, when we look at the sell-through through in distribution during the quarter, I think I mentioned little of this in the opening comments. Every week through the 11 real weeks we had in the quarter other than the Christmas weeks was remarkably consistent, that was two in November, was two first half of December, was two in January, and there was two in early February, which given at this, so many customers and so many products in that at least makes us feel like the world isn't coming apart, and there's no reason to be panicked about that. But we'll have to wait and see, I mean if you listen to all the commentary out there, it makes you very cautious, but certainly we haven't see that in the order rates from the broadest base of customers.

[Deepak Sitaraman:]

Okay, great. That's helpful. And just as a follow-up, would you care to comment on inventories in the channel and how you feel about start levels?

[Jerry Fishman:]

The inventories in the channel are normal. They're relatively flat to last quarter, the turns are normal, the demand that we're seeing from the distributors with order on us for replenishing their inventories are actually strengthening, which would indicate that they believe they need more inventory.

[Deepak Sitaraman:]

Great, thank you very much.

[Operator:]

Our next question comes from Uche Orji with UBS Warburg.

[Uche Orji:]

Thank you very much. Just let me ask you Jerry in terms of the earlier question you were answering about inventory and the consistency of the orders you've received, presumably there were some changes within regions. Can you talk about what you may have regionally, I know Asia, you alluded to Asia on the infrastructure side being strong, but we've had comments about Europe being weak from various players. Can you just give us any insights you might have about the regions in Europe versus Asia versus United States?

[Jerry Fishman:]

I'd say from a high-end view, North America was a little weaker than typically would expect. But Europe actually was good for us last quarter and in the early weeks of this quarter looks fine. So I don't see much of a change there. Again in Europe, we have a very diverse business, and one that is heavily industrial. So our mix of business in Europe is probably little bit different than some of our competitors, but the only other place geographically we saw any weakness was in Japan in the consumers space, and that's very seasonal phenomena. So, I mean that's where we seen so far, that is as much detail as I can give you.

[Uche Orji:]

Right. Just in terms of the -- talk about your operating backlog being two-thirds of your target sales. What is your expectation for time's order within this quarter? And how would you characterize that within historical level of translate you expect at this point?

[Jerry Fishman:]

The turns orders that we saw in the first quarter were a bit higher than they were in the fourth quarter, and our expectation is that we'll need fewer turns in the second quarter in order to have sales within the range of the guidance.

[Joe McDonough:]

And that's because the opening backlog.

[Jerry Fishman:]

The backlog is a bit higher.

[Uche Orji:]

Right. Okay. And just one last question Jerry I mean, if you look at your cash level now, you've $1.3 billion of cash, that's about 16% of your current market cap. What would be your intention for the use of this cash? You've talked about acquisition as a possibility, where does that rank in terms of how you use your cash business about share buyback?

[Jerry Fishman:]

Well, as we mentioned earlier, we have about $300 million left on the authorization. We certainly bid heavy buyers of our stock over the last couple of years. We bought back almost 30% of the company during that period. I think now, we are looking hard at, how much cash we have in the U.S., what about debt, what's the advantage of that, the capital markets are very complicated right now to take on debt. We have a large part of our cash balance outside the United States. So, we're constantly evaluating that, that is the best we can say, and we'll see how that goes and we'll tell you. But right now, those are all the considerations.

[Uche Orji:]

Okay. Thank you very much, Jerry.

[Operator:]

Our next question comes from Sumit Dhanda with Banc of America Securities.

[Sumit Dhanda:]

Jerry, I wanted to follow-up on your comments about the order rates from fusion being stronger than what the end customers placed on the distributors. If you had to disaggregate order rates from distribution versus OEM, how would you sort of characterize direct order rates from the OEMs?

[Jerry Fishman:]

Joe, do you want to…?

[Joe McDonough:]

I guess this is first approximation, the strength of the business from the distribution channel and OEM channel is similar. We've seen the same growth rates, same trends and ordering.

[Sumit Dhanda:]

Okay.

[Jerry Fishman:]

There is not a marked difference in the few channels. The reason that we don't pay a lot of attention to the orders and distribution or in fact we don’t pay much attention to the sales into distribution is because that bounces around a lot and that's purely based on their inventory levels. So we mostly pay attention to the order rates from the customers on the distributors, and certainly the order rates from the large customers on the analog and we only pay attention to the sales out from the distributors because that's the only that really matters. So there's a lot of noise in that system. If the order rates from distribution up and down it may be start in many ways there is more noise in that than signal. So we don't pay a lot of attention to ignore what we would recommend anybody else does.

[Sumit Dhanda:]

Okay. The other question I had was your industrial business relatively strong. Can you give us a sense of what your non-U.S. industrial business of the composition of the industrial business? And then are there any significant differences in terms of the margins associated with the portfolio products you are selling in non-U.S. geographies versus your best sales?

[Jerry Fishman:]

I mean, I don't have the specific numbers on that but have a very large industrial base of customers in Europe. We’ve an increasing industrial business in Asia, and particularly China, where there is many, many industrial companies where they are building their businesses in China. I don't really have any data on how those margins compare to the U.S. but I would say to first approximation in the industrial business, they are not very different.

[Sumit Dhanda:]

And would you say the first approximation your non-U.S. industrial business and as your revenues is half of the business more or less ballpark that all?

[Jerry Fishman:]

Could you repeat that? I thought I missed the question?

[Sumit Dhanda:]

Sorry, so my question was, your first approximation could you ballpark what your non-U.S. investor revenues are, is it 50%, 60%, less then that?

[Jerry Fishman:]

I'd say, I don't know the answer to that, we don't have the data here in front of us, but I think from thinking about the business, we probably have the largest percentage of our industrial business in the United States than Europe. Probably in Japan we have some, China we have some, but certainly the largest part of our industrial business is in United States and Europe. Now that might change in the future with China growing so fast for us, but right now I'd say that the percentage is higher in those two geographies for the industrial business.

[Sumit Dhanda:]

One last question for either you, Jerry or Joe. You indicated the backlog was up sequentially, you need lower turns to register sequential growth, which would be the midpoint of your guidance. Is it fair to assume the backlog, mid-single digits, is it more or less than that? Can you give us some flavor?

[Joe McDonough:]

I think it's fair to assume that it's up to a mid- to a low-single digits consistent with the guidance that we're giving. I think the right way to look at the guidance is we're talking about flat to up 4%. If it wasn't for the economic overhang that exists in the world, economies today, that 4% would be consistent with our expectation for next quarter, and we're tampering that as a result of just the economic uncertainty that exists in the world today.

[Sumit Dhanda:]

Okay, thank you. Very helpful.

[Jerry Fishman:]

Then on the industrial business, just so that we characterized that correctly, we've mentioned that the industrial categorization is about 49% of our revenues but within that about half of it is classic industrial, the rest of it is medical, and automotive and military and security, and a whole array of end markets that are not classical industrial markets.

[Sumit Dhanda:]

Thank you, again.

[Operator:]

Next question comes from Doug Freedman with AmTech Research.

[Doug Freedman:]

Hi, thanks for taking my question. Lot of have been asked and answered. So I am getting somewhat severe here. But can you give us the share count exiting the quarters that we might be aware of?

[Jerry Fishman:]

Share count exiting the shares that went into the EPS calculation were $304 million for the first quarter on a diluted basis.

[Doug Freedman:]

And that's your average, so what I guess I am getting at is, what numbers should we use for the April quarter?

[Jerry Fishman:]

Probably something in the $297 million or so.

[Doug Freedman:]

297.

[Jerry Fishman:]

We don't know that number yet.

[Doug Freedman:]

Okay. If you were to and just stepping back and probably just from the high-level standpoint, talk a little bit about what you've seen I mean clearly customers are cautious out there about the economy. From a competitor standpoint, have you seen any sort of irrational behavior on the pricing front or any sort of things happening on the competitive front that as you are saying, are there your competitors are seeing it, were so less, or doing things as far as protecting market share. Any commentary you can have sort on the competitive landscape that you are seeing?

[Jerry Fishman:]

I think Doug, if we were heavily invested in the baseband modem business and the PC power business, we probably be seeing a lot more pricing pressure than we're seeing. That's a very volatile business. There is a lot of competition out there in those markets, and the prices obviously respond to that. I think generically customers always are putting a lot of pricing pressure on everybody, the real key is to have products, the other people don't have, that's always sort of been what we wanted to do in a couple of market segments we heard from that strategy for couple of years. And so we changed it, but our sense is that we have lot of pricing power in the market because our products create a lot of value for the customers, and there is not second competitors that can go out there and easily cut your price and replace your functionality. Having said that, there is a lot of price pressure out there, and the customers are bringing armies of people around to try to separate value from price, and we respond to that from time to time, and so the burden is on us to keep reducing our cost structure so that the margins stay strong. So I mean I don’t think it's the analog is immune from the general price pressure that's out there in the market, but we're certainly immune from the most difficult price pressure where people sell products that three different people have and last vendor standing gets the order and doesn't like the money on it. I think we’ve a much lower percentage of our mix in those kind of products than we've over the last couple of years. Is that helpful?

[Doug Freedman:]

Yes, it is. If you would have a look it from the other standpoint when the market gets really tight and difficult for your customers. Are you seeing any shift on their part moving towards? We need to get the cost out of our systems, we're having a hard time selling our things, are they still really focused on pushing you for the highest performance products you guys can deliver?

[Jerry Fishman:]

Well, I think you see a little of both that we tried to keep in focused on. If you want lower prices, buy a product that's lot more efficient, which is what our goal has been continuing to innovate, like we mentioned earlier if we've a problem with the medical customer that is not buying ten A/D converters and is complaining about the price because the hospitals are beating them up and we tried to sell one with 10 or 12 A/D converters on a single chip that really gets the performance and that the needs but yet provides very good margins for us. So I mean the only way to really long-term winning this business is you got to keep the innovation level high because if the products they're buying are just what they've been buying over time in any volume that's any application outside volume, with all these pressure, the customers bring to fight that because they are in the pressure from their customers. But I would say that the fact that we're, we've cracked the 60-barrier here in the gross margins is a good sign for us and it says that we're continuing to get paid for the products despite the customers beaten on us as they always do and somehow rather the difference between the fights and the cost still favorable for us and that's our job.

[Doug Freedman:]

Great, thanks for taking my question.

[Operator:]

This next question is from Uche Orji with UBS Walberg.

[Uche Orji:]

Just one question again Jerry, I mean on the TSMC outsourcing, we are talking about this now for a few quarters, and now it's in the second half of rate?

[Jerry Fishman:]

It's always been second half of '08.

[Uche Orji:]

Right, let me just ask you Jerry, I mean is there any reason why, from what you've seen so far, the quality of getting out of TSMC, how does that compare with what you have at present? And then how does your gross margin change when this outsourcing finally happens and when the product file is starting to get shipped? Is it -- how much of this will go from your factory to TSMC, I just wanted to get a sense of what impact it will have on your gross margin?

[Jerry Fishman:]

Well, I think in general, the products that we are shifting to Taiwan are mostly consumer products and not the automotive products at least at the beginning. Those are the products we've changed around some of the designs in order to accommodate the process that's available at TSMC. But I think at the end of the day, the products are going to be lower cost, and therefore on those products, the gross margin should be more positive. Certainly, we're not going to be deploying a lot of assets. We have here on producing those products. So, both of those trends would result in higher returns on those products, but definitely matter of course that the MEMS products are 7% or 8% of our sales.

[Maria Tagliaferro:]

And consumers level.

[Jerry Fishman:]

And consumers a fraction of that. So it doesn't grow gross margin needle a lot, although over time the volumes of those products continue to build, it should have a positive impact on the market.

[Uche Orji:]

Right.

[Joe McDonough:]

Opens up market opportunities that are otherwise closed.

[Jerry Fishman:]

That's right. These are part of the market that the cost structure of what we're producing here in Massachusetts, we probably wouldn't go into those markets. And at the cost structure, we can get out with using our partners at TSMC, we can address markets that we (inaudible) for have not historically attracted.

[Uche Orji:]

Okay. And then just one last question on market share. I mean I think we’ve seen such an instrument become very attractive in terms of taking share from putting the analog segment. What's your sense as to your ability to defend your fairly high market share in compared to the moment because that just seems like, an area where we almost improve or we want to take a shot at you?

[Jerry Fishman:]

Well, I mean our sense is we have some of the majority of the best-converted developers in the industry. We sell our converter products to tens and thousands of customers. Our technology is extremely good and valued by the largest converter customers as well as the army of thousands of customers in the general marketplace. So, based on all the statistics that we see, we're doing a pretty good job respecting that position. And our goal is to continue to do that. This is not a market where you could come out with one product or two products and scoop a lot of market share, it just not like that. Our largest converter products only a few percentage of our sales, and we don't have many there are a few percentage of our sales. So it's a very challenging market to change here quickly, and at least from everything I have seen and listened to all our people on, I think we're doing pretty well in defending that position.

[Uche Orji:]

Well, thank you very much.

[Operator:]

Next question comes from David Wu with Global Crown Capital.

[David Wu:]

One for you and one for anyway. Jerry given the amount of uncertainty right now, when do you think you would have a pretty good idea, how do you looks because theoretically the maximum period of uncertainty is really right now through the end of calendar Q2, but things don’t fall apart by then, I assume that you would be able to bet on a rising second half of the fiscal year in terms of revenue? Am I reading correct, and what kind of tax provisions using for the rest of fiscal ’08 assuming who knows when he tax credit will be coming back?

[Jerry Fishman:]

It's very hard to say David, our senses will know a lot more as we get into March and April year, the second two months of the quarter and I think everything else right now is really speculative, and it's hard to say. But our product portfolio is good. Our competitive position is good. If the market gives us some tailwinds, I think it will be very good. We'll have to just wait and see what happens.

[David Wu:]

Okay. Joe, any change in tax rate?

[Joe McDonough:]

No, I think the level at which it is right now is probably a good an estimate as we have.

[David Wu:]

What would happen if the R&D tax credit get reinstituted what rate would that bring the tax rate down?

[Joe McDonough:]

I don't have the answer to that, obviously it will help us a bit.

[David Wu:]

Okay, thank you.

[Maria Tagliaferro:]

We're just coming up on the end of the hour here. We have two questions left in the queue, maybe we'll go ahead and take those and run a little long.

[Joe McDonough:]

Sure.

[Operator:]

This next question comes from [Allen Zwigler] with First Manhattan.

[Allen Zwigler:]

Okay, hello?

[Maria Tagliaferro:]

Hello, hi.

[Jerry Fishman:]

Hello, we can hear you.

[Allen Zwigler:]

Hi, how are you guys?

[Jerry Fishman:]

Good.

[Allen Zwigler:]

Quick philosophical one, you've done a great, great job at reducing your share count, and you had to be commended for that. And taking and helping the shareholders. What I'd like to know is, philosophically, when you look at your compensation structure which -- and I know you guys for a long time was heavily waited towards stock options and that kind of compensation. How should we look going forward in terms of now that you have reduced the shares, there are still options outstanding, I just philosophically would like to understand how you view the number of shares you have and how compensations less, paying people with stock versus cash money will look going forward?

[Jerry Fishman:]

Well, it's a very good question. It's very challenging thing as we think about at the management level. On one hand, options are now very expensive because we put them in the P&L, so that causes us lot of pause on that. Over the last couple of years of course the option holders have made a lot of money and all that stuff's going in the P&L anyhow. But I think the mix out there that as we think about it between what we pay people in the base salary. Most of the upside for the people on the cash side is based on our operating margins which we think are ultimately what's going to drive our stock price. We have taken a lot of shares off the market -- that certainly given us some leverage, and I think as we get up to higher earnings levels, the fact that we have a 100 million less shares outstanding will really help us on the way up. So, I think for employees, as we think about compensation is probably a mix of stuff they can rely on to figure bills, bonuses which are heavily dependent on the performance of the company and some form of equity that as the stock goes up, they get to participate in the gains we have. We talk about that a lot at the management levels, there is a lot of different ideas on what to do is enough opinions on that to literally fill the room.

[Allen Zwigler:]

What I am asking is in the current year, how many options do you expect to issue?

[Joe McDonough:]

I think you will find the answer to that in the 10-Q that we just filed.

[Allen Zwigler:]

Okay.

[Joe McDonough:]

Because we annually give out options, the annual cycle occurs on January 2nd, I think.

[Allen Zwigler:]

That's what I thought, okay.

[Joe McDonough:]

Take for year, that we use, second trading day of the calendar year so that we don't get into the question of what date did we choose to give out options.

[Allen Zwigler:]

I appreciate.

[Joe McDonough:]

Those are reflected in the 10-Q that we filed during this call.

[Allen Zwigler:]

What's the number?

[Joe McDonough:]

The number is 5.5 million shares that we just issued.

[Allen Zwigler:]

So, you are issuing 5.5 million, and how many options will you have at the end of the quarter?

[Joe McDonough:]

But there are also options that were canceled during the quarter as a result of employees who have left us. But you will see that there was very little affect on the dilution as a result of option, transactions during the quarter.

[Allen Zwigler:]

And if you don’t mind refusing me at this late hour, how many options are there outstanding today?

[Jerry Fishman:]

I think you will have to go through the details in the queue and make your own assessments because we have all the details of what is under water and what is in the money, and you know I think the best way is to make your own assessment.

[Joe McDonough:]

We have given a pretty detailed breakout and over here at each price point.

[Allen Zwigler:]

Okay. I am sorry. I will look at that. It was more of a philosophical question as you can plan because…

[Jerry Fishman:]

It's try to keep the dilution down well under 2% on a net basis.

[Allen Zwigler:]

Okay. Thank you, very much.

[Operator:]

This next question comes from [Phil Marriott] with ASB Advisors.

[Phil Marriott:]

Thanks for running over. I appreciate it. My question actually is a nice follow-on from that question on the options. I noticed that the expense came down from the prior quarter, and I am wondering whether you guys have put out a goal I think of, I think, 30% operating margins. But my recollection was that excluded options. What are your thoughts sort of longer-term on margin goals these days?

[Joe McDonough:]

Well, the way to think of it is that you have stated this quarter, I think, the option expense was 2% or 2.2% of sales. And our operating margin was 23.8% of sales. And so the 30% was including the option expense. So there is another 4% or so of leverage that primarily will be driven by operating-expense management. We continue to think in terms of operating expenses growing at less than half the rate of sales. So we will take growth to become in order to increase the operating margins. But that is part of the leverage. But the other part of the leverage occurs as a result of the shares that we have bought back. And so there are 30% fewer shares outstanding than would otherwise be outstanding and that leverage will come as the earnings grow.

[Phil Marriott:]

My second and last question is just following up on your power management goals. Given that there has also been a fair amount of pruning, I guess as you are at a sort of $100 million run rate in power management, is that about right?

[Jerry Fishman:]

It's in that range.

[Phil Marriott:]

Okay. And my recollection was that the goal over the next three or four years was to get up to a scale being $400 million or $500 million, is that still longer-term goal for the company?

[Jerry Fishman:]

The original goal that we have set out that didn't assume that we will get out of the PC power stuff, but the way to think about that is, if we didn't think we could make that into a large business, we wouldn't be investing what we're investing. And that's really going to be a combination of some pretty good sites hits with some very large companies, also a business that's more coincident with the sort of general analog business of customers, lot of products. But if we don't think we could get it up to some reasonable scale, the investment levels that we're currently putting in are way too high, so that's certainly our assumption.

[Phil Marriott:]

Okay. And you guys are committed to keeping us updated on that progress right because…?

[Jerry Fishman:]

Well, I think you're going to make us.

[Phil Marriott:]

That's why I'm asking the question here.

[Jerry Fishman:]

No, I understand. We believe that's a very important strategy for us. We're spending a lot of money. We have a really first class team of people that have been working on this thing. We have some good early indications that customers like the products they are doing, but we'll certainly keep you updated on that.

[Phil Marriott:]

I appreciate it. Thanks very much.

[Joe McDonough:]

It's about 5% of the revenue in order to size it today.

[Phil Marriott:]

Okay, thank you.

[Maria Tagliaferro:]

Okay, great. Well that was our last question. So I want to thank everyone for participating in today's call. We encourage you to take a look through all the detail provided in our press release and also in the 10-Q which was filed today with the release. Thank you.

[Operator:]

This concludes today's Analog Devices conference call. You may now disconnect.