Analog Devices, Inc.
Q3 2008 Earnings Call Transcript

Published: 20 Aug 2008

[Operator:]

Good afternoon and welcome to the Analog Devices third quarter 2008 earnings conference call. (Operator Instructions) Ms. Kohl, you may begin your conference.

[Mindy Kohl:]

Good afternoon, this is Mindy Kohl, Director of Investor Relations for Analog Devices. If you do not yet have our third quarter 2008 release, you can access it by visiting our website at www.analog.com and clicking on the headline on the homepage. This conference call is also being broadcast live on the Internet. From www.analog.com, select Investor Relations and follow the instructions shown next to the microphone icon. A recording of this conference call will be available today within about two hours of the call's completion and will remain available via telephone and Internet playback for one week. Participating in today's call are Jerry Fishman, President and CEO, Robert McAdam, Vice President and Head of our Analog business and Joe McDonough, Vice President for Finance and CFO. We have scheduled this call for 60 minutes. Jerry Fishman will present the results our fiscal third quarter during the first section of the call and the remainder of the time will be devoted to answering questions from analyst participants. Before Jerry begins, I wanted to let you know that we’ve updated the schedules on our IR website which include the historical quarterly and annual summary P&Ls for continuing operations as well as historical quarterly and annual information for product revenue from continuing operations by end market and by product type. Next I’d ask you to please note that the information we’re about to discuss includes forward-looking statements which include risks and uncertainties. The company’s actual results could differ materially from those discussed herein. Factors that could contribute to such differences include but are not limited to those described in the company’s SEC filings including our most recent quarterly report on Form 10-Q which was filed earlier today. The forward-looking information that is provided by the company in this call represents the company’s outlook as of today, and we do not undertake any obligation to update the forward-looking statements made by us. Subsequent events and developments may cause the company’s outlook to change. Therefore this conference call will include time sensitive information that may be accurate only as of the date of the live broadcast which is August 19, 2008. With that I’ll turn the call over to Jerry Fishman for opening remarks.

[Jerry Fishman:]

Thanks Mindy, the third quarter 2008 was another very solid quarter for ADI. Our revenues grew $659 million which was up about 7% year-over-year and about 1.5% sequentially which was right at the mid point of our planned range that we communicated last quarter. This performance follows the 6% sequential revenue increase during the prior quarter. Once again the diversity of our products, the end markets we serve, the customers we serve, and the geographies that we operate in provided great stability in our results in a very challenging economic environment. Similar to last quarter, the comments I’m going to make this afternoon will refer to the information that’s posted on our Investor Relations website, which provide analysis of our revenues for our continuing operations for the past five years sorted by both end application and also by product type. The very positive feedback that we got from investors last quarter on this level and the format of the data that we’re now providing indicates that many investors find this information useful in monitoring the trends in our results. Our revenues from our industrial customer base were up about 10% year-over-year and they were down just slightly less than 1% sequentially. Within the industrial segment interestingly most of the industrial segments were up sequentially while our sales to automatic test equipment customers which tends to vacillate from quarter to quarter declined significantly. In fact, our sales to ATE customers declined about $6 million sequentially after a very large increase in sales to ATE customers in the prior quarter. Probably most noteworthy in the industrial sector were increases that we received in sales to our automotive customers, primarily those automotive customers outside the United States which grew 6% sequentially and grew 26% year-over-year. This very strong sales growth is really the result of a very significant position that we’ve established with leading automotive manufacturers in safety systems such as airbags and electronic stability control, high end entertainment systems in cars and sensor applications for batteries and also for braking systems. In aggregate our industrial revenues comprised approximately half our revenues in Q3. Overall industrial revenues have been growing very significantly at ADI for many years. Our five year compounded annual growth rate has been about 13% per year and as a result revenues of industrial products have almost doubled over this five year period. In the industrial market, which is as I mentioned now about half our sales, represents really the backbone of ADI. Its our most diverse customer base in many different product sub segments in industrial products. It requires our highest performance technology. It supports very long product lifecycles and it earns above average corporate gross margins. Our brand is extremely strong amongst those customers and we often receive the first call from designers as leading industrial customers to help them design in the new systems. For those who have followed ADI for many years, you know that most of our industrial growth in prior years has come from the US and Europe, but we’re now rapidly penetrating new industrial applications all through Southeast Asia and China and those are experiencing high growth. Revenues from our communications customers were up 11% year-over-year and up about 1% quarter-over-quarter. We enjoyed strong sequential revenue growth in optical and networking applications and also from analog products and handsets, products such as microphone pre amps, power management products, lens drivers and RF detectors. Our sales to base station manufacturers declined sequentially in Q3 after an extraordinarily strong Q2. Based on our very strong market position and the current backlog and the current forecast we have from customers around the world in base stations, we expect base station sales to resume growth in our fourth fiscal quarter; the quarter we’re now beginning. In aggregate communications revenues comprised approximately 25% of our revenues during the quarter. Our revenues from consumer customers were down about 1% year-over-year but were up 5% sequentially led by continuing strong sales in advance TVs, digital cameras, and high end home audio products. There are all areas where our share is very high amongst the very top brands. We continue to see very good opportunities for ADI to expand our footprint in high end consumer products by providing new functionality to enhance the consumer user experience. In aggregate our consumer revenues comprise about 20% of our revenues in Q3. Revenues from our computer customers declined 5% year-over-year but grew 12% sequentially inline with the generally strong PC market worldwide. Computer revenues comprised the remaining 5% of our revenues in the third quarter. Analog product revenues in Q3 grew 6% year-over-year and grew 1% sequentially which is solid performance relative to the market and also relative to our peer group of analog companies. Overall if you look at revenues in the analog space over the past two years, ADI’s product revenue growth in the analog space over that two year period has well exceeded that of our closest analog competitors. Our data converter sales grew 8% year-over-year and 2% sequentially and represented 46% of our revenues in the third quarter. Converters remain our largest and our most diverse product family at ADI and an area where we are continuously innovating to enable our customers to redefine and also to differentiate their products. During Q3 we once again expanded our converter portfolio with the launch of many new, very important products including our highest precision, what we call our AD7626 pulsar A and D converter which is 2.5 times faster then any other [FAR A to D], 70% smaller and offers the lowest power consumption in class of 16-bit converters in the entire industry. We also announced that high end x-ray imaging device maker, Trixell, which is a joint ventures of Thales, Philips Medical and Siemens Healthcare chose this converter for their medical imaging system and given the fact that those are leader in the medical field, it bodes very well for that product going forward. Also during the quarter we announced a 24-bit 7190 sigma delta A to D converter which delivers the industries best combination of data rate and also of noise free resolution. Its this relentless focus on delivering innovations that give our customers a competitive edge that has been the key to ADI’s decades of leadership in converters. And we continue to invest to maintain our leading position in the market. Our converter revenues have grown at a compounded rate of 13% per year for the past five years, well ahead of the market and as a result we’ve continued to gain market share during this five year period. The statistics published by Gartner Dataquest which uses a very broad definition of converters, indicates that ADI’s market shared converters was approximately 37% last year; over two times that of our closest competitor. Other industry analysts indicate that ADI’s market share in converters last year was in the 43% to 47% range. But really by any measure even though there are significant competitive shifts amongst smaller converter competitors ADI’s position remains significant in what we believe is the most important product category in the analog space. Amplifier revenues grew 5% year-over-year and were approximately flat to the prior quarter. Amplifiers represented approximately 23% of our sales during the quarter. Industry analysts now indicate that our share of the overall amplifier market is about 20% but we estimate that our share of the high performance segment, where performance and prices are typically much higher, is approximately 40%. Revenues from other analog products, the category which includes RF products or radio products, MEMS, clocks and other signal processing products was similar to last quarter and represented about 15% of our revenues during the quarter. Power management revenues grew 20% year-over-year and 6% sequentially in the third quarter. We’re beginning to get traction in this product area after nearly two years of significant investment. We continue to focus our product development into industrial, communications and consumer applications where we can really leverage our position as the world’s leading converter and amplifier supplier at customers who already know and respect ADI’s technology. We are planning for continued improvement in 2009 for power management products. General purpose DSP product revenues grew 14% year-over-year and 4% sequentially in Q3 and contributed about 9% of our revenues. After the divestitures of our more commodity based DSP products such as DSL, and cellular base [band] modems, our DSP product line now more closely resembles our analog business in terms of gross margins and also in terms of end market diversification. As I mentioned earlier revenues grew about 1.5% sequentially after growing 6% in the prior quarter. Our results for the first three quarters indicate that we’re now on track for a solid year despite very challenging economic conditions. Our gross margin is at 61% or flat to the prior quarter and up 50 basis points from the same quarter last year. We believe this is a very good result given the mix of business we experienced during the quarter, the continuing reduction in our inventories and the higher raw material and energy prices that we’ve all suffered over the past couple of months. Our operating expenses grew less than 1% sequentially which was inline with our plan for the quarter and also the cost containment goals that we’ve established corporate-wide. Operating margins expanded by 30 basis points sequentially and 90 basis points year-over-year to 24.5% of sales. And earnings from our continuing operations were about flat sequentially at $0.44 but up 16% from the same quarter last year on a 7% year-over-year increase in revenues. Our cash flow remained very strong in Q3; totaled $196 million or 30% of our sales. Capital expenditures were $39 million or about 6% of sales. Our inventories decreased by just under $10 million or 3% in Q3 following an $11 million decline last quarter. As a result our days in inventory declined by five days to 110 days which is within our model levels. Accounts receivable decreased 2% from last quarter. The DSOs are now down to 45 days from 47 days in the prior quarter. During the quarter we paid out $58 million in dividends representing 42% of our net income and a dividend yield of approximately 2.5% at current stock prices. Our share repurchases during Q3 totaled about $28 million. As a result we ended the quarter with $1.3 billion in cash and no debt, approximately $1 billion out of the $1.3 billion is currently held outside of the United States in various foreign subsidiaries. The order rate for ADI remained strong in Q3 including July, and were fairly linear during the quarter. Regionally we experienced the best growth during the quarter in Europe, and also in China. Overall end customer orders in Q3 were up slightly from the prior quarter and the book-to-bill ratio was slightly above one. As in previous quarters we continue to experience very strong turns environment where many customers are placing orders for delivery during the quarter which is reflective of our short lead times. Our operating plan for Q4 is for revenues to grow in the flat to 3% up sequentially. On a year-over-year basis if we achieve those numbers this range represents a revenue increase of 6% to 9% for this Q4 over last year’s Q4. In Q4 we expect the industrial market to be in aggregate relatively flat sequentially on a worldwide basis. We expect seasonal growth in our consumer business and we also expect to experience a rebound in our communications revenues, primarily in the base station business. We are planning for gross margins to be approximately flat at 61% with of course the results depending on the actual mix of business that we achieve. We are planning for operating expenses to be about flat sequentially in line with our goal of continuing to get operating leverage on increasing revenues. This should produce earnings from continuing operations in the range of 44% to 46% for Q4. The earnings we’re expecting from our discontinued operations are expected to be approximately $0.02 a share. Clearly from these numbers ADI produced a solid quarter in a tough environment. A continuing ingredient in our success is the good returns that we’re achieving on the significant investments that we’ve made over the past few years and also from actions that we’ve taken to reshape our product and our investment portfolio to focus on higher growth and more profitable segments where customers value information because it changes the user experience and are willing to pay for that. We believe that we can continue to raise our operating margins by limited expense growth rates to rates well below the revenue growth rate and thereby achieving good leverage on revenues as we go forward. And certainly our continuing very strong cash generation capability offers the prospect of enhanced shareholder returns in the future.

[Operator:]

(Operator Instructions) Your first question comes from the line of Doug Freedman – American Technology Research

[Doug Freedman:]

If you just look at the business from the big picture here, we’re clearly coming up in a tough environment for growth, you’ve highlighted several product segments that are growing but overall you’re top line revenue growth year-on-year looks to be challenging. What segment can you point us to over the next 12 months that you think will propel your growth?

[Jerry Fishman:]

Its very hard to predict in the future. I think if you go back to the kind of historical growth we’ve seen in industrial products, its certainly been north of 10% annually. We’ve seen good growth in consumer products, the automotive products are growing quickly. In some segments of the communications market, the sales are growing. I think if it turns out that we post these kind of numbers for 2007 in a pretty tough environment I think that bodes well for the kind of things we can achieve when we just have a neutral environment. There’s an awful lot of headwinds out there for growth this year and to some degree everybody is limited by that but I think we have a lot of good drivers in a lot of different places in the company that if we just get an even break from the economy and the markets that are out there around the world, I think the top line growth should be good. One of the interesting parts of ADI has always been, we get a little bit of growth from a lot of places and I think that will continue to be the case going forward. I think putting up numbers like 7% or 8% year-over-year numbers this quarter in an environment which is very, very challenging out there, is not a bad sign for the future is the way I would describe it.

[Doug Freedman:]

Can you highlight anything underneath the covers on sort of the gross margin line, are there things going on as far as the cost structure or is it really going to be at this point mix related that’s going to help move the gross margin numbers, should we think of gross margins going forward as rather stable at this level?

[Jerry Fishman:]

I think they are relatively stable at this level. I think if the mix goes really badly one way, it could go down a little bit. It doesn’t vary very much because of the lower large numbers. We have so many products in so many markets, no one particular segment moves it very much and the relative part of the business each of the industry segments with a lot of quarterly fluctuations really doesn’t really change very much. Industrial has been about a half of sales, communications has been about a quarter, and consumer has been about 20%. So I don’t think that’s going to change very much. We have a lot of cost reduction initiatives that we’ve been working on hard where we’re getting towards the final part there in reducing our two FABs in Ireland to one FAB; we’re consolidating our six in [inaudible] FAB to and [inaudible] FAB. I think that’s going to help our cost structure particularly as we get out to the early parts of 2009 in our fiscal year and a lot of other cost reduction programs we have also. But I think to a first approximation we believe most of the earnings leverage in front of us is more on the expense side then the gross margin side and for a business like ADI there’s nothing wrong with 61% gross margins but the real leverage will be mostly on the expense side.

[Joe McDonough:]

I think this quarter demonstrated that some of the actions that we’ve taken in terms of cost reductions trying to manage the pricing with the customers, trying to really offset this quarter some of the cost increases that we get in raw materials, we saw the mix of business move in the wrong direction relative to the gross margin and yet the gross margin held at 61%. So we were pretty pleased with the results of this quarter in gross margin.

[Doug Freedman:]

You did mention that there has been some cost structure increases that you’ve seen from commodity prices, that’s fair to say?

[Jerry Fishman:]

Yes, I think there’s no doubt. They’re sort of hard to identify precisely but there’s gold in our products, there’s oil in the transportation of our products, there’s just upwards pressure on every raw material so its hard to quantify exactly but I think as Joe said I think the ability to hold the margins with that kind of cost pressure with price pressure from all the customers continuing, with all the headwinds on the mix that we had with automotive being much stronger, with industrial being flat, with consumer being up, and the PC products being up, I think 61% with that mix of business in that environment, we think is a pretty good result.

[Doug Freedman:]

Have you noticed any real change from the competitors in the landscape, any changes in behaviors out there that you’ve noticed as a result of a toughening environment?

[Jerry Fishman:]

Well I think for the companies that have a commodity product line, the price competition is extremely high. So much of our product line is proprietary that we get price pressure from competitors but I would say most of the price pressure we get is from customers who are trying to figure out a way to get the cost of their products down, not necessarily as a result of competitor A or competitor B coming in and dropping our prices. We have some products like that and we fight them off, but I think the largest pressure that we have is from customers who are just trying to be more competitive but not so much from competitors who are trying to just go in and undercut our prices. Because its very hard to do that without very similar products. So customers always try to separate price from value, we try to make sure our customers understand the value our products provide.

[Operator:]

Your next question comes from the line of Steve Smigie – Raymond James & Associates

[Steve Smigie:]

Following up on the gross margin question, it seems like given all the headwinds that that gross margin if in a more normalized environment and good quarter could almost be a couple hundred basis points higher and it seems like looking back over the past few years you’ve actually come up quite a bit from the high 50s up into the 60s, and was hoping you could talk about that? Does that make sense? Absent all these headwinds could you get to something like a 63 and is it just better mix that’s allowed you to improve even over the past year?

[Jerry Fishman:]

What’s really happened over the past couple of years, right now we have a much better mix of products then we did without some of the lower margin products that we divested. I think going forward its very much dependant on so many different moving parts. Of the mix we have, the products we sell, the geographies we sell, what the relationship the dollar is to the Euro, and the dollar to the Yen, and the dollar to Chinese currency, its just too hard to predict. Certainly the, so we don’t want to get ahead of that is really what I’m saying. I think if you look at 61% for this quarter that’s a good sign and that’s where I think I’d leave it.

[Steve Smigie:]

You did a little bit of a share buyback and paid out some dividend here, can you talk about what dividend and cash buyback policies are going to look like in the next quarter and next couple of quarters?

[Jerry Fishman:]

We raised the dividend last quarter and the yield is 2.5% and we’re paying out 45% of our net income. As we mentioned on the call last quarter most of our, the largest majority of our cash is outside the US. We’re not anxious to bring that back to buy stock back with and pay very significant US tax on that. To buy stock back at very large levels in this environment would require us to borrow money. I think as Joe said last quarter the environment for doing that is not very favorable right now. So I think the way to think about ADI going forward is that we have earnings that are going up, that’s a good sign. We have 30% of our sales in cash we’re generating on a regularly routine level. Eventually the interest rate environment and the credit markets will stabilize and we certainly have access to a lot more debt then we’re carrying now which is about zero. So I think there are a lot of prospects for the future in terms of returning even more to shareholders then we’ve been returning. We have bought back approximately 30% of the company over the last couple of years and we’ve taken obviously 30% of the shares off the market and we’ve raised our dividend consistently so I think we understand the value of that to investors, we understand the impact of all that providing support for the stock price, so its purely a question of trying to sort out what to do in a very complex finance market right now and we’re going to keep a very good eye on that. The best news is we have plenty of capacity to do that and that fact has not escaped us and I think we’ve also demonstrated that in the right environment we have bought our stock very aggressively.

[Operator:]

Your next question comes from the line of Chris Danely - JP Morgan

[Chris Danely:]

It sounds like about a billion dollars of cash you’ll sort of always have around because its kept offshore?

[Joe McDonough:]

Hopefully that number will grow because we’re generating profits both inside the United States and outside the United States. The cash outside the United States just happens to be trapped but that’s not a bad thing.

[Jerry Fishman:]

But I think for a company our size carrying a cash balance is a good idea but we can certainly support debt under the right circumstances.

[Chris Danely:]

Will you characterize your guidance this quarter as roughly seasonal and can you talk a little about the end markets and what you’re seeing out there where you feel a little better and where you’re a little more concerned?

[Jerry Fishman:]

I’d say that’s an accurate description. This is about seasonal guidance. The fourth quarter tends to be, usually a crappy August, a good September and a very good October. And that all adds up to flat to a little bit up typically. This is a little bit better then that and I think what we’re expecting is that at least the inference we’re getting is the industrial business is typically roughly flat in this quarter. The consumer business tends to pick up a little bit in anticipation of the back to school season and the beginning in October the build up for the holidays, and we’re expecting the communications, particularly the base station business which grew a lot in Q2, declined in Q3, at least that the forecasts and the backlog that our customers have given us for this quarter holds, that ought to grow next quarter and that would be a good thing which would, depending on how all those things happen, will determine whether we’re at the low end, the high end or in the middle of that guidance.

[Operator:]

Your next question comes from the line of Craig Ellis – Citigroup

[Craig Ellis:]

You mentioned in your comments that Southeast Asia is an opportunity for growth in the industrial business what do you need to do operationally to really make that a meaningful source of revenue and is it possible that over the next 12 to 24 months that can have a meaningful impact on the 13% five year CAGR that you’ve been achieving in that segment?

[Jerry Fishman:]

We’re actually fairly enthusiastic about that. We started out if you look back two or three years or four years, in the region of Southeast Asia primarily selling very high volume products because that was the market there. What we’ve really concluded about two our three years ago is there’s 10s of 1,000s of customers in regions like China and a lot more customers then we would have predicted in places like Korea, Taiwan, that are all very active in what we call industrial products which includes industrial process control, medical and many other segments that we’ve been very active in. So what that’s really required us to do is to try to duplicate the sort of efforts and infrastructure that we’ve put in the United States and Europe to develop that very broad base of customers in regions in Asia and we’re really doing that now and we’re beginning to see the benefit of that program. It would be very disappointing if we looked at our sales in some of those regions particularly like in China and if we didn’t wind up with 10 or 15,000 accounts in China that heavily in the industrial, medical and other aligned businesses to that. So I think that it requires better channels, better application support, better marketing, and all those things that we’ve been investing in to build the infrastructure in Southeast Asia because we really think there’s an opportunity there for significant growth and the early signs are very, very good. Even over the last two years, as the industrial business has grown at pretty good rates, part of that reason is because of the growth we’ve seen in those regions.

[Craig Ellis:]

If you think about getting your organization in Asia/China to a level of maturity, how far along are we on that so that we can understand those previous comments?

[Jerry Fishman:]

If you ask our sales guys they say 80%, if you ask me I’d say about 50%. In other words that’s a work in progress. It takes, when you’re dealing with industrial customers that are 10s of 1,000s of them in every, in a very wide diverse geography, and you try to build a brand at the same time in the region, it just takes a lot of things to do and it takes a long time but the good news is, once you get it as has happened in the US and Europe for ADI, once you get it you own it and you keep it for a very, very long time so the easier things we’ve done and some of the harder things but we got a lot of work to do to really get that to where we want it to be which I still believe is one of the great opportunities for us going forward. I would add that when you look at our sales channel in that region when we were selling base band and set chips it was very focused on that business because they thought that’s where all the money was. But just the divestiture of the base band chipset business and some of the power products in PCs in that region has really allowed us to focus our selling applications efforts on a very, very different customer base which in my sense I would say was at least a significant if not a predominant motivation for getting out of those businesses. I think now with the sales force and the applications force focused on those applications, I think our progress there will even accelerate further then it already has.

[Craig Ellis:]

You mentioned the encouraging progress you’re starting to see in power management, how should we think about what is happening within the portfolio. Are you starting to see design ins about equally across those three end markets that you talked about or it is much more in consumer and industrial and how can we think about the sequential growth going forward relative to what you just put up?

[Jerry Fishman:]

I think first of all its important to realize that that’s still a relatively small portion of our overall sales so we shouldn’t get, everybody get carried away on that’s going to put on a huge amount of sales very quickly. I think that in the early phases the design in rate is very high in each of those sectors but the sales have been higher in the more volume consumer oriented products then they’ve been in the industrial products but as I commented on about China and Asia, that’s going to develop. We’re beginning to see the right products come out, the customer feedback on the products is good, and I think over time we’re going to see good growth in each of those three sectors. But certainly right now in the early phases its more related to some of the higher volume stuff then the very fragmented stuff that we’re working to develop the infrastructure in.

[Operator:]

Your next question comes from the line of John Dryden – Charter Equity Research

[John Dryden:]

In the communications market, was the uptick there sequentially across the board or was there a difference between converters and your other products?

[Jerry Fishman:]

I’d say that what we said in the opening comments is the segments that grew, the optical and the networking segments and also the products that we sell into handsets, we sell a lot of analog products into handsets which are very proprietary and are very useful in handsets and I mentioned a few of those. I don’t really have the detail on whether it was converters or so on, but the only area that we saw sequential decline was in base stations mostly because of the tremendous growth we had the quarter before and we think that’s going to come back this quarter.

[Robert McAdam:]

The converter business was up last quarter and the base station business is slightly lumpy with a very, very strong quarter in quarter two, came back [inaudible] with this quarter. It’s a mix between quarter two we had the TSMC that made a [plug] in China which eased up a little bit. We had very strong both 3G and GSM deployment. We expect that to come back this quarter, so its hard between products, the converter business because we have such a strong share in converters, moves up and down directly with the base station business where we’ve had strong market share. But our new RF business which is, a very strong quarter in RF during the quarter so I would say that next quarter we expect converter business to be strong because of the overall base station business should come back.

[Jerry Fishman:]

I think the fact that our overall converter business grew a couple of percent sequentially when the base station business which is a very large consumer of converter products actually declined is something that we’re happy with.

[John Dryden:]

Could you update us on the TSMC relationship for your MEMS products, how that will help in Q4 on the, at the gross margin level?

[Jerry Fishman:]

The way to think about that is the TSMC efforts really apply to about half our MEMS business which is the consumer part of that business. As I think most of your know we’ve had our program that’s getting towards fruition to transfer a lot of that to production, TSMC both for scale and for cost reasons, that program is moving along. I wish it was a little further then it is but I think its really on course and I think its going to contribute exactly what we thought it was going to contribute towards the margins in the consumer MEMS product and also the scale of that business.

[Operator:]

Your next question comes from the line of Sumit Dhanda - Banc of America Securities

[Sumit Dhanda:]

If you could tell us what the backlog was as you entered the quarter? Was it up slightly and any difference in terms of how it looked within distribution versus OEM?

[Joe McDonough:]

There’s really not too much news there. The book-to-bill ratio was slightly above one. The backlogs are a little bit up quarter to quarter. We look at different cut of the demand and we include the end customers that our distribution channel has and we still the same thing that the book-to-bill ratio is a little bit above one. The turns ratio this quarter were a little bit less. I think about 40% of our sales were turns sales this quarter; that’s down a little bit from last quarter. There are the cancellations; we don’t see anything unusual in cancellations. They were actually a little bit less then they were last quarter which is good news. I think when you look at all those elements it looks pretty stable and is what we think is the foundation for the business plan that we’ve got for next quarter despite a lot of turbulence in a lot of economic markets around the world.

[Sumit Dhanda:]

On the operating margin or operating expense front, you saw a little bit of an expansion in operating margins, 30 basis points, ostensibly maybe something of that magnitude in the October quarter, is that the rate of improvement we should be looking forward to assuming that the environment doesn’t change significantly from a macroeconomic perspective or is there a more meaningful expansion to get to your non-GAAP target of 30%?

[Joe McDonough:]

I think the right way to look at it right now is that we’re at 24.5% of sales in a really tough environment; everything is challenging right now. Yet the margins are expanding. So at whatever point everything eases up in the world and we see things recovering in a more meaningful way, I would expect the operating margins to expand pretty significantly at that point. At that point what has to happen, at this point, everything is being constrained by everybody and our operating expenses are being constrained and we’re going to keep doing that. We’ll keep doing it even in the fact of growth of the revenue. So it really is some expansion of the business requirement that’s more meaningful that will probably get us up toward the 27.5% that we’re looking at.

[Sumit Dhanda:]

Let me put it differently, assume that the sales trajectory does start to grow, does start to pick up, can we expect something better then just OpEx growing at half the rate of sales to deliver more significant margin expansion?

[Joe McDonough:]

That certainly will be the objective and each quarter we’ll give you an idea of what we expect for the next quarter based on the plan that we’ve got for the following quarter.

[Jerry Fishman:]

I think the way that we’re managing the business right now, that half the rate is one way to look at it, but right now we’re trying to keep the operating expenses as close to flat as we possibly can. That’s the direction we’ve given all the business units, that’s the plan for this coming quarter and that is relatively irrespective of the growth rate in revenues. Until we get to the kind of numbers that I think this business should be producing. So we’re making slight progress on that but I think there’s a lot more progress to be made by keeping the expenses relatively flat almost irrespective of the growth rates.

[Sumit Dhanda:]

On the cash and the share repurchases, just so that I understand this correctly, you’re at the point now where you don’t anticipate any major reductions in share count given that much of your cash is offshore at this point, and so that’s how we should be thinking about--?

[Joe McDonough:]

I think if you model the share count relatively flat and some of the other elements that you’re probably interested in, the tax rate is probably around 23% next quarter and the non-operating income is in the $8 million to $8.5 million range for income next quarter, those are the elements below the operating profit as a percentage of sales.

[Sumit Dhanda:]

But even as your cash generation continues we should not anticipate any kind of a meaningful reduction in share counts given where the bulk of the cash is?

[Joe McDonough:]

A lot of the cash is being generated outside the United States and a lot of the cash is being used to pay the dividend inside the United States. So it is simply just a little more normalization in the debt markets that will allow us to free up the capital structure.

[Jerry Fishman:]

I think the way to think about it is with constipation in the debt markets we’re not actively going to go out and borrow a lot of money to buy stock back here, but with the debt markets stabilizing we have a tremendous, we have a lot of capacity for debt in the company but I think Joe’s comments are related to what we’re looking at right now in terms of the debt markets, if that changes certainly our strategy of continuing to buy shares could obviously potentially accelerate.

[Joe McDonough:]

We only have to borrow we have outside of the United States without doing it in a way that jeopardizes our tax situation. Its not that difficult if the world would just return to normal.

[Operator:]

Your next question comes from the line of Uche Orji – UBS

[Uche Orji:]

I know you’ve talked about base stations and the fact that its lumpy and business is coming back, can you give us any idea by region where you’re seeing a rebound in this business and more specifically are you starting to see any impact from China on the 3G side?

[Robert McAdam:]

I think that, we had a very strong quarter in 2Q in China in both the local [TSEDMA] thing and deployment for some of the Chinese companies outside so I think it will be this year, given that we will have some difficulty in the quarter by this stage already, I would expect it to be China and Asia, on the margin a change from where we are today.

[Uche Orji:]

On consumer, you’re talking about consumer growing seasonally in the face of some of the restrictions we’re seeing in terms of consumer spending, how confident are you about this in terms of seasonal growth of consumer and can you just define what you mean within consumer and I understand also with the rebound in base stations that’s probably offsetting some of the margin pressure from the growth in consumer but is there anything specifically happening within consumer to keep the margins higher, for example the mix changing?

[Jerry Fishman:]

First of all as far as the sales in that area, with all the pressure on the consumer even this quarter where there was maximum pressure they bought a lot of TVs and cameras and audio systems and when you look at the unit growth rate in that business its very, very high. There’s always price pressure in that business so our job, Robert and his team there are working very hard to make sure that the costs go down at least as fast as the prices go down. That’s the nature of the consumer business and that’s, you can’t be in that business if you can’t accomplish that. Its always hard to pinpoint that exactly but typically in the fourth quarter for us is a seasonally strong consumer quarter and in the absence of any clear evidence that’s what our customers are telling us and we’re dealing with the largest consumer brands.

[Robert McAdam:]

We have a lot of history on this in terms of the pre holiday season by, and so I think, in the consumer business that’s what we see. And its not as if the margins are that far below the averages so its between that and the other mix with base stations and other things, the margins should be okay.

[Uche Orji:]

If I look at some of the commodity prices, one of your competitors I think last quarter mentioned the impact coming from gold prices in terms of the back end of the business, are you facing any pressures from commodity and now that has eased up, did you face any pressure from commodities and now that some of them have eased up like gold, is that significant enough to impact your margins either way?

[Jerry Fishman:]

I think we certainly faced the same commodity price pressures as all our competitors, the major difference I think between us and some of our competitors is we’re able to keep our prices high and because of the value that our products bring so we have more control over the pricing then perhaps some of the other competitors. But certainly we suffer or face the same headwinds on commodity pricing as anybody else will.

[Uche Orji:]

On inventory, are you comfortable with this level of inventory are you still working to take that down?

[Jerry Fishman:]

I think we’re in the range of being comfortable. We’ve always said around 110 days was fine given the mix of business and given the lifecycle for the products and when we get up to 130 or 140 we get a little concerned. When we get down to 100 or 110 we feel like we’re in the right place.

[Operator:]

Your final question comes from the line of Craig Hettenbach – Goldman Sachs

[Craig Hettenbach:]

Can you provide any more color on the automotive market given the strength in the quarter and in face of the macro conditions, anything on dollar content you’re seeing and then also just the type of visibility you have within auto?

[Robert McAdam:]

Our business, it was a good quarter in auto because our business in newer applications mainly in Europe. It is softer in North America as you would expect. So basically the applications are in the safety and that’s both airbag sensors and the control sensors. In [inaudible] our DSPs and sigma DSP and audio products, the new entertainment systems and some new applications like battery monitoring in cars. Its basically new applications that are driving our growth in the automotive and we’re less exposed to, other then North America, to the overall softening of the automotive market we see worldwide and I think we’re relatively immune from that until, at the moment, with the next quarter or two because they’re newer applications that are growing.

[Jerry Fishman:]

We’re mostly riding the wave in cars where the signal processing content is going up at a rate that’s probably three or four times the growth rate of the units. So as long as we can continue to put new functions in cars and new sensors that people who drive cars want and new types of entertainment that they’re interested in and so on and new safety features, we can offset the unit decline or the unit pressure in car sales. Certainly that’s what’s been happening over the last couple of quarters. Last quarter was very strong, the quarter before that was very strong for us in automotive so as long as we can keep providing these new functions and the new products, I think the automotive business will continue to do well for us.

[Robert McAdam:]

[inaudible] the use for converters, RF components and DSP in active radar and driver [inaudible] systems is a brand new application. Very heavy signal processing content.

[Craig Hettenbach:]

Can you give us any sense of the breadth of customers your handset models just for us to shape up the opportunity over the next 12 to 18 months within handset power?

[Robert McAdam:]

As Jerry mentioned the overall power thing, a range across all the, both the industrial, consumer, communications, but the handset part does by its nature ramp more quickly so we have a range of, like our older handset business, we are dealing with the Tier 1 players here and we have several programs as each of the Tier 1 customers that will ramp up at different phases over the next 12 months.

[Operator:]

There are no further question.

[Mindy Kohl:]

With that, we want to thank you for participating in today’s call and we look forward to speaking with you again during our fourth quarter conference call. Thanks very much.