Analog Devices, Inc.
Q3 2007 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon. My name is Mark and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices third quarter 2007 earnings conference call. (Operator Instructions) Ms. Tagliaferro, you may begin your conference.
  • Maria Tagliaferro:
    Thank you. Good afternoon, everyone. This is Maria Tagliaferro, Director of Corporate Communications here at ADI. If you don’t yet have our third quarter 2007 press release, you can access it by visiting our website at www.analog.com and clicking on the headline on the home page. I am joined here today by our CEO, Jerry Fishman, and by our CFO and VP for Finance, Joe McDonough, and in a moment we’ll begin with opening remarks from Jerry. I would like to take a moment though to comment regarding our financial results for the third quarter of fiscal 2007, which was reported today. In accordance with GAAP, the third quarter results include $17.2 million of non-cash stock-based compensation expenses related to employee stock options, and $2.8 million of expenses related to previously announced acquisitions. The provision for taxes includes the tax effects of these items. In order to provide investors with useful information regarding the financial and business trends relating to our financial conditions and results of operations, and to help our investors better understand how we manage our business, our comments during today’s call will make reference to non-GAAP financial measures which exclude these items. We have included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in our earnings release issued earlier today. A copy of that is at the website. Finally, please note that the information we’re about to discuss include forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Act of 1995. Such statements 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 noted and included in the company’s SEC filings, including our most recent quarterly report on Form 10-Q, which was filed 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, the conference call will include time-sensitive information which may be accurate only as of the date of this broadcast, August 21, 2007. With that, we are ready for our CEO, Jerry Fishman’s opening remarks.
  • Jerald G. Fishman:
    Well, good afternoon. Q3 was a very strong quarter for Analog Devices. Our revenues totaled $680 million, which were up about 2% sequentially and about 3% year over year, and that’s after growing 10% sequentially the prior quarter on a comparable 13-week basis. The revenues of $680 million were toward the high-end of the range that we communicated last quarter. Revenues from our very broad base of industrial customers were approximately flat sequentially but within the overall industrial category, our sales to instrumentation customers, power meter customers, motor control applications, and automatic test equipment customers all grew sequentially, while our sales to medical, automotive and defense contractors declined sequentially in the quarter. Overall industrial sales continue to comprise about 43% of our total revenues. Consumer revenues grew 3% sequentially and were up 24% from the same quarter last year, with this quarter’s growth driven by digital cameras and home entertainment systems. ADI's leading-edge products continue to play a very important role in consumer electronics, powering these applications that I mentioned and many others, including the newest advanced plasma and LCD TVs and best-selling video games. Consumer products represented approximately 20% of our revenues in the third quarter, which is very similar to the prior quarter. Revenues from products sold to communications applications grew slightly sequentially in Q3. Continuing strong growth in products used in base station applications, which grew 13% sequentially and now represent almost 12% of our revenues, and also strong growth from networking applications were partially offset by lower sequential sales of DSP wireless handset chipsets, which declined sequentially in Q3 after increasing sequentially in Q2. Overall, communications products represented approximately 28% of our total sales in Q3, which is very similar to the prior quarter. Revenues from computer products grew 9% sequentially, in line with an overall stronger PC market worldwide. Computer products represented 9% of our revenues during Q3. In aggregate, revenues from our analog products grew 3% sequentially and were up 7% year over year. Analog products represented 84% of our revenues in Q3. Converter and amplifiers together represented 62% of our sales, or 74% of our analog product sales. On a sequential basis, converters and amplifiers grew sequentially by 2% and 5% respectively in Q3. We also enjoyed sequential revenue growth in other analog product categories, such as power management and radio frequency products. Micro machined product sales were flat quarter to quarter as expected, due to temporary manufacturing limits but were up significantly from levels of a year ago. Revenues from DSP products decline 5% sequentially, primarily as a result of a decline in sales of handset chipsets in Q3. Handset chipsets represented 7% of our revenues last quarter. Sales of general purpose DSP products grew 7% sequentially and represented approximately 8% of our revenues in Q3. Non-GAAP gross margins for the quarter were 57.8%, which were flat to the prior quarter and in line with the guidance that we provided last quarter. Inventories declined by another five days in Q3 to 116 days and are now approaching our model of 100 to 110 days. Non-GAAP operating expenses grew by about 1% sequentially, in line with our plan to raise investment levels in analog products such as power management, low power converters and MEMS, all of which we believe will offer substantial growth opportunities for ADI in 2008 and beyond, while at the same time modulating expenses in many other areas. In aggregate, the non-GAAP operating expenses are currently about 35% of our current revenues, which is well above our target of about 30%. Non-GAAP diluted earnings per share were $0.41 for Q3, which was also at the high-end of the guidance we provided last quarter. Net cash from operations totaled $191 million, or 28% of sales. Net cash flow from operations less $31 million in capital that was spent during the quarter was $160 million, or 24% of revenues. During Q3, we paid out $59 million, or nearly half our net income in dividends, representing a yield of 1.9% based on today’s stock price. In addition, during Q3 we purchased $632 million of our stock in the open market, representing 5.2% of outstanding shares during the quarter. Since we began our current stock repurchase plan in Q4 of ’04, we’ve purchased approximately 23% of all shares outstanding for $3 billion, and we have almost $1 billion left on our current authorization. Our cash balance at the end of Q3 was approximately $1.3 billion. The order rates during Q3 remained strong and increased 7% from Q2 levels. Orders from OEM customers were particularly strong during the third quarter and the end customer book-to-bill ratio was above 1 for the quarter. As a result, our backlog entering Q4 is up from 3Q levels. As a result, we are planning for our revenues to be in the range of $680 million to $710 million in Q4. While we’ve reduced our inventory from 128 to 116 days in the past few quarters, we are planning to continue to constrain production levels in Q4 to further reduce our inventory to model levels. We also expect the product mix in Q4 to favor consumer products, as is very typical in the fall period in anticipation of the holiday builds. As a result, we are planning for our gross margins in Q4 to be similar to Q3. As we reach model inventory levels of 110 days, or 100 to 110 days, we plan to increase production levels to match the current levels of demand that we are seeing. We expect expense levels to increase modestly to fund the analog programs that we mentioned earlier, as we continue to reduce expenses in other product areas. As a result, our plan is GAAP EPS in the range of $0.36 to $0.40, and for non-GAAP EPS in the range of $0.41 to $0.45 for Q4. We’ve provided a very detailed analysis of the items that reconcile the GAAP numbers to the non-GAAP numbers and that’s included in today’s press release. Going forward, we continue to focus on a few very key priorities. Certainly number one is to continue to fund the development of new products within the analog product category that in some cases are either new categories in emerging markets or alternatively in existing, highly fragmented markets where we are under-penetrated but have a very strong brand. We are also planning to aggressively fund product development in product categories such as amplifiers and converters, where we have the number one market share, as our very top priority. The high performance analog market remains one of the best product categories in the semiconductor industry in which to invest in and our brand is strong and our share remains high in some of the best product categories. Increasingly, we are planning to focus our investments on product areas where we can earn high and sustainable returns on the R&D investments. This implies investing in opportunities where ADI's technology is highly differentiated from competition and provides capabilities that help our customers gain advantage over their competitors in the marketplace. Thirdly overall, we’re going to continue to focus on maximizing efficiency and lowering our overall costs throughout ADI in virtually every area of the company. We are also planning to continue to focus keeping our cash generation strong and our returns to our shareholders high. Our sizeable stock repurchases and increasing dividends have been financed by very strong cash flow generated from operations and a consistent reduction in our excess cash. Fewer outstanding shares, of course, provide the opportunity for much higher earnings leverage as sales and profits grow in the future. We remain confident that our serviceable market continues to expand as our technology takes on increasingly important roles in medical devices and cars, telecommunications and many, many other applications. As a result, we continue to believe that we can grow our revenues at a compound rate between 10% and 15% per year and that this rate is very realistic, given the growth opportunities in these markets, given our brand and reputation for leading signal processing technology amongst the market leaders and the largest consumers of that technology, and are continuing and I would say intensifying scrutiny of product areas that have been negatively impacting our top line growth in our earnings. Even in areas where we already have very high market share, such as digital TVs, digital cameras and base stations, there are many excellent opportunities going forward to continuing to grow our dollar content. And as I mentioned at the same time, we are committed to continuously improving our product mix and our overall cost structure throughout ADI and to continue to provide a high total return to our shareholders. So those are all the formal comments, the opening comments. I’ll turn it back to Maria.
  • Maria Tagliaferro:
    Operator, we’re ready to open up the queue for our analyst participants who wish to ask questions.
  • Operator:
    (Operator Instructions) Our first question is from the line of Craig Ellis with Citigroup.
  • Craig Ellis:
    Thanks. Jerry, I’ll start off with a question on the top line; the outlook range is pretty wide at $30 million. Can you just identify what the variances would be that would lead towards the high-end of the range versus the low-end of the range?
  • Jerald G. Fishman:
    Well, it’s always complex in the second week of the quarter to try to be very accurate about the details of the next quarter. On the positive side, we are starting off with the backlog higher, the book-to-bill ratio was above 1, we saw generally strong order patterns for most of the quarter and we saw those order patterns in most of the regions of the world. We are seeing pretty good momentum on new products. All that’s a positive and we are seeing a lot of momentum in the consumer area, which is also usually a positive, particularly in our fourth quarter where the bills begin. But I think as everybody knows, there’s a lot of uncertainty out there in the markets. I don’t have to tell anyone about what’s been going on with interest rates and all the other things that have been the focus of attention of investors over the last couple of days, so I think it is wise for us -- we generally start the quarter with half our sales in backlog or so, so in the second week in the quarter, there’s a large range of possibilities of what could happen that would influence that one way or the other. I think most of the factors that we control, we’re feeling pretty good about but there’s a lot of factors that ultimately we don’t control and those are always worthy of some caution going forward.
  • Craig Ellis:
    Okay, and just a follow-up to that, have you seen any change in order patterns from your OEM customers over the last month or so, or is some of the range in the outlook just conservatism, given the awareness to what’s happened, particularly in the financial services area?
  • Jerald G. Fishman:
    As we’ve looked at the order patterns over the last month, they’ve remained relatively consistent.
  • Craig Ellis:
    Okay, thanks, and then --
  • Jerald G. Fishman:
    We haven’t seen any real evidence that there’s anything nefarious going on there.
  • Craig Ellis:
    Okay, thanks. And then, switching gears, on the product side you had a nice increase in power management. I think the best sequential changes seen in about the last 12 quarters. Is that primarily related to some of the computing strength, or is it broader than that related to some of your new products?
  • Jerald G. Fishman:
    I think it’s a little of each but certainly the computer market getting better helped a little bit on that.
  • Craig Ellis:
    Okay, thanks, Jerry.
  • Operator:
    Your next question is from the line of Romit Shah with Lehman Brothers.
  • Romit Shah:
    Thanks a lot. It looks like you guys had a good quarter in terms of booking. With the orders up 7%, I guess I am a little surprised that you are not forecasting your revenues to accelerate in the October period. Normally this should be a seasonally stronger quarter for you guys. Jerry, could you just provide a little bit more color on some of the end segments, particularly industrial and communications? Are you seeing any signs of a slowdown there or any other reason why you guys are being a little bit more conservative of the guidance?
  • Jerald G. Fishman:
    Well, I mean, we provide guidance that’s -- you know, the plan is that our product lines have submitted in that range. We don’t try to shape it really one way or the other. I’d say that as I answered in the prior comments that internally, we’re seeing good momentum and there are a lot of reasons to be very enthusiastic about the segments. Certainly this business is doing great in the consumer sector; the base station business is strong. There’s evidence that’s probably going to continue. We’re doing a little bit better on the computer side. The industrial business has been a little flat for the last quarter or two, but on the other hand going into that period, it was up very substantially most of the quarters last year. So I don’t think there’s anything going on in the segments that is cautionary. It’s just the overall environment is a little uncertain and there’s a lot of external factors going on out there that cause us to be cautious. I think it’s prudent for us to be cautious, to try to run the business cautiously until we really see how all these external factors are going to play out.
  • Romit Shah:
    But there’s nothing in the way of bookings in the last 30 days that’s driving some of this conservatism?
  • Jerald G. Fishman:
    No.
  • Romit Shah:
    Okay, and if I could, just as a follow-up on gross margins, by my numbers it looks like gross margins will be flat to down for the sixth consecutive quarter in a row and I realize that mix is always an issue but I’m just curious; is there somewhat of a more permanent dynamic going on either with competition that’s making pricing a bigger factor in winning some of these sockets?
  • Jerald G. Fishman:
    Well, I would say the largest factor in the gross margin issue you are mentioning has more to do with mix of products than anything else. We had a mix shift where consumer products a year ago was 17% of our sales. They are now 20%. Those products do carry slightly lower gross margins, although the return on assets on those products tends to be very good because we don’t fab a lot of those products ourselves. I would say we are operating the fabs below where we would like because we are trying to get the inventory down and we expect that will help us going forward. I think the way to think about the analog product line is that we have more than half our sales that we get in products where they are, you know, to a very fragmented customer base where we don’t provide a lot to any customer or any application, and the value of our products we get paid all the time for from our fragmented customer base. If the mix has shifted a couple of points towards consumer products, at least right now, and that’s heavily based on large build-outs of games, which I think has been reported widely, what we’re doing there, and very large build-outs right now on TV sets, which are a vast market right now for us. Our sense is if you look over time, that the mix is not going to shift very hard towards that. I know there was a lot of concern about that with some investors last quarter, that oh my gawd we’re going to become a consumer company and the margin is going to keep going down. That is certainly not what we’re planning to happen and not what any of the indications that we have say will happen. In a lot of ways, the way I would tend to look at it is the gross margins are down a couple of points over this period from the peak, which was about 60, and in that period we had a big change in the mix which we think is not going to continue to go in that direction, and we have been unloading the fabs to reduce the inventories in the fabs. We are also not standing idle around on that stuff. We have significant cost reduction programs going on in the company all over the place to reduce our infrastructure costs and our unit costs, you know, in the part of the market that is a value-oriented part of the market, there’s plenty of opportunity for us to get paid for the value we give our customers. So I would say that there’s been a lot of conversation about that. We’ve had a lot of conversation about that internally but I don’t really think there’s anything much going on competitively or any other way that’s changing that a lot. Clearly there’s more competitors out there and it’s always harder but we tend to be able to differentiate our products pretty well from competition, so we don’t get into a pricing spiral very often. So when I add it all up, I don’t think there’s anything fundamental other than the fact that we’ve had a mix shift. We are working hard to balance the decline in margins that we’ve seen in the consumer space with margins getting better on the other products. You know, it’s hard to predict because we can’t predict the mix but I don’t think there’s been anything fundamental going on with the profitability of our product. I think when you have a product line as diverse amongst markets and products as we have, mix shifts really dominate the question each quarter, not so much the price we get for any particular product.
  • Romit Shah:
    Okay. Thanks for that.
  • Operator:
    Your next question is from the line of David Wu with Global Crown Capital.
  • David Wu:
    Good afternoon. I have just a couple of things for the quarter ended. If you look at the operating expenses, those went up more than I would say slightly in the SG&A column. Is there any particular thing that happened that caused that to jump? And the other thing I was wondering is at the last conference call, we were told that this quarter, the inventory would be down sufficiently that were going to increase the utilization rate in Q4. What stopped the inventory from getting to the target that you were looking for originally?
  • Jerald G. Fishman:
    I’ll answer the inventory question. Joe can handle the SG&A because there were some unusual things in there that he’ll talk to you about. On the utilization, David, we looked at the inventory at the end of the quarter and we decided that we want to get it down to model levels this quarter, or close to it, because then as business gets better, we have much more earnings leverage on the upside. So we decided to let it go down for another quarter and then hopefully we’ll be down very close to our model levels and we’ll be able to then start building products at rates commensurate with the consumption rates of our products of our customers. So we decided during the quarter at the end of the quarter to let it run one more quarter and get the inventories down to pretty low levels. Joe, do you want to handle the question on SG&A?
  • Joseph E. McDonough:
    Yes, on the SG&A, you’ll notice that in the second quarter, there was an $8.5 million litigation settlement that on the non-GAAP financial statements, we backed that out. And so the non-GAAP SG&A I think is flat to up 1% quarter to quarter.
  • David Wu:
    I see. Okay, and just one quick question; on the DSP side of the house, with the mix the way it is, what is the -- what can you do to either make it more profitable, or discuss some of the less profitable activities?
  • Jerald G. Fishman:
    I think the obvious, David. We are really focusing the general purpose DSP business on the areas that have a lot of momentum and that we believe will grow the revenues as they have been growing pretty well in the last couple of quarters on the GP side, and therefore to really zero in on the expense levels on that side of the business. On the rest of the DSP business, as we’ve talked about in the past, we’re working to either make that better or to figure out a way to redirect some of that investment. I think those are the obvious answers and I think we can’t comment much further about those things directly here.
  • David Wu:
    Okay. Thank you.
  • Operator:
    Your next question is from the line of David Wong with A.G. Edwards.
  • David Wong:
    Thank you very much. Are you seeing any constraints in your ability to supply product into the computer space? And if you aren’t, are you getting any benefits from others not being able to supply a demand into computers?
  • Jerald G. Fishman:
    I really don’t know exactly the answer to that. Our sense is that we are keeping up with what our customers are asking us for, by and large, and I really don’t know if we are getting any benefit from others or if they can’t supply them or not. I just don’t know.
  • David Wong:
    Okay, great. And secondly, chipset sales, do you expect these will continue to decline over the next few quarters or are they going to bottom out at some point?
  • Jerald G. Fishman:
    Well, our forecast is that our handset chipset sales are going to increase next quarter.
  • David Wong:
    Okay, great. Thanks very much.
  • Operator:
    Your next question is from the line of Sumit Dhanda with Banc of America Securities.
  • Sumit Dhanda:
    Jerry, I have a couple of questions; first, on the chipsets, the wireless chipsets, why were they down as much as they were? They were trending up for a couple of quarters and it seems to have hit a bit of an air pocket here.
  • Jerald G. Fishman:
    Well, I think what happens is for us, for people who have followed analog for a long time, our third quarter in the handset chipset business is always a nail biter for us, and this quarter was not exception. We had planned that it was going to be down for the quarter and it basically did that. It had gone up pretty substantially in the second quarter. It was down in the third quarter. We expect it to be up during the fourth quarter, or at least that’s our current plan. We are really at the mercy of what our customers’ ordering patterns are and the customer list that we sell to, that seems to be their ordering pattern, where Q2 is good, Q3 is not so good, and Q4 is better, and that’s sort of what the forecast indicate is going to happen this time as well.
  • Sumit Dhanda:
    I had a bigger picture question on your operating model. You are running gross margins at about 57 on a GAAP basis, operating margins at about 20, and your stated objective is to have a 60-30 type of model. So the logical conclusion here is that to get there, to bridge that 7% gap to something smaller, in other words, if you want to get to a 60-30 model, your op-ex has to ramp much more slowly than sales going forward. I mean, is that the right way to think about --
  • Jerald G. Fishman:
    Well, I think there’s two ways. One is, that has to happen and the other thing we have to do is ultimately resolve businesses that have very high operating expense to sales ratios and low gross margin to sales ratios. I think part of the mix is getting a better mix of products in our portfolio and the other part is just keeping the expense growth at a very low level relative to the sales growth. In the early part of the year, we mentioned that on the analog part of the business, that we had some initiatives that we thought were prudent to let the analog expenses go up a little bit faster than the sales growth that we are getting and we are executing on. Those are important product areas that are going to be very profitable areas of growth drivers for analog. So I think it’s really both of those is my best answer, is that we have to overall just get really serious about keeping the overall momentum on the expenses down to an absolute minimum level and at the same time, we have to continue to work hard to rationalize the product mix. I can tell you that we are doing both of those.
  • Sumit Dhanda:
    Let me ask this differently; so hypothetically assume your mix improves, you see some good revenue growth because the business is improving cyclically, I mean, do you think that when you ostensibly hit a 60% gross margin target, you have everything in place to allow your operating margins to ramp to a 30% number? Or are there some things you need to specifically do still which will prevent that from occurring?
  • Jerald G. Fishman:
    No, I think that -- we have a -- I mean, the businesses that are not helping on that are very clearly identified in analog and I think we have a very strong focus in trying to get that resolved. I think when there’s a five point level there and you don’t do it, it takes forever to do it just by growing the -- keeping doing what you are doing and then grow the expenses a little bit slower than the sales every day. That’s now the way we are thinking about it.
  • Sumit Dhanda:
    Okay, a couple of other questions; you said you’ve chosen to keep production constrained here. That’s impacting the ability to expand gross margin in addition to the mix. Joe or Jerry, if you were to disaggregate the impact from those two factors, let’s say you had chosen not to bring down inventory further, would gross margins have been up 50 basis points? Is there a number you can put around it?
  • Joseph E. McDonough:
    I don’t think it’s really that simple. The inventories are down $10 million quarter to quarter. There’s always an opportunity, if all we are interested in is what happens in one quarter, to run the factory utilization a little bit higher and the gross margins go up but that’s not the way that we operate the business. We operate the business first to service the customers with a supply line that meets their expectations, and we try to balance the loadings in the factory in some sensible way over an extended period of time, so that we don’t run the factories up one quarter and way down the next quarter. As we have been saying for the past few quarters on the conference call, the inventories in days had gotten quite a bit above our model and so we are converging back toward our model, which is 100 to 110 days and we are not very far away from that. At the same time, we’re working with our external foundry partners, with our back end assembly and test partners to continually focus on the costs of everything that we are doing. We are working within the product line organizations and the engineering organizations to design products and redesign products in a way that they are more cost-effective. We are working in the manufacturing organization to look at all the manufacturing costs internally and continue to identify the areas where we can reduce our costs. The combination -- and we are working with the sales group not to leave a few pennies on the table when we are negotiating with customers. So it’s all those that are enabling us to earn the gross margins we have today, which may not be where we want them to be but they are very high relative to the semiconductor industry and they are indicative of the fact that we do deliver value to the customers and the customers are willing to pay for it. But we can do better.
  • Sumit Dhanda:
    Could you also quantify how much the backlog was up this quarter? The 13-week backlog?
  • Joseph E. McDonough:
    Hold on one second -- the backlog at the end of this quarter is, the 13-week backlog is $414 million, and it was $403 million last quarter.
  • Sumit Dhanda:
    Okay. Thank you very much.
  • Operator:
    Your next question is from the line of Steve Smigi with Raymond James.
  • Steve Smigi:
    Great, thanks. Just to follow up a little on some earlier questions, it looks like you are pretty close to getting internal inventory back where you want it, so would it make sense that this quarter, it would be back to where you want it? Or would you have to run it again, potentially a further quarter?
  • Joseph E. McDonough:
    No, I think it will start to converge this next quarter.
  • Steve Smigi:
    Okay.
  • Joseph E. McDonough:
    But there is -- there always is the question of the mix of business that is either manufactured internally or externally.
  • Steve Smigi:
    Okay. I was hoping you could talk a little bit more about the converter product line. I think you gave a general growth rate but some sense of is your expectation for growth in converters over the next year and if there were particular drivers there, both on an end market side and a product side?
  • Jerald G. Fishman:
    I think first of all, one of the important aspects of the converter products is we sell them to probably 10,000 or 20,000 different customers and we probably have 2,000 different products that we sell, so it is a very fragmented product line that sells many products to many, many thousands of customers. So generally, our growth in converters is not dominated by any new particular product that we sell, or any particular product a competitor tries to duplicate with analog. I think our converter business, as you I think can see in the, it’s on the back of our financial statements, has been a very solid grower over a lot of years. I think there’s no reason to believe that that shouldn’t continue. It’s a vital technology in the markets we’re serving. Converter ultimately determines a lot of what the image looks like or the audio sounds like or anything that people really can differentiate one product versus the other on, and I think that that means that typically with converter products, we can get paid in the marketplace for what we do. So we have the all-time best brand in converters, and that’s real important because a lot of the people that, a lot of our customers who buy converters depend on us to design the right products, supply them right, support them right, and brand makes a big difference in that business and I think that has been the case. That’s why we have such a high percentage of the market and why despite a lot of competitive noise out there, our share is very, very high and we expect it will continue. I think it’s probably the most important product area of analog. It’s a high margin business. It’s a good growth business and, you know, converters are always going to be the bridge between the analog and digital world and the analog world is not going away anytime soon, given that images, temperatures, and sound are always going to be audio. So I think it’s a great product line. It’s probably, of all the product lines in the analog business, it’s probably the best product area to be in because it really is the one that differentiates what the system does ultimately. We invest in that business to continue to be a very large market shareholder in that business and we haven’t seen anything out here yet that is worrisome about that not coming true. We always look at competitors. There are a lot of good competitors out there. They introduce products but at the end of the day, our share remains very, very high and our goal is certainly to keep it there.
  • Steve Smigi:
    Is there anything though about the nature of where you see the mix going that would make you think it would grow sort of more or less than the corporate average?
  • Jerald G. Fishman:
    It’s hard to say because converters are used so prolifically through every application. Industrial applications, we sell very, very high resolution converters. Consumer applications, we sell very high speed converters. In audio applications, we sell very low power converters. So some of them are application oriented but there’s just a large sort of mass of the market where if you have the best, the highest performance, the highest resolution, the widest dynamic range, the highest speed, you just sell products to thousands of customers. That’s how they buy -- and that’s the importance of brand in that part of the business. I’d say for argument’s sake, at least the way we think about the world, I think it will be about the same as it’s been and maybe because of some new consumer applications, the overall growth rate of those products can go up but it’s -- to our first approximation, at least our planning assumptions, they’re going to stay about the same.
  • Steve Smigi:
    My last question is just if you look at your guidance, could you give some sense of what the analog growth might be sequentially versus DSP?
  • Jerald G. Fishman:
    No, I don’t think we have that handy.
  • Steve Smigi:
    Would you expect one category to grow a little bit more than the other?
  • Jerald G. Fishman:
    Well, I’d say to a first approximation, about the same.
  • Steve Smigi:
    Okay, great. Thanks a lot.
  • Operator:
    Your next question is from the line of John Pitzer with Credit Suisse.
  • John Pitzer:
    Thanks for taking my question. Jerry, just a quick question; what do you think consumer will represent as a percent of the mix in the October quarter? It was about 20% in the quarter just reported. How much higher can it go?
  • Jerald G. Fishman:
    I don’t think very much higher. I think it might trend up a little bit seasonally but as we plan the model of the business, we don’t plan that consumer is going to begin to dominate the mix of our sales. The industrial business is 40% to 45%. It’s going to stay there. You know, there’s opportunities in the communications market for some products to grow a little faster, some will end up growing slower. So I don’t think the mix of our business is going to change drastically in the coming quarters.
  • John Pitzer:
    And then I guess when you look at that 60% target gross margin, if the leverage point isn’t really utilization or inventory, and it’s more mix, when you look at the product divisions, is it really the power management division that gives you the best leverage to get to that 60% gross margin?
  • Jerald G. Fishman:
    Well, I think there are a couple of opportunities around the company. That’s one of them.
  • John Pitzer:
    And I guess, can you help me understand sort of the lifecycle in that business? When might we expect to see some incremental socket wins for you guys there?
  • Jerald G. Fishman:
    I think we’ve had some good socket wins in that business to date. We’ll see the results of that probably 2008 in our sales, but we’ve got some pretty good momentum with some pretty important customers in that business and we have a good team out there continuing to crank out new ones every day. Right now, that’s not a business that’s enhancing our gross margin, let’s say. I think there’s opportunity as we create more value in the products that we begin to sell. As some of these new products move into the mix, there’s every opportunity for that to help the overall gross margin of the company rather than being below the average gross margin of the company right now.
  • John Pitzer:
    And then, Jerry, last question; if consumer stays at about that 20% level, is the 60% target margin still achievable?
  • Jerald G. Fishman:
    I believe so, yes.
  • John Pitzer:
    Great. Thank you, guys.
  • Operator:
    Your next question is from the line of Louis Gerhardy with Morgan Stanley.
  • Louis Gerhardy:
    Good afternoon. I just want to ask you first on the status of your MEMS production, both your ability to expand your own capacity there as well as to ramp up some third party manufacturers?
  • Jerald G. Fishman:
    Well, we have very limited ability to ramp up our internal production above the levels, plus or minus a few million bucks a quarter. We don’t have much production -- you know, ability to do that in the short-term. But once some of that production has been outsourced to Taiwan, we have virtually unlimited upside production to do that. So I think for the next couple of quarters, it is going to be production limited and I think after that, we are going to be out there beating on the sales, we’re going to get more business.
  • Louis Gerhardy:
    -- you’re qualifying a customer or are you still waiting for that?
  • Jerald G. Fishman:
    Pardon me?
  • Louis Gerhardy:
    Do you have parts back from these foundries that you are qualifying with some of your customers, or is that still too early?
  • Jerald G. Fishman:
    That’s a little early for that.
  • Louis Gerhardy:
    Okay. And then just a question for Joe in terms of the significant share repurchase; could you just give us a guidance range maybe for fiscal Q4 on both share count and other income?
  • Joseph E. McDonough:
    I can give you some pieces of it. We don’t know the stock price, so it’s a little hard to be sure but the other income, non-op line, I think if you were thinking in the range of $14 million of non-operating income, that probably would be the right range. The tax rate probably in the 23% range, and the earnings per share, the shares somewhere in probably 320. A lot of that is an average that’s factored in as a result of the repurchases that we did in the third quarter. They come into the share count reduction in the fourth quarter.
  • Louis Gerhardy:
    Thank you.
  • Operator:
    Your next question is from the line of Uche Orji with UBS New York. Mr. Orji, please go ahead with your question.
  • Uche Orji:
    Can you hear me? Hello?
  • Maria Tagliaferro:
    Go ahead.
  • Jerald G. Fishman:
    We can hear you.
  • Uche Orji:
    Okay. Two things; first, let me just ask you a couple of questions; are you able to qualify your utilization rates, just so that we understand what the average utilization rate is now and for as long as you keep constraining production, when you then finally start increasing production? Just for me to get a sense of how much headroom there is there.
  • Joseph E. McDonough:
    The utilization is different in different factories, as Jerry said. In the factory business, our MEMS products were basically at capacity but I think overall it’s approximately the same as it was last quarter, which is in the 70% range. And in the fourth quarter, the utilization will probably go up a little bit but not meaningful.
  • Uche Orji:
    Okay. That’s helpful. Just one other issue now; Jerry, if I circle back to following up on the previous question on MEMS, when do we expect to see the outsource production to start to contribute? Are you giving up any business at the moment? Do you see yourself losing business just because of the inability to supply at this point? Just for me to get a sense of --
  • Jerald G. Fishman:
    Well, right now our current plan says that we should begin to see something that would be meaningful by about the first of the year. That could go -- we are working hard to get that sooner but until we really see what the stuff that comes out of Taiwan is, it’s hard to be very precise about that.
  • Maria Tagliaferro:
    Fiscal year.
  • Jerald G. Fishman:
    Yes, the beginning of our fiscal year, but I’m saying that could easily -- it probably won’t come a little forward. It could easily slip a quarter -- it’s just too early to tell right now. The early signs in the relationship that we have on that and the amount of effort that’s going into it from our manufacturing partner side as well as Analog Devices is extremely high -- you can image the pressure that we are getting and also the opportunity that we have on that. I’d say that to date, that really hasn’t cost us any business. It’s really that we have a lot of customers that would love to start going down that path with us that we sort of have sampled and we’ve given them an idea of when it is we think we could respond to that. These are generally new products and new applications. It turns out for the kind of things that we are able to accomplish in some of those products, there really is no other person that can do it so what happens is the end products tend to get delayed a couple of months until we can supply them. Now of course, we can’t rely on that being the case forever. Eventually, people learn how to do it but I think we’re well ahead of what most people can build that would go into a product where most of the demand is on that. But certainly if we can get more sooner, that would help us. We have our sales guys on idle on this thing almost, until we really start to see some stuff back from Taiwan and we have a lot of interest in these products. I think there really has been an inflection point in the breadth of applications that this technology is applicable for. With the publicity on the Nintendo Wii game, which really was a, pardon the expression, a game changer, I think there’s an awful lot of people recognizing that it could really differentiate their products and change the experience, and that’s how market shares in that business changed a lot. I think it’s got -- I mean, it’s gotten a lot more visibility than we ever thought it would and when you listen to the people who use it, everyone is very excited about that technology. It is really moving hard out of the just automotive applications, although that is still a large source of our business and will continue to be, into all these other applications that none of us ever imagined. I guess that’s the big advantage when you invest in this core technology -- you never quite can tell what’s going to happen but it does. And so as we get production capacity into that business, it should become a very important business for us.
  • Uche Orji:
    Do you think that the margins will be better when your sourced through the foundries eventually than the internal model you have now?
  • Jerald G. Fishman:
    Yes, certainly that’s what our plans indicate. First of all, the technology base that we are going to put those, particularly the consumer products on, is a very standard semiconductor process where the real art form on that is still the beam technology. Right now, we are building it with a relatively expensive internal process that is a very unique process. I think as we get that on a more standardized process, I think there’s opportunity for us to make higher margins than we are today, fully recognizing that it’s consumer product and those tend to always be harder to get margins than industrial products, but I think we can certainly do better than we are doing today through external sources and that’s certainly the what the plan that we have in place today indicates.
  • Uche Orji:
    Just one last question; let me circle back to industrial. It looks like the seasonality was such that the calendar, first half calendar year is better for industrial. Let’s assume the seasonality holds as we go into early next year, will that be a key factor in driving your margins back up?
  • Jerald G. Fishman:
    Certainly the -- whenever we have a strong industrial quarter, the margins react very favorably to that. There’s no doubt about that. Even within that category, it’s 43% of our sales and we have seven or eight different product categories. Some carry extremely high gross margins. Some carry very high gross margins and some just carry high gross margin. So it really depends on the mix that we get even within the industrial business, but typically when the industrial category as a category goes up, the gross margins respond positively to that.
  • Uche Orji:
    Right. And on wireless, Jerry, we’ve seen this announcement of TD-SCDMA. Is that contributing any way to revenues yet? Can you tell us what is going on with this technology, given your position within this technology?
  • Jerald G. Fishman:
    Well, I would say certainly on the infrastructure side, on the base station build-out side, one of the reasons our base station business, although certainly not the only reason, has been extremely strong is build-outs in China and our products are very well-designed into a leading base station manufacturers in China. So on the infrastructure side, we’ve already begun to see some -- the improvements due to that build-out. On the terminal side, it’s still very low volume and we don’t know much more about when the volumes of that are going to pick up than you do. There seems to be a lot of momentum gathering but certainly we haven’t seen a lot of that that’s moving our needle very much on the terminal side.
  • Uche Orji:
    Are you expecting that in early fiscal year this year or --
  • Jerald G. Fishman:
    Well, you know, we have the product available. We have a very good relationship with the infrastructure providers that are going to -- and many of the Chinese customers that are going to build those types of products, so I think we are in good position when it comes but we don’t know much more than you do about when it’s going to come.
  • Uche Orji:
    Thank you very much.
  • Operator:
    Your next question is from the line of Michael McConnell with Pacific Crest.
  • Michael McConnell:
    Thank you. Jerry, if we look at Q1 of next year, or next fiscal year, the January quarter, things should be lining up though here from a gross margin standpoint. I mean, you have industrial networking in your favor. Can you talk about the inventory you were holding last quarter from the recently closed California facility? Have you sold all of that down? And could we also see a benefit in the January quarter as that lower margin inventory is sold through and you start filling the factories up with the higher margin inventory?
  • Jerald G. Fishman:
    I’ll divert that question to our esteemed CFO.
  • Joseph E. McDonough:
    I think that’s pretty fine grain in terms of looking at the inventory. The buffer stock that we did build up, probably a lot of them have been sold off but I don’t think that’s the major component of our gross margin. I think what we have done is we have significantly reduced our manufacturing cost structure over the past year as a result of the shutdown of that factory and we are continuing to look for other opportunities to reduce our manufacturing cost structure. That’s all one part of the gross margin equation of running a business that has a 60% gross margin. But everything else doesn’t stay still in the world. As Jerry mentioned, there are products where we are able to maintain our prices, we’re able to maintain our margins. In some cases, we can improve the margins. There’s other product areas, primarily in the consumer space, where the customers are always looking for price reductions and we are always looking for ways to improve the performance of the parts. And that’s the balance that winds up with a portfolio of businesses that today has an approximately 58% gross margin and we are only two points away from the 60% goal. I think that this gross margin is a little bit overdone in terms of the focus on those two points.
  • Michael McConnell:
    I guess if we are going to look at the January quarter, just with the consumer declining, industrial picking up, maybe the California fab inventory, as you said, is not a big driver. I mean, what’s the company’s confidence level that fiscal Q4 is indeed the bottom for gross margins and we start to see expansion as we typically do in the front half of the fiscal year?
  • Joseph E. McDonough:
    I think we’ll comment on the first quarter next quarter. At this point, the world has a lot of uncertainty in it out there and we have to take that into consideration. It certainly affects the economies of the world. It could affect the industrial base as well. The industrial business has been relatively flat now for three or four quarters in a row for us, although we’ve seen pockets such as the ATE business, that have been growing, which is a good sign for our industry. So you can look at the data and you can find reason to be very optimistic. You can look at the things you read in the newspaper every day and find reason to be pessimistic. So we are trying to run the business in a way that is able to respond to the opportunities that are presented to us but cautious enough so that if things change, we are prepared for that as well.
  • Jerald G. Fishman:
    I mean, all of the factors you mentioned are factors that tend to help the gross margins and there’s probably a whole unequal list of ones that could go against us during the quarter. I think it is just very early for us. We don’t have our plan for fiscal 2008 put together in detail yet, that within 50 or 100 basis points on the gross margins we have a lot to say on it. But I think we’ll have a lot more to say about it as we get through this quarter and we begin to see how it’s shaping up and we begin to see what is likely to be the mix of products that we are going to ship in Q1 and how the economy is doing. I think in a month or two, we’ll be a lot smarter and I think today all we can do is just speculate. We sort of hate to do that long in advance.
  • Michael McConnell:
    Thank you.
  • Operator:
    Your next question is from the line of Simona Jankowski with Goldman Sachs.
  • Simona Jankowski:
    Thanks very much. This one is either for Joe or Jerry; you guys usually keep very, very close tabs on the inventory at your distributors, and probably have some of the best visibility out there into what’s going on. Can you just give us a broader perspective on how you view inventories at your various customers, both looking at distributors, EMS customers, and OEM customers? And also, if you are sensing any desire by them to carry a little more inventory into the seasonally strongest part of the year or are people still pretty cautious about that?
  • Jerald G. Fishman:
    Joe, maybe you could talk about the first part and I’ll talk about the second.
  • Joseph E. McDonough:
    Well, the distributor inventory levels are roughly the same at the end of the quarter as they were at the beginning of the quarter. We think they are in line with what they should be for the levels of business that they are doing, and so there is no real significant data in that, I think.
  • Jerald G. Fishman:
    I think the other answer is what are the OEM customers thinking and how do we see what they are -- are they aggressive or conservative on the inventory. I still believe they are relatively conservatively watching their inventories. I think everybody is doing that right now and I don’t see any -- there’s always the one customer here, one customer there who tries to get ahead of a wave, but I think customers are managing their inventory responsibly. We don’t see they are buying ahead a lot and we don’t see they are laying back, waiting until the last possible moment to buy either. I think it is one of the few times where it looks like it is relative equilibrium.
  • Simona Jankowski:
    Okay, thank you for that color, and then just last question; I think you mentioned your OEM book-to-bill was above one. Can you also comment on your distributor book-to-bill? And also, if you can maybe give us the specific numbers?
  • Jerald G. Fishman:
    I would say if you looked at the total of OEM and distributor end customer bookings, which is the only thing that matters, both the aggregate of that was above one and I think each of them were above one, although Joe, you should correct me if I’m wrong on that.
  • Joseph E. McDonough:
    The overall end customer book-to-bill ratio was about 1.05, and that’s the aggregate of the OEM and the disti, which is the one that we look at. Because what that is is looking at the distributors on the bookings that they received from their customers and aggregating it with the bookings that we receive from our OEM customers.
  • Simona Jankowski:
    Okay, and it was positive, both going through the disti channel and direct?
  • Joseph E. McDonough:
    Yes.
  • Simona Jankowski:
    Okay, terrific. Thank you very much.
  • Operator:
    Your next question is from the line of Chris Danely with J.P. Morgan.
  • Scott Jones:
    This is Scott Jones calling in for Chris Danely. I had a question on the base stations. Last quarter, you guys showed a pretty good growth there and I kind of wanted to know if there was an opportunity there for this continued growth and if that was going to become a larger part of your percentage of revenues and if you could give a little background on, is that a product that adds to your gross margins and helps you get to that target? Or something that could basically keep you about where you are at?
  • Jerald G. Fishman:
    I would say typically, we achieved very good gross margins on the base station products. They tend to be relatively low volume. In a typical base station, we might sell 50 or more different products into a base station, so those tend to be products where the gross margins are good. The strength of the base station market has been helping us a little bit and actually that business out performed a little bit what we though it was going to do this quarter, so that’s a good business for us. We have a very strong position and there’s no indication that that position is going to get any weaker, so it really just depends on how vital those build-outs remain and right now, they look pretty good.
  • Scott Jones:
    All right. I was also going to follow up on the comment on the power management segment. It seems like you guys had the first good growth there in a couple of quarters. Can you tell me how you guys are looking there versus your historical view of that segment? Is it about getting back to where it should be or do you think it’s maybe turning a corner for heading for some growth?
  • Jerald G. Fishman:
    I think we’ve tried to say that we expected to really see momentum on some of the new products either late this year or early next year. It’s probably going to be early next year at the rate, based on what I’ve seen. We have a bunch of older products that are winding down still, and so I think as we look at that business, we remain convinced that it’s a good business for analog. It’s a highly fragmented business. There’s no one manufacturer or competitor that has a very large share in that business. There’s very, very -- there’s many product segments and a lot of those customers are buying our other products and would be happy to buy power management products from us if we have good technology. I keep pretty close tabs on that business and I am very satisfied with the output of new products from that group. I mean, it’s always hard to tell. If you look at it from 60,000 feet, there have been a lot of comments about “well, you’re a small shareholder, how can you ever get anywhere” -- well, we are also a small shareholder in the overall analog business but we have very strong positions in various product segments. In some converter segments, we have no share. In other converter segments, we have high share. In amplifiers, we tend to have very high share in the very high-end, a certain list of products, and a very low share in the low-end, which is another list of products. I think the same is true in power management. I think if you try to look at the overall category, you get very confused about what we should do and how likely it is that we will be successful doing what we do. If this was a market where there were two manufacturers that had 40% of the market each, and the market was very highly concentrated amongst a few customers and we had established competitors in those customers, we’d have to have our heads examined to invest the kind of money we are investing in that business. But I think in many ways, it’s just the antithesis of that. There’s many customers, there’s many segments, there’s no one large market shareholder in many of those segments and certainly not in the aggregate, so therefore there is no reason on earth that we can’t carve out a profitable, good growth business selling products that somehow are related to managing power. I think that’s the way I think about it.
  • Scott Jones:
    Okay, one last thing on your margins for next quarter. Looking at seasonality, it looks like consumer is going to be up a good bit. We already stated industrial will be -- industrial and communications will be down, so do you think the --
  • Jerald G. Fishman:
    I don’t think we said industrial and communications are going to be down.
  • Scott Jones:
    I think seasonally they are a little weaker, correct?
  • Jerald G. Fishman:
    We said the handset business will probably be up, base station business will probably be up, and the industrial business, it is too complicated to predict within a couple of percent at this point in the quarter. But we didn’t say -- I don’t remember saying any of those segments was going to be down sequentially.
  • Joseph E. McDonough:
    We did say the consumer should be strong.
  • Jerald G. Fishman:
    We said the consumer thing should be strong, or at least that’s what the forecast we have indicates.
  • Scott Jones:
    Okay, so that’s where you’ll get your balance out, is with the gross margins with consumer coming down in the mix a little bit?
  • Joseph E. McDonough:
    We literally don’t know the gross margin within a tenth of a point. All we are saying is that we believe it is going to be in the same neighborhood as it is this quarter. It is really something that we have to wait until it’s over to find out what the gross margin is.
  • Jerald G. Fishman:
    Or at least mostly over.
  • Joseph E. McDonough:
    Yes. It’s just that it’s -- we believe it’s very good at 58% in the semiconductor industry and that’s a sign of a good portfolio of products. We also believe that there’s an opportunity to work that a bit and improve it. The timeframe for getting to our 60%, we have not commented on that at this point.
  • Jerald G. Fishman:
    I think it will be very dependent on either the way the market moves towards any particular segment or the actions that we take to deemphasize products with very low gross margins. So there’s a lot of things that converge to come out with that number, which is why we are always reticent about making predictions on that up front. There’s just too many moving parts. So all we can do is say we’ve added it all up. It looks about flat. We’ll know more as we report the quarter and we’ll give you a lot more color on that as we report next quarter.
  • Scott Jones:
    All right. Thank you.
  • Operator:
    Your next question is from the line of Doug Freedman with American Technology Research.
  • Doug Freedman:
    Thanks for taking my question. A lot of them have been, a lot of good questions asked and answered. Are you sure I can’t get you to apologize for the 58% gross margin?
  • Jerald G. Fishman:
    Well, Joe’s not going to apologize. I don’t feel so good about it. Joe and I have these conversations all the time, but no, I think that we have a -- we have the opportunity with the markets we are serving and we determine the product mix. We determine where we invest the money. We determine how we price the products and I think there’s every reason that we should push the company towards that objective at an aggressive pace. That’s what I believe as the CEO of the company. I think Joe, I think in his mind looks at all these different things and he worries about it a lot and that’s good, because his worry pushes people to get these numbers done. I think that there’s no backing off the concept that I believe this business ought to run 60 points of gross margin. I’ve been consistent on it. I think -- we don’t feel like we ought to be apologizing every day for 58%, given the shift in the business. But the real goal is growing our EPS and there’s two ways to do it; get gross margins up and get the operating expense ratio down and we are working hard on both of those. I have by no means backed off on the goal of getting this company to 60% gross margins. I think that’s what we need, that’s what our entitlement is and I think we have the wherewithal to do it with our technology base and our pricing power. So that’s my opinion.
  • Doug Freedman:
    I’m not going to disagree with you. We look forward to it.
  • Jerald G. Fishman:
    So do I, so I don’t have to answer this question anymore.
  • Doug Freedman:
    My two questions are really keyed at if you could give us a sense of what you are seeing from the order patterns. I take it that they haven’t really changed very significantly. However, it looks like your orders were stronger percentage wise than backlog 90 day grew. Are we seeing a little bit more visibility, even if lead times haven’t moved? Could you let us know what lead times look like?
  • Jerald G. Fishman:
    I don’t really know. I mean, we tend to look at the order rates weekly. We look at a lot of aggregate numbers and I’ve been happy with what I’ve seen. Last quarter came out just about the way our sales guys predicted it would, maybe a little bit better. And we’ve seen no fall-off in that business. Given that part of that is July and we tend to always get nervous about July and early August, we’ve seen the order rates being okay. So maybe that will change and every time we say that, the next week goes to zero or something but right now it looks like the order rates are good. And there’s not a lot of reason for being negative about that now. We’ll see. I mean, we are going into a period, once we get into September and October, generally that’s a strong order period for us.
  • Doug Freedman:
    And my last question is regarding the restructuring actions and whether the present turmoil in the financial markets has really changed any of those outlooks or possibilities. Has it caused you to redouble your efforts or look at things any differently?
  • Jerald G. Fishman:
    I think if anything, more uncertainty causes more pressure to get things done. I think that’s true. But I think we’ve been on a pretty solid review process for quite a while about what we are going to do. Sometimes doing it takes a little bit longer than we all would like, but I think we are pressing on that pretty hard. And I would say at the margin, if anything, all the turmoil out there makes you press a little harder, not back off on that.
  • Doug Freedman:
    All right. Terrific. Thanks so much and nice results on the quarter.
  • Maria Tagliaferro:
    We are just coming up -- we’ve been on the phone about an hour and ten minutes now. We only have a few questions left in the queue though, so we are going to go ahead and take these last questions.
  • Operator:
    Your next question is from the line of Joseph Osha with Merrill Lynch.
  • Joseph Osha:
    I was looking at the rate at which you’ve grown the business since the end of the bubble, which is about 9%, which is sort of consistent with the target that you talked about, 10% to 15%. Over that point in time, you’ve hit 60% gross margin a couple of times and you’ve managed to load up your business and hit that target. Pretty much each time you have though, it’s not been time to celebrate; it’s been time to run for cover. And so I guess my question is not can you get to 60%, because I know that you can. My question is what is the normalized, sort of through the cycle, not peak, not trough -- what’s the normalized sustainable gross margin for this business if we kind of flop that top off that we know you can get to, probably at the cost of overrunning your business? Do you think it’s 58%, 59%?
  • Jerald G. Fishman:
    I would say, Joe, it really depends on the mix of business that we have. Our gross margin is certainly not homogenous across our product lines. We have certain product lines that are substandard gross margins, you know, by any measure and we have other businesses that are very high gross margins. I think if we were saying that the only vehicle of getting to 60 is just the normal, the fab loadings and when you are hot, it’s easy. When you are running a little bit less than hot, it’s hard. I think that would be -- I would come to one conclusion about the sustainability of that. I think though that at the same time we are going to have that bouncing up and down a little bit based on utilization, we are really working hard to get a better mix of business within Analog Devices and that tends to be more sustainable than just the ups and downs of how loaded your fabs are. So I would say to the extent we are successful in doing that, you know, 60 -- it’s hard to predict plus or minus a point, but in that range should be where we stay. Maybe when we unload it, it’s a little bit lower. When we load it -- we can’t predict it that closely unless we have a very clear idea of the mix of business, which is in transition right now.
  • Joseph Osha:
    All right, so your contention is that we shouldn’t think about this 60% the way the past 60% numbers have been hit?
  • Jerald G. Fishman:
    Well, I’m saying to the extent that the mix, the product mix changes and we force the margins towards higher margin products, I think there is -- there’s something different this time than last, is what I’m saying.
  • Joseph Osha:
    Okay.
  • Joseph E. McDonough:
    And the other factor that we consider pretty heavily internally is that 55% of our revenue comes from products manufactured inside Analog Devices. Those typically have very high gross margins, and 45% are manufactured externally and have lower gross margins but still very decent gross margins. The return on the assets of the latter group of products is actually very good because we have virtually no asset base, and the earnings per share leverage that we get out of the growth of that part of the business is actually pretty strong. So we are trying to balance a business where we can really grow the earnings per share and the gross margins are just one element of that.
  • Jerald G. Fishman:
    I would say, Joe, the other factor that really is a new way that we are thinking about some of these things is we used to believe that we had to carry around a lot of excess capacity in our analog business because -- in our internal businesses, rather, because the volatility -- now, a lot of the very high volatility products were still being built internally and it was very, very hard to predict when any customer was going to want them. I would say that the positive side of a lot of those products moving to outside of the companies in terms of fabbing, is that the product mix that we are going to build inside is a more predictable product mix than it was without the volatility of some of the very high-running, high volatility products that are built on the outside. I would say that we’ve also begun to conclude that we don’t have to lug around as much internal extra capacity to respond to that volatility as we did when those products were built internally. One of the reasons that we sort of had the guts to close the fab in California was because we have a much tighter view of what we can -- that we won’t get into trouble by cutting it a little narrower than we used to in terms of upside capacity, given the less volatility. And that’s certainly a factor in our thinking going forward, which is a little bit different than it used to be in the past.
  • Joseph Osha:
    Okay. Understood.
  • Jerald G. Fishman:
    Does that make sense?
  • Joseph Osha:
    Yeah, yeah, it does. That addresses my questions. Thanks. Thanks a lot.
  • Operator:
    We do have a follow-up question from the line of Sumit Dhanda with Banc of America Securities.
  • Sumit Dhanda:
    Jerry, just one philosophical question here in terms of how you are approaching your share count. You’ve been taking it down fairly meaningfully. Should we just think about this as the, you know, just direct share repurchases as the mechanism by which you are giving back cash to the shareholders? Or should we think about an accelerated repurchase program here at some point over the next couple of quarters?
  • Jerald G. Fishman:
    Well, I can give you my view, Joe can give you his view. I mean, we talk about this a lot. We think we’ve been doing a pretty good job of taking shares off the market in an orderly way. I think I mentioned we took almost 25% of the shares off the market since we started this thing. We’ve been aggressive buyers of our stock for quite a while now. The exact format where that will -- you know, we’ve taken down the excess cash from $3 billion to $1.3 billion, so I think we’ve done a responsible job in getting rid of some of the excess cash to date. We have a lot of appetite to remove some more for the future. There’s lots of different ways to do that and I think that the only thing that we can say is that we look at all the different options and figure out the best possible way to get shares off the market that results in the best returns for the shareholders. There’s lots of different theories about how to do that. There’s lot of different ways to do that and so far, we’ve chosen to do it with very, very aggressive purchases on the open market on our own. Whether that’s the way we go forward and do that or we go use other vehicles to accomplish that purpose, I think we’ll just have to wait and see. I think that’s the philosophical part. Do you have anything you want to add to that, Joe?
  • Joseph E. McDonough:
    No.
  • Sumit Dhanda:
    And then what kind of net cash position are you comfortable with at this point?
  • Jerald G. Fishman:
    Well, I mean there’s a lot of different ways to look at that. We still have $1.3 billion. We still have a lot of firepower on the $1.3 billion and we have a great amount of cash generation capability that allows us to borrow money if we want to. I think why don’t we just keep going for a while. We’ll tell you sort of what we’re doing when we do it and we’ll see how that goes in the future. We’ve still got plenty of cash that we could devote towards whatever purpose we want. I think that’s the best way to say it.
  • Sumit Dhanda:
    Thank you.
  • Operator:
    And we also have a follow-up question from the line of Uche Orji with UBS New York.
  • Uche Orji:
    My question has been answered. Thank you.
  • Maria Tagliaferro:
    Okay, well, that concludes our call for today. I’ll just remind folks that our fourth quarter conference call is scheduled for Tuesday, November 20th and thank you all very much for your time this afternoon.
  • Operator:
    This concludes today’s Analog Devices conference call. You may now disconnect.