Analog Devices, Inc.
Q4 2013 Earnings Call Transcript

Published: 27 Nov 2013

[Operator:]

Good afternoon. My name is Krishanda, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] Mr. Husain, you may begin your conference.

[Ali Husain:]

Thanks, operator. Good afternoon, everyone. This is Ali Husain, Director of Investor Relations. If listeners haven't yet seen our fourth quarter and FY '13 press release or our Form 10-K, they can be found on ADI's Investor Relations website at investor.analog.com, where you can also access this conference call. A recording of today's conference call will be available within 2 hours of this call's completion. It will remain available via telephone playback for 2 weeks and will also be archived in our Investor Relations website. We've also updated the financial schedules on the IR website, which include the historical and quarterly and annual summary P&Ls for continuing operations, as well as for revenue from continuing operations by end market and product type. Participating with me in today's call are Vincent Roche, ADI's President and CEO; Dave Zinsner, Vice President of Finance and CFO; and Maria Tagliaferro, Director of Corporate Communications. During the first part of the call, Vince and Dave will present our fourth quarter and FY 2013 results, as well as our short-term outlook. The second part of our call will be devoted to answering questions from our analysts and investor participants. During today's call, we may refer to non-GAAP financial measures that have been adjusted for certain nonrecurring items in order to provide investors with useful information regarding our results. We have included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in today's earnings release, which is posted on our IR website. Please note that the information we're about to discuss includes forward-looking statements intended to qualify for the Safe Harbor from liability, established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include risks and uncertainties, and our actual results could differ materially from those we will be discussing. Factors that could contribute to such differences include, but are not limited to, those described in our SEC filings, including our most recent Annual Report on Form 10-K that we filed earlier today. The forward-looking information that's provided on this call represents our outlook as of today, and we do not undertake any obligation to update the forward-looking statements made by us. Subsequent events and developments may cause our outlook to change, therefore this conference call will include time-sensitive information that may be accurate only as of the date of the live broadcast, which is today, November 26, 2013. So now I'll turn the call over to Vincent Roche, ADI's President and CEO, for his opening remarks.

[Vincent T. Roche:]

Thanks, Ali, and hello, everyone. Thank you for joining our call today. As you've seen from our press release, revenue for the fourth quarter totaled $678 million, up about 1% from the previous quarter and within the range we have provided. Diluted earnings per share, excluding special items, was $0.62, up 9% from the previous quarter and above the high end of our range. Business conditions during the quarter were generally stable worldwide in spite of the U.S. government shutdown in the early part of October. Now, while we did not see precipitous declines in business as a result, we believe that the uncertainty created by such an event impacts our business, particularly in our industrial and communications infrastructure businesses, which together make up over 60% of our sales and are highly dependent on capital spending. Let me take a moment to talk about our performance for the full year of 2013. Reflecting the uncertain economic and political climate during the year, revenue declined 2% to about $2.6 billion. Overall, virtually all of our end markets were flat to down in fiscal 2013, with the exception of automotive, which grew 4% over the prior year. This was really a tale of 2 halves in fiscal '13, with the second half of the year showing some good momentum, and our industrial, automotive and communications infrastructure markets combining for 8% growth in the second half as compared to the first, which is a positive sign. For the year, gross margins of 64.3%, operating margins of 30%, excluding special items, and diluted EPS of $2.15 on the same basis were credible results in what was a challenging environment. Our operating cash flow was over $900 million or 35% of sales, and free cash flow totaled $789 million or 30% of sales. In addition, we enhanced shareholder returns with dividends and share repurchases that totaled over $460 million or 59% of free cash flow. And our total shareholder return for the year was 28%. Turning to our performance by end market, during the fourth quarter, our growth was led by the automotive segment. Now revenues in this segment were better than expected, increasing 9% sequentially and 19% on a year-on-year basis on strength across infotainment, safety and powertrain applications. Revenue was bolstered from new infotainment platforms that are moving into production and the ramp of our next-generation safety platforms, including ADI's radar, that are seeing higher adoption rates. In powertrain, our self-start battery monitoring technology gained wider traction in more mainstream higher volume vehicles, further fueling potential growth. As the electrification of the car continues to gather momentum, ADI is aligning investments to provide increasing levels of content that enable lower emissions and higher fuel efficiency. The automotive sector continues to be a very good growth business for ADI with a 3-year revenue CAGR of 13%. This business totaled 19% of sales in the fourth quarter. The industrial sector represented 46% of sales and grew 2% over the same quarter in the prior year and was flat sequentially. The overall flat sequential performance showed positive trends within industrial. Our automation and process control business saw a third consecutive quarter of growth driven primarily by customers in North America and Asia. As we projected, last quarter our Defense and Aerospace business recovered in the fourth quarter, growing by more than 10%. The instrumentation business, after growing strongly in the second and third quarters, declined sequentially due to lower revenue from automated tech equipment customers, primarily in the areas of smartphones, tablets and other devices with wireless connectivity. The remainder of our instrumentation business serving a broad customer base was flat sequentially. Instrumentation was, however, stronger in the second half compared to the first, as well as our total industrial business. We are confident about the myriad of opportunities within the industrial sector as customers take advantage of ADI's high-performance signal processing technology and system domain knowledge to create more intelligent, connected and energy-efficient systems, including robotics, textures and other factories and process automation systems. We believe these trends, in addition to the opportunities still ahead in areas like health care, smart grid and motor controls, should result in higher growth rates in our industrial business in the future. Communications infrastructure, after growing 13% in the prior quarter, was flat in the fourth and represented 21% of total sales. In wireless infrastructure, we saw a modest sequential growth tied to deployments in North America and Asia, which was somewhat offset by inventory reductions at some base station customers. As a result, overall wireless revenue was flat sequentially and represented approximately 2/3 of our total communications infrastructure revenue. We continue to be optimistic about the prospects for our wireless infrastructure business, and we expect growth to resume in 2014 as U.S. capacity deployments accelerate, China builds out its 4G network and the European communications market, which is showing signs of a recovery where the CapEx catch-up accelerates into 2014. Our wireline business was also flat after a strong third quarter. We saw a good performance related to 100-gig optical systems for transmission and Metro networking infrastructure, as well as backhaul systems for LTE networks, which was offset by declines in products sold into the lower-speed networks. Longer term, the buildup of cloud connectivity and backhaul connections in response to high-bandwidth data demand should drive good growth for our wireline business, where ADI's focus on precision control and timing is a key enabler of high-performance optical systems. This, together with our strong high-speed signal processing solutions delivering next-generation cable solutions should also drive strong growth opportunities for ADI. And finally, our consumer business, which was 14% of sales in the fourth quarter, decreased sequentially as a result of declines in areas within consumer where we no longer focus. We've spent many years refining our mix within consumer and refocusing our investment dollars. For example, during the fourth quarter, we completed the divestiture of our microphone product line. Notably, consumer revenue outside of the microphone area increased sequentially. I believe there are many good opportunities ahead for ADI consumer, where we can leverage our existing core technology into applications that make a demonstrable difference to the user experience. Our design activity is strong, particularly in the portable space, where the timing of revenue for ADI would primarily be a function of our customers' product cycles rather than seasonality. So with that, I'll turn it over to Dave who will take you through some of the details of our financial results.

[David A. Zinsner:]

Thanks, Vince, and good afternoon, everyone. Fourth quarter revenue increased about 1% sequentially and declined 2% year-over-year to $678 million. Our gross margin was 65.6% in the fourth quarter, and this was up 110 basis points from the third quarter, primarily on higher factory utilization. We continue to carefully manage production in our facilities. Utilization increased from the mid-60s in the third quarter to the high 60s in the fourth quarter. On a days basis, inventory increased by 2 days to 111 days in the fourth quarter and is in good position relative to our model. On a dollars basis, inventory on our balance sheet declined by $1 million and is now at its lowest level in 11 quarters. We started the fiscal year by dropping our utilization rate down to the low 50s and over the course of the year, average low 60s utilization rates, bringing our inventory on a dollars basis down by $30 million or 10% compared to the same time last year, while maintaining solid gross margins of 64-plus percent and continuing high service levels to our customers. Lead times for our direct OEM customers remain similar to last quarter and are in good control with virtually all of our shipments to OEMs occurring within 4 weeks. We plan to decrease utilization to the mid-60s in the first quarter, which should keep our inventory on a dollars basis approximately flat to fourth quarter levels. Inventory distribution on a days basis was slightly above 7 weeks, which is lower than the prior quarter. Total end customer orders decreased in the fourth quarter compared to the third quarter, and our book-to-bill was below 1 in advance of our seasonally lower first quarter. During the quarter, we recorded a $16 million restructuring charge redirecting resources to areas we believe have better ROIs. Excluding this charge, operating expenses were $229 million, up $2.5 million from the prior quarter. Operating profit before tax for the fourth quarter, excluding the restructuring charge, were $215 million or 31.8% of sales, up 90 basis points from the prior quarter. Other expense of approximately $3 million in the fourth quarter, excluding any special items, was flat to the third quarter and reflects the ongoing run rate of our net interest expense at current debt levels. During the quarter, we reported an accrual of approximately $37 million related to our pending petition with the Tax Court. While we believe our tax position is appropriate, a recent Tax Court ruling in a matter not involving ADI required recording of this accrual. Combined with the taxes related to the gain on the sale of our microphone product line, this had a result of a tax rate of 29% in the fourth quarter. Excluding these items, our tax rate in the fourth quarter was approximately 8%, which reflects an adjustment of our annual tax rate from 14.5% to 12.9%. Based on current assumptions, we expect our tax rate in the fiscal 2014 year to be approximately 13%. Diluted earnings per share, excluding the special items I mentioned, was $0.62 and $0.04 of it related to the fourth quarter tax rate adjustments that I mentioned. For the year, diluted earnings per share, excluding special items, were $2.15, up 1% from the prior year. Cash flow in the fourth quarter was very strong, with operating cash flow representing 42% of revenue or $282 million. CapEx was $49 million, resulting in free cash flow of $234 million or 34% of revenue. For the year, CapEx was $123 million and our fiscal 2014 plan is for CapEx to be around $150 million. 2/3 of that relates to ongoing capital spend and about 1/3 of it is for new facilities. Our cash and short-term investments balance increased by about $233 million during the fourth quarter and now stands at $4.7 billion, with $1.3 billion available domestically. At the end of the fourth quarter, we had approximately $870 million in debt outstanding, resulting in a net cash position of $3.8 billion. We also distributed approximately $106 million in dividends to our shareholders, and on November 25, our Board of Directors declared a cash dividend of $0.34 per outstanding share of common stock, and that will be paid on December 17 to all shareholders of record as of December 6. At the current stock price, this dividend represents an annual yield of 2.7%. During the fourth quarter, we repurchased $43 million of our stock, with most of the repurchases occurring later in the quarter as a more aggressively tuned stock buyback program responded to lower stock prices. During the year, we increased our dividend 13% and in the fourth quarter, our combination of dividends and share repurchases represented 64% of our free cash flow. So in summary, fourth quarter and fiscal 2013 delivered solid results in a pretty tough macroeconomic environment. We believe the portfolio and productivity actions we have taken during this cycle set us up for significant leverage and sales increase. Factory utilization improves from current levels, and we continue to control operating expenses. So now I'll turn the call back over to Vince, who will discuss ADI's outlook for the next quarter.

[Vincent T. Roche:]

Thanks, Dave. Well, we're starting the first quarter with lower opening backlog, and order trends, while stable overall in the fourth quarter, were lower than in the prior quarter. In addition, many of our largest customers have plans for shutdowns during our fiscal first quarter to coincide with the Christmas and New Year holidays and plan to reduce inventories heading into their December year ends. As it turns out as well, the Lunar and New Year in Asia falls in late January, which is also within our fiscal quarter. In our distribution channel, the story is also quite similar with our largest distributors calling for a seasonal or marginally down performance for their December quarter end. We are, therefore, planning for our sales in the first quarter to decrease in the range of minus 5% to minus 10%, which at the midpoint is in line with how our business as it performed over the last 3 years in the first quarter, even when accounting for differences relating to the divestiture of our microphone business. Based on this expectation of lower sales, we plan to reduce production levels in the first quarter, which we expect will reduce gross margins to between 64% and 65%. We plan to manage our expenses as always very carefully, and as a result, we expect our operating expenses to decline about $3 million to approximately $226 million in the first quarter. We are expecting our tax rates in the first quarter to be approximately 13%. So given these assumptions, our diluted earnings per share should be in the range of $0.44 to $0.52 in the first quarter. Our largest customers are approaching 2014 with guarded optimism about their growth prospects. Our industrial customers are talking about an impending upgrade cycle in automation and process control systems. In addition, the secular growth opportunities in automotive and communications infrastructure continue to unfold, so we also expect to benefit there. As we close out fiscal 2013, I also think it's important to reflect upon our performance over a longer period of time. The last 3 years has been a slow growth environment as you all know, with demand being constrained by deferred capital spending decisions. For ADI, where much of our business is tied to some form of capital spend, this has a very real impact on our revenue performance. While we cannot control the macroeconomic environment, we can centrally control how we run our business relative to it. Over the past 3 years, we've been very busy at ADI, refocusing our R&D investments and technologies that target the most attractive growth opportunities, pushing the cutting-edge of our signal processing technology also. We have been deepening and broadening our customer engagements, while ensuring supply chain agility to respond to changing business conditions. Now, for example, in fiscal 2010, automotive made up only 12% of our sales. In 2013, we exit the year with automotive now making up almost 20% of our total sales, as we have continued to gain share of market in this space. Conversely in 2010, our consumer business made up 22% of revenues compared to only 14% now, thus significantly improving the mix of our overall business. In addition, in our just-completed quarter, we sold our microphone business, which was primarily focused on consumer applications, so that we can focus our MEMS investments on higher growth opportunities in industrial and automotive applications. On the manufacturing side, we have efficiently managed the production levels in our fabs and responded quickly to business conditions, ramping utilization rates as high as the low 80s in the second quarter of fiscal 2011, at greater than 67% gross margins, while dropping utilization rates down to the low 50s in the first quarter of fiscal 2013 while still maintaining greater than 62% gross margins. During this time, we've maintained exceptional service levels for customers and kept inventories under very tight control. We have not allowed this period of slow economic growth to slow our returns to shareholders. Earlier in the year, we committed to returning an average of 80% of our generated free cash flow to shareholders over the next 5 years, which is a significant increase from the 60% of free cash flow we have averaged in the prior 3 years. In addition, in that period of time, we've grown our dividend at a 16% CAGR and our total shareholder return is 17% on a 3-year compounded annual basis. Now, all of this puts ADI on a strong platform on which to build our future. At ADI, we have a deeply talented and committed workforce across all functions in the company. We possess the broadest and deepest signal processing technology portfolio in the industry that we're bringing to bear on our customers' greatest engineering challenges each and every day. As many of you know, we hold leadership positions in the foundational technologies for signal processing, namely converters and high-performance linear products. Over 2/3 of our overall sales come from these 2 product areas, where we are continuing to gain share. The convergence of pervasive sensing, cloud and mobility we expect will create a strong growth opportunity for ADI in the future. We continue to align our portfolio of choices with the most attractive opportunities, and we continue to work hard to broaden and deepen our customer relationships. We remain flexible so that when the world recovers from its current malaise, ADI will be better positioned than ever to drive top line growth, strong operating leverage and earnings growth and higher returns for our shareholders.

[Ali Husain:]

Thank you, Vince. [Operator Instructions] So with that, operator, we can start taking questions now.

[Operator:]

[Operator Instructions] Your first question comes from Steve Smigie with Raymond James.

[Jonathan Steven Smigie:]

I was hoping you could talk a little bit about the guidance in terms of the divested business that's I think your point you're saying would have been down about seasonally what you've been seeing over the past few years. So if you added back in that microphone business, can you talk about what that would be down and if that would even be potentially above seasonally when you add that back in?

[David A. Zinsner:]

Probably the easier way, Steve, to talk about it is to talk about how that impacted our guidance rather than what would have happened had we had the business because now we have the visibility and the fact that we sold it already. I think that we would have been kind of 1% better had it not been for the fact that, that business kind of went away. So the guidance of 5 to 10, it would have been like 4 to 9.

[Jonathan Steven Smigie:]

Okay, great. I was hoping you could talk a little bit about the comm market as well. I think there's been some fits and starts at some of the China rollouts here. And I'm just curious if you could talk about your dollar content. I think, say you have several hundred dollar content on a particular base station. Even at 200,000 base stations at least in this first phase, would that really be enough to significantly move the numbers here, or is that just a piece of the puzzle, and you've really got to have continuing 3G buildout, you got to continue to have other regions buildout to keep or give you opportunity for revenue growth over, say, 2014?

[Vincent T. Roche:]

Yes. Well, Steve, maybe the best way to answer that question, the ASP, the system ASP for the content of ADI provides into a 4G system where the radio architectures are very, very complex, more complex than the prior generations. We're getting about 20% more ASP. That varies from customer to customer, how do the channels run in the systems, and so on, so forth. But an average of 20% more ASP. Now, obviously the ultimate result depends on the -- there is a certain amount of replacement value, of course, replacing 3G systems. We believe that we'll move from something like 4G in our 13-year business, fiscal '13 being about 20% of the share to about 40% towards the end of FY '14. So if the unit volumes even stay flat with FY '13 on a system level basis. Just given the ASP increase, we would expect some level of outlet in our numbers.

[Operator:]

Our next question comes from Romit Shah with Nomura.

[Romit J. Shah:]

Just based on that guidance you've given us, it looks like fiscal '14, at least at this point, is on track to be flattish, maybe not so much growth unless we get better than seasonal growth in the remaining quarters of the year. So given that, backdrop -- well first, I guess, I'm curious if you guys are more optimistic about next year. And second, onto that assumption, how are you thinking about OpEx growth, again, in fiscal '14?

[David A. Zinsner:]

Yes, well first I probably would challenge that assumption. I mean, if you take away -- the first quarter of last year had a pretty meaningful amount of microphone revenue in there, if you strip that out, I'd say at the midpoint of the guidance, which is a tepid quarter for us, the first quarter will be up kind of mid-single digits. So over the rest of 2013, the microphone business slowly became de minimis. So I think the likely conclusion is that we probably will have a growth year in 2014, a little early to call what the magnitude of that is. From an OpEx perspective, I think as Vince talked about CEO on down, we've got a pretty hard rein on the OpEx level, and we're going to manage it pretty tightly until we start to see some revenue growth. And I think we've got all the dials in place to be able to do that. We did take a restructuring charge this quarter. It gave up, freed up some expense but enable us to double down the areas we wanted to and not have kind of a headwind in terms of expenses. On top of that, we sold the microphone business; that certainly carried some expenses and we realized that capacity to be able to manage through this without too much trouble. So I think we're -- I feel pretty confident that we're going to be able to manage the OpEx to get leverage through to the quarter assuming -- through the year, rather, assuming revenue had some growth to it.

[Vincent T. Roche:]

Let me add just one other comments to it, Romit. I would say looking into '14, unless we had some major turbulence on the geopolitical or the -- I think events out of our control, my sense is '14 will be a year of growth. That's my own sense from talking to our customers, just looking at the cycles of our business. We've actually gone through 2 sequential years of revenue decline, and that's an extraordinary -- very, very unusual in our business. We've been in this business almost 50 years. So what we're seeing is the macro delays just dampening enthusiasm and people's willingness to spend CapEx. But my own sense is '14 will see an improvement barring some geopolitical turbulence there.

[David A. Zinsner:]

Did you have a follow-up, Romit?

[Romit J. Shah:]

Yes. Just within OpEx, drilling into R&D as a percentage of sales, I'm sure you've probably noticed that it's about -- R&D is about 7 to 8 points above your largest competitor in analog. And does TI have economies of scale for being larger or do you guys feel like the investment you're making in R&D actually positions you for better growth looking out over the next 12 to 24 months?

[Vincent T. Roche:]

Well, we believe that innovation -- from the superior innovation brings superior results. We have the best signal processing story on the market. We have the broadest technology base, and we are pushing the edge like hell to allow us to have the best building blocks, to allow us to have the best ability to integrate into complete signal processing solutions that we need. And my belief as well is that we will get -- we've been making a lot of choices over the last 3 or 4 years in terms of the products that we picked in the markets that we really care about, and we're going to see the benefit of those choices I believe over the next year or 2 years. So I think if we can get this business into a 6%, 8% -- which is our expectation, by the way, 8% plus I believe is possible in -- when that kind of spend where -- we're spending because we believe in the growth possibilities, and we stick with that piece.

[Operator:]

Your next question comes from Aashish Rao with Bank of America.

[Aashish Rao:]

Dave, within your Jan quarter guidance of down 5% to 10%, I don't think I heard you say this on the call but could you provide some relative color on sales expectations in the 4 different end markets?

[David A. Zinsner:]

I think Vince talked about it in his outlook that we expected all end markets to be down sequentially. Most -- I'd say usually every end market is down in the first quarter sequentially, at least it has been over the last few years. So pretty consistent with the kind of the normal seasonal patterns we see for all end markets. Do you have a follow up, Aashish?

[Aashish Rao:]

Yes, so I'm guessing so you're basically saying everything is down roughly in that 5% to 10% kind of range?

[David A. Zinsner:]

Yes, I think consumer will be a little bit weaker because it definitely has a bigger seasonal headwind in the first quarter. But they all will be down.

[Operator:]

Your next question comes from John Pitzer with Crédit Suisse.

[John W. Pitzer:]

Yes, Dave, just a follow-up to that question, if you look at the seasonal pattern over the last 3 years, you guys are guiding this January quarter about in line with seasonal. But you go back further seasonality was a little bit better for you guys, i.e. down less than January. So I guess, when you look at the guidance for Jan, are you characterizing this as sort of normal seasonality or do you think some of the macro issues that you talked about are also weighing in the guidance?

[David A. Zinsner:]

Three years is a pretty good history and I think we were down 10% the first and the last 2 years and the year before that, I think we were down 7% or 5%. So it's -- I mean, it's kind of in the range of what we would normally expect. I mean, clearly, the cyclical kind of tailwinds and headwinds have a big impact at times, and right now, there doesn't feel like a big updraft in our businesses. Typically in the second quarter, we do see a lot, a much stronger environment because of the industrial space. So we will wait and see how it happens. But, I mean, I think we guided last year down 6% to 12%, so down 5% to 10% is better than that. I think the year before, we guided 5% to 10% so it's relatively consistent with our guidance the year before. So this is all kind of, plus or minus 1% or 2% of the norm.

[John W. Pitzer:]

Perfect. And then guys just maybe a little bit longer term, so you guys talked about your industrial and communication exposure as being reasons why the growth has been somewhat lackluster. But a lot of your peers have similar type exposure albeit you might be a little bit on the high end. And if I look at the data, you continue to kind of undergrow the analog industry and many of your peers, and I'm kind of curious as to why you think that is. And then I guess, more importantly, what's the catalyst to get to guys back into a position of outsized growth relative to peers?

[Vincent T. Roche:]

Well, I think you've got to take the window, the measurement window into account. Nothing moves, the share doesn't move rapidly in the industrial space, and many of our competitors, by the way, lump a lot of different subsectors into industrial, such as automotive, for example. So we separate automotive and focus our discussions always on the component parts of our industrial business, automation, instrumentation, aero and energy. We have a growing position with our key customers. We've put a lot of focus over the last 5 or 6 years into not only the long-tail, augmenting the long-tail of our business across the 50,000, 60,000 customers, but also committing R&D to applications and programs that the larger industrial customers care about. So we're -- as I said earlier, we're starting to see the benefit of the design and pipeline in those areas with a lot of new products that we put in place over the last 3, 4 years. And I think we will see, as we've said before, there are some longer-term trends around energy efficiency, smart machines, smarter energy that we will see the benefit of over the long term. So I think for us, it's both a focus on the customer, on the application, on the product and focusing our investments very, very heavily, and being able to grasp the opportunity there. And again in communication infrastructure, it depends very much on the window you're taking to make the measurements. But in the core areas, the core technology areas of converter and linear, we have gained share in the communications infrastructure space year-over-year for the past several years. I think it's really been a case of the environment being muted from a macro perspective, and CapEx being dampened that has hurt sales.

[Operator:]

Your next question comes from Chris Danely with JPMorgan.

[Christopher B. Danely:]

A bit of a longer-term question here. So you're sort of giving up the seasonals over the last few years and the overall not just spending environment but global demand environment has stuck for the last few years, and it doesn't seem like there's any change coming. So, I guess, my question is you have a fair amount of cash offshore, but actually a lot of cash. What's the desire, the thoughts around using that cash in some way, shape or form to help either growth or performance of the stock, either bring it back and just pay the tax penalty or lever up and do something with that or make some sort of acquisition or something else? Can you just give us your thoughts on that? And then if there's anything interesting there.

[David A. Zinsner:]

Yes, that's a loaded question. Yes, well, I mean, first of all, we have $1.3 billion domestically. We have plenty of options with the cash we have on the U.S. books. If we follow through that, then we'll decide what to do beyond that. The priorities for that cash are, of course, with our cash flow from operations generated in the U.S. We utilize mostly that to pay the dividend. And on the excess, we're looking to either buy back stock or do some small kind of tuck-in M&A deals to help kind of amp up the growth rate. And I think both of those you're going to see over the foreseeable future. You saw kind of the beginnings of our share repurchase program starting to kick in. I would tell you that we had perhaps, say, becoming the alpha ourselves a little bit and perhaps not quite the aggressive structure we wanted to put in place in order to get stock buybacks to start percolating. We recognized that, obviously, and in the fourth quarter towards actually the tail end of the fourth quarter, we tweaked the model to make sure we did buy back stock. That started to take effect and I think you'll see that going forward, and we continue to look for opportunities to do M&A work. We're very selective in what we look at. We have a high bar for what we're going to utilize our cash reserves for. And so -- there'll be sporadic in nature for sure, but there'll certainly be, I think, the opportunity for us to grow the top line through M&A and the bottom line through a combination of M&A and taking shares off the Street.

[Operator:]

Your next question comes from Ross Seymore with Deutsche Bank.

[Ross Seymore:]

First question is a near-term one. The second one is a longer-term one. And the near-term one, was there any change in linearity and specifically, did the latter part, the month of October, get to -- get weaker to lead to this guidance that's clearly below the Street as -- regardless of how we want to define seasonality?

[David A. Zinsner:]

Yes, I wouldn't call it significantly weaker, but I mean, I think we kind of track orders on a weekly basis, kind of on a 13-week rolling average. And they came out of July pretty strong. So we had a benefit of that going into August, looked pretty good. I'd say it did modestly trend downward over the course of the 3 months. And so that did perhaps for us at least kind of changed the dynamics of what we thought about for the first quarter. Having said that, we quite -- can't quite understand exactly why the Street had us down to the level that they did because if you go back in history, it's pretty clear that we declined kind of in the 5% to 10% range typically most years. So we were a little bit surprised that, that had gotten disconnected. But we guide on a quarterly basis, and so we're updating you guys to let you know that, yes, indeed, it will be more from us -- a seasonal pattern for us in the first quarter.

[Ross Seymore:]

So, I guess, my longer-term question and the follow-up side is on the comp side of the equation. Any number of companies have talked about that being a great growth opportunity going forward because LTE, et cetera, but -- yet any number of those with that telecom exposure have continued to disappoint and ask investors to just wait until the goodness comes. It's just one quarter beyond the horizon over and over again. Do you believe there's any aspect where we have a substitution effect going on, where 3G spending is going down at the same time 4G is going up, and so we all focus on the 4G side, but the 3G side is something that's missed? Or what would you use as the explanation as to why that segment, maybe not ADI-specific, but overall has continued to be a relative challenge versus investor expectations?

[Vincent T. Roche:]

They know, Ross. I mean, the replacement cycle has been going on for 2 decades now between 1G, 2G, 2.5G, 3G and so on and so forth. And so there's nothing new there. And, of course, as the technologies become a little bit more mature, customers get what they call productivity from year-to-year. So that's been a facet of the business. There's no question. There is some replacement of 3G with 4G, but I think there are dynamics happening. Every system from generation to generation, the complexity increases and the amount of technology that a supplier has got to have to be able to address the more integrated solutions that are taking place from generation to generation is a competitive differentiator. And we've been investing heavily over the past 5 years to bring out the most sophisticated radio architectures to allow our customers, to build more complete transceiver technologies and to extend from the baseband right into the RF. So I think there's a significant technology differentiation that you'll see the benefit of -- that we will see the benefit of in the years ahead. I think also on the customer side, there's a consolidation taking place. The bigger suppliers will become bigger, and I think the smaller bit players will fall off the edge, so -- and partnering is becoming a more distinct part of the activity between ourselves and many of our customers. So I think -- and also when you augment -- sorry, you complement those comments with the fact that 4G systems are going to allow people to do things in terms of moving social media, mobile, video data in a much more user-friendly way, I think the future looks good at least from a technology and customer perspective for ADI from a market perspective.

[Ali Husain:]

Thanks, Ross. I think that was your follow-up. And folks, we're closing in pretty hard on the 6

[Operator:]

Your next question comes from Tristan Gerra with Baird.

[Tristan Gerra:]

Just as a follow-up to the LTE question, I think recently, 3G revenue was about 70% of your mix on the communication infrastructure side. Is that 3G portion of revenue declining and specifically, since we are assuming LTE is less than 10% despite the 20% increase in comp and that you mentioned earlier on the call, is it fair to say that 3G decline could actually at least offset that LTE ramp currently?

[Vincent T. Roche:]

Well, clearly, 4G is growing as a proportion of the overall total. The 2G system builds are very, very small now. So it really is a case of our wireless communications infrastructure business being driven by 3G and 4G deployments. So my sense is who knows exactly how the share will tally at the end of 2014, but I believe that we're -- today, we're at around 20% in terms of our total mix being 4G. I think by the end of 2014, we will see 4G being somewhere between 30% and probably closer to 40% of our total.

[Operator:]

Your next question comes from David Wong with Wells Fargo.

[David M. Wong:]

With planned production levels you have for the coming quarter, what will your utilization rate be and what percentage of current products will be manufactured at foundries?

[David A. Zinsner:]

Yes, I think we're going to be in the mid to low 60s in terms of utilization -- I'm sorry, David, what was the other question you said?

[David M. Wong:]

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

[David A. Zinsner:]

Oh, probably about 50% will be manufactured in foundries.

[Operator:]

Your next question comes from Blayne Curtis with Barclays.

[Blayne Curtis:]

I just want to follow up, you talked about inventory reductions in base stations. That's obviously after the strong July. So was that China Mobile-related? And then if you could just talk about whether you're getting any indications of when that will work through.

[David A. Zinsner:]

I don't know specifically what region of the world they were selling it to. It was really one OEM, and they expect it to be done by -- I think their goal was to have it cleaned up in their minds by the end of the calendar year, probably for reporting purposes. So my expectation is we'll be done here pretty shortly, and we'll be back to normal pretty quickly.

[Operator:]

Your next question comes from Craig Hettenbach with Morgan Stanley.

[Craig Hettenbach:]

Vince, just following up on the 4% growth in autos last year and your comments on start-stop, just anything from a design perspective, what you're seeing as we go into fiscal '14 and what you're thinking for automotive growth.

[Vincent T. Roche:]

We believe it will be a growth year. What we saw this year was strength gaining throughout the -- from quarter-to-quarter. The second half was quite a bit stronger than the -- the second half was quite a bit stronger than the first half. And our fourth quarter saw a 19% gain over the fourth quarter in the prior year. So we're seeing good strength overall in all the sectors of powertrain, safety and infotainment. So we have a lot of exciting things happening in terms of being able to drive that growth further. We're seeing -- I think if you look over the last 3 or 4 years, each of those 3 sectors has been growing in the -- at a compounded -- double-digit compounded rate. And I think over the next few years, we can probably look at a 10% growth rate for that business, given that the denominator is as big as it is now. So -- but I think we have a lot of new programs that are coming into play. We have a lot of exciting new technologies that are at the early stages of adoption. And as I've mentioned before as well, our business has been very centered -- at least in the early stages was very centered on European and American customers, so we've been able to complement that over the last couple of years with a good design and activity and design traction in Asia -- as well as Japan and Asia. So I'm very optimistic, given that car companies still differentiate their offerings with electronics technology of which semiconductor is the foundation. So more and more sensing, all good stuff for ADI and I feel optimistic this year coming, as well as the -- over the longer term.

[Operator:]

Your next question comes from Terence Whalen with Citi.

[Terence R. Whalen:]

This question has to do with the comment you made about Chinese New Year and the January 31 date. I was wondering to what degree quantitatively in terms of percentage of revenue do you think that's an impact versus, say, if we got a later Chinese New Year in mid-February?

[David A. Zinsner:]

I have no idea, Terence. It could be a complete guess. I mean, it's probably -- certainly, that whole area shuts down for a good solid week. And certainly, some part of our revenue falls directly into Asia. But a lot of the -- our customers, even in North America and Europe, are shipping into Asia and can be impacted by that. It's not insignificant. It's a meaningful impact.

[Operator:]

Your next question comes from Jim Covello with Goldman Sachs.

[James Covello:]

Dave, relative to your comment before about kind of why the Street was modeling what it was modeling, you guys have been undergrowing your peers overall, I mean, somewhere between 5% and 10%, and industrials specifically between 10% and 15% this year. Could we be modeling a catch-up or should we just assume that's kind of gone, and we should be kind of modeling in line with peer growth? I think that catch-up dynamic was some of the reason that folks might have been modeling more than what would have been seasonal.

[David A. Zinsner:]

I think -- if you look at this over a couple of years, I don't think there was any difference between any of us quite honestly. There may be, in the short term, some perturbations because of revenue recognition in the period of the quarter. We're talking about a lot of these guys, obviously, report as of the end of September. We report at the end of October, and so there's some dynamics around that. There's no way market share changes in the industrial business. The cycles are 20 years. Nothing -- very little comes off in any 1 year. It's just not possible. I mean, I wanted -- on a more aggregate basis, as you look at ADI versus other peers out there, we have made a concerted effort to shift away to some extent from the consumer market. And there is no doubt that has caused a headwind in our business. We will definitely acknowledge that fact. It's been -- those investments have been put forth into areas in the industrial space, in the wireless space, in the comm infrastructure space, more broadly in the automotive space, and so forth. And a lot of those do have 3- or 4-year design cycles. So it takes a while for that -- those designs, that, the design effort to show up on the revenue side. So could there be that dynamic in their vis-a-vis the consumer? I certainly acknowledge that fact, but I think on the industrial space relative to the peer group, that's all just timing around quarters and how to keep companies recognize revenue and so forth.

[Operator:]

Your next question comes from Stephen Chin with UBS.

[Stephen Chin:]

Vince, I just want to follow up on the comment you made in your -- the remarks regarding investments in the consumer area. Did you mention portables? And if so, is that just in reference to computers or is that smartphones and tablets? And can you just talk about the reason [ph] behind that and the timing of when some of those investments pay off?

[Vincent T. Roche:]

Yes, so we made a very determined move out of PCs several years ago, and we have no dependence on PCs at all for our revenue in the consumer space. So when we talk about portable, we're really talking about smartphones and tablets in particular. So we have a pretty -- it's a fairly modest relative to the overall spend, but nonetheless, we have a pretty significant spend in developing audio subsystems, sensing subsystems and some other particular functions that our devices, that make a big, big difference in the user experience. And we've made very, very good progress, as Dave said, in terms of getting the products, getting underlying technologies and products ready, and we have a heavy -- we've got some good design ends and we have good design activity taking place. So I think we're starting to see the benefit on the portable side over this year and into 2015.

[Operator:]

Your next question comes from Craig Ellis with B. Riley.

[Craig A. Ellis:]

Vincent, you had remarked in a question that was asked by Romit that you thought fiscal '14 could be a year of growth. Can you identify what gives you confidence that the year can be one of growth whether it be things that you're seeing on an end-market basis, a geographic basis or a channel basis?

[Vincent T. Roche:]

When we talk to industrial customers, for example, we have a customer roster of 50,000 to 60,000 total. So I spend a lot of time talking to our largest customers in particular from all different regions, all different market segments, and I think if you talk to industrial customers, they see, as I said on the automation side, actually, we've seen some decent growth over the past couple of quarters. And our belief is that will continue. There will be an upgrade cycle as capacity has expanded in industrial machines and plants. There's a lots of -- as you know, in America, for example, there's a lot of activity in gas exploration and energy, in general. So we're benefiting from that, I believe, in the process control sector. Instrumentation, outside of ATE is doing well. ATE has become a notoriously cyclical business. It's got basically 2 buying cycles known in a given year. And so I think between what we read in terms of our design activity at our larger customers, what our larger customers are telling us about their beliefs in terms of the economics of their businesses and the demand for this and the technologies they've got. We think that will be a contributor to growth in '14. As I said, I believe automotive will continue to grow. I don't see any reason why for a number of reasons unless there's a big slowdown in the demand for cars there. But -- and communications infrastructure, the buildout of 3G or 3 or 4G in China will -- China and America and the upgrade cycle in Europe, I believe, will contribute to growth in 2014. So that's the lion's share of ADI these days. Those 3 businesses I've described to you, that's around 90%, 80%, 90% of our total business.

[Operator:]

The next question comes from Stacy Rasgon with Sanford Bernstein.

[Stacy A. Rasgon:]

I want to revisit the guidance again briefly. I want to put aside questions of share gain or undergrowing or overgrowing the competition, but this is the ninth quarter in a row that you guys have guided your forward revenue below expectations, and I know you said you were surprised where the Street was this quarter, but again, this is 9 quarters in a row. Is this just a continual problem with managing Street expectations? Or is something else changed versus where you used to be in terms of, I guess, more accurately forecasting? I'm just trying to figure out what's different now versus where The Street has been on this.

[David A. Zinsner:]

Well, thank you. We don't give guidance past 1 quarter, so what you guys put in your model is what you put in your model, first of all. Second of all, I think in an environment where it's been tepid, I think that most of the Street wants the world to be a better place. And so I think they create guidance that has some expectation around wanting it to be a better place. And it's just not, I mean, that the macro world is not improving that much. We're growing at a very tepid rate right now. And so I think that, that's the fundamental challenge that, I think, you guys want and believe that things are off to the races, and it's just -- the macro world is just not there yet. So I hope in 2014, that environment does get better and industrial companies start to spend some capital and the communications companies start to invest in infrastructure, and if that happens, it's going to be a very good year, and we'll be doing the opposite. We'll be beating your expectations. But at the moment, that hasn't happened, so we can't give you any visibility into a brighter day. But I think at some point, it does have to get better, and we're going to plug along. We're going to continue to invest in the areas that we think have the best opportunity to grow, and I think over time, you'll see that work out for us.

[Operator:]

The question comes from Vijay Rakesh with Sterne Agee.

[Vijay R. Rakesh:]

Just looking at ADI's comm side, if you look -- one of [indiscernible] exposures to telecom versus enterprise and as you look at January quarter, how do you see those 2 subsegments trend?

[David A. Zinsner:]

Well, most of our sales would be into telecom as you call it rather than enterprise. I don't know what the exact split is, but I imagine it's 80% or greater in telecom, metro and transmission networks, dish networks and a much smaller proportion into enterprise, but I really don't know what the split is going to be. What -- how it's going to perform in the first quarter, I really don't have any idea of that.

[Operator:]

The next question comes from Ambrish Srivastava with BMO.

[Ambrish Srivastava:]

Dave, I'll take the accolade. I was one guy who was living in the dark world for the quarter, but coming back to the consumer -- but just on the consumer side, you guys have been very forthcoming over the last several quarters on how you're deemphasizing it. And just looking out ahead, I'm not able to understand why chase after the portable market. The world is full of people. I mean, look at Maxim and their focus. You get a design win, and you guys had that yourselves a few quarters ago. You got the win then. Why not just walk away from that segment and stick with your really sticky businesses where you're doing a great job?

[David A. Zinsner:]

Well, I think, yes, we are definitely [indiscernible], but I think we are certainly focused a lot in other areas that are stickier. But our fundamental premise is about innovation. It's about areas where we think we can innovate way better than anybody else in the industry, and believe it or not, there are pockets within the consumer space where that can happen, where the innovation is so mind-blowing, let's say, that really no one else can do what we can do. And we can be in several generations. Now, can we be in a generation for 8 different versions year in year out? Maybe not, but I think if we can be in a consumer application for several generations doing something fairly innovative, we'll make a good ROI on that. And a lot of times, we take that capability, and we learn from it and poured it back into the other markets and that also has some leverage opportunities. So that's why we keep our toes in the water, I think, in the consumer side. I don't know if you have anything to add, Vincent.

[Vincent T. Roche:]

Yes, so let me just add one other comment to what Dave has just said. There's another part to our consumer business. One part is portable, but we have a business in consumer that's in areas like broadcast studios, high-quality enterprise audio and video. And in those areas, the life cycles of those products and the margin structures of those products actually look a lot like a horizontal business in the industrial space. So that's really the foundation of our consumer business. And as Dave said, if we can find certain areas to supplement that business in the portable space, where our technology we believe makes a real difference and we can make that difference for several generations, then we'll invest. But -- so it's really a segment with 2 very, very different businesses within, and we're very, very careful about how we spend our money and where we select the investments in both places.

[Operator:]

Your next question comes from William Stein with SunTrust.

[William Stein:]

I'm hoping to address the normal seasonal view one more time, if I might, especially relative to the last 3 years. If we look at just that time frame, there's been approximately 0 growth. And so if we hone in on that to calculate our view of normal seasonal for the rest of this coming fiscal year, I don't think that the result is consistent with your growth view longer term. So maybe either help us understand what management believes the typical seasonality pattern would be later in the year or maybe you could give us an updated view on the long-term revenue growth opportunity.

[Vincent T. Roche:]

I think there's talk about that; the goal is to have 8% or there in the zip code growth. And we've got the team behind them on that, so that's our goal. I think what happens is the second quarter generally is -- got a pretty good environment to it. It's up in the high single digits. And then what we would need to see in order to have your kind of year-over-year solid growth is we're going to have to have a couple of year -- a couple of quarters in the back half, where it's kind of sequentially better. The other thing that we -- which I talked about in the -- one of the prior conversations is that for the last several years, we have been de- emphasizing parts of the consumer business, and that has been a headwind, and we divested one of the key parts of the business, which is the microphone business. I think -- we think that's pretty much behind us and that we kind of leveled off, and we think we have some opportunities in the consumer space that will drive some growth. Timing of which is a little uncertain, but we have pretty good confidence that there will be designs won here in the not-too-distant future. And so we think that's no longer a headwind. That, in fact, might be a tailwind for us. The other businesses we have some investments and that we think from a design viewpoint look pretty good for the next rest of the year. And if the macro does okay, we should have a really solid 2014. I think it's early to say. We're not even a month into 2014. We've got to see how it goes. We'll update you in a quarter and let you know how things are progressing.

[Operator:]

Your next question comes from Ian Ing with MKM Partner.

[Ian Ing:]

I've actually got a nonrevenue question for David. There's a $3 million OpEx decline in January. Could you talk about contributions of shutdowns at the factory or company level and given less holidays in April, should we expect some related increase after that effort?

[David A. Zinsner:]

So, yes, I mean, I think the reduction in the OpEx has not as much to do with shutdowns as it does to do with just kind of the variable component coming off and kind of our normal operating expense management in the first quarter given it tends to be a little bit of a slower period. There is certainly a benefit on a spend level in the manufacturing because we are shutting down the factories and that helps us because we -- obviously, we expect our wafer production to be down and this way, we can reduce some of the overhead costs by shutting down for some period of time. So that has some benefit, the magnitude of which I'll have to kind of go back and pencil out, but -- and I'm sorry, was there another part of the question?

[Operator:]

Your next question comes from Doug Freedman with RBC Capital Markets.

[Doug Freedman:]

Dave, if you could give us a sense of what range of gross margins the company presently has, and given the lower growth, what's it going to take for you to have utilization move up by about 10 points where your -- is there a way to do that with your factory base?

[David A. Zinsner:]

Well, as you might expect, we have a fairly wide range of products in the portfolio, and so we certainly have margins up into the 90s for certain products. And in certain cases, we have products in the 50s. And that's kind of -- I'd say that's generally the range. There's probably some outliers to that spectrum as well. I think in -- I can't remember exactly the period of time we were running that, but I think we were in the mid-2012 range running in the mid-70s in terms of utilization, and we were kind of in the upper 600s for a sustained period of time, probably shipping at a little bit of a higher level, inventory was being built in distribution. So it wasn't that -- it wasn't too far ago -- too long ago that we were actually 10 points above. So in the right environment where the growth is back into that range, you could see the utilization start cranking up. And one of the things we did this time around, which I'd say in previous, let's call these mini cycles, what we didn't do is we really took out an active effort to reduce the inventory levels. I think I've mentioned in the prepared remarks that we reduced inventory by $30 million, and that have a pretty meaningful impact on our margins, and we still have 64-plus percent margin in that period. But the good news is we really kind of cleaned the desk. So as the demand starts to go up, the production is kind of instantaneously moving up as well. We should see that margins move up pretty quickly along with that, so I think we've set ourselves up on a gross margin basis to have really good leverage.

[Ali Husain:]

Thanks, Doug, and I believe you were capstoning our evening here, so I think we all did a pretty good job keeping good time. So just a reminder, our first quarter FY '14 earnings call is scheduled for February 18, 2014, beginning at 5

[Operator:]

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