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Linear Technology (NASDAQ:LLTC)

Q1 2012 Earnings Call

October 19, 2011 11:30 am ET

Executives

Paul Coghlan - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance and Secretary

Robert H. Swanson - Co-Founder and Executive Chairman

Lothar Maier - Chief Executive Officer and Director

Analysts

Emily Scudder

Venkatesh Nathamuni - JP Morgan Chase & Co, Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

John Pitzer - Crédit Suisse AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Deepon Nag - Macquarie Research

C.J. Muse - Lehman Brothers

Craig A. Ellis - Caris & Company, Inc., Research Division

Uche X. Orji - UBS Investment Bank, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

JoAnne Feeney - Longbow Research LLC

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

Operator

Good day, everyone, and welcome to the Linear Technology Corporation Fiscal 2012 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead.

Paul Coghlan

Hello. Good morning. Welcome to the Linear Technology conference call. I'm joined this morning by Bob Swanson, our Executive Chairman; and Lothar Maier, our CEO. We're conducting this conference call from our facility in Singapore where as we speak, it's actually 11:30 at night. I will give you a brief overview of our recently completed first quarter and then address the current business climate. We'll then open up the conference call to questions to be directed at Bob, Lothar and myself.

I trust you've all seen copies of our press release, which was published last night. First, however, I'd like to remind you that except for historical information, the matters we will be describing this morning will be forward-looking statements that are dependent on certain risks and uncertainties including such factors, among others, as new orders received and shipped during the quarter, the timely introduction of new processes and products and general conditions in the world economy and financial markets.

In addition to these risks, which we described in our press release issued yesterday, we refer you to the risk factors listed in the company's Form 10-K for the year ended July 3, 2011, particularly management discussion and analysis of financial condition and results of operations.

Secondly, SEC Regulation FD regarding selective disclosure influences our interaction with investors. We've opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our forum to respond to questions regarding our estimated financial performance going forward.

Consequently, should you have any questions regarding our estimates of sales and profits or other financial matters for the upcoming quarter, as well as how they might impact our income statement model and our balance sheet, this is the time we're free to respond to those questions.

As you can tell from our press release, we're in a difficult business environment. We reported revenue results for the quarter within our guidance but at the low end. Going into the quarter, we expected momentum to pick up, however, it did not. Bookings were flat in July and August and picked up somewhat in September. That is generally expected in a summer quarter. Customers continue to be very cautious and are concerned over general global macroeconomic conditions. We acknowledge in-demand opportunities that are in the wait-and-see mode, and running tight inventories in order to the low end of our lead times. Activity is quiet. We don't see many cancellations, pull-ins, nor pushouts. Our bookings are down from the prior quarter, and we continue to have a negative book-to-bill ratio at a similar level to recent quarters.

One bright spot is the automotive sector where we are experiencing good growth. Sales decreased by 8%. Gross margin decreased from 78% to 75.8%. We had shutdowns in all of our factories, and this adversely impacted absorption. ASP dropped modestly from $1.87 to $1.78, generally resulting from higher automotive content. Operating expenses decreased 4.5% or $4.4 million as we curtailed some variable spending, particularly in the profit-sharing area. Operating income at 47.8% was in the high 40s as a percent of sales, having been impacted mostly by the decrease in sales and the reduction in factory absorption.

Below the line, interest expense was unchanged while interest income and other income decreased $2.7 million, as a onetime gain last quarter on a lawsuit settlement did not repeat. Finally, income taxes increased as we had no discrete tax items this quarter, whereas we had a significant nonrecurring item last quarter, resulting from the finalization of the settlement with the IRS on previously opened tax years.

Resulting net income of $108,401,000 is a 33% return on sales, although down from last quarter still a very strong result. Headcount decreased by 2%, largely due to decreases in direct labor at our overseas manufacturing plants.

In summary, the effect of the items I just listed on the published quarterly results of that revenue was $329.9 million for the first quarter of fiscal 2012 compared to the previous quarter's revenue of $358.6 million and $388.6 million reported in the first quarter of fiscal year 2011.

GAAP diluted earnings per share of $0.47 decreased $0.21 from the previous quarter's EPS, of which $0.11 was due to a discrete tax benefit last quarter. And EPS decreased $0.12 from the $0.59 per share reported in the first quarter of fiscal 2011.

GAAP net income was $108.4 million, compared with $158.2 million last quarter and $137.3 million recorded in the first quarter of last year. EPS would be $0.53 on a pro forma basis, which excludes the impact of stock option accounting and the amortization of debt discount, which is the theoretical difference between the company's convertible debt, actual interest and the interest it would potentially have had to pay if it had used straight bank debt.

During the June quarter, the company's cash and short-term investments balance increased by $45.1 million to $967.7 million, net of spending $25.2 million to purchase 885,000 shares of its common stock. The company announced that it would again pay a quarterly dividend of $0.24 per share. This current dividend will be paid on November 30 to stockholders of record on November 18.

Looking ahead to the December quarter, we do not expect any initial improvement in the global macroeconomic environment. In the U.S.A., Congress faces a significant milestone in late November in addressing stagnant growth and rising debt. Europe also needs to face sovereign debt issues in its economic community this quarter. China's growth is slowing, but still positive overall and positive for us. Japan is doing reasonably well as it continues to recover from its earthquake disaster. The automotive area is strong for us and should continue to help us going forward. If the governments in the U.S.A. and Europe take actions that improve business confidence, product demand could improve in early calendar 2012.

However, we are cautious and we expect many of our customers, particularly in the industrial and communications end markets, to have year-end shutdowns and thereby delay inventory procurement into the new year. Accordingly, we expect another difficult quarter of declining revenues and earnings, with the revenues down 9% to 13% sequentially in this upcoming second quarter.

As is our custom during these difficult business cycles, the company will take the necessary measures to curtail spending and limit the impact of lower revenues and profitability. We expect operating income as a percent of sales to be in the mid to low 40% range depending on sales. As we have demonstrated in other periods of economic uncertainty, at these levels we expect to maintain industry-leading profitability.

We continue to be optimistic about our long-term growth prospects, and we are encouraged by the high level of interest in our products that indicate they are well targeted to meet the needs of our customers and their demand for innovative high-performance analog solutions.

Now I would like to address the quarter's results on a line-by-line basis. Starting with bookings. Bookings decreased this quarter over last quarter and did not gain the momentum we had expected. The modest improvement in September was generally seasonally related. We again had a negative book-to-bill ratio similar to recent quarters. Geographically, bookings were down in the U.S.A. both in OEM and in the distribution channel, and were down also in Europe and Asia-Pacific but were up slightly in Japan.

By end market, bookings in absolute dollars were down in most areas, relatively flat in computer and up nicely in automotive. At this time every quarter, we give you a breakdown of our bookings percentages by end markets to give you insight into those markets that drive our business. Industrial and communications continue to be our largest areas. Industrial was 41% of our bookings, down from 43%. Our industrial business is very broad-based, both geographically and by end products. The communications area also decreased, going from 23% last quarter to 22% this quarter. Within the infrastructure area, we continue to be well positioned in customers involved in the global base station buildout. Cellphone remained at roughly 1% of our business.

Computer was flat at 11% quarter-to-quarter. Within Computer, we serviced opportunities in notebooks, desktops, tablets, servers, storage devices and printing and imaging end products. The automotive end market increased significantly from 12% to 16% of our business. We saw a strength in each geographical area: Japan, Europe, U.S.A. and the rest of Asia. Recovery from the Japanese earthquake was one of the positive contributors in this area. Expansion of existing Linear parts to new car models, and also new parts for new programs, especially in the hybrid and electrical vehicle area, continue to help us. Automotive is an area that we've been focusing on, even the increasing electronic content in automobiles. Our battery monitoring products, hybrid and electric vehicles are achieving expanding market acceptance. In addition, we continue to distinguish Linear as a high-quality supplier in important international automotive manufacturers.

The consumer area at 3% of bookings was down from 4% last quarter. Finally, the military, space and harsh environments products at 7% of our business was also unchanged as a percent, but down in absolute dollars. The U.S.A. and Europe are the predominant geographic areas for this business.

In summary, we have largely completed our transition over the last several years into the more traditional analog businesses and less into purely consumer-related end markets. Consumer and cellphone products now comprise less than 5% of our business.

Note that we have a good balance of where our bookings are actually created, with 42% of them created in the U.S.A. and 58% internationally, similar to last quarter.

Moving from bookings to sales. Net sales decreased 8% from the prior quarter while decreasing 15% from the similar quarter in the prior year. Sales decreased in all major geographic areas. In summary, the U.S.A. at 29% of sales was up 1% from the prior quarter, and Europe at 20% of sales was down by 2 percentage points, which is not unusual for a summer quarter. Japan at 15% was up 1%, largely reflective of strength in the automotive area. And finally, Asia Pacific at 35% of sales remained unchanged.

Gross margin. Gross margin at 75.8% of sales declined from 78% in the previous quarter. In response to declining sales, the factories' average 1-week shutdowns in the quarter has led to absorbing factory costs over lower production volume. ASP declined from $1.87 to $1.78, largely due to higher automotive and lower industrial sales. These cost increases were only partially offset by lower profit sharing costs.

Operating expenses. R&D at $54.9 million decreased $1.1 million from the $56 million reported last quarter. However, it increased as a percent of sales, 16.6% from 15.6% due to lower sales volume. Labor costs decreased, primarily due to lower profit-sharing and stock compensation charges. These reductions were partially offset by increased mass costs.

SG&A. Selling, general and administrative expense at $37.7 million decreased by $3.3 million, while at 11.4% remained the same as a percent of sales due to lower sales volume. Labor costs decreased largely due to reduced profit sharing and stock compensation charges. In addition, there were modestly lower legal and commission costs.

Operating income. As a result of the above, operating income decreased by $25.1 million or 14%, and as a percent of sales decreased to 47.8% from 50.9% last quarter. Operating fixed costs over reduced sales base largely contributed to the decline. However, this is still strong profitability and clearly puts us ahead of our peers in this financial performance measurement. Both interest expense at $7 million and the amortization of debt discount at $4.9 million were similar to last quarter. Interest income of $1.2 million decreased by $2.7 million. $2.5 million of this decrease in interest income was due to the resolution of an outstanding lawsuit, which had benefited the company by $2.5 million. Pure interest income alone decreased by $200,000 as the effect of increased cash under investment on interest income was offset by a decrease in the average interest rates on all invested funds. As a result of the above, the company's pretax profits were $147 million, down $27.9 million from last quarter. Pretax profits are now 44.6% of sales versus 48.8% last quarter with the reduction due primarily to the lower sales volume.

For the first quarter, our quarterly effective income tax rate was 26.25% and we had no discrete items. Last quarter, our recurring effective tax rate was 26.5%, but this was largely offset by a 17 point positive discrete tax item due to finalizing settlements with the IRS related to the audit of several prior fiscal years. Absent discrete tax items, our annual effective tax rate for the rest of fiscal year '12 is currently estimated to remain at 26.25%. Changes in U.S. legislation relative to taxes could impact us going forward.

The resulting net income of $108.4 million is a decrease of $49.8 million from the previous quarter. $22 million of which related to higher taxes, and the remaining $27.8 million due to decreased revenue. The resulting return on sales was 32.9%, down from a heavily tax impacted 44.1% last quarter.

The average shares outstanding used in the calculation of earnings per share decreased by 613,000 shares. This quarter, the company purchased 885,000 shares of stock or $25.2 million after having purchased 500,000 shares in the previous quarter. GAAP earnings per share was $0.47, which was a decrease of $0.21 from the prior quarter, $0.11 of which related to lower taxes. Our pro forma basis without the impact of, stock-based compensation of $15.4 million and noncash interest expense of $4.9 million, diluted earnings per share would have been $0.53 per share compared with $0.76 last quarter and $0.67 in the first quarter last year.

Moving to the balance sheet. Cash and short-term investments decreased by $45.1 million. $149.9 million was provided by operations, $55.5 million was paid in cash dividends, $19.4 million was used to purchase fixed assets and $30.7 million were used to repurchase common stock, of which $25.2 million was in open market purchases and $5.5 million to repurchase restricted stock.

For the 102nd consecutive quarter, the company had positive cash flow from operations. Our cash and short-term investment balance is now $967.7 million and represents 58% of total assets. Accounts receivable of $161.9 million decreased by $7.7 million from last quarter due to the decrease in shipments. Our days sales and accounts receivable were 45 days, up from 43 days last quarter. Inventory at $74.6 million increased $2.4 million from last quarter. This quarter, the largest increases were raw materials, primarily from micromodule assembly parts, and work-in-process inventory at the die bank stage. Finally, finished goods inventory decreased for the second consecutive quarter.

In summary, our quarterly average inventory turns is 4.3x, similar to last quarter's 4.4x. Deferred taxes and other current assets decreased by $17.7 million, largely due to a decrease in prepaid taxes. Property, plant and equipment increased by $7.4 million. We had additions of $19,374,000 and depreciation of $11,927,000. Most of the additions were for both buildings to complete fitting out our renovated R&D building here in California, and for equipment across all of our factories the way for fabrication test and assembly. For fiscal 2012 we expect additions of roughly $35 million in total and depreciation of roughly $45 million. Other noncurrent assets totaling $50.5 million decreased modestly by $1.4 million.

Finally, on the asset side of the balance sheet, our return on assets was 26.4%, down from last quarter's 40.4%, which had been positively impacted by that quarter's uncommonly low tax rate of 9.5%, versus a more standard rate of 26.25%. Our current ratio was 7.5:1, up from 6.9:1 last quarter.

Moving to the liability side of the balance sheet, accounts payable decreased by $3.2 million, largely due to timing differences and capital additions. Accrued income taxes, payroll and other accrued liabilities decreased by $5.2 million. The largest items here are a profit-sharing accrual, income taxes payable and accrued interest payable on our convertible debt. Our interest payable accrual increased as we did not have a semi-annual interest payout this quarter. The profit sharing accrual, on the other hand, decreased as this quarter's charge to the accrual was offset by the actual payment of profit-sharing for the last 6 months of fiscal 2011.

We paid profit sharing to our employees semiannually in the fiscal first and third quarters. Our income tax accrual increased to reflect the tax liability on our profitability for the quarter and, the fact that we are only required to make minimal income tax payments in the first quarter of our fiscal year. Next quarter, we will have 2 quarterly payments as required.

Deferred income on shipments to distribution decreased by $5.4 million, as our shipments to U.S. distributors were less than what they shipped out to their end customers. Our reduction in shipments to distributors reflects the reduced sales expected in this channel in light of current business conditions. Our accounting on shipments to U.S. distribution is conservative. We do not record a sale nor income in our results of operations until the distributor ships the product out to its end customer. We continue to closely control our inventory distribution to properly position inventory relative to potential sales demand.

Our senior convertible notes increased by $4.8 million. This increase reflects noncash amortization of debt discount charged to the income statement. Deferred tax and other long-term liabilities of $156.6 million were basically unchanged from last quarter. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions, the net income, dividends paid and employee stock activity, and also the repurchase of stock in the September quarter.

The company announced that we'll again pay a quarterly dividend of $0.24 per share. The company believes that paying a dividend is an important way to return value to its shareholders. The company began paying a dividend in 1992 and has increased it every year since, and currently pays approximately a 3% yield.

Looking forward. Looking forward, several factors are influencing our guidance. On the cautious side of our guidance, first, customers are more guarded. There's tightening of inventory throughout the supply chain, and this caution is starting to impact in demand. Secondly, our distributors are forecasting POS on them to be down. It's not uncommon for U.S. distribution to be down in the December quarter due to the calendar year and holidays. However, this year, they are forecasting down up to 10%, which is a little more than seasonally normal. Europe, Asia and Japan distributors are also forecasting POS to be down but not as much as the U.S.A. Third, given our low lead times and good on-time delivery history, customers are comfortable maintaining low inventory and safety stock levels on our products. Fourth, we expect many of our customers, particularly in the industrial and communications end markets, to have year-end shutdowns and thereby delaying inventory procurement into the new calendar year.

Finally, the biggest factors impacting business adversely are the global macroeconomic concerns. These concerns will be impacted by key events this quarter that could lead to either more pessimism or some encouragement depending on their outcome. In the U.S.A., a report and recommendation from the 12-member bipartisan congressional panel are due out in late November. These recommendations will impact performance of the U.S. economy going forward. At the end of this month, Europe is supposed propose actions relative to the Greek debt, which, depending on their outcome, could impact the European banks and their lending capabilities.

Growth in China, although still positive, is slowing a bit. These macroeconomic concerns are dampening business confidence and near-term growth. On the positive side of our guidance, first, this doesn't feel like 2008. There is more caution than panic in customers. Customers generally expressed confidence as the drivers for demand are still present and business could improve in the medium term. Second, the automotive business, driven by the recovery in Japan, looks like it will remain strong even in the short term. Third, subcontractors in Asia have recently stabilized and are just now modestly increasing their demand on us.

Summarizing these various data points, coupled with the facts that we are entering the quarter with a negative book-to-bill ratio similar to last quarter and that bookings have not improved so far in the first month of the current quarter, we expect another quarter of declining revenues in earnings, with revenues down 9% to 13% sequentially in this December quarter. We expect operating income as a percent of sales to be in the mid to low 40% range depending on sales. As we have demonstrated in other periods of economic uncertainty, at these levels, we expect to maintain industry-leading profitability. In this regard, as is our custom during difficult business cycles, the company will take the necessary measures to curtail spending and limit the impact of lower revenues on profitability. These measures will include limited shutdowns, lower profit sharing and other variable expense controls.

Finally, looking beyond these near-term market difficulties, the market opportunities that drive our business continue to demonstrate continuing growth, namely the buildout of the broadband infrastructure, higher electronics content in gas-driven and hybrid vehicles and energy efficiency and other technological trends in industrial applications.

Finally, we are very well product and end market position to execute our strategy. We are strong in the areas we want to be: industrial, communications infrastructure and networking and automotive; and believe that we are in an innovation-driven environment, a strategy that's differentiated from other analog competitors. We dominate in different end markets. We are a more reliable supplier with consistently lower lead times and support, and our technology and support is valued as evidenced by our higher operating margins.

I would now like to open up the conference call to questions to be addressed to either Bob, Lothar or myself.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tore Svanberg with Stifel, Nicolaus.

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

First question, with the revenues being down 9% to 13% sequentially, and I know you went through all the assumptions, Paul, but should we assume that you're probably undershipping through demand at that point?

Paul Coghlan

Well, I think what's difficult, Tore, in the 9% to 13% is, certainly going to the quarter we felt we were unshipping through demand. Inventories have gotten pretty tight, and I think that has started to impact, to some degree, end demand. So I think the general feeling we have going into this quarter is that this stage would probably be about equal to end demand but we'll have to see how the global economic events play out.

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

Very good. And my second question, you mentioned you haven't seen bookings stabilized so far this quarter and the month of October, but you also said you're starting to see some contractors in Asia starting to stabilize. I mean, just sort of like best guess, do you think bookings could potentially stabilize in the month of November?

Paul Coghlan

Yes, I mean, when I said they stabilized in October. I didn't say they were getting worse necessarily. And I did talk about some subcontractor activity in Asia starting to stabilize and pick up a little bit. So at this stage, I mean, we're hopeful and think that bookings will at least be flat and hopefully pick up in November. But again, we have to see how it plays out.

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

Great. And just one last question. Or should I assume the inventory turns to remain relatively similar in the December quarter as in the 2 previous quarters?

Paul Coghlan

Depending on what revenue does, the turns could go down a bit. But maybe answering that a different way, I don't think we expect to grow inventory much in the quarter.

Operator

Our next question comes from John Pitzer with Credit Suisse.

John Pitzer - Crédit Suisse AG, Research Division

I guess, Paul or Lothar, can you give us a little more insight into what underlines the industrial buckets? Or are there other distinct buckets within industrial you can talk to and differentiate? How much of that business is going through distribution? And do you have a sense of how much of this is just distributors trying to manage inventory at the year end versus kind of end demand just being this poor?

Paul Coghlan

Well, industrial for us is a very diverse market. I mean there's made up of several thousand customers and many different products that we sell into it, and. A lot of it does go through distribution. And my sense is that what we're seeing is really not distributors shrinking their inventory even though there probably is some of that in this climate, but I think it's just our customers being cautious in the current marketplace. And so I think it has all to do with that.

John Pitzer - Crédit Suisse AG, Research Division

And then, Paul, on the gross margin and up margin side, a lot of variable cost in your business model. Can you help us understand the December quarter, where you think you utilizations will go, how do we think about gross margins kind of versus OpEx in the December quarter?

Paul Coghlan

Well, I think certainly I think OpEx will absolute dollars. I think as a percentage of sales, they'll probably go up a bit again this quarter. I think gross margin will be roughly the same. It could go down a little bit on this next quarter that we're in, the December quarter. Bear in mind, what happened is just about may be 1.5 years or 2 years ago that the market was flat then it picked up quite a bit, and we spent a fair bit of money to add capacity to the company. And that money that we spent to add capacity has become a fixed cost. And now that sales have dropped back down to levels we saw a while ago, we have a higher fixed cost burden. So that's impacting gross margin a bit. Now, nevertheless, gross margins of 75-plus percent are industry-leading and quite strong.

John Pitzer - Crédit Suisse AG, Research Division

And then, Paul, kind of my last question. Lead time's still short, but as you think about where you manage utilization levels, how do we think about lead times on the way out? At what revenue level would it be difficult for you guys to maintain where lead times are today? And when do we get back to that situation where customers are more concerned about getting parts than they are about the inventory on the balance sheet?

Paul Coghlan

That's our favorite question, yes.

Robert H. Swanson

Yes. That's an optimistic one, yes.

Lothar Maier

Yes. As far as lead times, we've got no problems in maintaining our lead time short. In this particularly we have especially no problems when sales are down. So we've got no issues with keeping our lead times in 2 to 4 weeks.

Robert H. Swanson

All the way to $400 million a quarter and then some.

Operator

We'll take our next question from Uche Orji with UBS.

Uche X. Orji - UBS Investment Bank, Research Division

Lothar, can you please -- are you able to provide any insight as to what's happening in the communication space? Obviously, you're involved in both wireless and wireline infrastructure. Any color as to what's happening between both subsegments of the com business?

Paul Coghlan

Yes. It's a little bit of an enigma right now is the communications. Clearly, it's tracking down with all of our business. And quite frankly, for me, it's a bit of a surprise. I would think with all of these new wireless devices and more data and voice being shoved over the wireless network that, that market would be stronger than we're seeing right now. I think it's just another issue where customers are becoming cautious, and that's a market I think long term is going to continue to be good for us because eventually the service providers are going to have to invest. And we've got a lot of products that are designed into those end applications. But right now, it's kind of tracking the rest of the market.

Uche X. Orji - UBS Investment Bank, Research Division

Okay, that's helpful. Can I just ask about computing? I mean, obviously Intel put out numbers yesterday showing growth. Within your computing business, you didn't seem to reflect that this quarter. Can you talk about what's going on here for you within computing, any dynamics perhaps competition-wise or pricing-wise that may lead to your revenue growth to be a little bit less than Intel's?

Paul Coghlan

Well, Uche, computer for us was one of the better areas last quarter, as I said in my opening comments. Computer was flat or at 11% with the prior quarter. So we didn't see that particular sector go down as much as the industrial and communications infrastructure segments.

Robert H. Swanson

Again, we're not aimed at the middle of the PC market.

Lothar Maier

As Bob says, bear in mind what Intel's selling into personal computers, it's only 11% of our business and encompasses servers, encompasses disk drives, encompasses PCs, both desktops and notebooks and a little bit of tablets. So we're probably spread out differently than Intel.

Uche X. Orji - UBS Investment Bank, Research Division

Sure. Okay, fair enough. And then let me just ask you about utilization rates. I know you gave some color a little bit earlier. If you could compare the level of -- I know you said what you see now is caution and not panic, but do you think that the overall utilization rate of the company will approximate or get close to where you saw in 2008 in the light of expectations of shutdown through the fourth quarter?

Lothar Maier

No. I mean, in 2008, the sales levels were much, much lower. But on the other hand, we're tooled up right now as a company, both from a capital equipment and from an employee standpoint, we're tooled up to over $400 million a quarter. Right now, we're not forecasting anything to get close to where it was in 2008.

Uche X. Orji - UBS Investment Bank, Research Division

All right. And then just real quick, I know you probably don't have much exposure to what's going on in Thailand, but is there any comments you can make as to whether that is in any way impacting Linear at all?

Paul Coghlan

Really no impact at all. We don't have a lot of customers there, and we do use one subcontractor in Thailand, but it's a very, very small percentage of our production, and pretty much everything that we run in Thailand we could run in other locations mainly our own facility.

Robert H. Swanson

And that subcontractor currently is not impacted.

Paul Coghlan

That's correct.

Operator

We'll take our next question from Terence Whalen with Citi.

Terence R. Whalen - Citigroup Inc, Research Division

This question relates to capital spending. I think you'd previously mentioned you've felt like $40 million was a correct number for fiscal '12. Can you give us an update based on where you see production utilization?

Lothar Maier

Well, I mean, Paul mentioned earlier that we're thinking capital expenditures would be around $35 million. Most of that capital is really receiving and finishing projects that have already started. We really don't have any significant need for additional capital equipment to support our manufacturing, because as we said earlier, we're already tooled up for over $400 million a quarter in sales. So really all the capital were talking about right now is closing on projects that have already been started.

Terence R. Whalen - Citigroup Inc, Research Division

Okay, terrific. And then the second question relates to work your view looking beyond the December quarter, just qualitatively, as you think about where the supply chain is with inventory, where you think orders for industrial-related end markets might go in the March quarter, do you have a feel yet for whether you might get normal seasonality emerging in the March quarter based on the low channel inventory?

Lothar Maier

Well, we don't forecast the subsequent quarter out, as you know. But generally, the March quarter's a pretty good quarter for us. What we're hearing from our distributors is some optimism looking into the March quarter presently. And from some of our customers, a lot of the industrial companies, they start their capital budgets in the new year. Normally, that would give you some optimism going into the March quarter. So although this year we think that if the political situation or the macroeconomic situation continues to be poor, customers may start off more slowly with their capital budgets. But overall, most of what we're hearing now with the sales channels is that March should pick up. However, I caution you, we told you at the start of last quarter that we thought things would pick up at the end of this calendar year and, that's certainly moving out into our estimation early next calendar year. So I don't know how much value you want to put on our forecasting on that.

Operator

Your next question comes from Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

I kind of want to come back to the inventory maybe throughout the supply chain, and it would strike me that this was discussed in an earlier question that you guys are undershipping demand by pretty good amount exiting the quarter. Any sense to where absolute inventories are going to be exiting the quarter in the supply chain? Are we going to get back to maybe the middle of last year's kind of absolute levels in the supply chain, given the undershipment that we're seeing this quarter and maybe in the next quarter?

Lothar Maier

We don't really know the answer to that, to be frank with you. What we have seen is -- we thought going to this quarter what happened would be that inventories will get pretty tight and things would pick up at the end of the quarter. There's been some, we think, backwards movement in end demand. We don't think it's catastrophic but there's been some of that. So this whole inventory level and what is it is a bit of a moving target. Now we do believe the end of this quarter there'll be more shutdowns than normally is at the end of a calendar year. So it wouldn't surprise me that coming out of the December quarter, inventories would be pretty lean. So that coupling your question with the previous question, if there some reasons for business optimism, then going into 2012, those inventories will probably have to be corrected. If that continues to be a reason for the business optimism, they'll probably continue to be run pretty tight.

James Covello - Goldman Sachs Group Inc., Research Division

Maybe if I could use my follow-up on that then. I mean, it's one thing if people are going to start to order because if your customers are going to start to reorder because there's optimism about the management, just another thing that inventories could eventually get drawn down to such a low level that they have to start to rebuild something, right? I don't think there's too many end markets that are down 25% in 2 quarters, right?

Paul Coghlan

Well, yes, that's a good point. I'm glad you amplified your question to that. I mean, I guess the one data point we have that I shared with you earlier was that a lot of our customers go through subcontractors, and the one data point I mentioned is we have started to see some stabilization in Asia, subcontractors and some modest pickup. Now whether that'll hold, we don't know. But I think that would kind of support your thesis that I'm sensing you have, which is that inventories are going to be pretty light and people will have to order some more.

Operator

Your next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

One similar question to the last one that was asked. If I look back historically, I don't think there is any example where Linear's revenues have been down sequentially more than 2 quarters in a row. You guys tend to take your medicine pretty quickly. What would be the puts and takes that could be different this time or the same this time that would keep that sort of 2-quarter trend in place? Or if it's worse, what would cause it to bleed out into the first quarter?

Lothar Maier

Well, that's a good question. I'm not sure we think it would be worse. I mean, as we said, the March quarter is normally an up quarter for us. That would mean that we would continue that streak you've said that we're not more than 2 quarters down significantly. But there's some pretty big political events that are going to take place that could impact that, and that's what I think we're all pretty nervous about. But I don't think there's anything structural beyond that.

Robert H. Swanson

Yes, I mean, so what happened during the financial crisis is that our sales drop dramatically 2 quarters in a row. We're 10% to 20% down, and then other strong down and then leveled, and then it's shot to the roof again, and now we're seeing this roller coaster roll off again.

Lothar Maier

Yes. I think, Ross, what we're seeing is recently -- that you're all seeing is that the cycles, if you want to call them that, they're just so short and the amplitude is so high. This thing could take off. It could stay down. It's just hard to call it.

Robert H. Swanson

Yes. I really believe that the macropolitical things going on are just interrupting the natural business cycle recovery.

Ross Seymore - Deutsche Bank AG, Research Division

Great. I guess [indiscernible]

Paul Coghlan

Are we answering your question?

Ross Seymore - Deutsche Bank AG, Research Division

Figure out. The second question I had was on the DIST versus OEM side, I guess one clarification, Paul, did you say that you expected POS to be what down 10% in the calendar fourth quarter?

Paul Coghlan

In the U.S.A., we thought it'd be down roughly that.

Ross Seymore - Deutsche Bank AG, Research Division

And overall, if you have to describe demand, is it mainly DIST or is it DIST versus OEM globally acting any differently, one versus the other?

Paul Coghlan

I don't think so. I think they're both pretty similar.

Ross Seymore - Deutsche Bank AG, Research Division

One last quick one, auto, you said that actually weighed a little bit on gross margin, given that auto's an area of targeting going forward. If you succeed or when you succeed in that, is there something that, that brings down the corporate average gross margin mix-wise? Or is that just kind of a near term phenomena?

Robert H. Swanson

Not going forward with the designs.

Lothar Maier

No, if anything is going forward, it might actually help because we're really designed -- initially, a lot of the automotive stuff was in sort of the Telematics type of part of the vehicle, which tends to be a little bit more competitive market. The products that we have right now in the battery management system and a lot of the other applications that we have right now are actually pretty good ASP and pretty good margin business.

Operator

And we'll take our next question from JoAnne Feeney with Longbow Research.

JoAnne Feeney - Longbow Research LLC

Could we go back for a question on the communications business. Perhaps you could help us understand the nature of your exposure to the communication infrastructure geographically. Do you have more exposures to the North American buildout or European buildout versus China, India or the other emerging markets? Can you give us some detail on that, please?

Paul Coghlan

We've got design ends virtually all of the major base station type manufacturers. And so it kind of depends who wins the tender in China or India or in the U.S. So for us, we've got pretty good design ends. We don't have a lot of control as far as who wins the tenders.

JoAnne Feeney - Longbow Research LLC

So there is some unevenness and you have some exposure that's better with some of the equipment providers versus others? Could you elaborate on which ones you have stronger relationships with?

Lothar Maier

Well, we do pretty well in Europe, and we do pretty well in China.

JoAnne Feeney - Longbow Research LLC

Okay, perfect. That's really helpful. And then just one sort of detail question, could you let us know in your guidance what you're assuming about ASPs and what you're assuming about turns that you'll make for the quarter?

Lothar Maier

ASP, at this stage, I think we feel, it'll be similar, although we again have to see how the quarter plays out.

Robert H. Swanson

I don't think it'll go any lower.

Paul Coghlan

Probably similar. And then relative to turns, turns will be similar to the last quarter in the high 50s.

Operator

We'll take our next question from Romit Shah with Nomura Securities.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Paul, could you just give some more color on the comment around customers having to shut down factories or planning to shut down factories here in fiscal 2Q? Are you referring to some of the smaller contract manufacturers or do you think you'll see that amongst some of your bigger customers as well?

Paul Coghlan

Well, we've picked up that comment more from our sales force back there. Our sales force has mentioned that they're being told by more customers. I think it's probably fair to say that more of that percentage would be in the smaller industrial guys. We're not hearing it from very big customers, but it wouldn't surprise us if some big customers, particularly right at the end of the year, close down. And it's kind of more OEM than it is contract manufacturers in Asia. I doubt they'll close out.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Okay, got you. And then you guys mentioned some data points around China slowing. Could you elaborate on that further, or was that just a general macro comment?

Paul Coghlan

Well, I think our point in Chin is you should bear in mind that it's a small part of our business. We've been growing our sales force there. We sell a lot into the industrial, some into the automotive business. So that for Linear Technology, where we're a small player in a very, very big market, we could probably buck overall percentage changes and you should bear in mind that even though China's -- it's growth is dropping, it's growth is still going to be positive. So we should do reasonably well in that kind of environment.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Okay. And then just last question for me, Paul, is if I look at your industrial business, last year was a great year. I have bookings up about 80% in calendar '10. And if I look at like ADI or Max and the growth was a lot lower, it was around 50%. This year though, your industrial performance looks like it more middle of the pack, and I'm trying to understand why. Is it just because you're facing tougher comps or do you think there's other reasons as well?

Paul Coghlan

Well, I think the overall market's tightening. So it's sort of whether you would continue to outperform in a tightening market, I'm not so sure.

Robert H. Swanson

I don't think it's competition that's -- yes.

Paul Coghlan

We don't know of any big change in the competitive landscape.

Operator

Our next question comes from Steve Smigie with Raymond James.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Great. Just some follow-up on some previous questions. With regard to the industrial market -- and I'm asking here sort of outside of auto, it seems like it had been very strong. Over the past several quarters it's been softening here. But would you characterize it now as just returning to a more normal state or would you say it's softer than normal at this point?

Paul Coghlan

Well, we think it's a bit softer than normal. But remember, when you look at our industrial numbers, a high percentage of our industrial customers are serviced through our distributors. So you're sort of looking at industrial through 2 lenses. One is the industrial companies themselves and then there are the distributors as they control their inventories, et cetera, since a more predominant portion of their business, particularly in Europe and the U.S.A. is industrial-based. So anyway I think that's...

Robert H. Swanson

Yes. Just maybe I can add a little color to it. So the industrial market is both covers a whole lot of areas. Certainly, the test and measurement part that's related to the IT business, that's soft. Other areas are a little soft, and then another areas seems to be normal. But certainly, the part that's related to the semiconductor business is clearly soft right now.

Paul Coghlan

And to amplify Bob's comments, in an area like Japan last quarter, the factory automation side of the industrial business was actually good. And their ATE business wasn't so good. So it's kind of area by area both geographically and within industrial as to the function.

Robert H. Swanson

And then again, this area is so hard to describe. But one of the things that we learned during this last cycle is that there's big pieces of the industrial market that are joined at the hip with the automotive market. So that's encouraging. If the automotive market is going to stay strong and recover, there's going to be a big piece of the industrial market that's going to tag along with it.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay, that's very helpful. And digging a little bit deeper some on the comm stuff, I know you guys said that you hadn't really seen the pushups in general, but you are seeing the surprising softness in comms that you mentioned. And so I was wondering if you could sort of reconcile why those would not be pushouts. And then sort of following on that, within say Asia, are you seeing particular programs that may be impacting orders? I mean, I'm sure you guys have yourself checked further down the channel. I'm just wondering if there's certain programs in Asia or certain programs in North America that are maybe being specifically slow that you've heard about?

Paul Coghlan

Maybe I'll tackle the first half. And relative to push outs, I said a couple of things. I said in my introductions activity I used the term quiet, which are often used. I meant there were little or no cancellations, little pushouts and little pull-ins. But we had also said that our bookings were kind of soft so that in the communications area, what we've had is a surprise to us a bit is the communications initial bookings, if you will, haven't been that great, and yet we see the demand for more base stations, et cetera, as consumers ourselves. So if your question was did we see these communication customers push out what they had already ordered, we didn't see much of that.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay. And with regard to specific programs in Asia or North America?

Lothar Maier

Yes, we're not aware of any specific programs. They haven't called us and told us that this program is being pushed out or that program. I think they're just slowing down the deployment of whatever they're planning to do.

Robert H. Swanson

Yes. We're out of the program. Yes.

Operator

We'll take our next question from Craig Ellis with Caris & Company.

Craig A. Ellis - Caris & Company, Inc., Research Division

Paul, back to the automotive comments, you mentioned strength in every geography. To what extent is that; just a further recovery from some of the issues that we had coming out of the first quarter with Japan versus company-specific programs that might be specific to Linear Technology

Paul Coghlan

Well, I think certainly, Japan has had an impact on it. Certainly, Japan coming out of the tsunami and the earthquake within Japan in this September quarter, they got back to full production, in some cases higher than full production. And I think that's going to carry forward for a little bit in the December quarter. And also, the European and U.S. auto manufacturers source some products out of Japan. So I think Japan in and of itself was helpful but just here in the U.S.A., we're selling model cars, now than were that car sales are up. Now that we were the car sales are up. The car sales are up I think around the world. So that I think it's probably a combination of both.

Robert H. Swanson

Yes, and we're certainly seeing new business in the electric guys and hybrids, so it's a combination of Japan and new programs that are ramping up for us.

Paul Coghlan

That's true.

Craig A. Ellis - Caris & Company, Inc., Research Division

And if you looked ahead over the course of the next 4 quarters where you could get incremental automotive revenues and kind of rank them, what would be the top 3 items that would be driving your incremental automotive revenues?

Lothar Maier

Well, clearly, we've as Bob mentioned have done a lot of product development and have introduced many products into the hybrid and electric vehicle market. Those products are first to market and have been designed into a couple of pretty significant car platforms, and so those could continue to be pretty strong drivers for quite a few years because typically, these things get designed in and run for a number of years.

Robert H. Swanson

And they're beginning to ramp. Yes.

Craig A. Ellis - Caris & Company, Inc., Research Division

Okay. And beyond the hybrid electric programs [indiscernible]?

Lothar Maier

We've gotten products in automobile lining. There's the emergence of stop-start system, which is likely to be mandated in some countries in the future. We've got products that are designed into those types of application as well. And there's new opportunities even in the navigation and telematics of the cars. And we kind of thought that was maybe kind of end of the road, and what we're finding is that there's actually new opportunities in that space as well. So it's a pretty big pallet of opportunities in the automotive market currently and going forward. And I think the important thing about the automotive market is we've been pushing products in this space for a number of years, and those products are really just now beginning to gain traction. And so the effort we've had for the last 3, 4, 5 years in this space, it's going to pay dividends here for a number of years going forward.

Robert H. Swanson

Yes. And one other category, safety systems, collision avoidance and so forth, is another area requiring a lot of electronics.

Operator

Our next question comes from Chris Caso with Susquehanna Financial Group.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Guys, you talked about the POS that you expected in the U.S. I just wondered, for the rest of the world, and I think just the rest of the world that it's probably a little better than the U.S., is something like on a worldwide basis POS down something 5% to 10% in the fourth quarter? Is that a reasonable assumption at this point?

Paul Coghlan

Yes, that's reasonable.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay. And with that being the case, I mean is there another way to look at that other than likely that some inventory is burned based on where you were guiding and where that POS is?

Paul Coghlan

Yes, that could be going on. There could be some inventory burn.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

And I guess would you see more on the finished goods side or the components side, I guess it's hard to tell from your perspective?

Paul Coghlan

The finished goods side, what do you mean by that?

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

In other words, I mean it seems that what you're saying is you're shipping into the channel more than what's shipping out, either on a component basis or finished goods. I guess the question is where would we see the most improvement in inventory, I suppose?

Paul Coghlan

I don't know as we said -- what we said is the POS, we thought, was going down. We told you specifically the U.S. that you alluded to and we talked about the other parts. And so that would also impact our shipments into those areas. So I don't understand the last part of your question. Are you saying are we going to ship into them more than they're going to POS? Is that your question?

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I guess my implication is you're shipping more Linear components in than your customers are shipping out the doors at their end, which would imply that there's some inventory burn going on somewhere. Is that the right way to think about it? Well, from the POS, from the distributor means that the customer ordering from him, I don't know whether that customer's ordering to store inventory or he's keeping his inventory balanced. My sense is he's keeping his inventory balance. So I guess I'm still having trouble maybe because it's getting near 1 in the morning...

Lothar Maier

And excuse me, Chris, for being a little been punchy. We think is the essence of your question is that going out of this quarter, is it likely that inventories relative to maybe true consumption, could be a little low? And that whatever has to wait and see is this true consumption, going to either level off or pick up because of a little more confidence in the macro global economic events? If that's where you're going, that's I guess sort of how we feel at the moment. I hope I didn't put words in your mouth.

Robert H. Swanson

If I understand, we don't know for sure whether the weakness in POS is a result of people trimming their inventories or aligning their receipts to match their new demand.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Right, okay. Well, that's very helpful then. If I could ask one other follow-up with regard to your own fab shutdowns. You talked about one quarter, a one week shutdown last quarter. I guess you assume to maintain that in the December quarter and how long would we -- should we expect that to persist?

Paul Coghlan

Well, you can expect it to persist as long as we need it to be. We've got a lot of flexibility in our factories, and we're able to trim the output of the factories relative to what we need, and we can do it in such a way that it really doesn't affect our lead times or our ability to deliver product to the customer.

Robert H. Swanson

We've got a heck of a good culture here at the company. We're here with our Singapore team tonight and they would vote for workweeks being trimmed or shutdowns rather than a retrenchment, which is their would for laying off people.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

And just one final, once those shutdowns were to go away, we should expect some positive impact on the gross margin line, is that right?

Paul Coghlan

You should. Yes.

Operator

And we'll take our next question from Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co., Research Division

I wanted to ask on operating expenses. Can you just review kind of where you think they're going to come in, in December, and then how much flexibility you have if this extends beyond for any reason?

Paul Coghlan

Well, we have flexibility, the areas -- wait, let me answer the second part of your question first. We have most flexibility in the variable cost side, which is profit sharing and shutdowns and events like that, that we've alluded to. So we continue to have flexibility there and would continue to have flexibility depending on the level of sales. In absolute dollars, we told you we'd expect R&D next quarter and SG&A next quarter to go down. What percent of sales, without sounding like a wise guy, what they come out to be will be dependent on the sales. But my guess is that percentage will be higher next quarter than it was this quarter.

Craig Berger - FBR Capital Markets & Co., Research Division

I see. And then the low to mid 40% operating margin range, is that with stock comp or without stock comp?

Paul Coghlan

That includes stock comp. That's a GAAP number.

Craig Berger - FBR Capital Markets & Co., Research Division

I see. And then another question on just the inventory, sorry for beating a dead horse. But I know you guys are sell-through but you still have visibility into what the DISTs are holding, right? And so about how many weeks of inventory do you think they're holding whether of your parts or more generally? And then if you go back to a few years ago in the downturn, what did that get down to just so we can compare how much more inventory-related pain there might be if for whatever reason things got worse out there?

Paul Coghlan

I'll address the pain part. I'll let Lothar address the what percentage he thinks inventories are there. Remember, they got -- inventories got very low, but I don't know if that's a fair question because you're talking about 2008 when there was a concern that the whole financial markets and the ability to get any money from a bank might disappear. So back then, I mean everybody was just flowing to getting their business to run purely on their own self-generating cash. And we don't see that kind of feel coming out of the distributors or the customers now. So I mean if your question is mathematically, could it get down more than in this year? Certainly. Is it likely to get considerably more, I think, only if people got into the mood of 2008, which I don't really sense them getting there at the moment.

Lothar Maier

And if you look at our inventory turns to the distribution, they're still very healthy. We've got 5, 6 turns of inventory, and that is appropriate for the current level of business.

Craig Berger - FBR Capital Markets & Co., Research Division

Last question for me, just philosophically, when you look at stock comp, is there a reason you want us to exclude it from our sort of ongoing pro forma earnings? Or isn't that a real expense? Don't you want to be aligned with Thomson First Call and standardize the industry? Is there a philosophical reason you guys still exclude it?

Paul Coghlan

Well, maybe it's more historical than philosophical. It is a noncash item. I presume you all know that if you've looked at how the stocks have performed in the last 5 to 10 years, these stock comp charges are significantly higher than the benefits any employee has been getting. So we just look at it as a pro forma kind of a noncash item and continue to separate it. Hopefully, you'll look at it as not -- I mean, I hope you don't think that's the amount we charge through the income statement is that $15 million benefit that their employees get, that $15 million benefit on the basic stock options. Restricted stock they would, but not basic.

Craig Berger - FBR Capital Markets & Co., Research Division

I see. I just see you spent $25 million to buy back shares, so I mean there's -- it's somewhere between 0 and what they make you reported that, I guess is your point.

Paul Coghlan

Not what I report it at, but what I'm required to report. And it's not like I picked this.

Craig Berger - FBR Capital Markets & Co., Research Division

Can you guys just bake it in so we can get aligned on the estimates? It's much less confusing that way.

Paul Coghlan

All right. We'll consider that. Thanks for your input, Craig.

Operator

We'll take our next question from Christopher Danely with JPMorgan.

Venkatesh Nathamuni - JP Morgan Chase & Co, Research Division

This is Venk in for Chris. A couple of quick questions. Number one, you already talked about October bookings stabilizing and that you were hopeful that November bookings will be up. What is your expectation for the Linear into the quarter and what's factored into your guidance?

Paul Coghlan

I think we're looking at a little like last quarter that Linear will be relatively flat, we'll pick up a bit November, we would hope early December, and then probably flatten out at the end of December. So we're not expecting a big hockey stick or ramp-up in bookings late in the quarter.

Venkatesh Nathamuni - JP Morgan Chase & Co, Research Division

Okay. And then you also indicated that both your industrial and communications end markets were going to be weak for the December quarter, given the expected shutdowns at the OEMs. On a relative basis, I know you can't give absolutes, but on a relative basis, do you expect industrial to be weaker than com or vice versa?

Paul Coghlan

Well, they both went down similarly. I mean, com was 23% of our business. It went down to 22%, so that's a 1 point drop. Industrial was twice as large as com, and that went down 2 points.

Venkatesh Nathamuni - JP Morgan Chase & Co, Research Division

No, I know, but looking ahead into the December quarter, though?

Paul Coghlan

Yes, I'm trying to get there, I guess. Bear again, it's late here, maybe I'm slow on the draw. I don't think there's going to be a big difference between the 2. My guess is they'll react somewhat similarly, and we don't think it'll be the best quarter for those 2 ends of our market.

Operator

We'll take our next question from Jennifer Chung with Barclays Capital.

C.J. Muse - Lehman Brothers

This is C.J. Muse with Barclays. First question is a point of clarification. I think I heard in the Q&A, you say that your shipments you thought would track end demand, is that correct or did I mishear you?

Paul Coghlan

We don't really know. I think we keep trying to tell you, we're not really sure what end demand is. We know that there is inventory going on and we know that, that's being tightened and we have told you we do think there has been some ebbing of end demand so that as we look of the quarter, we would guess there'll be some more ebbing of end demand in the December quarter, and hopefully -- people have asked us if we think that would continue beyond that, and we said at this stage the -- what we're getting is inputs is it would not, that it might pick up. So I mean, I wish I could tell you what end demand is, we really just don't know what it is.

C.J. Muse - Lehman Brothers

Sure. That's helpful. And not to beat a dead horse, on the inventory front, I was hoping you could kind of rank order as of today or where you think you'll exit the calendar year between yourselves, OEMs, ODMs, and DISTs, where you think things will be fine and where as of today maybe you're still a little bit concerned?

Paul Coghlan

Well, for our inventory, our plan is to keep inventory relatively consistent. So we're going to manage the company and the factories to really not grow our internal inventory any significant amount. As far as what our customers do and what the distributors do, we don't have as much control over that as they do. And our hope is that as we get through this quarter and into the next quarter, that things will get back to normal, but I guess we don't really know.

C.J. Muse - Lehman Brothers

Okay. And then I guess last question for me, in terms of share count, can you share with us what your actual share count was exiting the quarter?

Paul Coghlan

Yes. You mean the diluted earnings per share or the diluted shares in the earnings per share calculation were 232,985.

C.J. Muse - Lehman Brothers

But I guess curious what the actual count was exiting the quarter so that we can kind of get a vision of what share repurchase happened in calendar Q3 that will be reflected in calendar Q4?

Paul Coghlan

Yes. I'm sorry for not grasping your question. We bought back 885,000 shares in calendar Q3, of which only 400,000 made their way into the calculation of earnings per share.

Operator

We'll take our next question from Shawn Webster from Macquarie Capital.

Deepon Nag - Macquarie Research

This is Deepon for Shawn. So when you talked about keeping inventory consistent, is that on a days basis or is that on an absolute dollar basis?

Lothar Maier

On a dollar basis.

Deepon Nag - Macquarie Research

Okay, so you’re expecting your days to actually continue to go up a little bit?

Paul Coghlan

Probably.

Deepon Nag - Macquarie Research

And then just one other clarification. Did I hear correctly that the lead times had come down to 2 to 4 weeks? Or are they still in the 4 to 6-week range?

Paul Coghlan

Well, we didn't say anything about what lead times were, but...

Lothar Maier

Actually I did. I mentioned 2. In this environment, customers aren't giving us a lot of backlog, and so we're seeing lead times continue to contract. Certainly we're -- what's that?

Deepon Nag - Macquarie Research

I'm sorry, go ahead.

Lothar Maier

So we're finding that as customers become more cautious that they don't place a lot of lead time on us.

Deepon Nag - Macquarie Research

And compared to your historical averages, that's well below where you usually sit, right?

Lothar Maier

It's a little bit lower, yes.

Operator

[Operator Instructions] Our next question comes from Ambrish Srivastava with BMO Capital Markets.

Emily Scudder

This is Emily for Ambrish. Most of my questions have been answered, but just real quick, can you talk about your design activity in this environment and what are some areas you're excited about for the future?

Paul Coghlan

Yes. I mean, that's one of the few bright spots in the market right now is the fact that design activity continues to be strong and both internally to the company, we're focused on bringing new products out. And probably more importantly, our customer design activity, even when the market seems to be down, that the customer design activity is still doing quite well. So to some extent, it does make us optimistic that once we get through the cycle that things will turn around pretty quickly.

Operator

It appears that there are no further questions at this time. Mr. Coghlan, I'd like to turn the conference back over to you for any additional or closing remarks.

Paul Coghlan

Okay. Well, thank you very much for your questions, and I wish you all a good day, and we're heading off to hit the sack. Good night. Goodbye.

Operator

That concludes today's conference. Thank you for your participation.

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