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Maxim Integrated Products, Inc. (NASDAQ:MXIM)

February 27, 2013 7:15 pm ET

Executives

Bruce E. Kiddoo - Chief Financial Officer and Senior Vice President

Analysts

Joseph Moore - Morgan Stanley, Research Division

Joseph Moore - Morgan Stanley, Research Division

All right, great. Thank you, everybody. Good afternoon. I'm Joe Moore. With me, we're thrilled to have, the CFO of Maxim Integrated, Bruce Kiddoo. Welcome, Bruce.

Bruce E. Kiddoo

Thank you.

Question-and-Answer Session

Joseph Moore - Morgan Stanley, Research Division

So maybe we're going to start out with a look at the strategy. I once covered you guys originally in 1995, the -- at that time, you were sort of niched in micro niche. And then a decade or so ago, you started to really focus on these higher levels of integration. And it didn't go great at first, but it's now become a pretty good strategy and central to the growth. Can you just talk about where you are today with integration and what types of directions that's wrung into?

Bruce E. Kiddoo

Sure. I mean, I think if you think of analog, of course, this was a component business, so it's a building block business. And it was thought of by technology, all right? You had companies that were very good in converters, non-portable power. If you think of Maxim, we were about portable power interface. And I think to the company's credit, we saw that kind of going forward, customers were less interested in buying just components, and they were really interested in having a systems partner, someone to help them have faster time-to-market, lower R&D and really add value as a partner versus just being a component supplier. And so we took a number of steps to enable that. The first one was really kind of organizing by end market because if you're organized by technology, then it's very hard to have all those different technology groups come together with a solution for one customer. So instead of being -- having the power group and the audio group and the interface group, we now had the consumer group, the industrial group and the communications group. We also had to -- and just -- when you compare this to where -- of the things that are easy or hard to do, that was probably the hardest thing to do because very culturally, everybody thought of themselves as a technologist versus as somebody who supported an end market. So that was very difficult culturally for the company. And I think our CEO, Tunç Doluca, handled that. He took it slowly and made sure that we maintained our design engineers. The next step was to really focus on a common manufacturing platform. Analog, if you think about analog versus digital, digital guys, they use kind of standard merchant foundry CMOS process. We all have our own proprietary processes. We had 150 different ways we manufactured product. It's impossible to stitch those together, if one block is in one manufacturing process and another is in a different. So we centralized on a common manufacturing process, we centralized on a common EDA flow and we started having to focus our sales force to think about those large customers, all right? It's a different scale, it's a different relationship, if it's a systems sell versus just a component sell. So we did all of those steps. They kind of started in kind of mid-2000s. I think when Tunç took over as CEO in 2007, that really gave us the catalyst to put all this together. And we led in the mobility space. And clearly, we've done very, very well with these systems solutions, with this high integration. And it's the same thing the digital guys did. So it's nothing new, it's just hard in analog but lower cost, lower power, lower space, all those benefits that integration gives you on the digital side, it gives you on the analog side. And so as a result, what happened is we've now been able to go into a market like mobility and make it very sticky because we're offering something other people can't offer. And because we integrate new technology in every generation, that's actually a reasonable margin business. And obviously, to the extent that the consumers about 46% of revenue right now, yet we're still solidly within our gross margin range, it says that this is -- our consumer business is good margin. And I think, finally, that same logic applies to the other end markets. So if you look at our business, about 46% of our revenue is high integration, right? That's up from probably 18% 7 years ago. And so that's one kind of milestone of how far we progressed. But in that, mobility is a little over 1/2 of that. But the other side is in communications, say, like in integrated transceivers for small cell, right? It is in industrial, say, in the automotive, or smart meter market, right? It is in the computing market as well. So we think this is a clear trend. If you look at our outperformance, we've significantly outperformed, from a revenue point of view, against our peers. It is due to integration. I mean, that's clearly what's been driving our outperformance in both the mobility market and in the industrial and com markets. And so I think we feel that this is a trend that's going to be sustainable, and I think we feel we have a multi-year advantage.

Joseph Moore - Morgan Stanley, Research Division

Okay. And how many years has it been since you got to that common EDA flow and common process technologies?

Bruce E. Kiddoo

So I'd say, the -- it was probably in -- so it didn't happen all at once. So when we standardized on a common EDA flow, it first happened in the consumer business, right? And then kind of over a couple years -- so I think it really started probably in 2008. And I think the kind of the final move was in 2011, we did our last reorganization, really getting the com and the industrial very cleanly separated by end market instead of technology.

Joseph Moore - Morgan Stanley, Research Division

So you really in those markets, you're only really a year or 2 into a design process that should have probably multiyear payoff?

Bruce E. Kiddoo

Absolutely.

Joseph Moore - Morgan Stanley, Research Division

Because I wanted to let you address kind of one of the criticisms I hear, which is that Samsung has been mostly the growth of the company in the last 5 years or the success of the strategy has manifested itself primarily with Samsung. The analog business hasn't grown that much in 5 years, so it's still -- even if it's one customer, it's still a lot of growth the others guys didn't have. But can you just address that the fact that your pilot customer has worked pretty well and you're still in the process of proving this out in the other markets.

Bruce E. Kiddoo

Yes. I mean certainly to the extent we've outperformed, it's been because of the integrated products. We've done very well in mobility. Obviously, at our largest customer, Samsung, we've done very well in that. They've done well and we've been able to increase content and grow along with them. We have grown at the other handset OEMs as well. But I think it's interesting to note, even though we've had this very strong outperformance, let's take our industrial business, right? It was about, I'd say, 5 years ago, 28% of total corporate revenue. And I think last quarter, it was right about 26%. So with that strong growth, we've been able to maintain the industrial business, so it's grown as well. Now it's been helped a little bit by acquisition, right? We did the Teridian acquisition for smart meters, but automotive is in there as well, which has grown nicely, and a lot of the solutions for automotive are integrated as well. The part that's actually come down, and I would say it was a conscious decision, was in the computing side, right? When I first joined the company about 5.5 years ago, the notebook business was around 18%, 20% of revenue. And so that piece has actually come down to now about probably 3%, 4% of revenue. So actually, yes, the Samsung business, yes, our mobility business has grown. I would say the industrial business has done very well also. I think com is probably a little bit behind from that point of view. I think the integration didn't happen and we needed an inflection point. And for us, I think that's going to be small cell, right? I think from a optical point of view, the optical transceivers, is another high integration, but that market moves a little bit slower, I think, from a change of market share and integration strategy.

Joseph Moore - Morgan Stanley, Research Division

Okay, great. I want to come back to some of the product stuff. Can we just talk about the state of the sector right now? You guys are a little more product-focused than, I think, a lot of the other analog companies. But there's been a fair amount of enthusiasm lately for the prospect for bookings to get better and kind of the inventory reductions of last year to improve throughout the year. Where do you guys stand on that? Do you think we're going to have a year where the broader sort of building block types of products will grow? And do you think there'll be a restocking that we see at some point in 2013?

Bruce E. Kiddoo

Yes. When we look at our end markets, and when we kind of rank them as far as growth both in calendar '13 and beyond, certainly mobility is our top growth market, it's done well in prior years. We think it's going to continue to have a good year. In the industrial space, that has been a slower growth, right? Obviously, over the last couple of years -- as I've said, industrial is about 25% of revenue. Half of that is in vertical markets. So things like smart meters, automotive, medical, those have done well, and we expect to continue to do well, all right? I don't think those are kind of macro-driven. I think the other half of that industrial business is sort of the general-purpose industrial that sells through distribution, and I think that's the part that I think all of us are seeing some improvement in order flow forecast. Our global franchise partner is Avnet. Some of the kind of the resale forecast for Europe and North America, which are kind of the heavy industrial businesses, those forecasts are going up. So I think we're starting to see some indicators. I -- obviously, last year, about this time, we saw a similar strength and we actually had a good March, and I think the industry had a good June in industrial. And then kind of macro concerns and people got cautious, and September and December were below seasonal. So I think for now, things are looking good. If someone can control kind of the macroeconomy and avoid any shocks, I think 2013 should be a good year, but I think that's something we can't predict sitting here today.

Joseph Moore - Morgan Stanley, Research Division

Okay. And if you look at supply/demand for your products, inventories you have on the balance sheet, do you think you'll get into a situation where your customers need to restock or lead times need to start moving out over the course of this year?

Bruce E. Kiddoo

Yes. I think at some point, that could happen. I think today, any uptick we're going to see, I think, is going to be demand-driven. I think it's going to be -- you're going to see end demand pick up. I think you're going to see the end market bookings, the resale forecast pick up. We all have short lead times today. We can commit at about just under 6 weeks on average. We can deliver product to our customers. Our customers are still giving us about 8.5-, 9-week order lead times, so we have plenty of opportunity to meet those, so there's room there before you have to start pushing out lead times. So I think we are also running a little bit underutilized, so I think there's capacity out there. So I don't see an immediate need for restocking. I don't see an immediate push where lead times are going to go out. I think they're going to order that end demand, and I don't think they're going to start restocking right away. I think they're going to be cautious given our history.

Joseph Moore - Morgan Stanley, Research Division

Okay, great. So moving to the smartphone business, which I know a lot of the questions you get and I get are about that. It's probably important to start out to say it's been a pretty amazing success story in the last couple of years. I know all the questions are, including ones I'd like to ask you, tend to have a negative skew to them because the people are worried about what may happen, but it's been a great business for you guys. Can you talk about what has driven your market share? Obviously, Samsung is a big customer because they're very big. But you have a pretty broad base of customers, particularly in the Android type of platform. Is it the attach rate with a certain edge processor or baseband chip? Or what is it that drives your -- which phones you tend to be in and not?

Bruce E. Kiddoo

Sure. I mean I think all of our success has primarily just come from integration. I mean if you think about that, we were very good at power management. And kind of portable power management has always been historically a strength for Maxim. We started integrating the other analog blocks around that. Our other strength was interface or USB controllers. And so we integrated that and we integrated in some audio subsystems, right? Real Time Clock, flash drivers, all different types of analog, we got that integrated in. And so what happened was 2 things is: one, that increased our content per phone, both at our largest customer and in all of the others. We actually sell into all of the top-tier cellphone OEMs. We have content to various degrees. And so we were able to integrate, increase the content, right? We were able to grow, obviously, with our largest customer as they did well. And I think what's happened is that we've been able to continue to -- because we did this integration, because we brought all these benefits, the business became very sticky, right? So people used to think, "Oh, consumer business, you can win it and lose it, kind of platform by platform." Since 2008, we've actually increased -- either maintained or increased content in every successive generation, right? So this business has become very sticky for us. And because it's -- because of this integration, it's also actually very good margin business versus what people would expect for this business. And so it's been -- we've been able to maintain our 61% to 64%. And going forward, even in our best case, maybe we have $5 or something in a phone, we think there's a $10 available market out there. And a big part of that is sensors. We've made the investment. We think sensors will be the next big growth driver for us within the mobility space. We've talked about optical sensors, whether that's gesture or ambient light, proximity. We think that'll be meaningful revenue in this calendar year. And then right behind that is going to be motion sensors, right? The MEMS, the gyro, and the accelerometer and 3- and 6-degrees-of-freedom products. And so I think that's going to drive kind of -- in a business where people get concerned, we actually have probably a 3- to 5-year roadmap where we can see continued growth in this business.

Joseph Moore - Morgan Stanley, Research Division

Okay, great. And then within Samsung, specifically, and I know there's sort of limited amounts of stuff you can say about phones that aren't introduced yet and things like that. It's a big customer, 20% of your revenues in the last fiscal year, I believe. And it's exactly like every day there's kind of a story that you upped the socket or that socket and lot of times it's the same story, that comes up 4 weeks in a row, just talking about, but the -- can you give us some comfort in terms of that relationship, and to the extent that you can, talk about how extensive that Samsung relationship is? And do we need to worry when we hear about dialogue or Samsung LSI or Broadcom potentially winning sockets?

Bruce E. Kiddoo

So it's a big market. It's a fast-growing market. It's going to be competitive. There is absolutely competitors out there. With that said, we've been able to grow our overall mobility business every year. We've been able to grow our business with Samsung. And I think when we look at our business going forward, we're still comfortable that we're going to be able to do that. And I think the way we're going to be able to do that is if you look at increasing sort of the technology that we sell into specific platforms, right? In this case, we've done very well sort of growing in what we call our Power SoC, but it's just a power management chip plus other analog that we collected into a single chip. We believe, as I just said, I think from an optical point of view, optical sensors, right? That's a ASP kind of content opportunity for us this year. We also see the ability to kind of go into other platforms. The Note 2 is a product that, I think, done very well. The Galaxy Tab, and then just other Samsung platforms. So I think continuing to maintain our lead in power management from an efficiency space and power, going into new technologies, going into new platforms. And probably at the end, and most important, really leveraging the strategic relationship we have with them, right, where we have -- we work very closely with them. We've executed every year, we're able to deliver. We're very fast from a cycle time point of view and they've become a -- a supplier that they can rely upon. That's something we never take for granted. We work extremely hard to maintain it. And I think our -- I think we're confident if we continue to execute, we'll continue to grow that business.

Joseph Moore - Morgan Stanley, Research Division

Great. And I just have one more question, and then turn it to the audience. The other customers in the smartphone space, and you have a bunch of them, and I feel like when I talk to people in the supply chain, there's been a number of companies that struggled in 2012 that were ordering to a higher level and everyone's cynical because they struggled in 2012. If you have a year where it sort of broadens out and there are several successful companies in selling smartphones in the Android space, is that a good thing for you?

Bruce E. Kiddoo

Yes, I think so. We have content in all of those other folks, all right? We've actually worked very hard to increase our content and to get not only building block products but power management and the fully integrated Power SoC at many of those other cellphone OEMs. And so we've made those investments. And to the extent that they're able to be successful as well, that's great for us. I mean, we're very agnostic as far as who we can support, both from an OEM point of view and from a baseband and an apps processor point of view. So I think to the extent that you get some other folks gaining -- doing well, and that naturally provides a diversification for us, I think that's a good thing. And so -- but we'll see. We'll let them figure out who does well out in the marketplace and we'll just be the component supplier to all of them.

Joseph Moore - Morgan Stanley, Research Division

Okay, great. Let's see if there's any questions from the audience. I can keep going, if there's not.

Bruce E. Kiddoo

Sure.

Joseph Moore - Morgan Stanley, Research Division

Okay. Well, if we talk about the small cell business then. What the -- what are the milestones you've had? You've done pretty well, I think, in certain parts of that market. And when do you think that we can start to see a meaningful revenue ramp?

Bruce E. Kiddoo

Yes. So I think with small cell, there's kind of different subsegments of that market. Today, there is a very small cell or femtocell market, which is really, for 3G personal use. And this is just someone who, at their home or their office, was in a location that got bad coverage and so they put a femtocell there. We actually have very high share in the RF transceiver side of that business, over 50% share. That architecture is probably going to be the same architecture that goes into the small cell or picocell that everyone is talking about. I think initially, it's going to be the LTE version of femtocell. We're seeing that uptake right now. That business is doing well. Still, it's a small business, to be very clear. I think the next stage will be in enterprise. I think there's fairly a good consensus that the enterprise side of that market will grow as well. And then I think, finally, you'll get outdoor, where you're going to be the offload for the macro base stations. That third part is probably a couple of years out, I think, before that becomes meaningful. So I think it's a small business. I think it's going to ramp over time. I think what's important is in these businesses, you really need a technology inflection point to change market share in a meaningful way. And I think this is going to be one of those -- I mean, in macro base stations, we're not a big player, we have about 5% revenue. And so this is an opportunity for us to gain significant share in this new market now. The size of how large small cell will be, I think that's still to be determined, right? I think some of that still has to be worked out to the extent from the outdoor small cell. But certainly, we have -- we're very well positioned, assuming it does do well.

Joseph Moore - Morgan Stanley, Research Division

Okay, great. And then within automotive, it seems like another area that's right for integration. What types of products are you excited about there?

Bruce E. Kiddoo

So automotive has gone from, over the last 5 years, probably 1%, 2% of revenue to about 6% of revenue. It's grown kind of double-digit CAGR over that last 4 to 5 years. We think it's going to continue to do similar levels of growth in the -- over the next couple of years. And so for us, the current growth drivers are around infotainment, right, within the car, whether that's satellite or digital audio broadcast tuners, right, whether that's USB ports and controllers for that within the car, whether that's video distribution throughout the car. You have all these cameras now and you need to be able to distribute that video throughout the car. We even have a product which is from a keyless-go, right, it's your fob. When you think about that, that has to be a very low power RF solution. And so we have that capability and that's a market, that's -- a business that's actually growing surprisingly well for us from that point of view. And so that's sort of like the infotainment side of the market. We also have products and design wins around battery management systems, right, in lithium-ion battery controllers for both hybrids and electric vehicles. So again, I think that's somewhat end demand-driven, right, but I think we'll start seeing revenue for that in calendar '13. And so I think it's a market which you don't in essence have to take share because these are all new sockets. So again, there's an end -- if you think about industrial and com, it's very hard in our business. I mean, one of the benefits of our business is it's very hard to take share, right? Once you have this business, it's very stable, it's very good margin. It's inflection points when you can grab share, that's happening in automotive today. There's a whole bunch of new opportunities. I think we and some others are doing well. The other thing that's interesting about automotive is some of these -- we always talk -- our average ASP is $0.75, right? And we talk about we're doing well in a smartphone at $5. And in automotive, video distribution throughout the car, that can be a $30, $40 per car opportunity. Battery management systems, also a $30 to $40 per car opportunity, so there's actually some decent leverage. And these are designs that take a long time to get. So we have -- we've been working on it. We have the quality that's required now. We have the visibility. So I think we have pretty good visibility that these are going to come through. And then they last a long time, right? So I think it's a very nice -- the classic industrial analog business that's going to do very well for us.

Joseph Moore - Morgan Stanley, Research Division

Okay, great. And then just one last question. If the industrial part of the business comes back and the building block part of the business does come back just for business cycle reasons, ramifications for your gross margin, where you have -- that business tends to be more internal fabs and probably a little bit higher margin. What happens to your gross margins if we do get the -- a rebound in the general economy?

Bruce E. Kiddoo

So I think our gross margin range is 61% to 64%, we're at 61.5% right now. I think the biggest driver of that is utilization. And certainly -- it's oversimplifying it a little bit, but one of our fabs is more focused on consumer products and one is more focused on industrial and com products. The consumer fab is filling up because we took a technology that we used to kind of manufacture our current products and we've qualified that internally. It was previously only qualified at foundries. And so that's now qualified internally. So that utilization is going up this quarter. So we're going to see utilizations in that fab increase this quarter. The other fab is more focused on industrial. So to the extent that the building block business, kind of the broad-based business, does -- the positive signs that we're seeing now continue and are sustained, utilizations will go up in that fab. So both of those could clearly be -- put a positive bias on gross margin and probably get us back up into the higher end of our range. I think utilization has a much bigger impact than mix. Obviously, industrial is 70%-plus gross margin business. It helps from a mix point of view, there's no doubt, but I think utilization is a much bigger driver from a gross margin point of view.

Joseph Moore - Morgan Stanley, Research Division

Great. Well, Bruce, thank you very much. Thanks for your time. Thanks, everyone.

Bruce E. Kiddoo

Thanks. Thanks, Joe.

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