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Maxim Integrated Products (NASDAQ:MXIM)

F3Q07 Earnings Call

April 25, 2007 5:00 pm ET

Executives:

Paresh Maniar, Executive Director, Investor Relations

Tunc Doluca, President and Chief Executive Officer

Pirooz Pavarandeh, Group President

Alan Hale, Interim Chief Financial Officer

Vijay Ullal, Group President

Analysts:

Craig Ellis - Citigroup

Tore Svanberg - Piper Jaffray

David Wu - Global Crown Capital

Craig Hettenbach – Wachovia Securities

Deepak Sitaraman – Credit Suisse

Chris Caso – Freidman Billings Ramsey

Simona Jankowski - Goldman Sachs

Uche Orji - UBS

Sammy Birau(?) - JP Morgan

Jeff Rosenberg – William Blair

Eson Lynne(?) – Raymond James

Kenneth Coyle(?) – Crest Investments

Ross Seymore – Deutsche Bank

Doug Day – Moore Capital

Michael McConnell – Pacific Crest Securities

Presentation

Operator

Good day, and welcome to the Maxim Integrated Products Q3 2007 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I will turn the call over to Mr. Paresh Maniar, Executive Director of Investor Relations for Maxim Integrated Products. Mr. Maniar, please go ahead.

Paresh Maniar, Executive Director, Investor Relations

Thank you, operator. And welcome, everyone, to our fiscal third quarter 2007 earnings conference call. With me on the call today are Chief Executive Officer, Tunc Doluca; Group President Pirooz Pavarandeh; Group President Vijay Ullal; and Interim Chief Financial Officer, Alan Hale. There are some administrative items that I'd like it take care of before we cover our results.

First, we will be making forward-looking statements on this call and in light of the Private Securities Litigation Reform Act, I'd like to remind you that statements we make about the future, including: our intentions or expectations, or predictions of the future, including, but not limited to possible statements regarding bookings and orders, revenues and earnings, inventory and spending levels, manufacturing efficiency or capacity, projected end market consumption of our products, and any other future financial results are forward-looking statements. If we use words like anticipate, believe, project, forecast, plan, estimate, or variations of these words and similar expressions relating to the future, they're intended to identify forward-looking statements.

It is important to note that the company's actual results could differ materially from those projected in forward-looking statements. Additional information about risks and uncertainties associated with the company's business are contained in the company's SEC filing on Form 10K for the year ended June 25, 2005. Copies can be obtained from the company or the SEC. Second, in keeping with the SEC's fair disclosure requirements, we have made time available for a question-and-answer period at the end of the call today. This will be your opportunity to ask questions of management concerning the quarterly results and expectations for the next quarter. An operator will provide instructions at that time.

Third, fiscal Q4 of 2007 will contain 14 weeks instead of our typical 13-week quarter. This is because Maxim has a 52 to 53 week fiscal year that ends on the last Saturday of June. Therefore, every six or so years, depending on the number of leap years during a given time span, we will have a 53-week year. The first three fiscal quarters of 2007 were 13-week quarters. The fourth quarter of 2007 is a 14-week quarter.

Before I hand the call over to Alan, I want to remind you of the contents of our January 31, 2007, press release, which reported that due to stock option accounting matters, Maxim expects to restate its financial statement from fiscal 2000 through fiscal 2005, and subsequent interim periods. Since the company has not yesterday issued restated financial statements, we are unable to provide detailed GAAP or non-GAAP financials for the quarter ended March 24, 2007. As a result, all numbers contained in our press release and discussed on this call should be treated as estimates only and subject to change.

Regarding the restatement project itself, we are making good progress and we are hopeful that we'll complete the project in the summer time frame. No additional comments will be made regarding this issue during the Q&A portion of this call. I will now hand the call over to Alan.

Alan Hale, Interim CFO

Thank you, Paresh. Within the constraints just discussed, I will now describe some elements of our fiscal Q3 '07 results and financial position, which we hope you'll find useful and informative. Net revenues for the third quarter were $476 million down 4.4% from the second quarter, and down .5% from the same quarter a year ago. Gross turns orders during Q3 were $214 million of which $139 million was shipped for revenues within the quarter.

For comparison purposes, turns for Q2 of fiscal 2007 were $222 million of which $132 million was shipped for revenues within the second quarter.

Gross margins in fiscal Q3 excluding stock-based compensation improved approximately .8% compared to Q2. Two components led to this gross margin improvement: mixed shift and inventory reserves. Mixed shift produced a .4% point improvement. A primary contributing factor though this positive mixed shift was lower notebook shipments in Q3 versus Q2.

Additionally, on a sequential basis, Q3 gross margins improved approximately .4% points due to smaller inventory reserve actions. Operating expenses. Excluding nonrecurring items, operating expenses increased 2.4% sequentially. As we seized the opportunity to add to our research and development headcount. Nonrecurring expenses for the quarter included $19 million to settle a technology rights litigation matter with a competitor -- competitor, and $7.6 million for stock option litigation and restatement expenses.

I will now highlight a few items from our balance sheet. Total cash and cash equivalents and short-term investments increased by $8.5 million during fiscal Q3. Significant uses of cash during the quarter included $50 million in dividends, $64 million in cash payments for property and equipment, and $54 million for income tax payments. Accounts receivables decreased $26.3 million during the quarter to $250.7 million, and our days of sales outstanding decreased slightly from 52 days in Q2 to 50 days in the March quarter.

During Q3, Maxim recorded gross bookings of $486 million, a 3% decline from the previous quarter. Those bookings are expected to generate $463 million in future net revenues. Our beginning 90-day backlog for Q4 increased to $350 million compared to the beginning 90-day backlog for Q3 of $343 million. Our 12-month backlog declined to $397 million at the end of the second quarter compared to $404 million at the end of Q2.

I will now hand the call over to Tunc to provide additional highlights.

Tunc Doluca, President and Chief Executive Officer

Thank you, Alan. Good afternoon, everybody, on the phone. We have been seeing signs our business is improving, as we said in our press release. So far in this quarter, our turns orders have been quite strong. And our past experience tells us the significant increases in turns that are broad-based have been an inflection point in our future demand.

In light of this recent demand combined with our beginning backlog and the forecasts that we're seeing from our business units, we expect to report a sequential revenue increase of 9% to 13% in the June quarter. However, I want to remind you again that Q4 is a 14 -- 14-week fiscal quarter for us. Bookings in the first four weeks of the quarter are often misleading and it is not my intention to discuss them every quarter. However, having said this, there are some occasions when the change in order patterns are significant enough to affect revenue projections.

This turns out to be one such quarter and we are optimistic that this signals revenue growth in future quarters as well as Q4. The five gross margin measures we outlined in previous calls are taking effect in stabilizing gross margins as described by Alan earlier.

However, I would like to remind you that mixed shifts in inventory reserve actions will continue to produce small quarter-over-quarter variations in gross margin. We have historically been very conservative about inventory reserve actions, and I fully intend to continue to be the same way. For example, order cancellations for a wireless ship set from two customers increased the risk on approximately $3 million worth of inventory, so we decided that it was better for us to reserve this inventory in Q3. During Q3, bookings from our consumer end markets were up while those from industrial communications and computing end markets were down slight -- slightly.

This would imply an unfavorable shift in our beginning backlog from the gross margin point of view. However, our inventory reserve policy will most likely result in us taking a smaller reserve in Q4. Therefore, we expect our Q4 revenue -- gross -- Q4 gross margin to be approximately in line with Q3. And I also want to remind you that the bookings increases that we saw at the beginning of this quarter have been very broad-based.

Now, moving to operating expenses, excluding nonrecurring items, we expect them to increase by approximately 9.5% sequentially. And this is primarily as a result of our 14-week quarter. As I said before, we've moderated our net hiring and plan to grow below the line spending slower than revenue going -- going forward. In line with one of the initiatives I outlined last time, we have taken three actions to better align our product lines, to leverage the synergies among our business units.

First, the non-portable power product lines were consolidated under one business unit. This will make our development efforts more efficient in the server, workstation, telecommunications and networking markets for point of load regulators, digital power, hot-swap and other regulator products.

Second, we decided to redeploy our stand-alone high-speed, high-resolution analog digital converter product development resources. Our determination that these products had too many competitors and these competitors were fighting for a limited amount of available sockets weighed in on this decision. This also facilitated the settlement of an intellectual property dispute with a competitor, and thus avoided a costly trial. Alan spoke about the financial impact of the settlement earlier.

Third, we grouped our multimedia and communications power business unit under one group president, Vijay, to facilitate joint product development for handsets. These two product lines make functions that are very synergistic in handsets and other product areas. Our initiative to become more responsive in customer deliveries is also bearing fruit. Our lead lot from our Seiko Epson foundry arrangement has already been delivered with record yield and very short cycle time. Additionally, some of our internal wafer fabs have made progress in reducing manufacturing cycle time.

By the end of September quarter, I'm confident that we will achieve a three-week improvement goal that I have set for the company.

I would now like to ask Pirooz and Vijay to join me in informing you about some of the exciting design wins we achieved during Q3 that will contribute to Maxim's revenue and earnings growth in the future. Pirooz?

Pirooz Pavarandeh, Group President

Thank you, Tunc, and good afternoon. We've got many design wins and exciting opportunities to talk about, so we've tried to summarize them. Maxim categorizes its business into four segments, and those are the industrial, the communications, the computing and the consumer segments. I will be talking about the industrial and the communications segments. In the industrial segment, we -- it's a very broad market segment consisting of traditional industrial equipment, instrumentation and measurement equipment, medical, automotive and automatic test equipment. And I'm only going to cover some of the medical and automotive wins for the purpose of time.

On the medical front, one of the more exciting developments that's occurred is that we started penetrating the ultrasound imaging market. Some of the trends that are occurring in this imaging -- in this ultrasound imaging market are that there's a need for better image quality, higher resolution, and machines that are less expensive and smaller, and that -- and that are portable devices. So these trends and changes in the marketplace present us with some very exciting opportunities for renovation.

As an example, we have won two tier-one customer customers for high voltage switching that's very key in this class of equipment. This class of products is enabled by Maxim's proprietary high voltage process technology, and it's really not very readily available elsewhere in the industry.

Moving on to the automotive products within the industrial segment, we've continued our momentum in this market. This marketplace is exciting to us for a number of reasons. First, it's a new and large market opportunity for us. Secondly, our customers value the broad product expertise that Maxim offers. And the know-how that we have in a lot of different product areas and the breadth of technologies we offer. So they're very interested in engaging with us. So we have continued to strengthen our relationship with these customers and the value-add that we are providing for these major customers.

For example, we've signed development agreement for a body control unit with a tier-one automotive customer. Again, indicating their confidence in us. As another example we've developed a product that will be used in the communication networks within a car. Our technologies allowed us to develop a product that is more robust relative to our competition, and this robustness and reliability is a key differentiator that will get us many design wins in the future.

Moving on to the communications segment, the markets that constitute this segment are the networking, datacom, bay station and telecom markets. And I will only focus on the networking and datacom segment. One of the things that we're seeing in this market is that there are more and more Ethernet ports that are becoming bottom power enabled, this technology that is being used in the industry which is Power Over Ethernet - POE - is what I'm referring to. We believe the penetration of POE will grow from somewhere in the mid teens currently to approximately 50% of the ethernet ports shipped in about five years. So not only is the ethernet port shipment market size increasing, but also the penetration of POE within that segment is increasing rapidly as well.

This presents us with tremendous opportunities there. We've had design wins at several leading customers for POE. And we have had a very significant presence in this market. One of the wins that we've had is the market leading IP phone vendor for POE-enabled IP phones.

We expect that this design win will proliferate into many of their other platforms within this company. We've also had design wins at several major customers who use our product for sourcing POE ports, networking switch or router products.

Another trend that we see in the communications market is that the service providers are very interested in reducing their operating expenses. In order to do so they want to converge the traditional networks that are typically voice-based with IP-based networks. So we've had a design win at a tier-on account for a high integration product that allows this convergence – this convergence of these networks to happen. Our product has significant advantages over the competition with respect to size, number of external components used, and ease of use.

That concludes my segment. I will hand it over to Tunc for the computing segment.

Tunc Doluca, Group President

Alright, thank you, Pirooz. So I will do a brief update on the computing segment for you to recall, the computing market for us includes the notebook computers, desktop computers, servers, workstations, storage products, and financial terminals. We, as you know, have and will continue to have a strong presence in the power management and notebook computers.

I think the most important news about us is that we have successfully been able to expand our market from the motherboard power products into smart batteries, into LCD display power management products, as well as other functions like audio and hot-swap in notebook computers. If you look at our audio product offerings, we've captured a significant portion of the notebook market with our Vista-compliant audio subsystem chip. This is a product that we were first to market with that exceeded and met all the requirements in those Vista audio systems and this enables us to win many of the sockets for notebook computers in multiple accounts.

We also have come up with a hot-swap controller that's got the industry's highest integration level for firewire ports or IEEE 1394 ports. And these are quite popular in a class of notebook computers, and we have design wins at a major manufacturer, at both notebook and in desktop applications. Also in the LCD area, this is an area of very rapid growth, both in TV and notebook monitors, as well as large-screen flat panel televisions. But most importantly, regarding the notebook market, our proprietary technology allowed us to support higher voltages than are required by some new LCD panels, which really allowed the LCD panel maker in this specific case to reduce the overall cost of their system, by having to use less of other components by using more of Maxim's functions.

This really helped them come to market with a lower-cost system and expand their market share. Another area that's in the computing market that I'll talk about is financial terminals or point-of-sale terminals. We see a great deal of migration towards the requirement to have portability in these systems. And it's an area where Maxim definitely has technology, both in terms of analog content, power management, long life in batteries, etc., as well as protection encryption key security.

We have various products for that, including secure microcontrollers, as well as systems that will provide tamper protection for these products. So in a specific case, we have a design win at a major point of sale vendor where our single product replaced about 40 external components to provide tamper protection for their key.

I only talked about two specific product areas and markets, but we have design wins in many of these other applications, like servers and workstations and so on. But for the sake of saving time, I'll end it there, and I'll hand the call over to Vijay to talk about the consumer area.

Vijay Ullal – Group President

Thank you, Tunc. Good afternoon to everybody that's on the call. I'm going to talk about that segment of Maxim's product portfolio that services the consumer area. As all of you are very well aware, it's a high-growth area. For us at Maxim, it is also a very profitable area, because we have differentiated products which allow our customers to have differentiated products.

The reason is two fold. One, we reduced power consumption. The second, we are able to integrate many different building blocks, and that gives customers a cost advantage which is what gives them the differentiation in their product. Last quarter we had several design wins. I'm going at that talk about a few of them. Specifically, in cell phones and portable devices, such as digital cameras, a GPS and media players.

Talking about cell phones, we continue to have significant design win activity in the power management section of the cell phone. We are shipping and designing in not only building-block-type products with high performance, we've been able to get a lot of success in high integration chips. We're a leadership position in this segment of the product space and it results in many design ends. It opens doors for us for other product lines. An example is an audio chip, for instance, that got designed. It had a Class D amplifier, mated with our patented direct drive technology. It enables lower power consumption and it allows smaller form factor, mainly because we use less or smaller discreets and this leads to a thinner phone.

The second example is what we call analog signal processing, and two examples of those are battery current sensing and ambient light sensing. And the success here has been that we've been able to package in a very small package a high performance chip.

Third, since we have such a broad IP portfolio at Maxim, it enables us to combine very diverse product technologies, and an example of this is a white LED back light driver combined with an audio amp in a very tiny package, it's the first product of its kind and we're very excited about it.

Lastly I'll be talking about fuel gauging and authentication. As you all know, portable applications need to determine how much energy is left in the battery and also to authenticate the battery to identify second-source batteries and for consumer safety. Maxim is a clearly a leader in this area. And we continue to get major design wins in a broad spectrum of products - so many that I can't list all of them.

We think there are six of these design wins that are going into leading consumer electronics companies, which we are really excited about.

In summary, we are very pleased with our performance in the consumer section of our product portfolio. And with that, I'll hand you back over to Tunc for closing comments.

Tunc Doluca

So, as you have heard from all of us that talked about it, and from the fact that we continue to have the very well balanced product mix selling about equally into all four of these segments, you can see that our strategy has been and will continue to be to develop products in a balanced way and to win sockets in all these markets to preserve our diversity, and to make sure that we have profitable growth going forward. I think with that, I'm going to Paresh to get you ready for your questions.

Paresh Maniar

That's the end of our prepared remarks. We would now welcome your questions. Operator, will you please begin polling for questions?

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Questions-and-Answer Session

Operator

Certainly. Operator instructions. Our first question comes from Craig Ellis from Citigroup. Your question, please?

Craig Ellis - Citigroup

Just starting on the gross margin line, some of the color is obviously for gross margins to be flattish, and it looks like some of the initiatives are paying off, but as we move to a period where we can look for sequential growth, are we going to move to a period where you can get some upside on the gross margin line, or is the move to 35% application-specific revenues really going to be an offset to that upward pressure that utilization should give you?

Tunc Doluca

I think that we're going to grow, and I don't think at this time with these small growths that we're going to see a major expansion in gross margins. So our plans going forward in the short term are that they're going

to be about flat.

Craig Ellis - Citigroup

Tunc, on the last call, you mentioned one of your initiatives was to review the sales and distribution strategy. Can you give us an update on that?

Tunc Doluca

I think it's a little bit early for me to talk about it, but we have looked into that definitely. We have made some changes. One of the changes that we've made is, is that we decided that we would get better distribution management if we had a distribution manager in each of these geographies, and in some of those locations we've either assigned or hired the people to manage distribution locally, internationally. But that's just the start. There's a whole bunch of other proposals that have been made to me, and we're going to collectively discuss that in May and June and take some further action on that.

Craig Ellis - Citigroup

Okay. So you'll be done with the proposals by that time and implementing action in the second and third quarter?

Tunc Doluca

Yes.

Craig Ellis - Citigroup

Then lastly, capex was, I think, around $65 million in the quarter on a trailing three or four quarter basis, we're running about 15%. How should we look at capex not only in the fiscal fourth quarter but for next year?

Tunc Doluca

If we look at the quarter we're in right now in Q4, we're expecting capex to come in at somewhere around $90 million. Now, that excludes any type of opportunistic purchase of a fab that comes to us. It is slightly higher, it is higher than the quarter that we've been in. There's some fab equipment that we are purchasing for our fabs that’s higher than normal. We also are upgrading our electronic design automation software for the company, so there's a component of that in there as well. Now, going forward into next year, we believe our capex will go down. Essentially we've been buying capex to be able to do sales that are in the $2.5 billion to $3 billion range, because we had a pretty high forecast for this year. So we've been building to that. So we pretty much have most of our capex in place to be able to do next year's shipments, and I think that the fact that we also have the Seiko Epson foundry arrangement also will help us in getting capacity on line. So next year will be less than this year. The exact number, I won't be able to give you right now. But it will be substantially less than what we have.

Craig Ellis - Citigroup

Okay. But the flat gross margin targets assume obviously I would expect the increase in depreciation you're going to see off of a $350 million capex plan in fiscal 2007?

Tunc Doluca

Yes, it will.

Operator

Our next question comes from Tore Svanberg from Piper Jaffray. Your question please?

Tore Svanberg - Piper Jaffray

You went that your design wins by end market for end markets. Is there maybe a target interest on reporting revenues by end market as well?

Tunc Doluca

No, we really didn't intend to do that, other than saying that they're pretty much well-balanced amongst those four.

Tore Svanberg - Piper Jaffray

Obviously, the June quarter's going to have 14 weeks. How does that impact then trends going into the September quarter? I'm just trying to understand how we should model your growth. Should we maybe assume the growth to be quite moderate in September then?

Tunc Doluca

Well, I think that if when we look into the September quarter, our business units seem to be very optimistic about the quarter. However, I think the best way to model it - it's very hard for us to really pin a number down. But I think for a 13-week-to-13-week comparison of the two, it will be up, it will be up probably moderately. So I don't think we want to give a number out right now.

Tore Svanberg - Piper Jaffray

Then just finally, the last couple years there's a lot of talk about penetrating your top 20 accounts. Can you just give us an update there and if there's been any change in that strategy?

Tunc Doluca

Well, that strategy has not changed. We want to continue to have a good relationship with our top 20 accounts, and we continue to believe that a large portion of our growth is going to come from it these top electronic manufacturers in the world. I don't have the number in front of me right now, but I know that our percentage of revenue going into those accounts has been increasing. So maybe on the next call, Paresh, you should make a note, we'll give you numbers on what those percentages are and how they've changed from last year.

Tore Svanberg - Piper Jaffray

Great. Thank you very much.

Tunc Doluca

But the strategy hasn't changed.

Operator

Our next question comes from David Wu from Global Crown Capital.

David Wu - Global Crown Capital

Yes, Tunc, can you help me with simple math? If I do a 13 week equivalent for your June quarter, we're still talking about a double-digit sequential increase in revenue on a 13-to-13-weeks basis. That's a pretty strong rebound.

Tunc Doluca

No, it's not double-digit. So the way to do the calculation would be to take, for example, for 9%, you would take 1.09% and multiple it by 13 and divide it by 14. That would give you 1% or 1.5%. If you do the same for the high end, it will give you about 5%.

David Wu - Global Crown Capital

Yes. Okay. So that's a pretty modest improvement in business.

Tunc Doluca

Well, it is an improvement.

David Wu - Global Crown Capital

Yes, it is improvement. Could you describe it as a very pretty widespread across all your product category?

Tunc Doluca

Yes, the way I described it is I really looked at our business units and I tried to see if it was concentrated in any area. And I could see that almost all of them were up, except maybe one or two. So I'd say that it's very broad-based.

David Wu - Global Crown Capital

Finally, on the issue of operating expenses, if you go into the September quarter, your operating expenses are expected to grow 9.5% this quarter. Would that rate of increase drop off as you go to a 13-week quarter?

Tunc Doluca

Yes, it would. So 9.5%, somebody can do the math here for me, that's equivalent to about 2%. If it were a 13-week quarter...

David Wu - Global Crown Capital

Okay. That's basically it. Shouldn't those inventory reserves go away as your business starts to improve? It's been still, even though it's down, it's still pretty high relative to the past.

Tunc Doluca

Well, I think the best way to characterize it is that our inventory reserve actions are a result of looking at the inventory we have that had demand outside of 12 months, and also applying some thought process in there to make sure that if there was some reasons why we built it, then obviously we don't reserve it. But if it's outside of 12 months, and we're not certain that the customer's really going to come and purchase that product, we reserve it. So you can see that the reserve number will get modulated by what the ship demand forecast is outside of one year from the business units. So, it's a number that usually will trend down as the ship demand numbers are being increased and trends up as the ship demand numbers are being decreased for the future. And sometimes there's actions, like we had one this quarter where the department for a certain wireless chip set became suspect, because of an order cancellation acceptance that I mentioned in my prepared remarks. So we expect it to come down. But just like I said last time, if you recall, the same question was asked and I was very cautious in the answer, because I couldn't really tell exactly how we should treat it. So we expect it to come down next quarter but by how much I can't quantify.

David Wu - Global Crown Capital

Okay. Last one is just clarify, you mentioned about some activities you're no longer pursuing, I didn't quite catch what the product line was that you were no longer pursuing?

Tunc Doluca

The product line that we're talking about, and I probably should expand on this, is stand-alone, high-speed, high-resolution, analog-to-digital converters. When we looked at that market, we actually had put a lot of R&D into that market in the past, and we were continuing to do so. But we're realizing is that the size of that market is fairly limited, and there are at least five competitors that are competing for those sockets. So we decided that it probably was not worth expending that much R&D resources in the market and we decided that it was better for us to deploy those R&D resources elsewhere, where we believe we're going to get better returns. Now, we will continue to sell the products that we already have developed and continue to sell those parts. So we don't expect to see any major revenue impact in the short term. In the long term, it will be better to us, because I think we're going to make products in other areas that have better returns than those. I think that it really is a good move for us to better deploy our R&D resources.

David Wu - Global Crown Capital

That's this pretty high speed A to D converter you’re talking about?

Tunc Doluca

Yes, there's A to D converters that are for instance high resolution in 12 bits and higher speed than 65 mega-samples per second.

Operator

Our next question comes from Craig Hettenbach from Wachovia Securities. Your question please?

Craig Hettenbach - Wachovia Securities

Yes, thank you. On a notebook market you talked about some activity away from the motherboard. Can you just talk about the motherboard market itself and power management? Looks like TI, as well as Intersil are coming into the market. Do you expect to deemphasize that space a bit and focus on some of the other opportunities you discussed, or how are you positioning your notebook business?

Tunc Doluca

Well, in the notebook business in the motherboard power supply area, that's traditionally been an area where Maxim was the dominant supplier. Your observation is correct, it's become more crowded in the recent years and we're finding that the ability to differentiate the products has become more and more difficult. So that's why, I would say, maybe four or five years ago we began to look at other functions in the notebook space. And quite successfully we've diversified our product offerings, and hence our revenues into segments that I mentioned on the call, like smart battery, controllers, audio products, LCD panel power, all kinds of other parts. So I think going forward the motherboard power is going to be a very competitive area.

Craig Hettenbach - Wachovia Securities

You mentioned that recent order activity was broad-based. Over the next 6 to 12 months, based on your design pipeline today, do you think it will be more traditional Maxim products driving the initial leg of growth versus some of the new integrated products? Or can you help us size up some of the traditional products versus new products in terms of the impact on your growth?

Tunc Doluca

The way I'm seeing it, I think the growth is going to be all over those product lines. I'm not going to be able to say that it's going to be higher in one or the other. My expectation that if there is a difference between growth and revenue and building block and our high integration products, I expect more to be in the high integration area. But it won't be completely swamped out by that area either, because when I look at the products that we're getting a lot of revenues from, they're really all over the place. Some are building block parts, even the parts that we mentioned in the product section of our prepared remarks, there were some in there that were high integration and many of them were not actually.

Operator

Our next question comes from Michael Masdea from Credit Suisse.

Deepak Sitaraman - Credit Suisse

This is Deepak Sitaraman for Michael. Tunc, can you first help us understand with a kind of visibility you have, and perhaps comment on what lead times are doing and what kind of order patterns you're seeing so far in the current quarter?

Tunc Doluca

All right. Can you find that and I'll give you the data on the stuff that I have from memory. The customer-given lead times to Maxim Group Three actually got shorter, by approximately half a week. Paresh, I remember that correctly, right?

Paresh Maniar

That is correct.

Tunc Doluca

So that's reduced about half a week so we were getting shorter lead times by our customers. On the other hand, the lead time that we were giving, we were providing to our customers, were also shorter by about half a week. I think going forward in Q4, we expect our lead times given to our customers to shorten further, but not really substantially. I think in that same range, half a week to maybe a week or so.

Deepak Sitaraman - Credit Suisse

Okay, that's helpful. And I may have missed this, but did you say what inventories did during the quarter, and what are your expectations at least directionally exiting the current quarter?

Tunc Doluca

No, I don't think you missed anything. So we didn't talk about it, and I'll let Alan answer that question.

Alan Hale

Well, on a non-GAAP basis, our inventory dollars and days on hand increased slightly. I think next quarter the dollars will increase a little and the days will go down, that's our expectation. So I think inventories are in a good position right now. It's helped us decrease our lead times that we quote to our customers. And our coverage of turns orders has improved from materials that are staged at dye bank and after, which is an important measurement for being responsive to our customers. Does that answer your question?

Deepak Sitaraman - Credit Suisse

That does, that's very helpful. I'll just ask one more, and then go away. Do you guys have any kind of update on your long-term operating model that you alluded to on the last call?

Tunc Doluca

No. We do not have an update right now. We're in the process with the business units going through a better, more accurate business plan that we've had. The last business plan we made was about a year ago. And we're now making another one that's corporate-wide and we expect to conclude that in about a month or two. So after that at the analyst day we can give a good update.

Operator

Our next question comes from Chris Caso from Friedman, Billings. Your question please.

Chris Caso - Friedman Billings Ramsey

I wonder if you can give more color on the turns requirement for next quarter, and just doing the math, it looks like you need somewhere in the area of $173 million in turn shipments in the quarter based on the 90-day backlog. I guess some of that is a function of the extra week in the quarter, but you talk about the visibility that you have with being able to ship the higher level of turns this quarter?

Alan Hale

Well, you're accurate with your numbers within a reasonable range. I don't want to go through the formulas that you use and compare it to ours. But the important thing to recognize about the quarter is the strength of the turns orders at the outset. As Tunc mentioned the first four weeks, give us a good positive feeling about not only this quarter, but perhaps it's an inflection point that the following quarter will also produce good sequential growth. Our ability to ship turns orders is as good now as it has been for the past several quarters, as a result of staging the inventory at dye bank and having it ready for when the customer places the order. Does that answer your question satisfactorily?

Chris Caso - Friedman Billings Ramsey

It does. Typically in your fourth quarter, is it typically more of a back-end loaded quarter or front end loaded quarter or pretty linear as you go through the quarter with respect to turns?

Alan Hale

I'd say it's very linear. Now, it depends on the tone of business at any given time. And right now we've got a positive slope that's emerging, so we can't distinguish a front or back-end loaded quarter from a turns perspective. I think what's important to note here is that the turns orders in the first few weeks of the quarter have been much stronger than we'd seen before in previous quarters. And since the orders are coming in early, we should be able to ship them, A, because we have the dye bank, and B, because we have more time.

Chris Caso - Friedman Billings Ramsey

That's good color. Could you also talk a little bit about your visibility into customer inventory levels, and most of your competitors seem to think that the inventory correction is pretty much behind them, and judging by your guidance, it seems that's what you’re implying also. Would you agree with those comments, and maybe talk about some of the visibility there?

Tunc Doluca

Well, I mean, the visibility we have into the actual inventories is not that good. The only way we see that is really by the forecast they give us as to how many parts they need and by ordering patterns. So from those, I would be inclined to say that I agree with the other suppliers in the industry, that their inventory levels are low and that, therefore, they need product from all of us.

Chris Caso - Friedman Billings Ramsey

Right. Just basing upon their actions.

Tunc Doluca

Yes.

Chris Caso - Friedman Billings Ramsey

Right. Okay. And just one final one on housekeeping, I'm not sure what you guys can tell us with respect to how we should model share count or interest income, but those are kind of two pieces of our model that you haven't provided, I'm not sure if you can talk about that?

Alan Hale

We have chosen to not state those numbers, given that our restatement is in process. And we felt like since those were non-operating matters, that they weren't as important as focusing on the topics that we highlighted for you today.

Chris Caso - Friedman Billings Ramsey

Okay. Just one actually final one. You talked about the restatement being done in the summer. Is there potential of that being done at the end of Q2, or would we have to wait till Q3 for that?

Alan Hale

I think you should take our statement as it was stated and interpret it as it was stated. We expect to complete it in the summer time frame, and I can't add color beyond that.

Operator

Our next question comes from Simona Jankowski from Goldman Sachs.

Simona Jankowski - Goldman Sachs

I have a short term then a longer-term question. On the short-term question, your bookings were down slightly, but it sound like it's been picking up nicely which explains the guidance you're giving. But your accounts receivable were down versus last quarter suggesting maybe linearity was a little softer towards March. So I want to see if that's the way to reconcile those comments and also if you can reconcile with your prepare nine-month backlog being up a little over versus the 12-month backlog being down, and what are the dynamics there as well?

Tunc Doluca

There's multiple questions there. So I can answer the last one, because I can remember it. So what's happened is the effect you've seen about the 12-month backlog coming down is essentially an end result of the customer giving lead times to us coming down. So that makes sense, that's in line. Now, on the other question, maybe Alan can help.

Alan Hale

Simona, I don't detect a significant linearity change in the quarter that would be really noteworthy. It was clearly less back-end loaded, but not by an amount that would be worth discussing. I think, importantly, we've got 50 days of receivables and we had 52 days and that's within a reasonable range. I'm pleased with the outcome there, and it's part of our working capital that's well-managed, and there's really not a lot of information that you can glean from that change.

Simona Jankowski - Goldman Sachs

Okay. And then just for the long-term question for Tunc, with your expected decrease in your manufacturing cycle times, what are the corollary effects on your business that you expect to see, vis-a-vis maybe reducing more permanently the inventory you carry or your lead times, maybe improving competitive positioning. Will the cyclicality of the business increase, will the visibility decrease? What are the types of effects that that will cause on your business?

Tunc Doluca

I think it's best to probably talk about why we're doing it first. And that will tell us what effects it's going to have. First of all, the main reason we're doing it is that in several of our markets, especially the markets where we experience higher growth, we do see that our customers are really not able to forecast what they're going to need in a timely manner from us. So what we get is many times customers coming to us with significant upsides, and the only way we can respond is either if we have a lot of inventory, or we have a short cycle time, or a combination of the two. So we've decided that we'd be better served if we took our cycle times down so that we could respond to our customers, especially in the product areas and in those markets where there's a lot of seasonality or there's a lot of model changes within a year for that particular customer. So the long-term effect, the most important one for us, in my opinion, is going to be customers that are more satisfied with Maxim's service, and essentially that resulting in more business for us. I think that's going to be an important factor. I think it will also reduce inventories some. But really the cost of inventory is not that high, so the main benefit is really our standing with our customer, I think is the most important one.

Simona Jankowski - Goldman Sachs

Those two seem to be the clear positive. Do you think it will also reduce your visibility a little bit, and maybe make your top line a little bit more cyclical than it has been?

Tunc Doluca

It might reduce our visibility a little bit, but frankly, we don't have it now anyway. I mean, that's the reason we're trying to do this. Our customers are getting us forecasts, but in many of these cases they're so inaccurate that it's difficult for us to say that we have good visibility. So I think that the impact it's going to have on visibility, it's really not going to be that significant.

Operator

Our next question comes from Uche Orji from UBS.

Uche Orji - UBS

I wanted to understand first of all some of the inventory deduction you took last quarter had to do with some of the hazardous substances. Is that all cleared up now? Are we done with the inventory ride related to those products?

Tunc Doluca

You're talking about the inventory write-down we took in Q2?

Uche Orji - UBS

That's right. Which some of it has to do…

Tunc Doluca

Correct, we did take pretty much most of it out of our LED inventory in Q2. If there is some left, it didn't go down to zero, but those products we determined are products that the customers want us to ship them LID product on, but it's a very small portion of what we took town as inventory.

Uche Orji - UBS

Okay. That's good. A second question is about if I understand your guidance, it seems like we will still be looking at flat operating margins given that you're guiding on a clean basis, ex the extra week for operating expenses to grow about 2%, if I take the meet point of your revenue guidance, on a clean basis as well, we're looking at opportune margins being flat. Now if I look at a business model at what point should one start to expect to see some operating leverage within this business? Are we going to see operating expenses continue to track upline?

Tunc Doluca

Okay. If our gross margins come out to be flat and our revenues on a 13-week basis grow 3% or 4%, and we have a 2% increase in below-the-line spending, we should have an operating margin that get better.

Uche Orji - UBS

Right. So you're saying 3% to 4% is kind of a tight-end range, because it's like 1% to 1.5% to 5%, and I was just a little interested to know if that's probably more leverage to come through on this business.

Tunc Doluca

Yes, there will we, as our revenues keep expanding, because it is our intent to try to hold our gross margins, and at the same time we're going to grow our below the line expense at a slower rate than revenue, so we should get an improvement in our operating margins.

Uche Orji - UBS

That's helpful. If I look at some of the new products that you addressed during your opening remarks, are these products on an incremental basis going to have higher gross margins than the company average at the moment?

Tunc Doluca

There was a lot of products that we mentioned, so I don't think we can really… First of all, we didn't quantify it, none of us sat down and said it so I don't think we can answer that in an inaccurate way.

Uche Orji - UBS

As you push into new product areas, the choices you're making based on trying to push into areas where the incremental gross margin contribution is higher than the average of the moment.

Tunc Doluca

Our goal really is in the long term to grow our operating margins. So there are products that we are designing or getting design wins on that are lower than average and there are products that are higher. But our overall goal is, as we stated in our previous plans also, is to increase our earnings per share and to increase our operating profits.

Operator

Operator Instructions. Our next question comes from Chris Bainly(?) from JP Morgan. Your question please.

Sammy Birau(?) - JP Morgan

This is Sammy Birau(?) for Chris Bainly. Just had a few questions, more strategic. Can you please, given the portfolio exchanges which have occurred so far between integrated and the traditional products, give us an update on what is the long-term gross margin, operating margin targets, and also what would be a target for sustainable revenue growth rate for Maxim going forward on a year-over-year basis?

Tunc Doluca

First of all, in terms of being able to do revenue growth projections outside of the close one or two quarters, here, our visibility is very poor. However, we do plan to grow revenues. And in terms of giving a model, the model I gave before, I think, still stands. I said that we'd be in the low 60% margin-type area. And I couldn't give color back then as to what operating margins were going to have, because we had not completed this business plan that I mentioned earlier in the call. So I think at this point

all I can say is that we intend on the average to grow our revenues 15% to 20%, that's our goal, and we intend our gross margins to be in the low 60%.

Sammy Birau(?) - JP Morgan

Thank you.

Tunc Doluca

I'll give more color on what our operating margins plans are going to the future after we complete this business plan.

Sammy Birau(?) - JP Morgan

Thank you. In terms of the new product color which was given earlier, that was very helpful. In looking at some of the end markets which Maxim is attacking this year, which of the end markets is Maxim hoping to have the best growth rates? Can you rank order them for us? Between industrial, consumer…

Tunc Doluca

Between those markets?

Sammy Birau(?) - JP Morgan

Yes.

Tunc Doluca

I'm going to be able to do a good job of that at the analyst meeting, I think, once I get this whole plan completed.

Sammy Birau(?) - JP Morgan

Okay.

Tunc Doluca

But looking at how things are turning out and the signals we're getting this quarter, it pretty broad-based. So that's why it's difficult to say.

Sammy Birau(?) - JP Morgan

Okay. And just one more, if we look as we are coming out of this inventory correction as most of your peers have also given through their guidance and results, just your thoughts on what can we anticipated for overall analog growth for this year and which product category is kind of Maxim's focus, would it be power management interface? Would you add some color to that?

Tunc Doluca

Well, first of all, we have a very broad product portfolio and it's got over 70 product lines, and we really expect to grow in almost all of them. There are a few exceptions, which I don't want to really specify right now. We do expect the analog mixed signal market to grow. I don't have those numbers at my fingertips, and the more important numbers for us actually is really not how much the entire analog market grows, but what happens to the part of the market that we've targeted? And that's the piece that we're doing in our business plan right now. So we, essentially, like we have done in previous years, we look at all the products that we intend to make what the available market is for those products, and sum that up and essentially come up with a segment of available market to use, and use that as a model for growth for Maxim. And we're in the middle of doing that. And once we do that, we will communicate it.

Sammy Birau(?) - JP Morgan

Again, just the last one for me, in terms of users of cash, could you talk about as the capex, it seems to me from comments a majority of their capex spend was done this year and it's coming down for next year. Where does Maxim see as a users of free cash flow going into '08, dividends, stock buybacks, what?

Tunc Doluca

Our plan going into the future are similar to with a we've done in the past, which is we do want to continue to increase our dividends about 20% a year. And we want to continue to aggressively buy back our stock with our excess cash. There are some other companies that are using other methods of buying back their cash, and we're certainly going to look at that and see if that makes sense for the company. But for all practical purposes, until we do the restatement, we can't really buy back our stock anyway. So at this point there's really no pressure for us to make a decision on whether we're going to have a more aggressive buyback than we have been doing in the past. In other words, debt finance stock buyback, that's something we will consider. But as I said, at this point over the next few months, practically speaking we can't do anything.

Operator

Our next question comes from Jeff Rosenberg from William Blair & Company.

Jeff Rosenberg - William Blair

First of all, when you said that you got helped by Maxim notebooks were a little weaker, was that a surprise to you? I think when you said last quarter you expected gross margins to be stable, the fact that you got a benefit there, did that mean you weren't seeing that notebook weakness?

Tunc Doluca

We were not. I mean, if you look back, Q2, if you'll recall, was a very strong quarter for us, for notebook products. There was an incredible amount of upsides coming in that we had to respond to and we even said that our gross margins went down because of that. In Q3 we did not expect it to be that strong, but on the other hand, we really didn't expect it to fall as much as it did either. So we didn't think that it was going to have that big of an effect on our margins.

Jeff Rosenberg - William Blair

Okay. And then on your comments about the strengthening in consumer bookings this quarter, Vijay gave some good color on, but I think that was more design wins. Is this mostly cell phones that helped your bookings are maybe a little bit of granularity amongst the different areas where the strength in bookings was?

Tunc Doluca

If you look at the bookings, what we did is we also looked at it by region. And a lot of the strength actually came from Korea. And as you know, that's a major cell phone market for us. So most of that pick up was strong bookings that were coming from Korea in the cell phone market.

Jeff Rosenberg - William Blair

Okay. And longer term in cell phone, when you guys have looked out several years, that's always been the market with the most growth in terms of where you're served market growth will come. Given all the issues you've dealt with over the past year or so with some of those products and some of the things that you've done and the rapid shifts in the market, do you still see that as where you have the greatest served market growth opportunity, or has there been any change there?

Tunc Doluca

It continues to be a market that has, and if you looked at the cell phone market, I'd really categorize it into several areas. But most importantly, if you look at unit volume growth in cell phones, a lot of the unit volume growth is in the low end, mostly going into more of the developing countries. And those are phones that really don't have much value added. Most of the problems that we've had in terms of gross margin pressure and so on, especially in the wireless product area, have been in our chip sets that got into that market. However, if you looked at the other end of the spectrum, there's a shift also to a lot of consumers wanting to buy higher end phones or smart phones, which have more functions other than just voice communications, and that's an area that's very rich in mixed signal and analog content. So we continue to see that as a good area for growth for Maxim, both in power management chips, and also in some audio products, and also in some high frequency RF products, for example for mobile TV for GPS applications and so on. So we continue to see it as a good growth area for us, especially in this high end of the cell phone area.

Jeff Rosenberg - William Blair

Moving back to the near term, is the strength in bookings you're seeing, is that reflecting some improved ramp in some of the high end stuff, or is it more of the same in terms of stronger weighting toward the low end?

Tunc Doluca

Well, the particular increase in bookings that we saw last quarter was really one or two customers that I think that had gone, they were shifting from one model to the next one. And I think they weren't expecting the amount of success they had.

Operator

Thank you. Our next question comes from Eson Lynne(?) from Raymond James. Your question, please.

Eson Lynne(?) - Raymond James

Hi, this is Eson Lynne(?) calling in for Steve Smigie. I just have a quick question on the automotive market. I guess in the prepared remarks, Pirooz had commented a little about the automotive wins and I was just wondering if you can give us an idea of how much these design wins are worth and how long the design cycles are?

Alan Hale

Okay. Well, I don't think I should make any comments specific to the dollar amounts of these design wins, but let me give you some general background and you wanted to ask about the cycle. Some of the markets that we're targeting in the automotive space, if you were to categorize the automotive space there are segments of the market such as in the engine management and power train and things of that sort that are substantially longer design and cycle times. I mean, something on the order of three to four years. The segments that we have a lot of interest in are in areas that are not as mission-critical within the automobile. And the cycle times or the design and cycle times for those are substantially less, and they're actually approaching the design and cycle times that are similar to some of the consumer segments. So we're seeing those to be less than two years maybe in some cases even as fast as a year, depending on the module that we're getting into. I don't know if I answered your question adequately or not.

Eson Lynne(?) - Raymond James

Yes, that's good. Thank you.

Tunc Doluca

An example would be like the satellite radios and so on, they're pretty fast.

Alan Hale

Yes. I think there's also a substantial pressure on the automotive manufacturers, especially in segments that we call infotainment or body control. There is a pressure on them to accelerate their design and cycle times, just for competitive pressures. And those are the segments where they actually provide differentiation in their automobiles. So we are seeing a shortening of that design and cycle time, and it's, again, due to the competitive nature of that segment.

Operator

Our next question comes from Kenneth Coyle(?) from Crest Investments. Your question, please?

Kenneth Coyle(?) - Crest Investments

Yes, hi. If I look at your competitors like Analog Devices or National, they both participate in the vertical markets, one more than the other. National aspires to get to 65% gross margins, Analog Devices claims that their analog products make more than 65% gross margins. So do you believe that your product portfolio and franchise has more strength than these two competitors? If yes, why low 60% gross margin good, why not mid 60% or higher in the long term?

Tunc Doluca

Well, I mean, what we're hearing from our customers in terms of what's needed in terms of price to win sockets, and what they're willing to pay for the features that were provided, is getting us the numbers that are in the mid-to-low 60%. So I don't know what their exact model is for growth into the future and how that's traded off against the gross margins that they're telling you about. But this is really a trade-off as to how you want to trade off your revenue growth versus have gross margin. And we picked an area where we believe is the right trade-off. So it's really easy for a company to say I'm going to get 70% gross margin, but get that without getting growth in earnings per share.

Kenneth Coyle(?) - Crest Investments

So are you suggesting that your growth will be significantly better than the other two companies who may have slightly higher margins than you?

Tunc Doluca

Well, essentially we're saying that if we want to grow 15% to 20% from the revenue level that we're at, we need to be at those gross margins that I talked about.

Kenneth Coyle(?) - Crest Investments

Okay. Thank you.

Tunc Doluca

Now, whether they'll grow slower than us or better than us will depend on execution of the two companies.

Operator

Our next question comes from Ross Seymore from Deutsche Banc. Your question, please?

Ross Seymore - Deutsche Bank

Thanks guys, first of all congratulations for turning the corner, first time having gross margin and revenues heading north at the same time, it's been a while since that happened. A couple quick questions. First, just a clarification. Tunc, you talked about the revenues a little bit in the September quarter, just adjusting for the 13-to-14-week issue. If we do the two to six 13-week in the June quarter, usually you're kind of flat to slightly up in the September quarter. Is that kind of what you were talking about earlier? I just want to make sure I have the numbers right.

Tunc Doluca

On the 13-to-13-week quarter we expect to be slightly up in the September quarter and slightly up, I don't know how to really quantify that.

Ross Seymore - Deutsche Bank

That's precise enough for my question. Then the follow up would be more on the gross margin side of things. You've talked about some of the actions you're taking to improve the gross margin. Longer term, have those started to kick in in any meaningful way now? And if not, how do you expect them to flow in either late this year, early next year, or any timetable you could give would be helpful?

Tunc Doluca

Maybe I don't exactly understand the question so…

Ross Seymore - Deutsche Bank

You talked about some of the manufacturing efficiencies that you were going to do, given the yields up, lowering your cycle times, etc. And I think you highlighted three of the actions earlier in this call. I just wondered how much of those were contributing,

if any now, and if not, when?

Tunc Doluca

Okay. I understand. So the measures that we talked about obviously some of them were fairly short-term effect-type measures, like improving our test costs by moving offshore, being able to optimize our test programs to either get shorter test times or better yields for product loss due to test. Those are being realized as we speak on any product that we're ramping. Some of the longer-term effects, like how we quote business, which products we design, and making sure that the product that we're designing is going to command good gross margins, as I said before, that's going to have the longer term effect, and we probably are beginning to see the effects of those, but we're really not seeing the full effect yet, in my opinion. So it's a combination, depends on the measures that we took. I think the yield improvements that I talked about was for the Seiko Epson fab. or foundry, and those really in the past when we said that going to a foundry, the question was asked whether that's going to increase our wafer cost, we had taken the yield improvements that we were anticipating into effect when we answered that it was not going to increase our wafer costs. You can correct me if I'm wrong.

Alan Hale

That's accurate.

Tunc Doluca

So some of that was taken into account already.

Ross Seymore - Deutsche Bank

Okay. And then within the quarter itself, I think, Alan, you mentioned that you had about a 40 basis point benefit from lower inventory reserves. If I remember right, last quarter was about a 200 basis point negative, so is the right way to read that that this quarter, the March quarter was about 160 point negative?

Tunc Doluca

Relative to Q1, you mean?

Alan Hale

Relative to Q1, that would be correct.

Ross Seymore - Deutsche Bank

Right. So Q2 over Q1 was 200 Q3 versus Q2 was 160?

Alan Hale

Up 160, that's correct.

Ross Seymore - Deutsche Bank

Okay, so roughly speaking we have about 160 basis points worth of inventory reserves. Is that a number that's just the cost of doing business and that's the amount you guys reserve over time, or does that number continue to drop?

Alan Hale

Okay, I need to clarify one thing. We talked about a delta, not an absolute number. So the delta, to be really clear, Q1 to Q2, we declined 200 basis points due to inventory reserve actions that were unusually large. This time our reserves were not as large as they were in Q2, but they contributed a positive 0.4% increase to gross margins. So I hope that is clear, and if it is not, I'll be happy to repeat it.

Ross Seymore - Deutsche Bank

Nope, that's clear.

Alan Hale

And with regard to inventory reserves, I view these as normal operating events that contribute to normal fluctuations in gross margins, as does mix, average unit costs, our scrap rate, our yields, our pricing and so on. So there's always a multi-variable outcome on gross margins. We've chosen to highlight two elements, mix and inventory reserves, to add clarity and transparency to what's going on in our gross margins, which everyone has such a high degree of concern about, including ourselves.

Ross Seymore - Deutsche Bank

Okay. Then the last one, which should be the easiest and shortest, Tunc, you mentioned a few times about going into more details on your analyst day. Have you guys said when that's going to be?

Paresh Maniar

The rough date would be around the early part of September. We haven't finalized a date yet, Ross.

Operator

Our next question comes from Doug Day from Moore Capital.

Doug Day - Moore Capital

Just a follow up on the capital structure. Could you just talk about if management has identified people within the company to studied the options that you might pursue, has the board taken a similar action, and has this all moved up the priority list in light of the fact that so many companies in the semiconductor industry are taking aggressive moves now? Thank you.

Tunc Doluca

Okay, we kind of barely heard you, but you asked about the capital structure and if somebody was assigned to aggressively decide or advise the board on what to do?

Doug Day - Moore Capital

Yes, that's correct. I was asking if management is doing that, and if the board is doing that, in light of the fact that so many companies have been aggressive within the semiconductor space on this topic of late. I'm just curious if this is a higher priority at Maxim now.

Tunc Doluca

First of all, this is something that we had looked at almost a year ago. And at that time we had decided not to take any action. Right now as we said, because of this restatement work, we're really fully occupied and that's our number one priority. So we really didn't want any attention taken off of that activity. And the fact that we can't really and upon it anyway meant that I lowered the priority of that action. But as we get closer to the completion of the restatement, we definitely are going to look at that and see what the benefits and the risks are for making a major change like that to the company and act accordingly. But to answer your question, there is not a person that's assigned right now to analyze and make a recommendation on this, but there will be in the future.

Doug Day - Moore Capital

Thank you very much. One follow up. Do you worry that if you don't get after this and your competitors are and one already has obviously, that you'll risk alienating your engineer base which obviously historically has been paid through stock, and if they see the value creation elsewhere, they may become frustrated, if you don't become more aggressive on the topic?

Tunc Doluca

Well, that's a good point, and we'll definitely take it into consideration when we make a decision.

Operator

Our next question comes from David Wu from Global Crown Capital. Your question, please?

David Wu - Global Crown Capital

A very quick two questions, follow up. On your lead times to your customers, what are they generally running now? You said it's gone down half a week and I just wanted to know what I understand kind of numbers are we looking at? And the other one I have is about the decision on A to D converters. As I recall several analyst days ago, I remember listening to the person who was presenting the A to D converter opportunity, and the idea was if you have a better mousetrap, it is possible to unseat the incumbent and grab significant mark share and that was part of Maxim's ability to outgrow the analog industry as grabbing market share. But when I look at the composition of that competitive base, you mentioned five, one of which has over 40% market share, not much change in the last several years. Is that something we should take away and say, well, in the future against very entrenched competitor, probably Maxim won't enter the market as a new challenger?

Tunc Doluca

No, I wouldn't say that. I think many factors contributed to our decision, and I think that there have been markets where there was a pretty strong competitor and we definitely have been able to come in and change the market share percentages, depending on, A, the amount of dynamics that were there in that market, and B, on how much better using your terminology, mousetrap was. Our experience has been if there is a competitor that's got fairly large market share and we're trying to come into it, there needs to be something changing in that market. If it's really going in and there's no change, then it is fairly difficult to replace somebody. But if this is a tide change going on in the application itself, which requires a new set of features or a new set of performance factors, then absolutely it's a good market to go into. I don't remember exactly when it was that that last analyst meeting was, but it is important to realize that a lot of the growth we expected from that market was going to come from a much earlier and much more widespread deployment of 3G base stations. And really that didn't materialize to the plan or to the forecast that we were thinking about when we launched this entire product line. So we're going to continue to be competitive and aggressive, I guess, don't read it as a sign of us showing weakness. And what was your other question, was about…

David Wu - Global Crown Capital

Simple one, it's what's your lead time these days, since they've come down half a week?

Tunc Doluca

I got a table in front of me and I'm trying to read it. So this is Q3, the lead time we gave our customers, right? So it was about 9 to 10 weeks, and that was in Q3, and it is going to come down by about a week or so.

Operator

Thank you. Our next question comes from Mike McConnell from Pacific Crest Securities. Your question, please?

Michael McConnell - Pacific Crest Securities

Thank you. Alan, just so I understand this correctly with the gross margins, I know you guys have been cryptic on this a little bit for obvious reasons, but if I look at the fiscal Q2, you guys said that your mix was adverse, caused about 130 bits decline due to higher notebook sales, and then you also had 200 basis points decline due to inventory reserves, and then should we just apply the 80 bps increase to that for Q3 is that the apples to apples, how should we do this for Q3?

Alan Hale

You described it very well, Mike, it's exactly as you described it, apply the 80 basis points to the fiscal Q2 results that we described, and you should come up with non-GAAP gross margin number for our fiscal Q3.

Michael McConnell - Pacific Crest Securities

Okay. And then could you talk a little bit, Tunc, about just the efforts you guys are making in the wireless market with respect to an integrated PMIC coming out and if it's in the marketplace now, what kind of traction you're getting on that within some of the wireless handset customers, particularly in the WCDMA market?

Tunc Doluca

Well, in the handset market, we've…

Michael McConnell - Pacific Crest Securities

Handsets, yes.

Tunc Doluca

In handsets we've got products in several functional areas. The ones that we see a lot of growth opportunity for us are integrated power management solutions, as well as some building block solutions for either the main power supplies for battery charging, for white LED back lighting, etc. We also see the flow of opportunities and growth area for us for audio products as well. And also possibly some products like the integrated product mentioned earlier by Vijay where we integrated some audio functions and some back lighting functions, because on certain types of phones those products integrated together make the layout and design of the phone easier, especially like in a flip phone, for example. In terms of other functions, we also provide the world's best tuner ICs for mobile television, which is a growth area obviously these things start first in the far east and Japan and Korea and we've got a lot of design wins there for those products. And eventually it will start expanding in the rest of the world. So I think in general we have many other functions that we sell as well, but I would say that those are the major ones. And, Pirooz, do you want to add anything, or Vijay?

Pirooz Pavarandeh

No, I think those are the major ones and I think one of the other things to note here is that we're very much focused on the high end handset market, which the differentiating factor is that our customers really like to provide new features on their phones, and Maxim typically is there with the right product at the right time to allow those features to be designed into the phone. So that's another dynamic that's going on with the broad portfolio of products that we have. We've got a lot of building-block type of products that just fit a particular need that our customers have at any given time. That's another area where we see that.

Michael McConnell - Pacific Crest Securities

But in terms of differentiation, do you feel that the footprint, your cost basis is lower relative to the competition, and you can maybe extend some better pricing on the integrated PMICs to your customers to win some sockets, whereas some of the competition may be is lagging in that area? Is that one of the reasons you're getting some attraction, particularly in the high end market?

Tunc Doluca

Well, I think that the best way to characterize it is to divide it up. I think that the level of integration and the level of value-added, for example, in GSM phones or single-function, single-band phones is very low. So I wouldn't say that that's an area where we add much value and that's not an area where we have a lot of design wins either. But if you look at the either U.S. or Korean CDMA phones, or third generation phones, light band CDMA phones, those are areas where we have a really good portfolio of building block functions, and we can rapidly integrate these functions together for our customers. And they like the fact that we can design these products in very short times, because usually the power section is done last after they've figured out and mapped out how they're going to do the signal path. And the fact that we can design them quickly, the fact that we have all of the required analog functions already in our libraries to put it together quickly, and the fact that we have process technologies that allow us to integrate a lot of the external discrete components, like high voltage protection fits, battery chargers, for white LED you typically need a high voltage supply if it's a

fairly large display. So all those factors contribute us to be able to win these sockets.

Vijay Ullal

I think the overriding thing that really differentiates Maxim is that our product definitions are really superior, and a lot of it has to do with, of course, the fact that we've been in the business for a long time. Se have a lot of key customer relationships. So, I think that's really the overriding thing, and we've been getting those definitions correctly, and when we do get that definition right, and because of the close relationship, the speed at which it can be implemented in silicon, because we have the building blocks, and because we have the process technologies, because we have the design know-how, is very quick. And, then, of course, we do have our own manufacturing so that gives us a cost advantage. So in order of priority, those are the three things.

Michael McConnell - Pacific Crest Securities

So just the bottom line here, do you feel as the trends transition to WCDMA that your share within the WCDMA handsets will be higher than CDMA?

Tunc Doluca

Our share is pretty high already in CDMA. So I'm not sure that it's going to get much higher. So it's really more of an expansion for us, because CDMA phones are still selling. And it's really an expansion of our available market rather than a replacement of one by the other.

Michael McConnell - Pacific Crest Securities

Okay. Fair enough. Thank you.

Vijay Ullal

Could be also the expansion of the BOM in the phone, as well, which we also talked about. So it's not just the expansion of the unit sales of these CDMA phones, but what else we can sell into these phones. I think that's another important factor that needs to be considered.

Operator

Thank you. There are no further questions in the queue at this time. I'd like to turn it the program back to you for any further remarks.

Paresh Maniar

Thank you, Operator. This concludes Maxim's conference call. We would like to thank you for your continued participation and interest in Maxim.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Source: Maxim Integrated Products F3Q07 (Qtr End 03/24/07) Earnings Call Transcript
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