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Edited Transcript of MXIM earnings conference call or presentation 29-Jan-19 10:00pm GMT

Q2 2019 Maxim Integrated Products Inc Earnings Call

SUNNYVALE Jan 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Maxim Integrated Products Inc earnings conference call or presentation Tuesday, January 29, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce E. Kiddoo

Maxim Integrated Products, Inc. - Senior VP & CFO

* Kathy Ta

Maxim Integrated Products, Inc. - VP of IR

* Tunç Doluca

Maxim Integrated Products, Inc. - President, CEO & Director

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Conference Call Participants

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* Ambrish Srivastava

BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst

* Christopher Caso

Raymond James & Associates, Inc., Research Division - Research Analyst

* Christopher James Muse

Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* David Wayne Haberle

Susquehanna Financial Group, LLLP, Research Division - Associate

* Harlan Sur

JP Morgan Chase & Co, Research Division - Senior Analyst

* John William Pitzer

Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head

* Ross Clark Seymore

Deutsche Bank AG, Research Division - MD

* Srinivas Reddy Pajjuri

Macquarie Research - Senior Analyst

* Tore Egil Svanberg

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Toshiya Hari

Goldman Sachs Group Inc., Research Division - MD

* William Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Maxim Integrated Second Quarter Fiscal 2019 Conference Call. (Operator Instructions) As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Kathy Ta, Vice President, Investor Relations. Please go ahead, Kathy.

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Kathy Ta, Maxim Integrated Products, Inc. - VP of IR [2]

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Thank you, Jonathan. Welcome, everyone, to Maxim Integrated's Fiscal Second Quarter 2019 Earnings Conference Call. Joining me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer, Bruce Kiddoo.

As part of our usual process, we have posted a supplemental financial presentation through our external Investor Relations website. The information in this presentation accompanies the financial disclosures in our earnings press release and on this conference call.

During today's call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website.

Now I'll turn the call over to Tunç.

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [3]

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All right. Thank you, Kathy. Good afternoon to all our participants, and thank you for joining us today. We appreciate your interest in Maxim Integrated.

Our December quarter results came in below expectations due to the soft environment. However, we are encouraged to see bookings return to normal levels in recent weeks. We believe our business model enables us to be successful in any environment, and we continue to generate strong free cash flow despite current conditions.

Our strong free cash flow and positive net cash balance enable us to increase our share buyback and continue our industry-leading dividend, and we are on track to return 125% of free cash flow to shareholders this fiscal year. We continue to believe that buying our shares is the best use of our cash in the current environment

Before I turn to my end market commentary, I want to remind investors that our second fiscal quarter last year was a 14-week quarter and was impacted by the transition to sell-in accounting at one distributor. My comments on December quarter year-on-year comparisons are just down year-ago quarter revenue for both of these items.

Let me now discuss December results and current quarter outlook, starting with Automotive. In the December quarter, our Automotive business was up 8% from the same quarter last year. We continue to see the strongest demand signals from battery management systems for electric vehicles and driver assistance content. However, in our infotainment and auto body electronics business, we are seeing some seasonal performance driven by slower car sales.

We do see ample content growth opportunities for Maxim in driver assist or ADAS applications in power management and point-to-point serial link data communication products. At the Consumer Electronics Show, we held a record number of customer discussions on our battery management, driver assistance and power management solutions. Our latest generation of GMSL-2 automotive serial link products transport video, audio and data in a 6-gigabit per second transfer rate and can also transport 1-gigabit per second Ethernet. We expect to introduce additional GMSL-2 products in the coming year and have already won designs at 7 different OEMs.

Our business and battery management systems for electric vehicles continues to grow in global footprint and scale, and we discussed our latest generation products with customers at CES. Additionally, we announced new families of high-voltage automotive power solutions that efficiently control and supervise the hundreds of watts of power required for advanced driver assistance systems. In the March quarter, we expect Automotive to be up sequentially and up in the high single digits from the same quarter last year, supported by continued strong demand for battery management systems, but offset by lower overall car sales.

Let me next turn to the Industrial market. In the December quarter, Industrial was down 6% from the same quarter last year. Throughout the quarter, we experienced slow bookings and resales across most of our product lines sold to the industrial broad markets and to factory automation customers. Bruce will provide more detailed commentary on the dynamics of our distribution business right after me.

We continue to believe in the long-term growth trajectory of factory automation in the areas of interface and communications that bring intelligence to the factory edge, digital isolation and isolated power and protection solutions and ultraefficient and tiny footprint power margins. In the March quarter, we expect Industrial to be down sequentially with core Industrial flat.

Let me next discuss Communications and Data Center. In the December quarter, Comms and Data Center was down 13% from the same quarter last year. As we expected, we saw a pause in demand for 100G laser driver products for optical modules used in hyperscale, intra-data center applications and a decline in demand for communications infrastructure products. In the March quarter, we anticipate Comms and Data Center revenue to be strongly down sequentially with continued softness in 100G laser driver shipments and in broad-based building block products. We continue to believe in the long-term growth opportunities in the data center market.

Finally, let me turn to Consumer. In the December quarter, Consumer was up 7% from the same quarter last year due to the holiday ramp of our broad-based business in tablets, wearables and peripherals. In the quarter, we introduced a number of new power management products, including mini PMICs and highly integrated battery chargers to address a broad set of consumer applications, including smartwatches and fitness and health monitors, wireless headsets, body cameras and [ePens]. These products extend battery life, provide excellent signal-to-noise performance for adjacent sensors, in fact, in multiple power rails within the tiny design footprints required for wearable mobile devices. In the March quarter, we expect Consumer to be strongly down sequentially due to normal postholiday seasonality of our broad-based consumer business and below historical growth in smartphones.

To reiterate what I have said previously, we have built Maxim to be successful in any environment. One, we continue to grow content and generate new design wins in high-quality, diversified and long product life cycle markets, such as automotive and industrial. Two, our flexible manufacturing structure ensures consistent world-class gross margins. Three, we continue to exert tight spending controls. And four, we have low capital intensity in manufacturing. All of these results in strong, predictable free cash flow, all of which we return to shareholders.

With that, I will now turn the call over to Bruce.

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [4]

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Thanks, Tunç. Revenue for Q2 was $577 million, down 1% from the same quarter a year ago, normalizing for the 14-week quarter and sell-in accounting revenue transition that occurred last year. While this is clearly a period of soft demand, as Tunç has said, we are built to perform in any environment. Our trailing 12-month free cash flow, excluding onetime payment in Q4 FY '18, grew 8% from the last year, and we are executing on our plan to return 125% of free cash flow to shareholders in the current fiscal year with our rate of buyback nearly doubling in Q2 from the previous quarter. Our revenue mix by major markets in Q2 was approximately 28% Consumer, 27% Industrial, 24% Automotive, 18% Communications and Data Center and 3% Computing. Our Industrial and Automotive businesses comprised over half of our revenue in the quarter.

Turning to the distribution channel. Distribution comprised 44% of Maxim's revenue in the December quarter. We ended Q2 with 68 days of inventory in the distribution channel. Channel inventory dollars decreased by 2%, but was offset by lower-than-expected resales. Resales were down 12% from the same quarter a year ago with weakness noted across most markets and geographies. We continue to closely manage our supply chain, our inventory in the distribution channel and our distributors' performance given the uncertainties in the industry. We remain committed to bring down our days of channel inventory to our target of 60 days or less. However, given the lower demand environment, this may take a few quarters.

Turning to the P&L. Maxim's gross margin, excluding special items, was 65.9%, down 2.6 percentage points from the prior quarter with the decrease driven by onetime credits in Q1 and higher inventory reserves in Q2. Operating expenses, excluding special items, were $188 million, down 3% from the prior quarter and below our guidance, reflecting tight cost controls.

Q2 GAAP operating income, excluding special items, was $192 million. Operating margin was 33% of revenue, down from the prior quarter due to lower revenue. Q2 GAAP tax rate, excluding special items, was 13%. GAAP earnings per share, excluding special items, was $0.60, up an estimated 2% from the same quarter a year ago after normalizing for the 14-week quarter and sell-in accounting revenue transition that occurred last year.

Turning to the balance sheet and cash flow. Overall, total cash, cash equivalents and short-term investments decreased by $603 million in the second quarter to $1.96 billion due to the repayment of our $500 million bond that came due in November and higher share buyback. Total debt is now $1 billion or approximately 1x trailing 12-month EBITDA.

Q2 inventory days ended at 129, up 5 days from Q1 due to lower revenue. Inventory dollars were up 1% from the prior quarter. Capital expenditures were $13 million in the quarter.

Trailing 12-month free cash flow was $919 million or 37% of revenue, which is up 8% over the same quarter last year. Our free cash flow yield is 6% at yesterday's closing stock price. Our free cash flow per share was $3.28.

For capital return, share repurchases totaled $208 million in Q2 as we bought back approximately 4 million shares. Dividends totaled $127 million in the quarter or $0.46 per share. Based on yesterday's closing stock price, our dividend yield is 3.3%.

Our beginning Q3 backlog was $372 million. Based on this beginning backlog and expected turns, we forecast Q3 revenue of $520 million to $560 million. This is the result of continued content growth in Automotive, offset by softness we are seeing across a broad set of customers and end markets.

Q3 gross margin, excluding special items, is forecasted at 64% to 66%, down slightly from Q2. Our flexible manufacturing strategy is working as expected to minimize the gross margin impact of lower revenue. Q3 operating expenses, excluding special items, are expected to be down from Q2 to the low to mid-180s due to increased cost control in response to the lower revenue.

Our tax rate for Q3, excluding special items, is expected to be 14%, up a percentage point from the prior quarter. 14% is the best estimate to use for modeling purposes for the balance of fiscal 2019. For Q3 GAAP earnings per share, excluding special items, we expect a range of $0.49 to $0.55. For FY '19, we expect capital expenditures to be just above our targeted range of 1% to 3% of revenue due to lower revenue and required upgrade at our one internal fab.

In summary, we expect to see -- while we expect a sequential decline in Q3 revenue given uncertainty in the current environment, we are built to perform in any environment. We believe automotive, industrial and data center are high-quality, long-term secular growth drivers. Our flexible manufacturing strategy enables us to maintain high profitability, and we'll continue to tightly control operating and capital expenses. These factors result in high-quality earnings and strong cash flow, which support our fiscal 2019 plans to return 125% of free cash flow to shareholders. As a result of this increased buyback during this industry slowdown, we will expect -- we will exit this period with greater earnings power.

With that, I'll turn the call over to Kathy.

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Kathy Ta, Maxim Integrated Products, Inc. - VP of IR [5]

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Thanks, Bruce. That concludes our prepared remarks, and we will now open the call for questions. (Operator Instructions) Jonathan, could we please have our first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Harlan Sur from JPMorgan.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Solid job on the quarterly execution in a pretty tough environment. Industrial was down about as expected in December. But unlike your Automotive business, you're not seeing that sort of normal seasonal sort of quarterly uptick in the March quarter. I guess the question is, is it still the broad-based sort of SMB customer base that is driving the declines in March? And I think you mentioned core Industrial is expected to be flat. How do you guys define core Industrial? And as you think about sort of just the very near-term trends thus far here in January, wondering if the team is seeing any signs of stabilization and bookings trends in Industrial.

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [3]

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So Harlan, so on the Industrial space, I mean, the weakness that we're seeing, if you recall last quarter, we started with a broad base of customers. But throughout the quarter, it kind of expanded into other customers as well. But let me try to answer -- you asked a couple of questions in there. So core Industrial for us, a majority of it is in controller automation, over half of it, but it encompasses other areas as well. But what we are seeing is that weaknesses both in small, medium customers as well as some of our larger customers were -- that they're seeing the pause from their customers in terms of ordering equipment. But if you recall, our Industrial business also has some verticals in it, and some of those verticals, especially ATE, we've seen a lot of weaknesses especially going into Q3 right now. So it's kind of broad based. There are some special verticals that are being especially weak, and I don't think we should be that surprised by ATE being weak with all of industry seeing a downturn. So that kind of gives you an idea.

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Operator [4]

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Our next question comes from the line of Ross Seymore from Deutsche Bank.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [5]

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Tunç, I just want to go into your comments on the bookings getting better recently and in general just talk about linearity throughout the quarter, what got worse in the December quarter and then what's getting better. Any geographic or end market color you can provide around how bookings acted in those 2 quarters would be helpful.

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [6]

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So what we -- if you recall, what we said when we were entering Q2, we said that we'd seen orders weaken in the last couple of weeks of September. And in commentary later, we said that things did not improve. They've gotten worse, I guess, until the beginning of December, after which the bookings actually got worse in terms of orders. What we're seeing now is actually kind of broad based. It's kind of too early with only 3 weeks of data to be able to tell you accurately which markets are stronger than others. So I think we're not going to go there in terms of trying to explain that. But essentially, what we saw in January is that the order rates really improved from the prior few months that we saw. So that's the information that we shared. Bruce, do you want to add any more color to that?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [7]

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No, I'll just say, Ross, I think when we look at sort of the kind of the broad-based business, and we usually use kind of distribution as a proxy for that, we really saw the weakness in the December quarter in China. I mean, it was much lower, meaning it was literally kind of down double digits quarter-over-quarter when seasonally it's usually up kind of low double digits quarter-over-quarter. So that's really where we saw that weakness. The rest of Asia was also weak, right. We saw some weakness in Japan and Taiwan. And then the Americas and Europe were actually kind of in line with seasonality. I mean, it's not like they were doing great, but they weren't as bad. So really we saw our weakness in Asia and, let's just say, on the resale side through distribution, which is about 44% of revenue. So it's a pretty good proxy and not as bad in Americas and EMEA.

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Operator [8]

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Our next question comes from the line of Ambrish Srivastava from BMO.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [9]

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I'm a little confused with the comment on the bookings returning to normal levels. Just a little bit of clarification. So is that just coming back from a really bad December? And then a related follow-on is how is that factoring into your factory loadings?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [10]

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Yes, so this is Bruce. So as Tunç said, right, we sort of -- when -- at the end of September, we saw bookings kind of go from a normal level where we had been booking down substantially and kind of stayed there in a quarter. As Tunç said, it kind of weakened near the end of the quarter. And what we're seeing now in January is sort of return to normal bookings, so at those levels. So that's still early. It's 3 weeks. So certainly, can't draw any conclusions from that. But just as a data point, we wanted to share that with investors. We certainly haven't drawn any conclusions from it yet. We're still obviously managing the business expenses, both operating and capital, tightly. As far as impact to moves, you saw our inventory is still at 128, 129 days. And so we obviously have reduced moves in the factory both in response to the lower revenue and in order to adjust our inventory on our balance sheet to bring that down as well. So clearly that's what those moves are down. I think it's still a very strong statement to say that kind of gross margins are holding up at the 65% even with the lower revenue and with moves at a level to begin to reduce inventory.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [11]

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Okay. So you're not changing your loadings, okay.

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Kathy Ta, Maxim Integrated Products, Inc. - VP of IR [12]

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No, go ahead. Sorry.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [13]

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No, my question was that as you said, just to keep it [together] here, is it's too early. You're not calling a bottom and you're just saying that this is too early to draw any conclusions. Your factory loadings are still along the trajectory of what you thought earlier or later in the year, right?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [14]

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Yes. I mean, we're looking at -- we have inventory on the balance sheet. So -- and I said before, I don't like inventory. So we're working to adjust that.

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Operator [15]

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Our next question comes from the line of Craig Hettenbach from Morgan Stanley.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [16]

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Tunç, just a question on the automotive market. You mentioned some of the legacy kind of infotainment seeing an impact from lower car sales, which has been evident in the marketplace. So just wanted to get your sense in terms of the December quarter, when you really start to see that. And what type of volatility are you seeing from customers in terms of, let's say, adjust production for lower sales?

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [17]

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Well, I wouldn't -- so obviously, we did see it in the quarter. I wouldn't really -- it was not volatility. It was just a general reduction in the number of units that were being ordered. There wasn't any sudden action that we saw from anybody, in particular, frankly and just broadly, people were ordering fewer of the parts that they use to order. So -- and when we ask the question about why, usually the answer was it's just lower car sales, without really giving anything specific. So I don't think that it happens in a way that was a reaction to something from the auto suppliers. It was kind of gradual. Did I answer what you were asking? Or were you asking something else?

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [18]

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No, you did. Appreciate that.

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Operator [19]

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Our next question comes from the line of John Pitzer from Crédit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [20]

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Tunç, I'm just kind of curious, when you look at your backlog entering into the March quarter and look at sort of your guidance for March, it implies sort of a turns coverage, which is kind of in line with sort of the 8 quarter average plus or minus a little bit. And I'm just kind of curious, as we go through correction periods, can you rely upon turns that consistently in what had been a little bit more conservative to kind of guide to in turns coverage that's kind of below what we've seen over the last 8 quarters when business was pretty good?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [21]

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Yes, John, this is Bruce. I'll take this. Certainly, in the current environment, we did not, in any way, shape or form, lean forward on our turns forecast to get to that number. So if we look at sort of our turns to booking and that's kind of actually at the low end of sort of our historical range, when we look at our beginning backlog, it's a percent of net revenue. It's a little bit lower. One thing to always remember about our Q3 is to the extent that there's any type of ramp at our largest customer, they always place those bookings within the quarter. So they always show up as turns. So even with smartphones being down just on a sequential basis, the third quarter always has a little bit higher turns historically than other quarters, and so that may be one area that just contributes. But no, we did not lean forward. Our philosophy here, being an engineering company, is we forecast what we think is the most likely number and balanced on kind of upside and downside.

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Operator [22]

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Our next question comes from the line of Tore Svanberg from Stifel.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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And I have to ask Bruce this question since he's going to be retiring, so I got to get the questions in. So Bruce, you talked about gross margin sensitivity. With revenue down 10%, impact to gross margin is 1% to 2%. Is that kind of -- is inventory days at 110 or does that not going to change now with inventory days at 129?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [24]

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Yes, so first off, I'm not going anywhere soon. So you're not getting rid of me, so I'm sorry to let you know that. But no, I think when we look at the gross margin and we said, yes, for a 10% decline, down 1% to 2%, I think that's appropriate throughout. As I recall, obviously there's other issues that are going on as far as, like you say, are we trying to burn off inventory. That may push it up to like closer to like 2% impact. If you look at the kind of the guidance that we gave for Q3, right, we're basically down a point, right. We are at 65.9% in Q2. We guided to 65% in Q3. And when you look at revenue, we're sort of down quarter-on-quarter. We're down 6%. So we're a little bit over, but that's probably that point, right, that's sort of in line just because of the inventory burn off as well.

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [25]

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Yes, now that we're on a more flexible model, keeping the factories loaded is secondary effect, which has a much less impact than it used to 10 years ago.

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Operator [26]

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Our next question comes from the line of Chris Caso from Raymond James.

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Christopher Caso, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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Just a question following up on some of the earlier questions. And I guess my question is what sort of linearity have you assumed with the guidance? And I ask that because I realize this is a particularly tricky quarter with Chinese New Year in the middle. You've seen some improvement in bookings in January, but in the last 2 quarters, I guess, we've seen some deceleration at the end of the quarter. So just trying to understand what sort of assumptions you made in putting together that guidance -- that all into consideration?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [28]

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Yes, so this is Bruce. Generally speaking, at Maxim, linearity within a quarter is not -- we don't -- is not that important. We're a very broad-based business. We ship thousands of our stuff to the customers throughout the quarter. So we're not back-end loaded. So when we do our forecast, we don't -- we look at it for a total quarter. We don't look at it month-by-month. As far as Chinese New Year, our view of that has always been demand is demand. Maybe it gets pulled in a little bit depending -- the bookings get pulled in maybe and then you have a slow week, but then it comes back. But over an entire quarter, that really shouldn't change the overall demand environment, the timing of Chinese New Year. So we don't try to forecast that as well when we look at sort of the bookings and turns forecast for the quarter.

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [29]

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Yes, I mean, especially Chinese New Year is in the middle of the quarter, so it doesn't have the effect. If it were at the end, it would be a consideration. But it's in the middle, so it doesn't.

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Operator [30]

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Our next question comes from the line of Toshiya Hari from Goldman Sachs.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [31]

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I was hoping to learn a little bit more about the Automotive business, what kind of trends you're seeing in the different applications. You guys talked about strength in BMS and ADAS and I suppose a little bit of weakness in your legacy infotainment business. But what sort of growth rates did you see in the December quarter? And what kind of growth rates are embedded in your March quarter guidance?

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [32]

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Yes, so in terms of growth, as I said in my prepared remarks, I mean, the growth areas for the December quarter was basically in battery management systems and in ADAS and the others were either -- infotainment was either flat or slightly down. But those growth rates were very strong. I mean, both of them were in the 40s percent to 60s percent on a year-over-year basis. So that market continues to do -- or that submarket of Automotive continues to do well for us. Getting into the March quarter, the battery management systems is still pretty strong, probably in those ranges. The ADAS is still double digits. Probably not as strong as BMS, frankly, but it's still in the double digits. And I think that the trend that we do see in those markets are secular and they're going to go on for a long time because more and more cars are being built essentially powered by batteries and more and more driver assistance going into cars. So those 2 are really good content growth stories for automobiles. And also remember that electric cars also, in addition to just having systems required for battery management, they still need all the other stuff. They still need infotainment. They still need driver assist. So that's a really good trend for us in terms of future growth. But that's the color I can give you about in the short term what they look like last quarter and this quarter.

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Operator [33]

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Our next question comes from the line of Srini Pajjuri from Macquarie Securities.

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [34]

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Tunç, I was hoping you could put the current cycle in perspective. I mean, obviously, historically, we have this inventory-driven cycles. Typically, late in the cycle we had extending lead times and double bookings and then followed by cancellations and then a couple of quarters of inventory digestion and then that followed a typical snapback. We never had much of lead-time extending in the cycle. I don't recall many companies talking about double bookings either. So I'm just curious, how do you see the recovery from hereon compared to some of the previous cycles that we have seen in the past?

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [35]

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Yes, so let me make a few comments. I think that -- first of all, let me just talk about Maxim for a second. So for us, we've had multiple years, I think 5 or 6 years, where we had lead times that were relatively short. And even through the up cycle, we were able to -- because of our flexible manufacturing, we're able to keep up with the demand increases and not have shortages. I don't think that's been the same for the entire industry. There's many market segments that did see lead time extensions, especially in some of the discrete products, memory. All these areas were -- had all kinds of lead-time extensions. So I think we have a kind of a distorted view from our space because we didn't have those, and it's really hard for us to be able to tell whether there's going to be a snapback or not and how strong it's going to be from where we sit. By the way, the other item you mentioned was double order and cancellations, and I think we said in previous calls, in the summer, that we didn't have double orders that we could detect. And I think some of you all set about cancellations and those were all normal for Maxim. And they haven't really changed that much for us right now either. So I think we're not a good company because of our supply chain working pretty well to be able to time when you have a recovery back from an inventory correction or not. But I think that the industry has gone through some of the symptoms that you talked about in your question about especially lead-time extensions in some markets and some components.

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Operator [36]

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Our next question comes from the line of C.J. Muse from Evercore.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [37]

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Just in sort of uncertain environment, you're still putting up pretty spectacular free cash flow. So curious how are you thinking about OpEx beyond the March quarter? Are you stepping up the gas on any R&D projects or just treating as normal? And how should we think about the trajectory there as long as the uncertainty persists?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [38]

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Yes, I'll take this first, C.J. and then maybe Tunç can comment as well. So first off, it is nice being a CFO with a really experienced management team. As soon as we saw kind of the slowdown coming, all the GM started kind of looking at their spending and being a little bit more careful about that. And so when we kind of came out as a finance team and kind of gave new lower targets to people, everybody was pretty much there. To be very clear, we're being prudent to the extent we have invest areas, whether that's in factory automation or automotive or data center or even some of our like broad-based consumer businesses that we've been investing in, we'll continue to invest in those. That said, when a company is spending -- we were spending around $195 million a quarter in OpEx, there's always areas that you can look at and pull back on. And so we've done exactly that. We came in below $190 million in the December quarter, and we're going to be in probably the low to mid-180s in March. And we have the playbook and we'll watch and we'll continue to watch the order flow. We won't get ahead of it. But if we see things improving, then we'll kind of -- we'll adjust. And if we see things stay the same or weaken, then we'll adjust as well. So it's very much a real-time process here at Maxim, and I think it is just the benefit of having a management team that's experienced and our business is cyclical. And I think fortunately for me as CFO, I have -- get to work with people who are good at managing through it.

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [39]

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Yes, I don't want to add to that. You did a pretty good job.

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Operator [40]

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(Operator Instructions) Our next question comes from the line of William Stein from SunTrust.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [41]

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Tunç, can you remind us how big that 100-gig optical driver business is? And with the slowdown there, is that a matter of customers transitioning to 400-gig or maybe a share loss? Or is it more just a pause in demand? And along with that, maybe any expectations for recovery there?

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Tunç Doluca, Maxim Integrated Products, Inc. - President, CEO & Director [42]

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Yes, so first of all, Bruce can look at the numbers. But in terms of what we see in the market, we definitely see it as a pause. We're not seeing it as a loss of sockets in the laser drivers that we're selling. And it was -- if you recall, it was really 2 things that we cited that caused it. One of them was an issue with one of our customers' products, a technical issue with it. So that caused a supplier reevaluation or change. So that was one of the reasons. But the other thing, I think it's pretty clear now, that's come out in the last few months that the capital spending by the cloud customers has gone down. So that also has an effect. But the biggest reason for the pause was the fact that there was a technical challenge that a customer had to go through, unrelated to our product by the way. So that's why we're pretty confident that we have -- we don't have a share loss issue here. Now having said that, it clearly -- the pause is also being caused by the fact that even though they have this technical issue, they were really not crying out for these parts. So they must have had enough inventory to carry them through this period of a pause. So that's the way we're seeing it. It's really -- I have not heard that it's because of a transition to a faster data rate. If there is, we have those products as well in our pipeline. But that's not what we're seeing for the insight of the data center-type applications.

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [43]

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Yes, and just to size the business for you, right, we've said before that our data center business was sort of mid-single digits 5%, 6% of revenue and cloud was about half of that and optical was the primary driver within the cloud. So it's not really a large business for us. It was driving outside growth for us for a couple years, I think, and -- which was great. That slowed down, and as Tunç said, maybe they sort of needed some time to digest some of this inventory that we were shipping at kind of 50% year-over-year growth rate off a small base. But clearly, there was strong shipments for an extended time period.

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Operator [44]

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Our next question comes from the line of Christopher Rolland from Susquehanna.

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [45]

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Yes, this is David Haberle on behalf of Chris Rolland. Just wanted to dig in a little deeper on the March guide for Consumer if we could. That was strongly down quarter-over-quarter. Is this just new seasonality now that you're diversified into many different customers? Or is this guidance largely just driven by a weaker handset environment?

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Bruce E. Kiddoo, Maxim Integrated Products, Inc. - Senior VP & CFO [46]

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This is Bruce, and the answer to your question is yes. So it is both new seasonality as we've gone to a more broad-based consumer business, which has -- generally is strong in the September and December quarters, which we saw good strength in those quarters in those kind of broad-based businesses: tablets, wearables, peripherals, gaming, et cetera. And then it's typically down in March. So that is some new seasonality for us in our broad-based business. In addition, we are seeing, and I think like others, weakness in smartphones, such that we're seeing kind of below historical levels for smartphones in the March quarter. So I think it's a combination of both. I think overall, we still feel very good about the broad-based consumer business. It grew very -- those grew very strongly in this kind of 20%, 30% range year-over-year in the December quarter, and they're just going through their kind of a normal seasonal softness in March.

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Operator [47]

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(Operator Instructions) And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

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Kathy Ta, Maxim Integrated Products, Inc. - VP of IR [48]

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Okay. Thank you, Jonathan. That does conclude today's conference call. We'd like to thank you for your participation and for your interest in Maxim.

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Operator [49]

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