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Analog Devices, Inc. (NASDAQ:ADI)

The Citi Investment Research 2013 Global Technology Conference

September 03, 2013 12:50 pm ET

Executives

David Zinsner - Chief Financial Officer and Vice President of Finance

Analysts

Terence Whalen - Citigroup

Terence Whalen - Citigroup

Welcome back to Citi Technology Conference. I am Terence Whalen, Citi's Specialty Semiconductor Analyst. It's a pleasure to have with us today Analog Devices', with us from the company Dave Zinsner, CFO. Dave, Welcome.

David Zinsner

Thank you.

Terence Whalen - Citigroup

Sorry, we can't be a little better on the heating over here. Now, I am going to ask a couple of general questions that we are asking across all of the semi companies and then we can dig into some ADI-specific questions. You guys obviously have had an earnings release recently. What would you character as the real growth drivers here looking into first half '14?

David Zinsner

Obviously, not surprisingly, comm infrastructure looks to be a pretty good market. I think you probably have heard this probably if you asked this question to a number of semiconductor companies, probably everybody is talking more bullish about comm. It looks from our standpoint in the fiscal third quarter, we saw lift both, in Asia or TD-SCDMA, so 3G technology within the China region and then in North America and broadly beyond that looks like we are having some 4G and a combination of 3G and 4G deployments going in those locations. Still on the comm, where everybody wants to see coming in their business is TD-LTE build out, which has long been advertised and yet hasn't delivered so far, but it looks like just based on our reads that that is on the comm pretty soon. Our best guess is that in the fiscal first quarter, we will start to see some revenue from that and hopefully it will continue for a couple of quarters there, but that looks like a great business opportunity for the next few quarters for sure and our expectation is that over the course of several years, we will continue to see capital spending increasing or at least spending increasing on the radio account side that will lift our comm infrastructure business up for the foreseeable future.

Industrial had certainly run into a little bit of trough as well. We had seen, since our second fiscal quarter kind of a steady march towards improvement in that space. I don't it's in any way seeing what normally you see in these cycles, which is a big pick up usually preceded by some sort of shortage of sockets. I think the industrial business at least as far as we can tell is going have a hopefully a steady march of improving numbers. It's probably a little bit of seasonality kind of baked in.

The auto market looks like a great business for us. It's been growing double digits for the four or five years. We've been in what I would call a little bit of a pause in 2013, but our expectation is that the dollar content improvements that are going to go on in auto for the next few years. They are going to continue to drive our business there as well.

Then in consumer, we tend to be a little bit more selective in that space. We think we have some opportunities in the portable space for next year that should lift that business. It's probably going to be sub-seasonal in the fourth quarter, but I think over the course of the quarters beyond that, we should start to see a pick up again in the consumer business if some of these new socket wins that we think we have start of manifest themselves into revenue.

Terence Whalen - Citigroup

Okay. Terrific. One other sort of longer term question that I have is, as we look at consumer, you tend to really want to maintain price and margin in your business and so have to select very carefully. It's sort of interesting that you are getting more into that market now in some ways as the composition of growth is headed more toward emerging market? How do you sort of balance the decision making process given where growth is being generated versus where you see sustainable margin opportunity.

David Zinsner

This is in the consumer business specifically? Yes. I think, our model has been to be very selective in the consumer space. Not surprising one of the headwinds we had on our growth over the last three years, because the consumer business as a percentage of the total has been shrinking. It's running at about 15% of revenue right now. I think that this is where it's going to kind of settle in at.

What we tried to do is, identify areas where we have technology as an advantage where we don't think we have a lot of competition, where we can get a reasonable price based on the dynamics of the consumer market and where we can sustain ourselves over multiple generations. We make those guesses sometimes wrong sometimes we can sustain ourselves and we walk away from the business, but for the most part I think we are pretty good at identifying the areas where we think we can kind of sustain a level of technologies advantage that kind of keep the real kind of pricing bloodbath for materializing. I think that's going to be the strategy going forward in that space.

We there are opportunities, particularly in the portable space. To maintain that technological advantage and those are the areas we are going to kind of invest and focus on, but to be honest with you, we have kind of reduced our R&D investment over the course of last five years in consumer. I think right now where we are spending is probably the appropriate level based on the opportunities we think we have in that space.

Terence Whalen - Citigroup

Okay. Terrific. One more general question that I am asking is, how is visibility at this point in 2013 different than visibility in the past couple of years? How are you adapting to perhaps shorter lead time from the management perspective?

David Zinsner

Well, we did our keep our lead times relatively short through the last few years. I mean, I think, some other semiconductor companies had seen an expansion of their lead times. We actually managed to maintain them within its kind of a tight band.

Having said that, we are running at about four-week lead times right now and that is definitely on the lower end of the range that we normally operate in. That's about the visibility we get. Four weeks of visibility, so visibility is definitely limited. It's more of a turn going in this environment out there.

What we do is, we carry a relatively meaningful amount of inventory on our balance sheet. We have a little under 110 days of inventory and we have to keep a lot of different product types available in the event that we get significant turns business and that's how we operate.

I think, we can manage this kind of short lead time, high turns kind of business, maintain that level of inventory and not see kind of any sort of pockets of shortages or packages of inventory stretching out.

Now, is this a new norm? That's like kind of a follow on question and I don't know. Generally what happens is, somebody has a shortage somewhere the customers begin to panic about shortages, materializing in other places that certainly would impact their business and so they end up ramping up at some point and my guess is that different history as it usually guide that probably will happen at some point in time in the future. I think for the foreseeable future, it's going to be very short lead time environment for everyone.

Terence Whalen - Citigroup

Dave, you talked earlier about seeing growth acceleration into next year in wireline. What about industrial? I think, when we saw your results, your industrial business grew I think about 1%, slightly below our 4%. It's obviously a business that is sort of tough to project for given the long customer tail. What are the tools that you use to sort of forecast that business forward and plan your loadings and perhaps, how do you think about seasonality in that business as well?

David Zinsner

Yes. Your projection was probably pretty close to our internal projection. We thought industrial too and absent one sub-segment of the industrial space, it actually did that, so it behaved pretty much as we expected. We did have one little slippage. We had a military customer push out some deliveries into the fourth quarter and that was the kind of difference making the high end of the range which was 4% making the 1% that we ended up achieving.

Much like everyone else, we read the papers, we track all these economic indicators. I generally find them not to be very helpful, because by the time the indicators come out that's actually materialized in our business in some way, so our best opportunities to get some insight are to talk to the customers on both, the distributors and their end customers and in some cases the larger OEMs that we deliver to and try to get a kind of qualitative sense as well as quantitative sense as to what they have seen what their business doing and from that it gives us a little bit of a guide as to how things are going out into the future.

Then quite honestly, we track kind of four-week and 13-week rolling growing average orders from industrial customers and try to make a determination of which way we think the business is going and based on that kind of adjust factory utilization in concert with that.

Terence Whalen - Citigroup

What about the regional perspective as it's now? Where are you seeing acceleration versus deceleration?

David Zinsner

Well, we saw actually last quarter we saw Japan pickup quite a bit. Japan at this point is now mostly industrial for us. We still have a pocket of business in the camera, but for the most part that's an industrial business, so that's definitely was a pickup and now part of it probably was something to do with currency valuation changes, but I think it actually most of the leading edge factory automation customers are in Japan and I think that pickup is actually a good leading indicator of maybe some kind of industrial pickup over the course of the next year as well.

We saw kind of a slightly down or down quarter for Americas, but as I said a lot of that had to do with this military program pushing out, so absent that it would have done fine. Europe did okay. It wasn't going gangbusters, but I think that the quarters in which it had been declining have kind of it's been bit high there and I think we will probably see a kind of bottom out and start to pick back up again. China also had a good quarter for us, this quarter, and a lot of had to do with industrial strength, so I think that that's also another positive, a, maybe beginning some spending to kind of simulate the economy over there on the industrial side and that should benefit us as well.

Terence Whalen - Citigroup

Great. I think, one part of that answer you mentioned getting closer to customers and qualitatively assessing what demand looks like. What are your customers telling you right now in industrial, in auto and in medical?

David Zinsner

Yes, and I think they think it's kind of plugging along. It's growing and it's their expectations of up growth are very similar to what kind of world GDP forecast of growth are for the next year, which is certainly they like it to be better, but the fact that it's just kind of recovering is a good sign and I think that's part of the reason why we have seen this more disciplined and steady recovery in industrial business. I mean, they are not exactly optimistic, but I think any level of growth is good for us.

Terence Whalen - Citigroup

Maybe if we can switch gears a little bit to some of the corporate initiatives that have been developed through the past several years. One of them was indeed sort of getting closer to customers by reorganizing sort of the customer inner [space]. Can you just kind of update us on how that initiative has developed over time and where you are with that?

David Zinsner

Right. We originally were segmented within our organization by product type, so we had a data converters group and we had an amplifiers group and the power group and so forth, and what we came to realize was that what we really needed given that customers were evolving and they were requiring more systems oriented solutions and sending seven different people into each customer selling a set of products was relatively inefficient and it didn't really combine the technology in a way that provided a solution to the end customer any way. We decided to kind of reformulate the reorganization so that we managed it on segment basis, so there is a group that focuses on comm infrastructure and then there's two subgroups below that one that focuses on wireline. One that focus on wireless. We have sub-segments within industrial, we have the healthcare business manager, or GM who manages the healthcare group and the idea is those people get better depth of understanding about our customers, their solutions, what sort of product roadmap they will require and will require to help facilitate those customer s and basically just develop better products for the customers that anticipate their needs. We put that in place right around the time I started, I think, which was in 2009, like late 2009. I know it's taking some time to kind of, one, to build up the expertise internally and hire enough people that has this kind of end customer kind of knowledge around the system to give us some real insights into what product we should be developing and I would say at this point now, we are just kind of starting to hit our strives with that you really have a sense now that the groups within the company that focus on these end market really have a good understanding of the system, how do they know that what the needs of the end customers of our products are, but even their customer. For example, we will know what the OEMs that built base stations, what the requirements for their applications, but even with the carriers will in terms of technology to help them generate a revenue source, so it's gone well. If we were to try to put the numbers around it, 8% to 12% targeted top line growth rate. Provided context with that growth rate relative to sort of the economic backdrop and then how much of a contributor to some of these initiatives that improve customer interface contributor, so I mean obviously the economic headwinds we based certainly hamper that growth rate considerably.

In fact actually we have had a couple of years where we have been declining and part of that's been this kind of move-away from consumer which has created a bit of a headline as well, but when you look at the automotive business is growing double digits in general. The comm infrastructure business, if you believe these rollouts are going to happen, if you believe that 4G technology is required to meet their requirements of all these kind of portable devices. That business should grow easily into the double digits.

We have consumer now at a price where the areas that we wanted to exit, we've exited and now we are investing in areas that we think have growth opportunity like in a portable space. Really, the only wildcard then becomes the industrial space and what could that business grow and it's been largely overshadowed by the macro side. As you feel like that that macro starts to improve over time, certain locations like North America start investing in manufacturing again and then some of the fairly focused areas that we are involved in like energy efficiency, like medical systems, even energy efficiency within motor control. All those things could drive kind of outstripped growth rates beyond, what, kind of a normal [PEC] growth rates you would see in the industrial space. I think we have a good chance of hitting it. Now, the high end of that range is very aspirational for sure, but if everything executes the way it should, there is no reason why we shouldn't be able that high end of the range.

Terence Whalen - Citigroup

Then you touched on this, but if I think out three or five years, what are some of the emerging growth drivers that ADI gets excited about? I think a lot of investors in general either they may market at the deflationary landscape. You see that what's happened in PC and perhaps as well in smartphone given the growth shift. What are the newer technologies that you are really beginning to invest in for three to five year of growth outlook?

David Zinsner

I mean, we believe [apart] in this immense technology. A lot of them are tailored towards the safety part of the automotive market, plus a lot of other safety orient systems within or sensing systems within the industrial space, I think that's going to be, sensors are predicted to grow at like high teens or something like that. I think that's a greater of investment. We are excited about the opportunity. I think it has been proliferate around a number of different applications within the industrial space. It's going to be a very big business for us and a good ROI business for us.

Obviously, we have the commanding share of the data converter space. We are now integrating more and more data converters with other peripheral signal processing technologies. For example in the comm infrastructure space, we integrate the data converter with the RF technology in order to make a more robust art at a lower lithography. I think that's create applications not only in the comm. space, but also if things move more wirelessly outside of the comm., space, we are excited about that opportunity as well.

I think, in every one of our end markets, we have specific areas or specific end applications that we think are going to drive very good growth. In other words, the energy efficiency kind of the macro trends out there a lot of the parts that we are making either directly help those kind of energy greener technology kind of applications or they take old kind of nuts-and-bolts applications that we had before and make them more energy efficient and I think that's the big trend for us.

Terence Whalen - Citigroup

Okay. Maybe also asking the converse which is, what areas of the business are deflationary at this point for you or headwinds for you?

David Zinsner

I think the biggest one that was wasn't behind us was the consumer business and I think that we are at a point now where it's not going to be deflationary like it was in the past. Most of that business now is either in portables where we are making some investments and we think have some opportunity to grow or it's in more kind of stable businesses like what we call the prosumer business, which is we call it, home entertainment, but it's more like high end home entertainment and broadcast systems and so forth, so I don't think that that is a deflationary area anymore.

Automotive and comm infrastructure don't look like deflationary areas and the industrial business should be recovering, so never say never, one might come up at some point and it always do surprise when they do come up, but don't see anything right now in front of us that would be particularly deflationary.

Terence Whalen - Citigroup

Okay, so the decision to exit [PT power] and the [MediaTek] business.

David Zinsner

Yes. Pretty much done.

Terence Whalen - Citigroup

Yes.

David Zinsner

Yes. I mean, never say never. There could be something, but I am going to guess that if we do, do something it would be relatively small.

Terence Whalen - Citigroup

Okay. Then just touching on profitability a little bit, if you can remind us where you are, where your targets are, how we get there? What utilization are required market dependent versus what's in your control.

David Zinsner

Okay. We did 65% gross margins. We were in the low 30s in operating margins. Aspirationally, we would like to be in the high-60s in gross margins at a minimum and be in the high 30s in operating margins. Our utilization right now is in the 60s, so as that kind of progresses towards what is normally considered optimal levels, which is kind of the low 80s, we would expect to have gross margins that easily got into the high 50s and there are a number of initiatives that we have going on both, on the price and cost side to kind of improve that further, so I feel pretty confident that getting into the high 60s notwithstanding in sort of macro kind of headwinds, it's pretty doable for us.

On the operating margin side, obviously some of that will come from gross margins expanding, but on top of that as revenue grows, we expect to be able to manage of that rate that grows slower than revenue growth, so we should get good drop through and good leverage on the operating expense line, so I would imagine we will have much difficulty getting back into the kind of high 30s that we were in, in the prior peak.

Terence Whalen - Citigroup

Okay. Great. I think that also a pretty interesting initiative announced recently has been the decision to allocate 80% of free cash back to shareholders, just talk a little about the genesis to that decision process and how that coincided with Vincent taking over the role.

David Zinsner

Yes. I think as we step back, there are so many of the things that Vince does were very similar to what Jerry did and in a lot of ways Vince was doing the things for Jerry, so it's not a surprise, but I think the one as Vince stepped into the CEO role that he was, I won't say more interested, but certainly passionate about was kind of driving shareholder return and it was probably one of the first things when we got the job, we sat down, I want to drive that further. We sat down, obviously (Inaudible) out all the things that we could do to drive up the shareholder return and obviously one of them is in ramping up the return of free cash flow to shareholders, which we could when we have been piling cash on the balance sheet and that's certainly kind of our long-term goal, so we sat down and kind of ran these 10-year scenarios as to different levels of growth and different levels of pricing and so forth and kind of backed into what is a reasonable amount of cash flow we can return and still not screw up the cash structure we have in place and it kind of popped out this 8% number.

One of the drivers of communicating it was there's a component of it which is dividends, which is going to be routine of course to quarter hopefully over every year it goes up, but then there's this amount of the cash flow that is somewhat opportunistic. It's the repurchasing of shares and we recognized that we have this kind of algorithm for better or worse that spend time execute some quarters and other quarters it doesn't, because I felt more obligated to just give the shareholders a sense for over time, you are going to see this amount of cash coming back to you. It may not come back to you every quarter in the kind of the routine way at the 80% level, but over time if you step back and look at over a five-year period how did we do, we should be generating this 80% back to shareholders, so that was kind of the goal.

Obviously last couple of quarters, we haven't purchased shares, but I think the algorithm will kick in at some point regardless of what the stock price does and we will make sure that it averages 80% when we are all said and done.

Terence Whalen - Citigroup

What do we see you do with the additional cash that's developing then and what's the philosophical view on how that's affecting your multiple?

David Zinsner

Well, obviously, we would love to probably be more aggressive and if we had a different tax structure, we probably would be more aggressive, but given the cards even delta and given the uncertainty around how that cash under the company is in the same situation, how over time that gets handled by the U.S. and by the various tax authorities around the world drives what our plans are on that. Notwithstanding all that if probably we will accumulate a little bit offshore or obviously we have this 20% of free cash flow that continues to add to the pool. We will look for M&A opportunities.

I wouldn't say we have a giant shift in our strategy around M&A, now that Vince is a board, but we are at least looking at more opportunities and my guess is that over time we probably will be a little bit more acquisitive than we've been in the past, but still be generally around the things. You know, tuck-in kind of technology oriented acquisitions, but they will probably increase in their frequency and so that's probably where we will use some of the cash just to kind of kick up the growth rates and hopefully identify technologies that just from an ROI standpoint just wouldn't make sense to develop internally take those and kind of bolt them on and hopefully provide solutions to customers that we couldn't have done if we were just going to manage it organically.

Terence Whalen - Citigroup

What's the activity right now? I mean, did the rise in public markets create sort of outsized expectations for private companies or are you still seeing some potential feasible candidates?

David Zinsner

I think that we have our general pool of opportunities and it's really trying to take our strategy and match it up against one of those companies to identify the match. I would say it's when we do go down the path of market valuations for the most part the valuation discussions are relatively reasonable. Fortunately NOI cases when we are talking to companies, they are usually pre-IPO, and I think that the path for IPO for companies is challenged, quite honestly unless you have a real set, broad set of the customers and applications that you are dealing in, so their exit strategy has to be M&A, and in those cases we are looking sort of like take it, squeeze every last nickel out. Obviously we want to pay a good price for good value and that's basically where we are at thinking that market.

Terence Whalen - Citigroup

Okay. Terrific. We have about 12 minutes remaining, so I want to go to the audience and have them ask questions. Just wait one second, we will have the mike for you.

Question-and-Answer Session

Unidentified Analyst

David, I wanted to ask about your communications business. Would you be able to break it out between wireline and wireless based business? I mean, within wireless, are you able to talk about the various generations of wireless technology? 2G, 3G, 4G and where your revenues kind of distribute across that space and then I have a follow-up.

David Zinsner

Okay. About two-thirds of our business is wireless other third obviously is wireline. Within the wireless business, probably 80% of it is 3G or older technology, so really only 20% of our revenue right now is coming from 4G.

Unidentified Analyst

Okay. Then in the 3G space, and I guess the same question applies to 4G, but in 3G have you guys talked about what percentage of the bill of materials, I am assuming this is mostly in base stations. You guys talked about what percentage of the bill of materials is Analog based or is at least an adjustable market for Analog Devices and how that will change 4G?

David Zinsner

It's most detail we've given is that let me think about how I will describe it. I think one thing we have talked about is from 3G to 4G, we get about a 20% or 30% lift in the bill of materials, but I would tell you a lot of that has to do with radios, which makes the other your first question kind of difficult to answer because so much of our dollar content is driven off of how many radios are in the base station. Sometimes the configuration could be three radios then we have a relatively small amount of the bill of materials of a base station. In other case as you know there are 4G base stations that are being deployed with 24 radios and suddenly we actually have pretty decent percentage of the bill of materials of that base station, so it's heavily dependent on the radio count more than anything.

Terence Whalen - Citigroup

One back here.

Unidentified Analyst

Dave, a question for you, in terms of seeing the analog trends in the last few years, TI kicked it off with the acquisition of National and given that the industrial market and today if you look at the themes starting with Fairchild, they are talking about mid-single digit growth for the industry, but if you want to outpace it industrial and comps and medical markets and Maxim now making the acquisition of (Inaudible) and then sort of accelerating the IP, seem like the analog companies are gravitating towards everybody is talking about industrial, medical and automotive markets to go there.

I mean, so is there a differentiation there and if you want to really outpace the industry growth, don't you have to be a bit more aggressive on the M&A front and what you are talking about nip and tuck acquisitions or whatever it is you want to call. It seems to be bigger, larger acquisitions activating the IP in those markets seems to be the trend.

David Zinsner

Yes. Well, I mean, I guess the question of whether you are going to count the revenue that you acquired as part of your growth or your accounting.

Terence Whalen - Citigroup

No seasonality and that no cyclicality is so shallow now and they are targeting seasonality after the PCMB and the handset markets, in a telling about these getting along right now, who knows where is the bottom. First half seasonality if you want to call, seems to be industrial, automotive market kind of trend, so.

David Zinsner

Yes. I mean, I agree with you. We are going to need acquisitions. We are going to need acquisitions to accelerate the growth. I still believe though that those submarkets can grow at a rate, for example, let's take automotive. Automotive notwithstanding, may be a little bit of a low, has been growing at kind of low- double digits growth rate for the last five years in terms of dollar content for automobile. I don't see why that would change any time soon.

Now, we may need technology to kind of get us there. Maybe the dollar content increases are in areas that we couldn't do organically, so we will have to acquire that stuff, and maybe it comes along the revenue. Maybe those guys have gotten traction, maybe they have some design wins, maybe they have a couple of customers, so I would not disagree with you that acquisitions will be an important of the strategy. I just don't know that you need to go at with the sense of if I can acquire $500 million of revenue and count that as part of my 12% growth rate.

Unidentified Analyst

Just one follow-up. My point is more around along differentiationality to differentiate with Maxim and you, that's my point. If everybody is gravitating, right? I mean, that's the cracks of how you as an analog company differentiate yourself?

David Zinsner

I agree. Automotive market is going to grow very fast, but everybody is gaining and even franchise is a non-stock?

Unidentified Analyst

Yes.

David Zinsner

Well, what we have tried to do, what I think Maxim tries to do, what Linear tries to do, as we focus in the areas that we think we are competitively ahead of the game relative to the competitors, so where we think we are ahead of the game is in kind of the signal path part of the market kind of the data converter space and the combining of data converter, amps, we also have MEMS, which not a lot of the other participants or competitors within the semiconductor space have, so we use that as an opportunity to gain leverage in the space.

I mean, to take automotive for examples out there, there's a relatively fine item out of companies that actually have the resources that really can compete in that space. You have to have unbelievably high quality standard, you have to be tested about a million different ways by the automotive customers, because they want to take a risk that your part is going to cause $50,000 cars to suddenly flow back in that.

I think that there's still an opportunity to be highly differentiated and to maintain a technological advantage in a market that is growing rapidly and that competitors are clearly trying to focus in that space. I like our chances given our breadth of products and our customer position.

Unidentified Analyst

Dave, I just wanted to circle back to earlier questioning that Terrance had, which was kind of around your growth rate in that 8% to 12% target. What are you thinking about in terms of macro growth and are we in a new normal? For instance, if U.S. GDP is 2% and that's all it's going to be is even the low end of your 8% range challenged and I know you gave some other drivers, but I think industrial is like around 40% or 30%?

David Zinsner

Yes. 47% of our revenue, so obviously that's virtually half of our revenue. It's heavily dependent on world GDP. Yes. If certainly if world GDP, nominal GDP stays at 2%, we will be challenged to hit the low end of the range, there's no doubt about it.

Unidentified Analyst

Okay. Then just to follow-up separately. On ASPs, I know mix is probably a factor year-to-year, but just in general analog price pressure is different than you see in some other areas, processors et cetera, how do ASPs look to analog year-over-year? Are they down, flat, could they even be up?

David Zinsner

No. Usually, we've rebuilt an industry that has been expectation of price decline and a lot of cases, so I would say our erosion is kind of in the like low-single digits year-over-year, which it has been running at the level for years and it tends not to be influenced by cycles or seasonality it just kind of plugs along. Where it is influenced is by mix, so obviously the erosion in consumer is more significant than the erosion in comm infrastructure. Industrial generally sees almost no erosion or minor debt. Automotive will see some erosion above the corporate average, but we have maintained the level that's been remarkably stable over the course of years and years of doing this, but I wouldn't envision it getting any worst.

Unidentified Analyst

Dave, one of my last questions is, some of the work we've done is focused on the annual pattern developing in ISM and PMI indices are very strong inventory or industrial build burn cycle that's becoming almost more dramatic first half to second half. That's also caused destocking into the fourth quarter. What's your feeling looking into your fiscal first quarter this year versus a year ago and do you think this is a new seasonal structure that's developing and is this influencing customers, how they hold their own inventory?

David Zinsner

I have no idea, though I am going to speculate a little bit. I think last year, if I remember correctly, we had kind of entered the full sequestration kind of nightmare and so I think CEOs broadly were thinking time to reduce their inventories, thus the distributors also followed suite and reduced their inventories. Now, we recognized all revenue in a shipped out basis, but we certainly pay attention to what's going on in distribution and there definitely was this kind of work down.

Through the first three quarters of this year, inventory at distribution has come up although it's been relatively small, so distribution inventories were kind of in the low seven weeks, they have risen to kind of a high seven weeks, but still under eight weeks, which is kind of their normal level, so it seems like although maybe incrementally more optimistic I don't sense that distributors are feeling like think of gangbusters and I am going to like build up the ton of inventory and then kind of see how things go. I think they are kind of cautiously moving along and kind of paying a lot of attention to what's going on in terms of end consumption.

Our end customers, I can't tell you what our inventory levels are at end customers. I can tell you what their total inventory levels are, at least the 25 and those inventory levels have stayed relatively stable through this entire process. They don't seem to have worked up or increase in inventory levels. If they have, it seems like minute is like [applicable standard], so the supply chain looks relatively, I guess, maybe a little bit higher than three quarters ago, but certainly not where they have been when cycles have like turned sharply down.

Having said that, when we enter into our January quarter, what we generally see is our manufacturing shutdowns that just occurred, so it's not much about inventory levels. Yes, I guess in some sense, but it's really they are trying to manage, they got this view of how they are going to grow year-in, year-out and they know that they have a set of production days that has some quarters in which there's a lot of production days and some quarters in which there aren't as much production days. Then in the January quarter my expectations would be that we would expect to experience a little bit of a shutdown activity they normally have.

Terence Whalen - Citigroup

Sure. Okay. We are at our time limit, so thank you, Dave Zinsner, ADI, for presenting. Always a pleasure.

David Zinsner

Thanks.

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Source: Analog Devices' Management Presents at The Citi Investment Research 2013 Global Technology Conference (Transcript)
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