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Analog Devices Inc. (NASDAQ:ADI)

F1Q2014 Earnings Conference Call

February 18, 2014, 05:00 PM ET

Executives

Ali Husain - Director, Investor Relations

Vincent Roche - President and Chief Executive Officer

David Zinsner - Vice President, Finance and Chief Financial Officer

Maria Tagliaferro - Director, Corporate Communications

Analysts

Aashish Rao - Bank of America

Romit Shah - Nomura

Christopher Danely - JPMorgan

Blayne Curtis - Barclays

Ross Seymore - Deutsche Bank

Steve Smigie - Raymond James

Craig Hettenbach - Morgan Stanley

John Pitzer - Credit Suisse

Craig Ellis - B. Riley

Kulin Patel - BMO Capital Markets

Stephen Chin - UBS

Atif Malik - Citi

Stacy Rasgon - Sanford

William Stein - SunTrust

Jim Covello - Goldman Sachs

Ian Ing - MKM Partners

Doug Freedman - RBC Capital Market

Operator

Good afternoon. My name is Rachel, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices' first quarter fiscal year 2014 earnings conference call. (Operator Instructions) Mr. Husain, you may begin your conference.

Ali Husain

Thanks, Rachel, and good afternoon, everyone. This is Ali Husain, Director of Investor Relations. Thank you for joining our first quarter 2014 earnings call. With me today are Vincent Roche, ADI's President and CEO; Dave Zinsner, ADI's Vice President of Finance and CFO; and Maria Tagliaferro, Director of Corporate Communications.

During the first part of today's call, Vince and Dave will present our first quarter results and our outlook for the second quarter. The rest of call will be dedicated to Q&A.

If you missed our press release, you can find it and all related schedules on ADI's Investor Relations website at investor.analog.com. Today's conference call can also be accessed from our Investor page. And a replay of today's call will be available within two hours of the calls completion.

During today's call, we may refer to non-GAAP financial measures that have been adjusted for certain non-recurring items in order to provide investors with useful information regarding our results. We have included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in today's earnings release, which is posted on our Investor Relations' website.

Before we begin today's call, I'd like to review the Safe Harbor statement. Please note that the information we are about to discuss includes forward-looking statements intended to qualify for the Safe Harbor from liability, established by the Private Securities Litigation Reform Act. These forward-looking statements include risks and uncertainties, including but not limited to those described in our Form 10-Q filed earlier today.

Our actual results could differ materially from the forward-looking information that's provided on this call. Subsequent events and developments may cause our outlook to change and we do not undertake any obligation to update the forward-looking statements made by us today. Therefore, this conference call will include time-sensitive information that may be accurate only as of the date of the live broadcast, which is February 18, 2014.

So now, I'll turn the call over to Vincent Roche, ADI's President and CEO, for his opening remarks.

Vincent Roche

Thanks, Ali, and hello, everybody. Thanks for joining our call today. As you've seen from our press release, revenue in the first quarter was $628 million, which was down 7% from the previous quarter, but up 1% from the same period last year and at the midpoint of our guidance that we provided. Excluding the microphone product line, which we divested in the fourth quarter, first quarter revenue actually grew 5% year-over-year.

Diluted earnings per share, excluding special items, was $0.49 and slightly better than the midpoint of the guidance we provided last quarter. Overall, the first quarter of fiscal 2014 unfolded about as we had expected. We felt some order weakness around the holiday periods, when many of our customers tapered their operations. But starting in January, order rates begun to improve, led by the industrial, communications and automotive markets and we ended the quarter with a book-to-bill that was above one.

In addition, the feedback we have been getting from our largest customers suggests that they are more optimistic about their growth prospects for 2014. This feedback coupled with the strong order momentum we are thus far seeing, gives us some measure of confidence that the improved sales performance we experienced in the second half of fiscal '13 can sustain through this year 2014.

Now, turning to our performance by end-market during the first quarter. As expected, sales were flat-to-down sequentially across all our major end-markets, but were largely up on a year-over-year basis. Our all-important industrial business performed in line with expectations declining 7% sequentially, primarily as a result of fewer production days of customers in our first quarter. A number of holidays fell into our first quarter, including this year, the beginning of the Lunar New Year in Asia.

On a year-over-year basis, our industrial business grew about 3%. Now, while the macroeconomic data points are mixed lean channel inventories and increase confidence at our largest industrial customers, are both very positive signs for this more than $1 billion of highly diversified franchise going forward.

In automotive, revenue decreased in line with our expectations and this market made up 20% of our overall sales. Sales in this sector decreased 5% sequentially, as manufactures in North America and Europe took seasonal production breaks. Each of our focus applications within this sector exhibited modest sequential declines.

On a year-on-year basis, our automotive business grew 15%, which was the fourth consecutive quarter of year-over-year revenue increases, as we continue to grow in content and gain share in this market across all geographies. Also we are collaborating with innovative car brands and their tier-1 suppliers worldwide to develop smarter, more fuel-efficient vehicles, and together we are applying signal processing technology to make each generation of design better than the one before.

Revenue from communications infrastructure customers was approximately flat sequentially, but was up 11% on a year-on-year basis and represented 22% of our sales in the first quarter. This sequential revenue performance was a very good result in what is typically a seasonally weaker period for our communications business.

During the first quarter, the wireless infrastructure business was up slightly and the wireline business decreased marginally, as we had expected. Sales to our wireless infrastructure customers were driven by TD-LTE base station deployments in China and the beginning of U.S. 4G LTE network densification, which together with expected deployments in Europe and emerging regions, should benefit our communications infrastructure segment during 2014.

With the proliferation of more and more 4G-enabled devices hungry for bandwidth and running on strange networks, operators are increasing investments in LTE systems, and they are benefiting from increasing per user revenue and service differentiation. In aggregate, the industrial automotive and communications markets together made up 88% of our total sales in the first quarter.

And finally, our consumer business, which was 12% of sales in the first quarter, decreased sequentially in line with normal seasonal patterns and year-over-year, as a result of the sale of the microphone product line. Portables, digital imaging and prosumer audio/video, all declined.

So now I'll turn it over to Dave, who will take you through some of the details of our financial results, and Dave will also provide more color on our recently announced dividend increase and share buyback authorization.

David Zinsner

Thanks, Vince, and good afternoon, everyone. As Vince mentioned, revenue in the first quarter was $628 million, which was down 7% sequentially and up 1% year-over-year. Excluding the microphone business, which we divested, revenue was up 5% compared to the same period last year.

Gross margin was 65.1%, which as you know was better than our guidance. Inventory on a dollars basis, increased $6.6 million and days of inventory increased to 120 days, as distributors managed inventory in advance of the Lunar New Year and as we positioned inventory for strong sequential growth in the second quarter.

Inventory levels remain in good control. Compared to the same quarter in the prior year, first quarter 2014 inventory was lower by $17 million or 6%, and utilization in the mid-60s was higher than the low-50s utilization rate in the prior year.

Our plan for the second quarter is to increase our utilization levels to the low-to-mid 70s, which on higher expected sales should decrease our days of inventory. Inventory in distribution on a dollar basis was lower than in the prior quarter and on a week's basis was about 7.5 weeks.

During the first quarter, we recorded a $2.7 million restructuring charge, as we continue to identify opportunities and redirect resources to the areas we believe have better returns. Excluding this charge, operating expenses were $226.8 million, which was down $2.4 million from the prior quarter. Excluding special items, operating profit before tax were $182 million or 29% of sales, which was down 280 basis points from the prior quarter and up over 200 basis points from the same quarter in the prior year.

Other expense of approximately $4 million in the first quarter represents the ongoing run rate of our net interest expense at current debt levels. Our first quarter tax rate was approximately 13%, which we expect will be our tax rate for the remainder of fiscal 2014. Diluted earnings per share, excluding the restructuring charge, was $0.49 and slightly ahead of the midpoint of our earlier guidance.

Cash flow in the first quarter continue to be strong. We generated 25% of our revenue or $157 million in operating cash flow. Capital expenditures were $48 million resulting in free cash flow of $109 million or 17% of sales. Our 2014 plan is for capital spending to be approximately $170 million, of which about two-third relates to ongoing capital spend and about a-third for new facilities.

Our cash and short-term investment balance increased by about $18 million during the first quarter and now stands at approximately $4.7 billion, with approximately $1.2 billion available domestically. At the end of the first quarter, we had approximately $870 million in debt outstanding, resulting in a net cash position of $3.8 billion.

So now I want to take a moment to talk about our capital allocation strategy and reiterate our commitment to returning 80% of our free cash to shareholders. In line with our capital allocation strategy, during the quarter we repurchased 1.8 million shares or $89 million of our stock and distributed $106 million in dividends to our shareholders.

In addition, our Board of Directors approved a 9% increase in the quarterly dividend to $0.37 per share, which is payable March 11, 2014. And they also increased the authorization under our stock repurchase program to $1 billion. This capital allocation strategy coupled with strong earnings growth will continue to drive our return to shareholders higher.

And now, I'll turn the call over to Vince, who will discuss ADI's outlook for next quarter.

Vincent Roche

Thanks, Dave. Well, we started the second quarter with solid bookings momentum. We expect industrial, automotive and communications infrastructure to grow and for consumer to be about flat to the first quarter. In the industrial markets, we anticipate a seasonal increase in sales and expect all areas within industrial to grow.

After the seasonal low in the first quarter, automotive sales are expected to increase with growth coming from demand for new vehicles in North America and China, enhanced by a strengthening European market. The accelerated builder of CD LTE in China in combination with continuing 4G network densification activities in the U.S., along with anticipated improvement in the CapEx environments in Europe is expected to yield a strong second quarter for our communications infrastructure business.

Overall, we are planning for revenue to be in the range of $660 million to $680 million of approximately 5% to 8%. Gross margin should be up between 50 basis points and 100 basis points on higher utilization and a continued favorable mix. Our utilization is expected to increase in the second quarter compared to the first. It will still remain in the low-to-mid 70s, which indicates that we still have significant gross margin leverage, as sales improve in future quarters and the utilization expands. We estimate that operating expenses will grow approximately 2% sequentially, well below the sequential sales growth we expect to achieve in the second quarter.

Based on these estimates and excluding any one-time items, diluted earnings are planned to be in the range of $0.54 to $0.58 in our second quarter. So the short-term looks good and the long-term looks even brighter for ADI. Over the past several years, we have undergone a successful strategy shift, intensifying our focus on industrial automotive and communications infrastructure, while maintaining our commitment to build the world's best signal processing technologies.

Customers tell me time and again that they need ADI to help them solve of their signal processing systems challenges and cyclical and secular trends continue to improve, we are ready. We have continued to focus investments in line with our strategy. We continue to control inventory and operating expenses, and we're using our cash generation capacity to enhance total shareholder returns.

We are very excited about the future and we will continue to invest, innovate and deliver for our customers, our employees and for our shareholders. Thank you.

Ali Husain

Thank you, Vince. I'd like to remind everyone that during today's Q&A period, please limit yourself to one question, so that we can get everyone on the line. We plan to run today's call until 6:00 PM Eastern, so in case time remains at the end, we'll keep the lines open and give you an opportunity to ask another question. So with all that, operator, we can now start taking questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is from Aashish Rao from Bank of America.

Aashish Rao - Bank of America

Dave, a question on the capital allocation. I mean you've talked about getting to 80% of free cash flow churned and with the dividend increase that could account for 60% or so. Do you think the pace of buybacks will be sufficient to offset dilution from stock options at a rising share price? Any color on how we should think about thinking the win buybacks versus the dividend?

David Zinsner

So that clearly is part of a complex goal is to keep the dilution at a minimum for the options. And so I do think roughly 60% plus or minus comes from the dividend and the rest of comes from buyback that should be enough to offset the dilution. Although, it's the stock were really to ramp, obviously that might not be the case. But I don't think anybody will complain too much.

Operator

Your next question is from Romit Shah from Nomura.

Romit Shah - Nomura

Dave, just on gross margin, the guidance for April to me seems ultraconservative, just given the strong sales growth you're forecasting better utilization and better mix. Can you just walk us through what maybe some potential offsets? And then as a follow-up, Vince, I was hoping you could talk about the power management business for a second. It's still hovering around 4% to 5% of sales. I know this question comes up from time-to-time. But I'm just surprised at the size of the business, just given how complementary it is to signal path, where you guys dominate. And given that the cash balance is now approaching $5 billion, I'm wondering if you guys are considering potential acquisition to boost your presence here?

David Zinsner

On the gross margins side, the high-end of the range is clearly where everything kind of works in our favor, the mix is a little bit in our favor. Although, we expect most of our businesses to be up next quarter, so there's not a ton of like mixed differential.

But definitely we're going to crank up utilization a bit. Although, I would say, we're being a little bit conservative around cranking it up, just to make sure that we kind of guide ourselves into what potentially could be an improving situation over the rest of the year.

There is an always a chance we could beat the high-end of the range, so I'd say the conservatism for us is really around whether we take a little bit more in terms of inventory reserves in the quarter, and that would kind of mute a little bit of a benefit we get on the factory utilization side to bring it down.

But gross margin is going to be up, there's probably almost no question about that. It's probably just a matter of magnitude. And we thought that between, 50 to 100 was a pretty decent guide, and if it goes, it could potentially be better depending on how things go. And the second part of the question, I think is you, Vince.

Vincent Roche

Well, on the question of power management, so we are a very much signaled processing focus. That's the essence of ADI's business. And over the last number of years, we've been resteering our R&D into the market and the technology that we think are most important to be able to meet our growth goals and profitability goals over the long term.

So we actually have two businesses in power management. One is an area that has a lot of penetration in areas like communications and infrastructure, where we do hot swapping sequencing and so on and so forth. And we have a classical capability in linear regulation, for example, but we use that technology now primarily as a supplement to our core signal chain activities.

And also we're using the capabilities that we have in that space, in that power regulation area to enhance many of the new signal processing technologies that we're developing on very, very fine lithography process technologies. So power for us is really a core capability that we use to strengthen our signal chains and to attach to our core products.

Operator

Your next question is from Christopher Danely from JPMorgan.

Christopher Danely - JPMorgan

Probably a question for Vince, you gave some guidance by end market for this quarter. Can you just give us your thoughts on how you expect the big three end markets to trend throughout the year? And maybe add in a little commentary just on how you feel right now versus how you felt a year ago at the beginning of the year?

David Zinsner

So I think looking out, I mean there are still uncertain signs, I think when you look at many of the economic indicators. But what we know at this point in time is that we've got bookings momentum and from my own discussions with several of our customers across the globe in areas like communications, infrastructure, automotive, industrial, I'd say the sentiment generally speaking is better.

For example, industrial customers believe that is an upgrade cycle coming in manufacturing process control equipment. So I think the sentiment is certainly better. My own belief is that there is an improved CapEx cycle on its way even outside of communications and infrastructure, and that we'll see the benefit of that during the year.

But still, visibility is quite short. Leap times are short. And all we can speak with the facts that we have at our command. So my own sense is that all three of the big areas that now contribute virtually 90% of the company's revenue will see growth throughout the year as it unfolds.

Operator

Your next question is from Blayne Curtis from Barclays.

Blayne Curtis - Barclays

Maybe just from a high level, if you could talk about, it seems like from your commentary maybe comm was the strongest segment for year guide. One, just make sure if that's correct? And two, can you talk about, a lot of people noted that they saw a pickup in January in orders. I think you alluded to that you saw some TV strength in January, but just can you talk about the magnitude of the order and how you see that unfolding this year? And is that business up double-digits in April?

David Zinsner

I'll start, and Vince, probably could add some colors. I would tell you, this is the first quarter communications did surprised us to the positive. We did see momentum that we're stronger than we expected in the month of January. We do expect it to be up next quarter. Although, I'd say, all three of our kind of major focus areas within the business are all going to be up and potentially even industrial could do better, because it tends to be seasonally strong.

From an orders perspective, just in general for the company, we had pretty good momentum through the quarter outside of just three different areas where we normally have weakness. At the end of November, when we have Thanksgiving, at the end of December where we have Christmas, and then the Lunar New Year, which we start to see, but absent that we had pretty good momentum across the business.

Certainly we had it in the communications, really beginning in the month of January, and continue into February. So this is a good sign. We do think that this 4G build out in China is upon us and we're seeing some good momentum because of that. And hopefully, it's the beginning of a pretty significant increase in capacity and bandwidth across a number of different areas beyond just China.

Vincent Roche

Yes, just to add a little bit more color to what David said, the infrastructure business is notoriously lumpy. So my own sense is what we will see is during the course of the year here, a lot more CapEx being spent to rollout 4G systems on a global basis not just China.

And perhaps China, it will be the tail really of the first half of the year. And I am expecting, as the year unfolds here that we'll see the continued build out of the densification of the American 4G network as the demand for 4G devices continues to increase. And the appetite for data continues to explode here.

And Europe requires an upgrade, I think that's well-known. And again, my sense there is that as the year unfolds, Europe will start to elevate in terms of demand. And it will be very much 4G-related as well. So really good position as a company, because we've invested heavily over the past four or five years to make sure that we've got the underlying technologies to be the dominant player in the radio system.

Operator

Your next question is from Ross Seymore from Deutsche Bank.

Ross Seymore - Deutsche Bank

A bigger picture question for you. If I look at your revenues in calendar '13, excluding the consumer space, you guys grew pretty much in line with your peers, and that consumer space has been down for, I believe, three years running. I know you sold-off part of the sensor business, et cetera, but what are the strategic options for that consumer business? And do you think that's going to continue to be a headwind for overall ADI revenue growth going forward?

Vincent Roche

Well, we've made no secret of it, Ross, that we've done resteering our investments into B2B applications primarily over the last four or five years. And just given the development cycles for those particular products and those particular market categories, and the adoptions cycles, it just takes time in the B2B space. So my sense is over the next year or two years, we will start to see some significant tailwinds in terms of the product cycles in automotive, infrastructure and the industrial market.

Now, consumer is an area where we've been picking our spots very, very carefully. We have purposefully decided that there are parts of portables that are of big interest to the company in terms of bringing sensing and signal processing technology to play. And while all that's been happening, we've taken our R&D percentage five or six years ago from 40% of the entire R&D budget going to consumer to a much, much smaller number right now.

So I think what consumer has given us is very much a headwind over the last couple of years. In fact, over the last five years, we've taken about a $0.25 billion of our topline out of the consumer space. What my sense is now, the investment portfolio targeted the B2B space largely, and the spots that we've picked in consumer will stand the company in good stead. So I think the headwind that has been consumer will be behind us in the next year or thereabouts and we'll start to see the tailwind that is B2B space.

Operator

Your next question is from Steve Smigie from Raymond James.

Steve Smigie - Raymond James

I was hoping you could talk in some more detail about your MEMS business, specifically what sort of growth opportunity do you see in that? And could you break out a little bit for that growth. Is it more likely to show up in industrial versus auto?

Vincent Roche

Yes. We've built the franchise of MEMS in the company around the automotive, the airbag ignition applications. And what we're seeing more and more now is opportunity in the industrial area. So we continue to make automotive the primary consumer of R&D. But we also now have begun to diversify into healthcare and industrial applications, into things like monitoring, for example, for healthcare.

And also areas like vibration monitoring in industrial plants and equipment. So our sense is we've sequentially over the last career three or four years increased every year of the R&D spend in the MEMS business, given our confidence in that technology and its valued-ADI over the long-term.

Operator

Your next question is from Craig Hettenbach from Morgan Stanley.

Craig Hettenbach - Morgan Stanley

Vince, just following-up on the positive customer feedback. I think you had alluded to that last quarter. Can you just talk about from Q1 into Q2 has that kind of changed? Has it strengthened a bit? And any other anecdotes, given that you did say, macro is still mixed, yet it seems customers are a little more positive?

Vincent Roche

I think if you take a longer time window, I would say the second half of '13 saw a distinctly different positive sentiment, let's say, a level of positive sentiment compared to the first half and I think that continues. I think people are on the margins, our customers are more confident and their customers are more confident about the macro situation. And I think what I've seen through the second half of '13 has continued in terms of order momentum as well as positive sentiment.

Operator

Your next question is from John Pitzer from Credit Suisse.

John Pitzer - Credit Suisse

Dave, I want to go back to Romit's question just on gross margin, given that consumers' flat into April, it sounds like comms infrastructure is a little bit stronger than the midpoints and utilization going up, but your drop there is good, but it's still kind of below your average. Is there anything that I'm missing? Is the utilization benefit that you're getting in April really flowing through to July? And how should I think about incremental margins from these levels?

David Zinsner

It could. I mean, the reason it gets a little bit hedged is because we may not get the full benefit and that we may take some inventory reserves, and that could drive the margins a little bit lower. It's somewhat an anomalous moment of a little bit of a reset of the inventory levels.

And so that will happen for one quarter and then not repeat itself after that. That would be the only reason that it wouldn't hedged. I would tell you that virtually every end market, we don't have that kind of disparity of our gross margins between the different end markets. They are almost all like very high.

You think of consumer, and I know a lot of times you have a tendency to look at that as being a really low margin business. But for us because of the quality of our products and where we target them, the margins are actually very good in that space. So there is not a big mix shift like you get in other companies depending on those end markets. They're really good and they all generate high gross margins.

So mix is not quite as bigger driver for us. The bigger driver would be the utilization levels and things that we're doing to improve gross margin over time. The utilization levels, depending on whether we hit them, kind of the low end of our utilization guidance or the high end of our utilization guidance, will probably mostly determine whether we're up 50 to a 100 basis points.

Operator

Your next question is from Craig Ellis from B. Riley.

Craig Ellis - B. Riley

It's a follow-up to, John, just on the gross margin remarks that you had, Dave. When I look at the trajectory of gross margin after the guidance, relative to revenues and look back at historic peak levels, it looks like your gross margins are cracking a little bit better than revenues to get back to past peak. So as we look at that, how much of that is either intra or inter-segment mix dynamics versus any other initiatives that the company might have maybe around pricing or other factors? And where are we in those initiatives? How much is left to go?

David Zinsner

Again, mix doesn't really have a tremendous impact, maybe 20 or 30 basis points, plus or minus. I think the bigger driver of kind of the incremental benefit we're getting off gross margins this year versus last year has been a lot more disciplined around both pricing and cost.

And I think I've talked about in the past that we have a group within the company that is identifying opportunity, both on pricing cost that could incrementally improve gross margins and we've had tremendous success. I report, fairly regularly to Vince on it. And I've been really impressed with the teams' ability to find little nuggets of opportunity and get better pricing and get better cost over time.

So I think that has been a big driver. One thing that we talked a lot about, the gross margin leverage, but I think the EPS leverage is going to be really good this quarter. So I just do want to highlight the fact that we are going to get really good drop-through on the earning side and we're pretty with the performance there.

Operator

Your next question is from Kulin Patel from BMO Capital Markets.

Kulin Patel - BMO Capital Markets

This is Kulin Patel filling in for Ambrish. I had a question on your automated test equipment business. I understand that business is relatively large and pretty soft last year. How should we think about the cycle from that business as that business is ticking up in 2014?

Vincent Roche

First off, the ATE business for ADI, it is not that big. I mean, its part of our instrumentation business, which is a significant chunk of the overall industrial business, but ATE for ADI is a very lumpy business. So it modulates in terms of it's scale relative to the total, but it's a relatively small amount of business, but it has been really, over the last few years, it's all been driven by mobile products. And as the cycle of mobile products go, so will go the ATE business these days to a large extent.

So very hard to read at this point in time extremely lumpy, but there will be cycles during the year here in terms of things like obviously smartphone platforms, variable devices, and I believe those dynamics will drive ATE business. So I just want to make it clear that it isn't a very large part of ADI's business, our instrumentation business is really a very diversified group of customers in the many thousands across the globe who represent the classical long tail of ADI.

Operator

Your next question is from Stephen Chin from UBS.

Stephen Chin - UBS

Given your strong net cash position, I want to get some thoughts on the strategy of building versus buying new products, the example would be the investments in your portables market currently, at least long-term particularly related to that end market. I mean any thoughts on, if there are high quality IPs that might be out there and the asset value out there today, relative the time-to-market, because I understand investments in the frozen market may take some time to generate new revenue?

David Zinsner

I will start. I'm sure Vince has an opinion on this as well. Since I'm doing M&A I can probably just start. We do have a strategy in place to do acquisitions and actually it's been around for quite some time, actually, although I recently have started to take more responsibility over. And I think for the most part, we're looking for technologies, IP as you pointed out, that tucked-in within ADI really bringing greater value to our customers.

So it's generally are going to be very small acquisitions as they have been in the past. Although, there could be one, that's kind of a little bit larger than small over time. And that is the use of some of the cash. The rest, of course, is for funding the dividend and the buyback as well. So we're not trying to accumulate a ton of cash.

We do have a structure in place that does generate a fair amount of cash offshore, which that has to be used for things other than dividends and buybacks for the most part. So in that case, we do look for opportunities to utilize some of that cash to drive growth a little bit further and to enhance our kind of portfolio.

Operator

Your next question is from Terence Whalen from Citi.

Atif Malik - Citi

This is Atif for Terence. Within your consumer business, can you talk about what percentage of it is still DSP camera related and if those sales are still contracting or have stabilized?

David Zinsner

Camera is relatively small percentage of the total and a relatively small percentage of the consumer business. We think we're at a point where it's not in contraction mode. We've kind of leveled-off here. There's still a good opportunity for us particularly in the high performance part of the market and that's where most of our demand is today.

Operator

Your next question is from Stacy Rasgon from Sanford.

Stacy Rasgon - Sanford

Over the last few quarters, you had complained a little bit that your buyback algorithm was too conservative and that you would fix it, and obviously you're buying back a bit more stock now and you raised the authorization. So can you talk a little bit about the kind of changes that you have made to that algorithm in order to fix it? And I guess, overall your stock price today actually plays in determining the amount of the buyback in that new algorithm?

David Zinsner

Well, basically, we used pretty much our rolling average. It was a longer-term rolling average and we've created, I guess, a little bit more of a, call it maybe complex, would be the way to describe it, but different approach, where we use some longer-term and some shorter-term rolling averages, so that when it weakens, it's kind of like, had short-term weakness to it.

The buyback initiates as well. We tuned that I think in October, I believe, or some time around there or November, and this quarter we did have generally strong, but it did have these moments of weakness in it. And when it had these moments of weakness, the buyback executed.

So it's difficult to predict what will happen. Obviously, we want the stock price to go solidly up into the right. But to the extent it doesn't do that and it has some volatility to it, I think we'll do a better job or accumulate more in terms of buyback activity over time.

And we talked to the Board yesterday about that and that we thought that the buyback activity would ramp up a little bit more than it had been in the past. And by virtue of that, we felt like we needed to get the authorization backup to $1 billion as a matter of a housekeeping item. And the board was very supportive of that and agreed with our approach.

Operator

Your next question is from William Stein from SunTrust.

William Stein - SunTrust

You mentioned earlier that you had a book-to-bill book one and that some of your customers had expressed more optimism, it sounded like, and I wondered if that was concentrated in any particular end-market. And to the degree that it is the comms infrastructure end market, which is I think how it kind of came-off to me. I am wondering if you can comment on your ability to predict, forecast revenue in that end-market relative to the very short lead times that your customers have on to their customers?

Vincent Roche

Well, I think it's true to say that the book-to-bill has strength across the board, across all sectors and also our distributors, our largest distributors. I have also expressed the fact that they have seen very, very positive book-to-bills. Their orders are not so quite strong. And the largest part of our industrial business actually moves through the channel. So the strength is across the board at this point in time.

Operator

Your next is from Jim Covello from Goldman Sachs.

Jim Covello - Goldman Sachs

A follow-up to Ross' question from a while back. The question in my mind, how many more quarters -- understanding the real target is B2B and it takes a little while to kind of to get that ramped up, how many more quarters do you think that we'll see the wind down in consumers? Is there anyway to quantify that from a client basis?

Vincent Roche

I believe that during this fiscal year we're starting to bottom out in that business now. So they've said we've got an imaging business, which is beginning to find its true level. We've also got a prosumer business, which is a combination of many smaller customers buying many, many different products, which is very stable business for the company.

So my sense is the worst of the headwinds behind us and I believe during this year we'll find our kind organic level and build off that. And one thing we do have at least from a pipeline perspective, it's somewhat a matter of timing and how could those platforms take off. But we've had some very good design activity in the portable space, which is the area we are primarily focused on with good proprietary technology that we think is sustainable to multiple generations.

It's somewhat a matter of when those platforms take off and when they get introduced. Some of that might happen this year, some of that might happen next year. But I think that the momentum has certainly shifted towards one, where we're starting to focus on the growth side of the consumer story and away from the kind of contraction part of the story.

Operator

Your next question is from Ian Ing from MKM Partners.

Ian Ing - MKM Partners

For Vincent on industrial. It looks for April that segment is still going to be more than 20% below to prior peaks in 2011. So how much of the remaining recovery is going to be in this classic inventory cycle? And how is from new demand opportunities, things like equipment for manufacturing process control?

Vincent Roche

Well, I must say, I can't quantify that for you. But inventories are very lien there. So I think what we're seeing at this point in time is true demand. What we saw in 2011, of course, was a massive supply shortage and an over reaction in the market. So at least we don't have that do at this point. I believe what we're seeing is real demand. So I think the basis in which we're making our predictions is much steadier than it was two, three, four years ago.

Operator

Your next question is from Doug Freedman from RBC Capital Market.

Doug Freedman - RBC Capital Market

Could you talk to us a little bit about what you're seeing in the pricing environment out there in the marketplace right now?

Vincent Roche

I think for us pricing -- we're of course in the high performance side of the market, which has a lot more stability to it than the general analog space. And of course in the lower more general purpose oriented part of the market, they see massive ASP erosions. But I think partly because we have good proprietary technology. It's generally on the advance side, so we don't see a lot of competitors. It's generally in areas with long life cycles, so there isn't a lot of price competitions, generally lower volumes, so that also helps.

But if I can make one advertisement for my little general fair gross margin counsel, is that I do think that we have made ourselves a lot of improvements in how we approach pricing. We look at it more holistically. We have better analytics around it. We even have a budget around how we approach pricing from year-to-year. And so I think from our standpoint pricing has been amazingly stable, but it's because we've done a lone of work around both on the R&D side to develop good products and on the operational side to just execute really well on pricing.

Operator

Your next question is from Aashish Rao from Bank of America.

Aashish Rao - Bank of America

Vince, just a question on the competitive landscape in wireless infrastructure. Is TI still your primary competitor in converters for base station radios or have you seen some other vendors, any evidence of price cuts spring more design wins. But it seems like TI has that better sales growth in comms, but weaker margin. So any comments would be helpful?

Vincent Roche

I think, clearly, TI is our biggest competitor in the infrastructure space. Albeit, the approach we will take, but there is some overlap of course, but the approach we will take is quite different. We are very much radio signal processing, microwave and RF focused. And that's the area where we've been investing very heavily over a last number of years in terms of building out our capabilities.

We also have by the way a very good business with a leadership position in the optical control space, which is a space that uses again our precision portfolio. So there we have probably 50% of the market and we are growing share. And so I think what's been happening in the wireless part of the business is that share has been concentrating into the two or three big suppliers and I think that's going to continue.

Operator

Your next question is from Steve Smigie from Raymond James.

Steve Smigie - Raymond James

I was just wondering on the general DSP business, could Internet of Things potentially be a driver that gets that going to a more significant rate? And if I could just sneak a next one in, as we look at the gross margin, obviously you had pretty nice guide on revenue. And for a lot of my companies I see that gross margin benefit common subsequent quarters, the utilization benefits inventory. So it would be fair to say maybe the July quarter we could actually get some nice benefit on the gross margin side?

Vincent Roche

Well, the first one's an interesting question. I hadn't actually felt of that connection between IoT and DSP, but I believe that the Internet of Things, whatever it becomes, its many things to different people. But it's largely going to be about bringing lot's of real world phenomena into the cloud brain, so to speak, and designing data preference and building new business models around the information and intelligence.

Now, we're in a good position I think as a company to take advantage. We already play in what is emerging as the Internet of Things with industrial customers, healthcare customers, but it's really about the building blocks of sensing, very ultra-low power signal processing and communication. And those are all in need of digital signal processing, whether the processors we have are relevant to those signal processing task or not is a question. But there is a lot of digital signal processing, which leverages the skills and capabilities that we've got in this company on both analog as well as digital signal processing.

Operator

And so we have no further questions at this time.

Ali Husain

All right. So if we have no further questions, I'd like to thank everyone for joining us here tonight and keeping good time as well. Just to remind you that our second quarter FY '14 earnings call is scheduled for May 28, 2014, beginning at 5:00 PM Eastern Time. So thanks again for tuning in everyone. And have a good night.

Operator

Ladies and gentlemen, that concludes today's Analog Devices conference call. You may now disconnect.

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