National Semiconductor's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: National Semiconductor (NSM)

National Semiconductor (NSM) Q4 2011 Earnings Call June 9, 2011 4:30 PM ET

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

David Wong - Wells Fargo Securities, LLC

Craig Berger - FBR Capital Markets & Co.

Jonathan Cofsky

Deepon Nag - Macquarie Research

Venkatesh Nathamuni

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

Ross Seymore - Deutsche Bank AG

Christopher Caso - Susquehanna Financial Group, LLLP

Brendan Furlong - Miller Tabak + Co., LLC

Doug Freedman - Gleacher & Company, Inc.

Operator

Good afternoon. My name is Kristin, and I will be your conference operator today. At this time, I would like to welcome everyone to the National Semiconductor Q4 Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] At this time, I would now like to turn the call over to our host, Mr. Mark Veeh, Investor Relations Manager. Please go ahead.

Mark Veeh

Thank you, Kristin. And welcome, everyone, to National Semiconductor's Fourth 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 Q4 results, 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.

So before I turn it over to Don, I would like to remind everyone that we will be holding our special meeting of shareholders on June 21 at our headquarters in Santa Clara, California at 2:00 p.m. Pacific time to seek approval for the merger between National Semiconductor and Texas Instruments. So with that, I'd now like to turn it over to Don.

Donald Macleod

Thank you, Mark. As you know, we're in the midst of major change here at National Semiconductor as we work through the acquisition of our company by Texas Instruments. I'll give you an update on how we see that transaction progressing towards closing later. But first, let me give you an update on what we saw as the business and market trends through the just completed fourth quarter of this fiscal year.

So we entered this quarter looking for a 4% to 7% sequential revenue growth. That was $360 million to $370 million. The day following our last earnings call when we actually issued that revenue guidance, the earthquake and tsunami hit Japan. Given that typically, 8% to 10% of our sales go to customers in Japan, any other potential impact that Japan has on the global electronics food chain, we thought we had good reason to worry about achieving our revenue guidance for the quarter. These production disruptions to our customers in Japan did, in fact, add up to a revenue result for our Japan region that was 15% down on the preceding third quarter. However, we were able to more than offset this with much better business conditions in the industrial segment of our business so that we actually did achieve revenue growth for the quarter of 9% sequentially up to $374 million.

Regionally, the most visible evidence of this was in Europe where our sequential revenues were up by 20%. And by the way, Europe represented 28% of our sales in the quarter.

Globally, we serve the broad industrial segment mostly through our distribution channel. Our distribution resales, which is what pace out [ph] of our products were up 16% sequentially. Our distributors did a very good job for us in the fourth quarter. They did a good job not just in Europe but also in the Asia-Pacific region, with our resales driven mostly by China, were up 20% sequentially.

So the broad industrial segment through this distribution channel in Europe and in Asia-Pacific really were the drivers of our 9% sequential revenue growth in the quarter.

If I look at order trends through the quarter, our overall company bookings were up 21% sequentially and this is up for the first time in 3 quarters. Our book-to-bill was also above 1 for the quarter. And notably also, turns bookings were also up significantly in the quarter. Unlike our booking trends, we're back approaching more typical level.

Consistent with my comments on revenue earlier, our bookings in the Europe region were up more sequentially, but interestingly, our bookings in the Japan region were also up by about 30%. The customer base in that region now gets back to more normal business, I think, earlier and quicker than we might have expected a few months ago.

So beyond the industrial segment, which, by the way, accounted for 49% of our revenue in the quarter, we saw less favorable trends in mobile devices. Here, we saw production cutbacks from some of our more established volume customers in the consumer and enterprise segments of the mobile phone market, and this impacted our business through the quarter. Our overall revenues to the mobile device market were flat sequentially in dollars, with lower shipments to these volume customers being offset by new model ramps with Taiwanese and Chinese handset suppliers.

We do participate in some of the new smartphone tablets, but I think other than the obvious market leader in this space, we've not yet seen any critical mass from any of the various models that we supply ICs into as of yet. The mobile device segment as a whole, by the way, accounted for 21% of our business in the quarter.

In the communications infrastructure market, we did see sequential growth in our revenues of 8% in the quarter. And here, we continued to see growth in our business with the 2 largest China-based communications infrastructure companies. The earthquake and tsunami in Japan had some impact on this segment of our business in the quarter. We had some customers building more inventory than normal, and I think this was due to that Japan situation. For example, in China, as our customers prepared for the fifth bid of TD-SCDMA infrastructure and some other situations where customers have supply limitations, they pushed out some of the products and this was due to other component constraints. So the communications infrastructure segment accounted for 13% of our overall sales in the quarter. And these 3 market segments, which is industrial, mobile devices and communications infrastructure, it covered nearly 85% of our overall business this quarter.

So I began by discussing the growth in revenue from the broad industrial segment and when you really boil it down, this is really the core focus of National's capability. And an appropriate question to ask really is where we see further revenue growth opportunities in this industrial space in the future? When we look at it, one of our strongest franchises here at National is our SIMPLE SWITCHER products for industrial power supply applications. And these accounted for 13% of our revenues in the quarter as part of this overall industrial segment. Here, our sequential revenues grew by 16% in the quarter. And we actually launched 12 new SIMPLE SWITCHER integrated power modules in early April and they extend our offering of power modules up to 10 amps and enable our customers to get to market much faster with these more complete subsystems.

And of course, they're fully supported by our WEBENCH engineering online design tool which just recently was awarded by EDM magazine its Innovation of the Year Award in the software category for its new FPGA powered architect design support feature. Also, by the way, we added full Portuguese language capability to our WEBENCH engineering design tool this month, and this is to extend its reach to the growing industrial opportunity in Brazil.

Another industrial subsegment for us, the automotive marketplace. For in-car automotive entertainment and driver assist applications, we have a leadership position here with our SerDes products. And here, our revenues grew by more than 20% sequentially and 100% over the preceding year's fourth quarter. We have our products now present in volume car models with Audi, BMW, Chrysler, Daimler and Jaguar, Land Rover and Volvo. And we expect further volume increases as newer models come to market from additional U.S. and Japanese manufacturers out in the future.

Another area of growth focus for us is in energy efficiency applications, such as LED lighting and solar energy applications that use our Power Management Semiconductor intellectual property. In LED lighting, one of our focus areas here is in powering replacements for incandescent bulbs. We are increasingly present on retail shelves for dimmable LED 40-watt and 60-watt bulb replacements, some of which are on the shelf retailing for less than $20 today.

We see this as a growth area, as prices drop even further, and so do others. And you might have seen the quote in June 1 Wall Street Journal by Home Depot's Electrical Merchandising VP when he said, "I really believe LEDs will be our light source for every socket in our home in very short order here."

In the solar energy area, in early May, we launched 10 new SolarMagic integrated sockets. We now have a growing range of integrated sockets for power and energy optimization of solar panels, along with solutions that now bring safety improvement, such as arc [ph] detection and upcoming solutions for panel monitoring and remote shutdown of solar installations. Our offerings are now broadening our engagement here beyond the solar panel manufacturers now to work with inverter, microinverter and other balance of solar system providers.

And these are just examples of future revenue growth opportunities, which we at National Semiconductor have invested in and are now potentially leverageable in the future by Texas Instruments. And this is not just in isolation, but they're leverageable even more by TI in many cases where they already have complementary market and customer efforts in these same areas.

So talking more about the upcoming closure of the acquisition of our company by TI. So far, in the 10 weeks since we announced the deal, we're progressing very well towards closure. We cleared the U.S. antitrust hurdle on the 23rd of May. And as Mark said earlier, we have a special shareholder meeting set up for June 21, and this is to seek their approval for the merger. And we're also progressing well through the various international regulatory approvals, and we don't really anticipate any issues or delays. So for me, personally, this could very well be the last of my 82 quarterly earnings announcements here at National Semiconductor in my capacity either as CFO or COO or recently as CEO. So beyond these regulatory and shareholder approval processes to get closure of the acquisition of our company by TI, we're obviously deeply involved in integration planning so the 2 combined businesses can hit the ground on day one as effectively integrated as possible.

This integration planning process is going very smoothly, and we're finding our cultures are very similar, our annual focus is very complementary and our engineers are looking forward to leveraging the intellectual property in each other's toolkits. Our manufacturing facilities are pretty excited by the opportunity to increase their capacity utilization. And above all, we're both focused on enabling our much larger now combined sales force to sell the extended product offering from day one.

And TI and National who on their own, very capable analog and power management companies. I think now the combination of the 2 should be even more formidable in the future. And you now have that to look forward to. So let me hand over to Lewis and let him give you some more granularity on the business through the fourth quarter. Lewis?

Lewis Chew

Thank you, Don. Good afternoon, everyone. And as Don alluded to in his comments, there've been just a few slight changes in the situation here at National since our last earnings call on March 10. We made our announcement about the TI deal on April 4 and once everything's approved, the deal will close and National will become part of Texas Instruments. So today, my commentary will be tailored to reflect these circumstances.

I will still go over the trends that we saw on our bookings and distribution, et cetera like I normally would, and this will give you more information in order to gauge the business environment from a revenue perspective.

So with respect to the full income statement, our Q4 expense numbers and earnings per share were impacted by the transaction in process with TI, and this will continue to be the case into Q1 and through the close of the deal. And therefore, it won't be as meaningful for me to provide detailed projections of all the line items on the income statement for Q1 like I might normally would. So instead, I will make directional comments about expenses at a more aggregate level.

So let me now jump into a discussion of the bookings we saw in Q4. As we said or as Don said, total company bookings for the quarter were up 21% sequentially. We came into the quarter expecting the orders to increase, but the 21% was more than we had projected. The quarter started off with March bookings slower than planned, but April bookings surged up more than 30% over March on a weekly run rate basis. Then the order rates backed off a little by the end of May, but were still substantially above what we saw in March.

From a regional perspective, all 4 of our major geographies, and that's the Americas, Europe, Asia and Japan, had higher sequential bookings in Q4 with the highest percentage increase coming in Europe. From a channel perspective, all of our bookings improvement came from the distribution channel, as our direct OEM customer bookings in total were down for the quarter. And that OEM negative trend was driven almost entirely by a couple of large handset manufacturers, both based in cold countries, which overshadowed any increases we had from other OEM customers. Don't you just hate it when that happens? Then we also comment on turns orders, which are a subset of our total bookings, and represent those orders in which a customer asks for delivery in the same quarter that the order is placed.

Total turns orders were also up sequentially in Q4 and were a little above the high end of the range that we contemplated when we gave revenue guidance at the beginning of Q4. Turns orders were relatively slow in March, but accelerated through April and May. These short-term orders came primarily from our distributors as they saw resales of our products increase by 16% in Q4 over Q3, which was a bigger increase than we originally projected. As a result, distributor weeks of inventory went down during Q4 and ended at around 10 weeks. Last quarter, end of Q3, that figure was closer to 11 weeks of inventory.

So heading in Q1, we recognized that the bookings run rate in May eased a bit from the fast pace that they ran in April. Distributor resales will probably go down a little in the summer, and this is normal for us. And turns orders could also go down because of the summer, but we don't expect too big of a drop off. And by the end of the quarter, we should start to see the order activity pick up as customers start preparing their supply chain for the pre-holiday manufacturing ramp.

So that is my color commentary on the business trends as we see them. Because of the pending merger, we are not issuing formal guidance on revenue. Our sense is, that if we were, the number for Q1 would be in the $370 million-ish range, plus or minus a little.

So now let me move onto the rest of the financials and talk about the impact on our numbers from the TI deal. In Q4, we incurred about $14 million of expenses that were attributable to the merger agreement that we announced during the quarter. Most of this is embedded within SG&A expense. You can treat this as both a pre- and post- tax number since the vast majority of these expenses are not tax deductible. As you would expect, these expenses are largely made up of outside costs associated with the documents, the filings, more documents, more filings and oh, did I mention lawyer and banker fees? I'm sure not as much as they would want, but that's a side comment. Also at the end of Q4, our average diluted share count was 256 million shares and this is 9 million shares higher than last quarter and a large portion of that increase was triggered by a wave of option exercises that happened after the merger announcement. In accordance with the merger agreement, we could not do any stock buybacks in the quarter to offset any of the share count dilution.

So if you look at the GAAP EPS that we reported in Q4 of $0.26, embedded in that net result is about $0.05 negative impact from the deal-related expenses and another $0.01 or $0.02 negative impact from the higher share count. Heading into Q1, we will continue to have deal-related expenses as we work towards the closure of the transaction. So instead of a detailed projection of all the line items on the income statement, I'll make some directional comments instead.

Starting with gross margin. In summary, since revenue will likely be in the same ballpark as the quarter we just finished, we will expect Q1 gross margins to be pretty consistent with Q4. By the way, in Q4, we ran our fab utilization at about 57%, down slightly from Q3, so we could burn off some of our internal inventory, and we were able to do that.

Regarding operating expenses, we are proceeding on a steady course right now and not looking to add or subtract any significant number of personnel. Since headcount is the primary driver of our operating expenses, our attitude is to maintain operating expenses at a consistent level, subject to seasonal fluctuations and things like variable comp accruals, especially since we are beginning a new fiscal year with new goals and targets. Our stock compensation expenses will also be comparable.

Our weighted average share count diluted will continue to rise for the same reasons that they did in Q4, but not necessarily by the same amount. That will depend on the activity.

So let me finish up with a few comments on the balance sheet and operating metrics before I turn it over to Mark for Q&A.

In Q4, our capital expenditures were about $22 million. We brought inventory dollars down by about $6 million and ended at 96 days of inventory on hand, and that's compared against about 109 days last quarter. Our days of sales and receivables was about 20 days and that was at the very low end of our range due to the linearity of shipments through the quarter combined with strong cash collections at the end of the quarter.

Speaking of cash, we ended Q4 with a little over $1.1 billion of cash reserves, up from $900 million last quarter. Operating margin in Q4 was just about 30% and that excludes the merger-related expenses that I mentioned earlier. Return on invested capital was above 20% in Q4 and was over 22% for the year as a whole, and that would be 6 of the last 8 years in which our ROIC was 20% or better. But who's counting? So on that final note, let me now hand it over to Mark Veeh one more time to moderate the Q&A. Thank you. Mark?

Mark Veeh

Thanks, Lewis. At this time, I will ask the operator to open up the lines to begin the Q&A session. So Kristin, can we please have our first question?

Question-and-Answer Session

Operator

Your first question is from Tore Svanberg with Stifel, Nicolaus.

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

First question is for Lewis. Lewis, you mentioned maybe turns orders slowing down a little bit for this upcoming quarter. Is that purely seasonal or is there maybe some macro factors in there as well?

Lewis Chew

I think it's a combination of both, Tore. Normally, we would expect, in any typical year, turns to go down in the summer. But on top of that, we saw very strong turns this quarter, obviously enough to push us above the high end of our range and yet with very linear shipments. And so I think we're just being cautious not to expect too much in turns. I know historically, I've given guidance that says our turns is typically in the 20-ish to 30-ish percent range of our revenue and it was in that range this quarter. But heading into summer with some of the seasonality, we're just being a little cautious about whether that strength will continue. So far in the first couple of weeks of the quarter, the turns have continued to be very good, though.

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

Okay. And just as a follow-up and by end market for this coming quarter, are things going to be fairly consistent there or do you expect some markets doing better than others?

Lewis Chew

Right now, we're not making any major shifts in the end markets. Obviously, as Don said, the industrial area has been the strongest for us, and wireless has probably been, in a relative sense, the weakest. I don't expect that to change dramatically over the summer.

Operator

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

Venkatesh Nathamuni

This is Venk in for Chris. You talked about industrial end market being pretty strong, so as you look past this quarter, what is your outlook? And more importantly, is the growth coming primarily from emerging economies or is it a combination of both emerging and developed economies?

Donald Macleod

I'll take that one. If you look at our industrial business in this quarter, we really emphasized 2 areas of our -- of 2 regions of the world relative to your question. One of them was the way our business picked up so well in Europe and the other was the way our business picked up so well in Asia. And the reference point that we were using for both was what we call our distributor resales; in other words, what they sold out of our products. In the quarter that we just completed, and I think from our point of view, we saw strength from, if you want, the mature business in Europe, which really is heavily automotive and industrial and a lot of that, of course, is exported to some of the developing countries. But I think what was frankly surprising to us was the strength we also saw in Asia-Pacific in resales in the quarter, again, heavily China. I think our resales in the Asia-Pacific region were up in the region of 20% sequentially for that business. So when you look at both these 2 drivers, the question you're asking is should that change over time? And I don't see any reason to expect that, that is a one-off event in terms of that business. I mean, after all, our business there is through our distributors to thousands and actually tens of thousands of customers, very broadly in both these two markets. And we at National Semiconductor in the past few years have invested heavily in supporting our distributors and incentivizing them in a much more positive way than we have in the past to address that broad customer base. And there, as I said in my prepared comments, one of the franchises that we have that best addresses that industrial market broadly is the power management industrial business we have, our SIMPLE SWITCHER product category is one of those, where it's pretty much the go-to capability for people developing and building electronic systems that need power supplies. And that business is extremely pervasive. It's everywhere, it's very broad. And we are spending a lot of money at this point in growing the brand awareness of that capability in China, specifically. We're doing various things to incentivize. We're setting up competitions. We're working with universities. We are doing promotions, et cetera. And as we also mentioned in the call, we have some really, really good design engineering tools for customers online that we don't actually have to even talk to, to make the sale for some of these capabilities. So I think this is a good franchise. It's an enduring one. It's an industrial one so you won't see major change in a quarter-to-quarter basis, but I think the foundation there should continue.

Venkatesh Nathamuni

And then moving to the communications infrastructure end market. I know you alluded to the fifth phase of China TD-SCDMA. But with regards to LTE and 4G, what are you seeing especially as the rollout occurs in the U.S. and Europe and your participation there?

Donald Macleod

Yes, I think my comments, I mentioned that communications infrastructure, which now represented, what 13% of our sales this quarter? Our business actually grew by 8% sequentially. We're obviously dealing with a broad base of the customers in that marketplace. I specifically mentioned our progress with the 2 large China infrastructure providers, and I mention that because, again, that's been an effort over the past few years for us to penetrate and work with these customers in a way that we haven't in the past and it's beginning to bear fruit. But we do work with other customers in that marketplace and I think we saw 2 trends in the quarter beyond the trend in China. We saw strength in our business that's actually addressing cost reductions in the, if you want to call it, the existing mass infrastructure, which is versions of GSM. We saw that. And we also saw, and continued to see like everybody else, the strength of the business from some of the major European providers into the U.S. market for the next generation; you referred to it as LTE. That business has been actually pretty consistently good for us in the last, I don't know, last year. This quarter isn't unusual. I would say, though, that we did see out of the China customer base this quarter, we did see them pull in some orders for product that we did actually deliver in the fourth quarter, where they were concerned through the quarter about supply driven by the situation in Japan, and I think that business will moderate. I'm talking here about the China Infrastructure business with us. That will moderate its growth rate over the summer as that inventory gets used off and as the fifth bid [ph] gets shipped. So I think the growth rate may not be quite a strong as the 8% we saw in this last quarter.

Venkatesh Nathamuni

Okay, great.

Operator

Your next question is from Doug Freedman with Gleacher.

Doug Freedman - Gleacher & Company, Inc.

If you could spend a little time talking about what's happening in the mobile space as far as your design win, I know that was an area that you were expecting to see some pretty strong revenue growth. Could you spend a little time in talking about it? It sounds like the end market is seeing some trouble, but if you could focus more on the design progress that you're seeing there.

Donald Macleod

Yes, Doug, I think that's an appropriate question because we entered this quarter with, I would say, more optimistic expectations for this mobile device marketplace than the end result actually reflected. And to be fairly specific about what happened through the quarter is that some of the more mature larger customers, 2 in particular, over the quarter, just continued to cut back on their short-term needs, as the public information that's very obvious and visible tells everyone they're not shipping the volumes that they thought they would ship. So that clearly impacted our business. And as I said in the call, our business is actually flat in aggregate terms even though it was down with those majors who are still amongst our top tier 4 largest customers as a company. But we did offset that with growth in our business and some new designs where over the past couple of years, were focused on a couple of segments in the phone business that in the past we've chosen not to address. And those were the 2 segments that, one the Mobile Phone business that's built and designed out of Taiwan; and the second is the growing mobile phone opportunity within China itself, where we have got a number of devices on our reference design for one of the TD platform providers in the China handset marketplace. And we have begun to get some momentum with an obvious Android handset provider that is based out of Taiwan. So we're working to broaden our design base beyond the majors, the obvious names, but I think it's fair to say that some of these obvious names are clearly losing share in the overall market, and that's affecting our numbers. So we're going through that transition. And the good news is that the smaller the big guys get, the less impact it's going to have going forward. But it's been a tough slog to be quite honest about it.

Doug Freedman - Gleacher & Company, Inc.

On that front, if I could dig in on a little bit more detail, are you getting any sense out of them when, if there's going to be stabilization on the forefront, any sense if they're presently taking less product than they're selling out? Or are they themselves going through inventory adjustments? Any sense you can give us as far as what sort of outlook they're offering you guys in terms of when they expect things to stabilize or turn a corner?

Donald Macleod

Doug, the only comment I can make to you is that for the largest player in that space, we, like other suppliers, deal through what's called vendor managed inventory. So we make the product available, and they decide what they want. And there's really no room for them to build up component inventories because it's all on our books, suppliers. So I really can't comment beyond that. But clearly, it's concerning.

Operator

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

Christopher Caso - Susquehanna Financial Group, LLLP

It's been a pleasure following you over the years, if this is the last call. And I guess maybe that's my first question. I guess, is the expectation now that it looks like some of the regulatory stuff will be complete before that September timeframe at this point?

Lewis Chew

Chris, this is Lewis. We're being very careful not to make any specific comments. I think the comment that TI has made for the record is that they do expect the close to happen within what the original guidance was, which was 6 to 9 months. One of the reasons why we acknowledge realities here is that now the next quarter end is over 3 months away and we're very quick to report. Remember, we report a good week to 2 ahead of anyone else. So if you allow what even normal people would report on, that might be 4 months away. And I think you start getting into a window where a reasonable person could say that's within the range of probability. But in terms of official guidance, all we're saying right now is that we expect the deal to close within this calendar year, consistent with what TI said.

Donald Macleod

Yes, but I think it's fair to say that we passed a major hurdle which is the regulatory approval here in the U.S. from the FTC, the Hart-Scott-Rodino, and that's clearly the major one and that's behind us. So we're on the road here towards closure, and I think time will tell.

Christopher Caso - Susquehanna Financial Group, LLLP

Okay. And I guess just moving on to the commentary on bookings and I guess the non-guidance, I guess, is it fair to say that I guess some of the surge of bookings you saw in the month of April was somewhat of a reaction to the earthquake? And I guess what I'm hearing is it's come back to sort of normal levels. Is there any concern that customers have built some inventory as a result of the surge in bookings in April? Is there any kind of risk going forward that you see there?

Lewis Chew

I wouldn't characterize that as a very large risk, Chris. And in fact, I was very careful to point out that we did see the surge of bookings in April, which it's hard to tie any one reason to that. We do know that, that was accompanied by a surge in resales, so it certainly wasn't just inventory pouring into our disti partners, but going all the way to the end customer. But then, if you look at the bookings in May, even though they slowed down from April, they were still running at a pretty strong rate. In fact, if I take the May month standalone and do a quarterized book-to-bill on that, that will be running above one for the quarter that we just shipped. So but to make a comment on inventory when disti resales goes into so many thousands of customers would purely be a guess.

Christopher Caso - Susquehanna Financial Group, LLLP

All right. Then if I could just add one more. With respect to the customer reaction to the acquisition, and I know, I guess a previous question talked about some of the efforts you had in the handset space, but I think in general, you guys were focusing on gaining some share, on getting your pricing structure changed. How has that been progressing in light of the TI announcement?

Donald Macleod

I think you alluded to the handset market place, obviously, we've talked to a lot of our customers in that space. And they know both of us, they know TI, they know National pretty well. We're both companies of long standing, and we have different businesses. If you look at the handset market today, National tends to focus on really 2 capabilities: One of them is providing power in the RF work and mobile phones where we tend to have some clearly unique capabilities. And if you look going forward as we go to more and more multiband phones and that capability tends to be more and more required. And the other side of our mobile phone presence, at least in parallel [ph], is where we focus on backlighting, displays, lighting, et cetera. TI is not really a direct competitor of ours in these 2 spaces. They tend to specialize in the PMIC portion of the phone business along, of course, with OMAP and other applications, processor capabilities. So we're very complementary in those marketplaces and I think that's the way the customers view it at this point in time. I think we certainly bring to the market the uniqueness, that combined with TI, gives us even more scale in this mobile phone market. And frankly, when I look at it from National Semiconductor's point of view, the capabilities that TI provides with some new intellectual property that can be combined with what we already have and some more advanced processes and even 300-millimeter capabilities. So going forward, the business it used to be National Semiconductor under TI is going to be an even more competitive offering to the mobile phone manufacturers around the world. I think this is actually a pretty good deal from their perspective. And we've already, as you said, got efforts to reposition ourselves as a competitive supplier in that space given our prior history of price and margin focus. That reestablishment of positioning is already out there, so TI doesn't have to do that. The customers know that we're in for the business. So I think this is all good from their point of view and it's good from our point of view.

Operator

Your next question is from Stacy Rasgon with Sanford Bernstein.

Jonathan Cofsky

This is Jon Cofsky standing in for Stacy. I was wondering how the retention issues were on personnel especially now on the sales side now that the merger's been announced and you've gone through the U.S. regulatory process?

Donald Macleod

The question in more general terms about retention, actually, the key teams at National that TI will want to retain, I suspect, are the engineering teams, as you said, and on the other side, the sales team. Part of the merger agreement was that we were able to put in place retention packages for the key employees in the organization pretty broadly. And this is a fairly large sum that's clarified in the merger agreement that was mailed out with the prospectus for the shareholder meeting we have the week after next. So if I look at our engineering workforce, naturally, since the announcement, our attrition rate in that area has halved. It was not a big deal beforehand, but it's actually halved in the 10 weeks since we've announced the deal because, obviously, people have an attractive retention capability in front of them and are looking forward with some excitement to this. And of course, there are some other financial rewards such as the stock options that are going to vest on the closure here. The sales force, TI has been very clear. They want all the customer facing sales people to stay and make their very large global sales force even larger and even more formidable, and we're working through integration planning with TI and how we can make that sales force, the combined sales force, effective on our products and their products on what is publicly available at this point in time and have them run from day one with this product portfolio to the customer base that, frankly, both of us are kind of dealing with the same customers already anyway so it just gives them more to sell, broader palette of offering. So I think that is an interesting and exciting capability for our sales force, and so far, so good. We have not seen attrition in our sales force.

Jonathan Cofsky

Okay, great.

Operator

Your next question is from Brendan Furlong with Miller Tabak.

Brendan Furlong - Miller Tabak + Co., LLC

A question on the distributor resale, if you have any color on what you think the resale numbers will be for the August quarter?

Lewis Chew

Yes, Brandon, this is Lewis. Right now, in the non-guidance that I gave, we're modeling that the disti resales will ease a bit over the summer. It's not a large percentage, but normally what happens for us is we do have some slowing down in Europe, and Europe has been very strong for us. And on top of that, Europe is very distribution centric. So that all adds up to a little bit slower resales for the quarter. But we don't typically give out any sort of a percentage there, but it's not a large percentage. It's not 10% or something like that.

Brendan Furlong - Miller Tabak + Co., LLC

Excellent. And a question, a follow-up on the cell phone side. It obviously, the expectations are, that you are going to gain some traction on your cell phone here in the August and November quarters, but outside of the 2 companies that have the issue this quarter, it is -- the traction that you were hoping to get is coming to fruition?

Donald Macleod

Well, there's also, Bren, this is Don Macleod. I mean, I kind of answered that question a little bit before, but there's a seasonal trend in this mobile phone market place. And I think the real truth test of our business is the design wins that will be present in the fourth calendar quarter of this year as those get launched and gain momentum from the players in that marketplace. I think the phenomenon that affected us this quarter was purely volume driven by the customer base that we have had for a long time and is maturing, but losing share in the overall position. And the fact is that that's still a big portion of our business. And moving forward, this quarter, we were able to offset it and have a flat business. That's not what we wanted, but at least the good news is we were able to offset it by the design wins that actually started ramping up. I would expect that our business will show design win activity that reflects in the revenue that will be in the fourth calendar quarter of this year. Will that be reported by National Semiconductor in its second fiscal quarter or TI in its fourth calendar quarter, fiscal quarter? I don't know, but that's the kind of window of time of when I would expect that to be visible.

Brendan Furlong - Miller Tabak + Co., LLC

Okay. I guess my last question then is on the non-OpEx guidance for the next quarter. Is that coming -- is steady OpEx coming off of the higher base or should we back out the $14 million in acquisition costs?

Lewis Chew

Yes, the $14 million in acquisition costs, I'm not saying that, that will repeat next quarter. There will be some, but I'm giving no specific guidance on that number. It's probably not going to be as big until the deal closes because there's a big surge of activity this quarter, as you can imagine, some of which is actually publicly disclosed. Some of the nature of those expenses are in the proxy that we mailed to shareholders. But in the terms of the normal core OpEx, since we're pretty much holding headcount relatively flat combined with probably some marginal attrition as a result of the deal, we don't see any big drivers for OpEx to go up other than seasonality.

Brendan Furlong - Miller Tabak + Co., LLC

Okay, understood.

Operator

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

Craig Berger - FBR Capital Markets & Co.

I wanted to ask you about industrial demand. Apart from the potential earthquake impacts, it seems like there has been efforts to replenish inventories in the industrial supply chain over the past year. Has that been driving good news into your revenues and earnings that may subsist as customers and your customers' customers stop taking inventory to bump consumption rates? And how much magnitude might that have versus normal seasonality in the second half?

Donald Macleod

Maybe I'll take that. The one area where we did see customers pulling in products to build more inventory buffers wasn't in the industrial space. It was in our communications infrastructure business. And I think the question that you would ask relative to did we see any other areas of our business in industrial where, for example, inventory buffer for both, I would point to Lewis' comment about our distributor inventories, our distributor weeks of inventory actually came down. It was what, almost by a week in the quarter that we just went through. And you would not expect that if the buffers were being built up. If customers were building buffers up, you would expect distributors to be doing the same and that didn't happen. I would also say that one of the other reasons why our distributor weeks of inventory came down was that we had a very strong resales quarter out of distribution. And I think we said our resales were up 16% in aggregate for the quarter, sequentially for the quarter. And I would say that our distributors didn't expect going into the quarter to see that strength. So part of what we saw is turns orders in the quarter was a response to the improving resale position going through the quarter where distributors sold more product than they expected and sought from us, more immediate deliveries for products to restore their inventories on the shelf. So I think an altogether healthy situation where resales were stronger, inventories and weeks were lower and turns orders, more short-term delivery was higher during the quarter. So I think at this point, we're comfortable that we're not seeing a lot of inventory building up. And I would point out to the fact that we didn't see that in Japan because when you look at our business in Japan specifically, it was the one most affected. It was down 15% in the quarter. And by the way, we're looking for that business to come back up in the first quarter to the levels it was running at before the earthquake and tsunami. And I think we'll kind of restore that business to more normal level.

Craig Berger - FBR Capital Markets & Co.

I guess one point of clarification is, do you guys track any large -- do you track inventories of the large industrial ODMs out there at all? And I guess the follow-up question is the economic data has been pretty weak, ISM, et cetera, how much of your business do you think is driven by just broad economic trends versus how much of your business is being driven by structural content gains in handset, automobiles and industrial, et cetera? How should I think about weakening economic data affecting demand and top line with content increasing out there?

Lewis Chew

Craig, that was one hell of a long question, so let me [indiscernible] answer. On the inventory question, the answer is no. We don't track or have insight into our large OEM customer inventories. And then on the end demand/macro drivers, that's very hard to pin down, especially with so much of our business going through distribution right now, it's very diverse. So I would imagine that there are, in fact, customers at the end of that chain that are consumer driven that are driven by the macro. But then customers that are more in the industrial space may be driven more by capacity needs or even upgrades of equipment in the factory. So it's very difficult for us to say with any precision how much that affects us. The one thing you can look at is, obviously, we didn't have a huge snapback coming off of that last downturn. So we may not have as much exposure to that in the sense that there wasn't a lot of overheated selling that we were doing that you could know was due to people just stocking up on inventory. Plus, when Don was talking about inventory, he could've also mentioned that we also brought our own days of inventory down by 13 days this quarter. That's not a small number. We went from 109 to 96 in one quarter, further evidence that even it's a strong quarter, none of that ended up in inventory.

Craig Berger - FBR Capital Markets & Co.

What's the gross margin impact of that inventory decline?

Lewis Chew

Yes, the gross margin impact is probably anywhere from half a point to a point and that's because we're such a high fixed cost company that if you think about burning off $6 million of inventory in a quarter where you grew revenue, we could have had a significant improvement in our absorption rate if we had simply kept the inventory levels consistent with the revenue growth. And that probably retarded the margin anywhere from half to a point.

Operator

And your next question is from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG

A quick question on the disti side as well. You talked a lot about the days side of things for obvious reasons, but is my math right that the dollars of inventory must have risen in the channel in the fourth quarter? And if so, how much did they rise and what are your expectations for the dollars of inventory in the August quarter?

Lewis Chew

There's always some smart aleck out there who does the numbers. That's right, so the dollars of inventory in the channel did rise, but clearly didn't rise anywhere near at the rate of resales. So on the quarter that's coming up, we're looking to hold the dollars relatively flat.

Ross Seymore - Deutsche Bank AG

Got you. And then have you seen -- now that lead times have kind of come down to normal for most of your competitors, have you seen any change in the competitive landscape out there?

Donald Macleod

No, our lead times, if we look at our portfolio this point in time, lead times are at a point when if you want product off-the-shelf, it's almost available off-the-shelf. We're -- 90 plus% of our products are available within 6 weeks, and we haven't quite been as good as that in the last 2 quarters. But that's the way it is today. No, I don't think we see any trends in that. We did see in the beginning of the quarter when the earthquake and tsunami occurred in Japan, we did see customers coming scrambling in and looking for alternative parts to their other suppliers when the earthquake might have damaged some facilities. But it didn't really translate into much real demand. I think it was more inquiry driven and we found it very hard to pin down that we actually picked up any more business from those inquiries. So I think that was more of a non-event, frankly.

Ross Seymore - Deutsche Bank AG

Got you. And I guess the last question and it might be the last question for you guys forever since this is your last call. Lewis, since you're giving non-guidance, any shot you want to give us non-guidance for fiscal year '12? We'll take just revenues and gross margin, that's close enough.

Lewis Chew

Yes, that would be pretty good. No, I don't think -- obviously, we've actually constructed a plan that we're going to if, assuming that the deal closes, we're going to hand over to TI. They've been pretty openly on record about their general plan to grow above market, and I wish them all the best at that. But me, I'm not very good at guessing that far out. So I'm not going to give FY '12 non-guidance guidance.

Operator

Your next question is from David Wong with Wells Fargo.

David Wong - Wells Fargo Securities, LLC

Lewis, your non-guidance for the coming quarter of somewhat flattish revenues, would you consider that normal seasonal or slightly less with the normal seasonal? And if so, apart from the wireless handset stuff that you've mentioned, is there anything else that might be weaker than -- might be weakening in the current environment?

Lewis Chew

Yes, that's a fair question, David. I think our normal stance would be that summer should soften by anywhere from a point to 2, even though the last several years, that may or may not have happened because the cycles have been so weird. And that's purely driven by the fact that there's going to be some more holiday taken in regions where a large percentage of our sales are. As Don MacLeod said earlier, that 28% of our revenues this quarter was in Europe, and this was not a very holiday-driven quarter. So in the summer, there will be a little bit of that. Plus, you have the typical summer vacations by customers as they get ready for the build for our November quarter. So I'd say 1 to 2 points. I wouldn't say there's any particular end market that we're expecting to blow up this summer. It's mostly a seasonal effect. And then the third would be, going back to the questions asked by the previous 2 or 3 guys, it's hard for us to gauge how much of the demand right now is, in fact, due to people trying to protect themselves against supply chain. It doesn't feel like it's a lot, but there's no way you can go out there and survey that because they're so many customers. So there's probably some element of caution for that.

David Wong - Wells Fargo Securities, LLC

Great. And just one other small one. Is there any sign of the strength you saw in the quarter just passed that might have been related to the fact that there was an outstanding acquisition that might be completed soon?

Lewis Chew

We don't think so, but it would be very hard to measure that.

Operator, I think we're going to have time for one last question.

Operator

Your final question will be from the line of Shawn Webster with Macquarie.

Deepon Nag - Macquarie Research

This is Deepon for Shawn. I had a question with your Auto business. So it was extremely strong in the quarter. There's been a lot of talk about supply chain disruptions, cutting of orders in factories by customers there. What do you think happened that was different for you guys, and do you see any going forward that might change that?

Donald Macleod

The automotive business that we do primarily, the strongest part of that relates to automotive infotainment and driver assist that where we provide the communications interface products that move the information around the vehicle from the cameras, the various displays, et cetera. We didn't really see that business impacted by the Japan earthquake and tsunami in a sense that we were an alternative supplier to somebody else. And in this case, the shipments that we made in the quarter were products and capabilities that were designed in quite a long time ago. The design cycle is, as you know in automotive, are multiple year long. So there isn't capability that they can switch stuff over. I think at the more kind of ordinary product levels, let's call it the power management and other more catalog-ey products that we ship into the automotive space, we did see some of the Tier 1s, if you want, in Europe in the automotive marketplace supply chain, gaining share from Japanese Tier 1s where the automotive manufacturers had switched business over where there was more reliable supply chain out of Europe. And we did see some of that drive our business. I wouldn't say it was a big number, but we did notice it and we would [ph] expect that to continue, frankly. So I think that's the only kind of impact we saw in automotive. The automotive business is becoming increasingly more interesting for us. It's not just in the infotainment and driver assist space. We're participating in, for example, LED lighting and forward and other lights. In cars, we're participating now in some of the more sophisticated displays and display backlighting in some of the more upscale models in automotive. And we're beginning now to get some design win momentum in sophisticated charging management systems for electric vehicle battery systems. So the automotive marketplace is clearly one where the analog capabilities we have is getting more and more valued out over time. So I would see that as a big driver of our business 2, 3 and 4 years out from now.

Deepon Nag - Macquarie Research

Great. One final question would be if you could maybe get a little more granular on your European business. Would you see more strength in certain countries and more weakness in maybe in the more debt-affected countries out there?

Donald Macleod

Shawn, a general comment, as Lewis said, Europe was 28% of our business. Europe clearly was an area where we saw a lot more strength this quarter. That strength was not in the mid to OEM customer base. I think we did see a little in the communications infrastructure business. But I'm saying it was not in the mobile phone portion of our business in Europe. But net-net-net, the business grew very nicely. And if we really point to any one place, it's our broad-based distribution business in Germany and Central Europe. And when we really boil down to the capabilities, it's our catalog power management capabilities that address those very broad industrial capabilities. Again, think of power supplies, think of those very broadly. That's what drove our business. And that looks pretty good and pretty sustainable given the export nature of that economy in Central Europe and Germany.

Mark Veeh

All right. So with that, we're now going to end the call. Let me remind you that the replay will be available shortly on our website and thank you for joining our call today.

Operator

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

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