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Executives

Mark Veeh - Manager of Investor Relations

Donald Macleod - Chairman and Chief Executive Officer

Lewis Chew - Chief Financial Officer and Senior Vice President of Finance

Analysts

Shawn Webster - Macquarie Research

David Wong - Wells Fargo Securities, LLC

Craig Berger - FBR Capital Markets & Co.

Bin Jiang

James Schneider - Goldman Sachs Group Inc.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Christopher Danely - JP Morgan Chase & Co

Sumit Dhanda - Citadel Securities, LLC

Brendan Furlong - Miller Tabak & Co., LLC

Christopher Caso - Susquehanna Financial Group, LLLP

National Semiconductor (NSM) Q3 2011 Earnings Call March 10, 2011 4:30 PM ET

Operator

Good afternoon. My name is Kristin, and I'll be your conference operator today. At this time, I would like to welcome everyone to the National Semiconductor Q3 FY 2011 Conference Call. [Operator Instructions] Thank you. At this time, I would like to turn the call over to our host, Mr. Mark Veeh. Please go ahead.

Mark Veeh

Thank you, Kristin, and welcome, everyone to National Semiconductor's Third Quarter Fiscal Year 2011 Earnings Conference Call. Joining me on the call today is our Chief Executive Officer, Don Macleod; and our Chief Financial Officer, Lewis Chew. During our prepared section of this call, we will be providing details around our Q3 results, background to our Q4 outlook and some commentary around our recent market trends and business environment. At the end of our prepared comments, we will then take questions until approximately 2:30 p.m. Pacific Time.

As we begin our call, I would like to remind everyone that today's discussions will contain forward-looking statements that involve risk factors that could cause National Semiconductor's results to differ materially from management's current expectations. Please review the Safe Harbor statement contained in the press release published today, as well as our most recent SEC filing for a complete description of those risks. Also, in compliance with SEC Regulation FD, this call is being broadcast live over our Investor Relations website. For those of you who have missed the press release or would like a replay of the call, you can find it by going to National's IR website at www.national.com/invest.

With that, I would now like to turn it over to Don.

Donald Macleod

Thank you, Mark. So let me first take you through a few comments about how we saw our business trend as the quarter progressed, and then I'll talk about how we're doing in addressing some of the newer revenue growth areas we are pursuing.

So first, the third quarter and what we saw as we progress through the quarter. We came into this quarter expecting our revenues to be down and this was due to two major factors. One, we expected to ship about $25 million to $30 million less into our distribution channel that we've shipped in the prior second quarter. And this was both, to accommodate the slower resale pattern for December, January and February, which as you know, includes all the usual holidays and also to reduce channel inventories. Our actual shipments to distributors were down in the range of our expectations and distributor inventories did reduce slightly in dollars. The other major assumption that we made going into the quarter was that we'd shipped less to our mobile phone customers, as is also usually the case in this post holiday build seasonal quarter. Here, our actual shipments to mobile phone customers were, in aggregate, down sequentially by about 18% with the usual seasonal reduction. And these two factors were the drivers of our slower Q3 shipments.

The key question going forward is, how do we see the other side of this seasonality and the distributor inventory adjustment now enabling revenue growth for us going forward. Well, we're guiding our revenues for this upcoming fourth quarter to be in the range of $360 million to $370 million. The distribution channel and the mobile phone market are now both contributing to this revenue growth.

So how are we looking for growth in our distribution business in the fourth quarter? First, as a baseline, our distributor resales, that is, what they sold out of our products in Q3, well within the range of our other pre-quarter expectations. And we're now looking for 5% to 7% sequential growth in resales in the fourth quarter. We also saw improved order rates on our spiral distributors in January and again in February. Weekly order rates from our distributor channel for February, which by the way includes the lunar new year holiday, went up over 20% on the equivalent for December. As a result, we're expecting to ship $10 million to $15 million more to them in this fourth quarter over third quarter levels. At these increased shipment levels, our distribution channel will still be burning off inventory in the fourth quarter and we still have room to increase shipments to the channel over the next few quarters as we get back to equilibrium if our distributor resales continued to meet their expectations. As our distribution channel in the Americas, Asia-Pacific and Europe accounts for about 60% of our business. I thought it was worthwhile to give you this background on our assumptions leading to how these inventory adjustments work their way through our revenue numbers.

The other most significant vertical market that we address for revenue, the mobile phone market. For it, we're also projecting sequential revenue growth for this upcoming fourth quarter. Here, we're seeing new growth opportunities now contributing to our revenues going forward, in areas, for example, such as Android phones, where we now have an applications processor power management chip shipping in the new Nexus S phone. In new tablets, we have power management ICs in several of the new offerings from the well-known phone volume players and typically, we have at least the display backlight IC in these tablets. Also, in China, we have both audio and power management ICs in a major local China reference assigned that is now ramping up. These are just a few examples of new contributors to our revenue growth in this mobile phone space.

It's also worth noting that our bookings for mobile phone customers were, in aggregate, up 16% in Q3 over Q2 and they did exceed our billings. So I think we're now at an inflection point for our mobile phone business as we're now seeing both increased orders, and of course, additionally, we're working on increasing the number of new design wins for the future.

So now let me say a few words about our revenue growth initiatives beyond mobile phone applications. A number of these growth initiatives are typically aggregated under the industrial market category. For example, power management products for industrial power supplies, analog ICs for automotive applications, LED lighting applications for both general lighting and automotive, and a newer area for us, industrial sensor applications. So let me take you through these.

First, our long-standing simple switchers for industrial power supply. In February, we commenced a major branding campaign to create more demand in the China market for these products. Today, our simple switchers account for about 12% of our overall company revenues, with the overwhelming amount of that coming today from the more mature European and American marketplaces. This new campaign has many facets, including the availability of our WEBENCH online engineering design tools in Chinese, and these tools now incorporate a range of about 12,000 accompanied passive electronic components that was supplied from local Chinese suppliers with an extensive local sales distribution and support network that we've specifically created for power supply system designers in China. We also, in the quarter, made our WEBENCH engineering tool available in the Korean and Russian languages. To illustrate the uniqueness of this WEBENCH online engineering tool, in the quarter, we were nominated as a finalist in the Software category for the Best Semiconductor Product by EDM magazine. And all of this WEBENCH engineering design tool for operation [ph] enables customers to efficiently and quickly design their electronic systems, of course, with National Semiconductor silicon.

So continuing on the industrial revenue growth theme our automotive, infotainment and driver assist products again demonstrated growth this quarter. They grew 10% sequentially in the quarter and with one quarter to go of our fiscal year, we should be able to double revenues here over the preceding fiscal year. In the quarter, new models from Audi and Mercedes ramped production with our ICs and our pipeline in this very long-cycled automotive market has many design wins yet to come to production level. Another industrial application, LED lighting, is also a growth focus area for National. Like most other participants in this LED area, we saw some choppiness in the overall growth rate of this market as we went through calendar year 2010. We now have overseen new signs of growth momentum in, what is still, an emerging market. Our orders for LED applications picked up in the third quarter. Our billings in the third quarter were also up over the second quarter and we grew our backlog. We're now seeing again, orders for LED streetlight applications from China. More automotive applications are ramping up and more LED replacements for traditional incandescent bulbs are also appearing in the shelves in the U.S., in Japan and also in Germany. And from a design win perspective, in general lighting, we also have our constant current power management chips on complete products, as well as reference designs from the market leader in LED diodes. Within the industrial area, a newer revenue growth opportunity for us is in sensor applications. Here, in January, we launched a new family of configurable Sensor Analog Front Ends for chemical and broad industrial sensing applications. These products provide a hardware and software solution for sensor designers to allow them to integrate discrete sensors into monitoring and measurement systems. And of course, again, builds on our WEBENCH online engineering design tool capability. I think this highlights another facet of our application-specific analog growth focus. By the way, the very broad industrial market accounted for about 45% of our sales in the third quarter.

I'd like to now move on and make a few final comments about our progress in the communications infrastructure and networking market. It again, accounted for 13% of our overall company sales in the quarter. Revenues were down about 8% and this was mainly driven by slower shipments to China infrastructure providers, following strong shipments to them in the second quarter. Here, we expect business to pickup in the fourth quarter, and that's going to be driven by the upcoming fifth bid. And also as we begin shipping to new opportunities with European wireless space station manufacturers and these are the first fruits of our new customer engagement efforts with them. So in this communications and network area, we are also began addressing, which is new for us, applications with our 10-gig products and this is to extend the interconnect reach in data centers and data storage and in high-performance communication systems. Our new products here consume half the power and deliver twice the reach of current industry solutions. And this is enabled by a new proprietary in-house silicon germanium BiCMOS wafer fab process. It will also allow us to address new PCI express applications. And in the near future, this will enable copper communications of up to 28-gig, which was previously the domain of expensive fiber.

So in summary, we have a number of opportunities for medium-term revenue growth in this industrial and communications networking area. And this compliments our shorter-term focus which is on regaining our position in the mobile phone space. In addition, in the very short-term, with the distribution inventory correction largely behind us, the revenue growth is now in front of us as a company. Our business model, by the way, is well set up to deliver earnings leverage as our top line growth. We did a good job managing that business model through this correction. For example, with our wafer fabs below 60% utilized in the quarter, and revenue down sequentially, we still generated 66.5% of gross margin. I think we also managed our operating expense as well. If you look at our SG&A expenses for the quarter, we were down $6 million from the preceding second quarter. And by the way, they were down $18 million on last year's third quarter, as we committed. And all of this just amplifies the opportunity for us to translate additional sales right into higher earnings, as we now move beyond the distribution and customer inventory collection and a usually seasonally slower third quarter.

So now over to you, Lewis, to add some more flavor to our results.

Lewis Chew

Thanks, Don, and I know I've not told you this before but I for one, applaud the efforts to turn WEBENCH into the Chinese language. So anyway, as you've all heard by now, we are currently expecting Q4 revenues to range from $360 million to $370 million. And in percentage terms, this range represents a sequential increase of about 4% to 7% over the quarter that we just finished. And by the way, based on past years, it is most typical for our revenues to go up in Q4. So, in my comments today, I'll provide you with a little more background on what the revenue projection's based upon. Then, I'll go over the estimated gross margins and the operating expenses in Q4. I'll finish up with a brief discussion of key balance sheet items along with metrics.

So, regarding the Q4 revenue outlook, let me start by discussing the patterns we saw in our new orders during Q3 just ended. For Q3 as a whole, total company bookings were about the same as they were in Q2. Recall, that bookings for us, had gone down significantly in each of the previous two quarters earlier this year. So the fact that they leveled off from a trend perspective in Q3 is a good indicator and a signals to me that the inventory correction part of the cycle has probably turned the corner for us. We do not typically provide forward guidance on bookings, but I can imagine that the question will be asked about what we expect in Q4, at least directionally. So let me address that now by saying that we are projecting higher bookings in Q4 over Q3.

Returning to my discussion about the patterns we saw in Q3, I said that overall bookings were about the same quarter on quarter. Within the quarter, we started off with very low orders in December, followed by higher bookings in January and then again in February. And although total bookings were steady, turns orders were higher. We came into Q3 expecting turns to increase and they did, but ultimately at the lower end of our projection.

Distributor resales were down for the quarter, but fell within our range as they dealt with seasonality, as well as the inventory corrections happening throughout the supply chain. In other words, beyond just the distributor shelves themselves. In addition, shipments into our wireless handset manufacturers were at the lower end of our seasonal range.

During Q3, we reduced our distributor inventory dollars slightly, and we ended the quarter with weeks of inventory below 11. In Q4, we anticipate that distributor resales will pick back up. This should result in weeks of inventory coming down in the quarter. We also expect our sales to OEM customers to increase in Q4. Our turns orders have been lower than normal the last two quarters, as we've been working through the inventory correction along with seasonality. And when I say lower than normal, I typically am referring to what percentage of turns are to total sales. In Q4, we are projecting that turns will increase compared to Q3, and the amount of that increase will depend on the strength of end demand, along with the comfort level of inventory throughout the channel. And that includes, not only inventory at the distributors, but also at contract manufacturers and end customers. Last quarter for example, I mentioned that in Q2, we saw direct orders from contract manufacturers drop by over 35% in aggregate. But in Q3, we saw orders from that same group of customers bounce back up to where they were in Q1. And although our direct business with contract manufacturers is a relatively small percentage of the total company, their order patterns give us another read on what's happening in the supply chain and whether inventory levels are being adjusted. So in summary, these factors and trends I just discussed, along with what Don went over, are the main drivers behind our revenue outlook of $360 million to $370 million in Q4.

Let me now talk about gross margins. In Q3, we had gross margin of 66.5%. Although this is down from the 68.9% that we had in Q2, we had anticipated a drop off in gross margin as we lowered our production levels in Q3 to align with the revenue. Our fab capacity utilization in Q3, based on wafer starts, was approximately 58% compared to 68% utilization in Q2, and this was the driver of the lower gross margin in Q3. In Q4, we anticipate that gross margin will range from 66% to 67%, as we plan to maintain production levels at about where they are now and take advantage of the projected increase in revenue to burn off some internal inventory. Our inventory went up by about $2 million in Q3 and I expect that the inventory will drop by a few million in Q4. And that will depend, of course, on the revenue that we achieve. Fab utilization in Q4 will likely remain below 60%.

Regarding our restructuring activities. The charges we recorded in Q3 included a noncash write-down of approximately $6 million on assets held for sale. The last remaining process transfers and qualifications from the closed Texas plant to the factory in Maine are expected to be completed in Q4, and as such, we expect about $2 million in restructuring costs in Q4 for those activities. Regarding the closed China plant, we are currently in the middle of a transaction to sell that facility and are targeted to close on that in Q4. I'll update you on this item in the next quarter's call.

So now I'd like move on to the operating expenses. For R&D expense in the fourth quarter, I anticipate that they will range from $67 million to $70 million. I expect SG&A expenses to range from $65 million to $68 million. I would like to point out that the Q3 expenses we recorded were exceptionally low because of extra savings we achieved over the holidays, as well as adjustments to expenses for variable compensation. And some of this will not repeat in the fourth quarter. Obviously, especially the holiday stuff. The range of expenses I'm expecting for Q4 is very similar to the guidance I gave heading into Q3. And we continue to control the operating expenses pretty closely until we see more recovery in the revenues.

Stock compensation expenses, which were about $13 million in Q3 are projected to be between $12 million and $13 million in Q4, broken down approximately as follows: $2 million in cost of sales, $4 million in R&D and $7 million in SG&A. Other income and expense is estimated to be about $1 million of expense and interest expense net is expected to be around $13.5 million. And the Q4 effective income tax rate should range from 28% to 30%. With respect to the balance sheet and operating metrics, our capital expenditures in Q3 were about $32 million and I estimate that capital spending in Q4 will drop to between $20 million and $25 million. We are still working on our project to convert some capacity in the U.K. plant to aid its wafers [ph] and our long-term model for CapEx is still to run at about 5% to 6% of revenues annually. Our inventory in Q3 was up $2 million to end at $138 million and that's raw material to finish goods, both down while die bank was up.

Days of inventory on hand ended at around 109 days compared to the 102 days we had in Q2 and the days should come down in Q4. Days of receivables at the end of Q3 held steady at about 124 days versus 23 days last quarter. Cash reserves ended Q3 at approximately $900 million, up from $878 million in Q2. During Q3, we paid down a number of accrued liabilities, including a six-month interest payment and that muted our net cash generation. I think our Q4 net cash generation should be noticeably higher. Operating margin in Q3 was about 29% compared to 34% last quarter, and return on invested capital for the quarter was about 18%, and those both includes stock expenses but not restructuring charges.

So the business model continues to be a strong point. Looking at Q3 compared to last year's Q3, for example, our revenues were down about 5%, but net earnings were higher at $0.24 versus $0.22. We've kept gross margins above 66% this cycle even with utilization dropping down into the 50s. This gives me confidence that we can hold to our objective while consistently running gross margins in the mid- to high 60s, even when going through troughs in the industry cycle. But obviously, more revenue growth going forward is the key for us if we want to take full of advantage of this nice business model.

Well, thank you and let me hand it over to Mark Veeh for the Q&A session. Mark?

Mark Veeh

Thanks, Lewis. At this time, we will go ahead and open the lines for Q&A. So Kristin, can we have our first caller, please?

Question-and-Answer Session

Operator

Your first question is from the line of Brendan Furlong with Miller Tabak.

Brendan Furlong - Miller Tabak & Co., LLC

Just a couple of housekeeping. Any restructuring charges expected this quarter?

Lewis Chew

In Q4, you mean, Brendan?

Brendan Furlong - Miller Tabak & Co., LLC

Yes.

Lewis Chew

Yes, they're going to be somewhere in the $2 million range or slightly below that.

Brendan Furlong - Miller Tabak & Co., LLC

And then I guess as we return to somewhat of a growth profile here, how should we look at the OpEx on a go-forward basis?

Lewis Chew

The OpEx, right now, on a fully loaded basis are probably in the low 140s, we're running a little bit below that. I think we would expect that the operating expenses will hold relatively steady until we see more momentum in the growth.

Brendan Furlong - Miller Tabak & Co., LLC

And I guess my last question then is on the channel inventory. How much exactly did you take it down by, in the quarter? If you could give me that?

Lewis Chew

Sure. The inventory dollars went down a few million, the weeks actually climbed a little bit, but mainly driven by the mathematics of the drop in resales. But in Q4, what's currently baked into our revenue guidance is actually the inventory dollars and weeks coming down. So we'll have to see how that shakes out as the quarter goes along. Obviously, if the distis [distributors] needs inventory, we'll give it to them.

Operator

Your next question is from the line of Tore Svanberg with Stifel, Nicolaus.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

First question is on your Wireless business. How much visibility do you have into the programs where you've received those bookings? I guess, there's some fears out there that there could be a potential inventory buildup in tablets and smart phones, and if you could comment on that, that would be great.

Donald Macleod

I think two comments are relative to our mobile phone business. If we look forward, we did see -- we did enter the third quarter with a stronger backlog for our mobile phone customers than we eventually shipped. We did see some backlog move from the third quarter into the fourth quarter. And I think that was one aspect behind the sequential decline in our sales to the mobile phone business. Some of that backlog that moved was due to some of the new tablets that are being launched and announced. And I think what we're seeing is in fact, that some of these tablets are little bit leader in their production ramps than we had at least been led to anticipate by the customers as they placed their orders and forecast on us. So I think that's one factor that's in this. I think the other is that, when you look at the seasonality in our mobile phone business, I mentioned to you that our bookings in the mobile phone space were up 16% sequentially and the backlog that we have in the mobile phone space actually grew as we go into this fourth quarter. So we do have better visibility in the sense that our opening backlog is much more solid and more complete than it was 13 weeks ago and some of these new programs that we're in, in terms of the tablets, is a good example. We see them launching in the fourth quarter and thus, participating in those. So I don't think we would see inventory, we just see many, many different customers launching many, many new products at a time when I think the whole arena, in terms of form factor, is changing towards these tablets. So we're very excited about the opportunity, but it's still got to prove itself in terms of how well the individual units sell.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

That's fair enough. As a follow-up question, obviously, we're starting to track your revenue growth, especially your secular revenue growth with all your new initiatives. I mean, if you look at automotive, there would be lighting, industrial sensors and so on. I mean, how big is that business today? I mean, is it reaching 10% of revenues or any color you could add there a bit would also be great.

Donald Macleod

Our Automotive business today, Lewis, is running at about, a what?

Lewis Chew

It's probably in the neighborhood of 5% to 7%.

Donald Macleod

7% percent of the company's revenues, and the new automotive infotainment thrust, driver assist infotainment, actually represents already about 1/3 of that Automotive business, so it's come from nothing, 18 months ago, to that level today. I think the Automotive business can become a much larger segment of the company's revenues because we're not just addressing infotainment and driver assist, we're also addressing these lighting applications, whether it's headlight applications, display backlight applications and of course the traditional power management applications for shorter term revenue. So I see a lot of growth there. In longer term, one of our growth initiatives is in addressing energy efficiency solutions for electric vehicle batteries and we're working with customers on applications that are a couple of years from market. In that space for electric vehicle battery efficiency and these will add to the dimension of our Automotive business cycle overtime.

Lewis Chew

You want to comment on the LED?

Donald Macleod

LED lighting. The LED business, as I said, I think we're a little bit disappointed in calendar year 2010, on the rate of tick up, of LED solutions to the marketplace at large, and I think this year, we are beginning to see some better signs of adoption. I mentioned, we're seeing sings from China on a renewed ramp on street lighting applications, given the fact that they've now addressed these standards for reliability in China and the provinces and we're seeing much more opportunity in terms of the bulb space. So I think the LED business can be a big business. I think at this point, I wouldn't put a number on the table, but it's still running between 1% and 2% of the company, but growing at significant amounts going forward, still small, but it still -- a lot of room to grow.

Operator

Your next question is from the line of James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc.

Moving back to the handset area for a second, could you talk a little bit, in more granularity, about what you saw last quarter and what you're expecting this quarter? In terms of the mix of smart phones versus more lower-end and feature phones. And then, are you seeing any big shifts between your customers in terms of some doing much better than others?

Donald Macleod

Well there's only two dimensions to our focus on the mobile phone space. One is, in the last year or so, we've changed the way we address that marketplace. I think, frankly, we have become a lot more competitive in terms of our offerings. We've also become a lot more focused in terms of supplying system level solutions, application-specific products and more integrated solutions than we have in the past. So, the nature of that business for us has changed. If we look at the specifics of what we are shipping today, so we're still shipping products that were designed into mobile phones with our previous strategy a few years ago. So what we're tying [ph] that part of the business continues to fall off. But we're adding to that with new design wins and these new design wins, frankly have a lot better quality. I mentioned, for example, the applications that we have with power management integrated sockets in some of the Android phones. I mentioned in previous calls some of the power management solutions that we have now designed into Qualcomm reference designs, an area that we didn't focus on in the past. And a third area that I mentioned in the call today was our focus on participating in China, the reference designs I mentioned in the call today are focused on, for example, the TD-SCDMA handset market place in China where we're actually supplying both an audio subsystem for the handset and a power management integrated circuit that goes with the baseline chip, and I would say that's not an area we participated in the past. And the benefit, of course, in participating with some of these reference designs is, that these designs get adopted in volume by the players who are in front of the customer and we're seeing that happening in the case of China and we're seeing that beginning to happen with some of the Qualcomm reference designs that we have our power management devices in as well. So the nature of our business and the approach is different, and the marketplace itself is changing as you're implying your question. When we look the many tablets that are being introduced or in the process of being introduced in the marketplace, there's a lot more demand for devices that manage power, for example, to both the RF and to the phone and to the display. The display is a huge consumer of power and that dimension has changing a lot with tablets and we're enjoying the benefits of that. So I think the change is happening and the composition of the market and I think we're well placed to enjoy that.

James Schneider - Goldman Sachs Group Inc.

And then as a follow-up, could you quantify what your current assumption is for your Q4 guidance? What's incorporated in that? And then, what do you think are the one or two biggest swing factors in terms of turns or is it just distis or something else?

Lewis Chew

Jim, this is Lewis. Historically, what I've told this audience is, that a normal assumption for National, in turns, is in the neighborhood of 20%. And then when things are booming, that number can move up to 30% and when things drop off typically, when there's an inventory correction, it drops down into the low teens or maybe 10%. So we've actually seen that level of fluctuation over the last five, six quarters. In the current quarter, I would characterize it as being sort of low normal turns is what's baked into our revenue assumption.

James Schneider - Goldman Sachs Group Inc.

Got it, so low teens. And what are the biggest variables there?

Lewis Chew

No, no, no. I wouldn't say low teens, I said that our normal range would be in the 20s. So I'd say, think about a number that would be kind of in the 18%, 20% range of revenue would be what's baked into our turns.

James Schneider - Goldman Sachs Group Inc.

Just what are the biggest swing factors in terms of the variability in turns or is it distributors or something else?

Lewis Chew

Yes. The number one factor really, Jim, is the level of distributor resales we see pulling through Q4. Because as I mentioned, and Don said the same thing, we do feel very comfortable that resales will rise in Q4. At this point, obviously, we are making a projection that we don't totally control, but if those resales are strong, that would caused those turns to go up. If the resales are relatively weaker, then it would probably fall within the range. We're typically a little bit on the conservative side about our turns assumption.

Operator

Your next question is from the line of Chris Danely with JPMorgan.

Christopher Danely - JP Morgan Chase & Co

Can you just run through what the different end market exposures were during the quarter? And what was better or worse than your expectations? And then also, maybe what you expect the relative growth rates to be this quarter out of those end markets?

Donald Macleod

Maybe I should take that. The end market exposures seem to be -- largest, single identifiable end market that we address is the Mobile Solution and that's in the range of 25% of our revenues. The very gross Industrial category is about 45% and the third category, Communications Infrastructure and Network is about 13% of our revenues, and what's left after that is a whole collection of different capabilities that we don't really measure. So, the real question is, I assume, what did we see going through the quarter in terms of those segments, I would say that our mobile phone business was down 18% sequentially. I think we had expectations that it might be down a little bit less than that. But then if you go back and stand coldly and look at that number and say what you should expect from seasonality, I would just point out that the mobile phone volume market leader and their outlook for the first calendar quarter, put a range of expectations for our unit volumes of mobile phones that they would expect to ship in the first calendar quarter over the fourth calendar quarter, to be exactly in the range about the number that we had. The overall number for the quarter in terms of the mobile phone market. I would say the other markets performed the way we expected for the quarter. As we said in our commentary, the distributor resales were in the range, pretty much the number we started the quarter with. So that's kind of evolved that way we expected. Our communications infrastructure number will stand 8% and I think we were a little bit sensitive to the fact that there were some inventory that had built up in the communications infrastructure marketplace going through the end of calendar year 2010. And we expected that inventory adjustment to have impacted our business, which it did a little. So I think, at the end of the day, these three numbers, I gave you my flavor for what we expected in the quarter we just completed. Now going forward, what we look at is how our customers give us indications in backlog on the outlook for the business. And the key indication for us in the mobile phone market place is the orders and backlog that we have seen from the customers as we go through this fourth quarter. And I mentioned to you that the orders were actually up 16% in the third quarter versus the second quarter in the mobile phone market place. When we look at the customer forecasts for that fourth quarter, and I think we're pretty comfortable with growth numbers in that market place in the range of the company overall. Lewis talked about the overall projection. In the industrial space, clearly, we're looking at distribution resales and we're looking at 4%, 5%, 6%, 7% growth and there's distributor resales for what really is March, April, May over December, January, February. And by the way, a lot of that growth will be visible in the month of March, which is a big month for the quarter, for our distributors and for us and we're right there, right now. And Communications Infrastructure, we do expect to see that business also grow and there are two factors behind that in the fourth quarter, but we think most of that is market driven with a little contribution from some share gain that we have ourselves with some European providers of infrastructure equipment. Long answer to your short question, Chris.

Christopher Danely - JP Morgan Chase & Co

And then as my follow-up, so it sounds like, the share gains you guys have been talking about in wireless for a while are starting to help. Is that true? And then can you point us in any direction? Is it on Android phones? Is there any particular geography where you feel like you're gaining share?

Donald Macleod

Gaining share, I think recovering our business, is probably a better word to use at this point. I think we have passed the inflection point in that business where clearly, in recent quarters that business was falling off at a faster rate than the marketplace itself. If you ask me subjectively where I see us making progress. I think we're making progress in all applications and areas with perhaps the exception of Korea at this point, where we could do better. I think that's the way I see it. I wouldn't articulate it to Android or any other platform. I mean, at the end of the day, what we tend to supply in the mobile phone space and power management and power efficiency, it's agnostic to the standard. The reality is, as I said earlier, this space is becoming bigger, audio is becoming more complex and more sophisticated. And the RF requirements in mobile phones, more and more bands for coverage therefore, more and more need for power management in the RF portion of the mobile phones. And so, I think all of these things are kind of agnostic to the operating systems.

Operator

Your next question is from the line of Chris Caso with Susquehanna Financial.

Christopher Caso - Susquehanna Financial Group, LLLP

I wonder if you could talk a little bit about the gross margins going forward. And you've typically, as things start to recover, the utilization starts to recover, we see some drop-down on the gross margins. But I guess you guys have had a bit of a change in strategy with regard to where your gross margins are likely to be in order to accelerate some of the revenue growth. So, how do we look at that drop-through to the gross margin line as we go forward?

Lewis Chew

Chris, this is Lewis. I think until notified otherwise, you can safely assume that with our utilization below 60%, that our fall-through characteristics will be similar to what you've seen in the past. Where, if you were to imagine a significant increase in revenues, the fall-through would be anywhere from mid-70s up into the 80s, and I think we can't avoid producing those kind of goods. As you guys have seen, revenue continues to be the number one question about National and it's pretty good. No one's asked a question ASP yet. But, for example, our ASPs mark were flat for the quarter. So we're obviously not out there bombing prices. So I think you're going to see a reasonably strong good fall-through on revenue growth. Now with respect to Q4, in my prepared comments, I made careful note to point out that we're holding production levels relatively steady, so you know our revenues are expected to climb in Q4. We're going to take advantage of that to burn off some inventory. But if we were going to try to match production levels, we would probably see some fall-through on the margins, even in Q4.

Christopher Caso - Susquehanna Financial Group, LLLP

And how far will that go? In other words, you'll see that falter for a certain period of time as the gross margins increase. I guess maybe the question is, how high are you comfortable letting them get as we go into the cycle?

Lewis Chew

Well, our stated models to have margins in the mid- to high-60s, and high-60s can obviously go as high as 69-plus. I think right now, I'm comfortable saying that we would see high fall-through. Until you started to see utilization get a lot closer to fully loaded which might be more like 85%, 90%. But in the meantime, even if, for example, you take worst-case example, we accept business at lower standard margins, our incremental cost of production is so low that we will still get a high fall-through, in my opinion. But I think where I'd like to stick to, Chris, is reinforcing our model for margins as mid- to high-60s, because we do want to enable the revenue growth, which is the one big thing here at National we are trying to fix. We don't want that to be standing in our way.

Christopher Caso - Susquehanna Financial Group, LLLP

And maybe as a follow-up, since you didn't mention the pricing part of it. And perhaps maybe you could go into how you guys are approaching pricing right now and perhaps what you're seeing from competitors out there.

Donald Macleod

Yes, I should take that. Pricing, I think Mark mentioned, our ASP is pretty much flat quarter-on-quarter for the company as a whole. We obviously have a very broad portfolio of products. We have roughly 12,000 products that are shipping into the market, so our ASP is obviously an amalgam of all of that stuff. But the real dynamic for pricing is, as Lewis mentioned, we are not constrained by our cost conditions to get ourselves competitive market pricing. And we are prepared to be aggressive in these vertical markets where there's volume to regain business that we walked away from in the past. And we clearly have the luxury of being able to do that given the low cost of each incremental unit in our cost structure. So pricing in the marketplace is not an issue. We don't see ourselves in a position where we have to be dynamic on a daily basis in pricing yet, we have to change our attitude to pricing and be more aggressive on a strategic basis to address pieces of business we didn't address in the past. And we're beginning to do that, and some of the customers are beginning to see us as a different company in that sense. And I would really point to some opportunities in the mobile phone infrastructure space, where we are getting business that we didn't get in the past, because we're prepared to put the right pricing in front of the customers and be competitive. So that's a good general statement on strategy. At the end of the day, we have to have good technology and the customers have to buy that first and the pricing becomes the issue that determines whether you get it or not. And I think we're well placed on the technology side. I think we just have to work our attitude with the customers to get away from the National of the past where margin was the driver of our business, not revenue growth.

Operator

Your next question is from the line of Terence Whalen with Citi.

Bin Jiang

This is Bin speaking for Terence. We heard some Chinese distributors are pretty cautious on their inventory and they might start to lower their inventory level heading into March. So could you please comment on that and also give us some insight about distributors in other regions?

Donald Macleod

Just a general statement. I'm not sure we're seeing that. We actually did see our distributors from the Asia-Pacific region which is heavily China and Greater China, meaning Hong Kong and Taiwan, increase their orders on us in the third quarter over the preceding second quarter. So I'm not sure I see that at this point. In fact, if you look at the business attitude we're hearing from our distributors in Asia, and China is part of that obviously, since the lunar new year, we're seeing a positive attitude to the business from them and I think it sounds pretty good at this stage. I have heard some discussions about distributors in China talking about some of the low end handsets in China being an issue with volume and inventory, but we don't really play in that media tech pool and if you want to call it that, mobile phone business. So far we haven't seen that.

Lewis Chew

And regarding your question about the distributor levels by region, we don't disclose that specifically. But suffice it to say, that the Asia/Pacific regions where we have typically, our lowest weeks of inventory from a profile standpoint, clearly, single-digit numbers.

Bin Jiang

Just a follow up on inventory. Do you see a different, like a distributor behavior across different end market? For example, industrial, and communications and automotive?

Donald Macleod

Well, typically, our distributor inventory largely supports an industrial market, although it's true that in Asia/Pacific there's always going to be consumer electronics. But we do not break down our distributor inventory by end market. We tend to look at it in total.

Operator

Your next question is from Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co.

On the disti inventories, I thought you guys are supposed to burn $25 million to $30 million this quarter, in the quarter just ended. Wasn't that the plan?

Lewis Chew

Yes, we saw that in one of your reports and we couldn't call you up and say you got that nuance on. What Don said last quarter was that we would ship $25 million to $30 million less into the channel this quarter and that was driving our revenue decline. We didn't say that we would burn off $25 million to $30 million inventory, because that would be a huge percentage of our inventory.

Craig Berger - FBR Capital Markets & Co.

And then the second question I have is, one of your competitors has had quite a bit of success with sort of an über integrated handset chip. And I just wanted to understand, are you guys sort of adopting that Broadcom IP library über integration approach? If so, where? Please expand.

Donald Macleod

I'm not sure what you mean by über integration. I mean any integration is über, in the sense that you're starting off from IP building blocks the way we are. Of course, we're pursuing integration in the mobile phone market place. That was an area we did not pursue in our prior strategy. And we are prepared to be competitive and pursue integration in that space. And I think we do have the intellectual property building blocks there to provide that integration. So it's really just requires us to have a different attitude to pursue that, and we are doing that. I mean I just referred to a few examples in my discussion about the mobile phone business today, where that integration is created into customer solutions. An aggressive effort to be made to pursue reference designs in China, for example. We have an integration that is the PMIC block for the base band and then we have audio subsystems, which are two separate integrations by the way, not one at this point in time. But we saw opportunities we have and if you look, for example, at the -- I mentioned the Nexus S phone, that is an Android standard phone, we have an integration there and the PMIC that we haven't had in the past. That networks with the applications processor. So yes, we're pursuing integration and I think that's a good strategy for growth.

Craig Berger - FBR Capital Markets & Co.

Obviously, revenue growth is the big issue with National right now and investors look to buy at much higher multiples if you guys were growing more. You did over $400 million a quarter in calendar '10. What does it take to get back above that level? What does it take to get back above the prior peak revenue levels and what's the timeframe?

Donald Macleod

That's a good question and it's a good reflection on our desires internally in the company which is conceptually, to get back to that level this calendar year and we, I think, have some momentum behind us in the sense that today's revenue levels are impacted by inventory adjustments. These are pretty much working their way through. But it gives us some leverage as we go forward, as we start shipping into our industrial channel distribution. Shipping in the more -- typically reflecting the rates of resales they have. And we're not doing that today because inventories are being run down, so that gives a bit of an opportunity. The other opportunity we have is, if we look at the seasonality of our business, our second quarter of our fiscal year '12, it’s the quarter, it's really the November quarter of calendar year 2011. And we see that as a good opportunity for seasonal growth and we'd like to be back at that $400 million-type level in that window of time. I'm not making a forecast, but that's the way we're driving our internal behavior and we're looking for revenue growth projects that can help us close the gap to that level. And I think, and as Lewis talked about, when we get these incremental sales dollars, a large chunk of these fall through to the bottom line given the leverage we have. So we're with you on that one and we have the same objectives.

Craig Berger - FBR Capital Markets & Co.

Why is the distribution inventory issue seem to be hitting National harder than other competitors? I know we just don't hear that much about it, even from other sell-in companies further down the value chain?

Lewis Chew

That's a question we get a lot and I think the first and most obvious answer is that, as far as we can tell, and Mark and I look at this, we just have a lot larger exposure to the distribution channel as a percent of our sales. It's over 60%. And we've long been known for being very strong in the channel. And it's pretty clear that in FY ‘10, when you look at some of those growth rates, there were some whipsawing going on with that. It affected us more than others and we have to live with that going forward. But certainly, that's a great channel for us to sell our products. So we're not apologetic about that. I think that's the first and largest answer to that.

Donald Macleod

Okay, I would add that, that 60% number is when we refer to our distributors in the Americas, in Europe and Asia/Pacific, excluding Japan. Because our business in Japan is kind of a hybrid business where we ship everything through distributors that call themselves data10 to lower that business' logistics business for the major Japanese OEMs. So, if you really wanted to interpret the business broadly, you could add another 9%, 10% of our revenue which is our Japan business to that number. So when you compare us with others, you're looking at a company on an apples-and-apples basis, where nearly 70% of our business goes through the channel. We tend not to count the Japanese portion because of the area there is different from the classical demand, creation, distributor and design industry which we have a U.S. and Europe, and now increasingly in Southeast Asia.

Lewis Chew

And so in some cases, Craig, that could be literally double somebody else's exposure.

Craig Berger - FBR Capital Markets & Co.

How much is auto of the industrial group?

Lewis Chew

Well, Auto, for the whole company as we said, although we don't break that out separately, it's pretty commonly known that it's in the neighborhood of 5% to 7% of the company.

Operator

Your next question is from the line of David Wong with Wells Fargo.

David Wong - Wells Fargo Securities, LLC

A clarification on the bookings. Your book-to-bill I think was less than one for the February quarter, you'd said. But you're seeing increasing bookings. Do you expect book-to-bill will be above one in the May quarter?

Lewis Chew

David, we'll have to wait and see. Because we typically don't like to make a specific projection on bookings for the quarter. All I said was that I think that bookings will be up in the quarter, so we'll have to wait until the end of the quarter and see if it's above 1.0.

David Wong - Wells Fargo Securities, LLC

And then another quick one, following up from the earlier question on handsets. Do you have an interest in regaining share in mid-range and low-end phones? And if so, are you seeing revenue ramping in these types of products here?

Donald Macleod

No, that's a broad brush statement to say mid-range in low-end phones. We, in the past, we have participated very little in the low-end mobile phone space. Clearly, there's not quite the same room to differentiate the -- if you want the human interface features in low-end phones, when I talk about the human interface, it's the most sophisticated displays, the most sophisticated audio, and these other kind of analog functions. So we haven't really participated in that space in the past. And I would say that we're generally not that interested in participating in that space in the future, because really, again, when you see that analog differentiation tends to be in the smart phones, the tablets or pads and the, what I've called the future phones. So that's the area we want to focus on.

Operator

Your next question is from the line of Shawn Webster with Macquarie.

Shawn Webster - Macquarie Research

In terms of the China business. How big is China for you guys today?

Lewis Chew

We don't break out China separately. Asia-Pacific is around 45%, 50% of the company. And I'd say, as a swag, China would be in the neighborhood of half of that, maybe not quite, but we don't track that as a separate region.

Shawn Webster - Macquarie Research

And how big is optical com for you guys? Optical com infrastructure?

Donald Macleod

I'm not aware of that. I've never heard that expression in our company.

Shawn Webster - Macquarie Research

The next one is, in terms of the smart phone builds, given your exposure there. How would you characterize it? Based on your experience, what you're seeing now? Would you describe the design activity as normal for this kind of year? Above normal? Less than normal?

Donald Macleod

Well, that's again, a very general question. I mean, from my personal perspective, I see lots of our mobile phones and other customers focused on this tablet or web pad-type marketplace. We see a lot of new people participating in attempting to supply that market. That's a whole new phenomenon that's just come over in the last six months and we're seeing ourselves participate in that. So I think that's a new layer and if your question where is that going to displace at the end of the day, is it going to displace our booking fees [ph] or is it going displace smart phones? I really don't know the answer to that. We see more of these tablets or pads in the marketplace and we'll see how they succeed.

Shawn Webster - Macquarie Research

And then the final one is, so your days of inventory are a little below 11, do you have a target level of inventories or what historically would be normal for you guys?

Lewis Chew

Yes. I'd say, as an equilibrium point, probably in the neighborhood of 10-ish weeks is probably the equilibrium. I mean, the target used to be a little higher than that, but I think distributors have learned to run on leaner inventories in the last couple of years.

Operator

Your final question will come from the line of Sumit Dhanda with Citadel Securities.

Sumit Dhanda - Citadel Securities, LLC

A couple of questions. Lewis, a clarification on the expected pickup in bookings in Q4. Is it just the favorable comparison, given that December was a low bookings month? Or do you expect a pickup in the run rate as you exited last quarter?

Lewis Chew

It's probably a combination of both, Sumit. I mean, obviously, you can't escape the fact that December was a low booking month for us. But I would also say in the quarter before that, September was a low booking month. So some of it is a seasonal pickup.

Sumit Dhanda - Citadel Securities, LLC

And then just your last comment on distributor inventories, normally running around 10 weeks. My recollection is, that it used to run more closer to this high single digits. And I guess where I was going with this was, given that you're running just under 11-week, is the possibility that you have a hick up higher? Given that you are anticipating resales to pick up in the May quarter and that's not been a source of strength the last two quarters?

Lewis Chew

Yes, I think I want to point out though, Sumit, that you're catching me at the trough computation. Because, remember what I said, we actually brought inventory dollars down this quarter, but the math is affected by the lowest point I would have in a year on resales. So when you calculate weeks, which is backwards looking, I am getting no benefit from resale because this was a particularly low resales quarter for us. If I were to calculate the same inventory weeks for the upcoming quarter, the weeks would drop noticeably. So I think you want to be careful of picking any one quarter to hone in on a number. I think we feel very comfortable with our inventory levels right now. In fact, we actually kind of here distis starting to once again wonder whether or not they should stop burning inventories and when they start to grow. We'll wait and see on that. I think that's probably the most insightful comment I can give you. But remember, the Q3 weeks computation use it as a denominator, the Q3 resales which is our low point from a seasonality standpoint.

Sumit Dhanda - Citadel Securities, LLC

Just one last question. I think, Don, on the last call, there was a question that was asked about your guidance versus certain peers. And I think your comment had been, the others hadn't seen the same month in terms of revenue shipment that you had and hence your weaker guidance. But it seems like you're down 17% from the peak as of the last quarter. Other analog companies haven't come close, should we expect them see more of a correction? Or it just what Lewis talked about, in terms of the extent of the product going to distribution that is a factor and that's sort of the explanation?

Lewis Chew

Yes, actually, I think you almost answered it with the last part of your question, there, Sumit, is I think to do a better analysis of that on your different companies that you're analyzing, take a look at how much of their revenue goes through distribution. Because I think distribution is the variable here. As Don mentioned, what we saw in wireless, which is our biggest vertical market, was pretty much seasonal. But the disti impact is bigger for us in others and then also then, factor in how many people are sell-in versus sell-through. But that's the bulk of the answer to your question.

Mark Veeh

All right. So with that, I'd like to thank everyone for tuning in to our third quarter earnings results and we'd like to wish everybody a happy day.

Operator

Thank you, this does conclude today's conference call. You may now disconnect.

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