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Analog Devices (NASDAQ:ADI)

Q1 2012 Earnings Call

February 22, 2012 5:00 pm ET

Executives

Maria Tagliaferro - Director of Corporate Communications

Jerald G. Fishman - Chief Executive Officer, President and Director

David A. Zinsner - Chief Financial Officer and Vice President of Finance

Vincent T. Roche - Vice President of Sales and Strategic Market Segments Group

Analysts

James Covello - Goldman Sachs Group Inc., Research Division

Shawn R. Webster - Macquarie Research

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

John Pitzer - Crédit Suisse AG, Research Division

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

Uche X. Orji - UBS Investment Bank, Research Division

Christopher J. Muse - Barclays Capital, Research Division

Jonathan Smigie

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Operator

Good afternoon. My name is Natalie and I will be your conference facilitator. At this time, I will like to welcome everyone to the Analog Devices First Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] Thank you. Miss Tagliaferro, you may begin your conference.

Maria Tagliaferro

Okay. Thank you, Natalie, and good afternoon, everyone. This is Maria Tagliaferro, Director of Corporate Communications for ADI. Here with me now are Jerry Fishman, our President and CEO; Dave Zinsner, Vice President of Finance and CFO; and Vincent Roche, Vice President of Sales and Strategic Market segment. We appreciate you joining us for today's call. If you haven't yet seen our first quarter fiscal year 2012 release or the release announcing an increase in the dividend, you can find both on our IR website at investor.analog.com. A recording of this conference call will also be available on the website within about 2 hours of the call's conclusion.

I would like to point out that there were 14 weeks of activity in the first quarter of fiscal 2012, that compares to a typical 13 weeks in a quarter. From time to time during today's conference call, we will point out the impact of this additional week on historical and projected trends.

The 14-week quarter occurs because ADI follows a fiscal year calendar of 52 weeks per year. As a result, there is an extra week approximately every fifth or sixth year, and to adjust for that one day difference between our fiscal year and the typical 365-day calendar year.

Finally, I'd ask you to please note that the information that we're about to discuss includes forward-looking statements, intended to qualify for the Safe Harbor from liabilities established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include risks and uncertainties, and our actual results could differ materially from those we will be discussing. Factors that could contribute to such differences include, but are not limited to, those described in our SEC filings, including our most recent quarterly report on Form 10-Q which was filed today.

The forward-looking information that is provided on this call represents our outlook as of today, and we do not undertake any obligation to update the forward-looking statements made by us. Subsequent events and developments may cause our outlook to change. Therefore, this conference call will include time-sensitive information that may be accurate only as of the date of the live broadcast, which is February 22, 2012.

With that, I'll turn the call over to opening remarks from our CEO, Jerry Fishman.

Jerald G. Fishman

Well good afternoon to everybody. As you can tell from our press release, our revenues in the first quarter totaled about $648 million, which was a decline of 9.5% sequentially and 11% year-over-year. And although within the range we provided last quarter, it was at the lower end of that guidance range.

Continuing inventory reduction by both our customers and distributors in November and December, coupled with lower capital spending by many of our customers, reduced orders on ADI and that continued the trend that began about 6 or 9 months ago. Nevertheless and happily, order rates and orders began accelerating in January and have continued strong into February, which leads us to believe that our first quarter may represent the sales gross margin and operating margin trough of this cycle for ADI. And we expect to resume growth in our second quarter, which began in early February.

We believe that customer and distributor inventories are reaching levels commensurate with the now revised outlooks and many of our larger customers have become marginally more optimistic and are beginning to free up some of their capital budgets. I'll provide a few more specifics on the short-term outlook towards the end of the call.

In the first quarter, our sales, into virtually every end market except automotive, declined sequentially and year-over-year. In the first quarter, automotive sales actually increased 6% sequentially and 26% year-over-year as ADI continued to benefit from increased ADI dollar content per vehicle and increased vehicle unit sales worldwide. We would expect that our automotive sales to remain strong in our second quarter.

Industrial revenues declined 8% sequentially in Q1 for the third consecutive quarter of declines. The decline was very broad-based across customer tiers and geographies and of course industrial automation, energy instrumentation and health care applications. As has been the case now for several quarters, order rates from industrial customers appear to be well below consumption rates for our products for the first 2 months of our first quarter, but have recently been showing some good signs of improvement, which of course is very welcome news for us, since the industrial market represented 45% of our revenues in Q1 and remains our highest margin business. Based on these trends, we expect that industrial revenues will increase in the second quarter after now 3 quarters of sequential decline.

The communications infrastructure end market also declined in the first quarter. Continued economic uncertainty, some country-specific regulatory issues and disruption from the failed AT&T and T-Mobile merger all contributed to widespread deferral of orders for new systems in favor of temporary improvements, mostly software and network capacity. Communications was 19% of revenues and declined 13% sequentially. While at this point in time, we're not currently forecasting much improvement in communications infrastructure revenues in our second quarter, our customers in many geographies are now beginning to signal that we should expect the resumption of growth in the second half of this year.

The consumer end market decreased 21% sequentially, a little bit more than our seasonal expectations, but also due in part to customer production limitations caused by the floods in Thailand, which limited our customers ordering patterns for many of our products. We're currently forecasting some growth in consumer sales in the second quarter, in line with what we normally see seasonally from first to second quarter.

So I think, really, the summary comment with few exceptions is the 2 things that seem to play out during the first quarter were inventory reductions at most of our customers and delays to long-term capital expenditures at many of our customers. And I think for the most part, we now believe that both of these trends seemed to have run their course, at least for ADI, by the end of December.

On a regional basis, only North America experienced any sequential revenue increase in Q1. And even in North America, the growth rate was very modest. It was only up about 1% or so. And that was the result of strength in automotive and the wired communications markets in the U.S.

Revenue in Japan declined by 23% due to consumer inventory seasonality and also the supply-chain limitations that I mentioned earlier.

Revenues from Europe decreased 12% as increases on automotive sales were more than offset by declines in industrial and communications revenues.

Revenues in China decreased 11%, as declines across the industrial end market overshadowed good growth in other markets.

This RoW, or rest of world, decline of 6% was largely due to reductions in consumer revenue.

So now Dave will take you through some of the details of the first quarter financial results, and I'll come back after Dave's comments and talk a little bit more about the outlook.

David A. Zinsner

Thanks, Jerry. As Jerry mentioned, first quarter revenue declined 9.5% sequentially and 11% year-over-year to $648 million. Our gross margin was 63.2% in the first quarter. This was down from the 64.3% we reported in Q4, primarily as a result of our decision to decrease factory utilization.

Lead times for our direct OEM customers remained similar to last quarter and are in control with virtually 100% of our shipments to OEMs occurring within 6 weeks and in 99% within 4 weeks.

Operating expenses for the first quarter were approximately flat from the prior quarter at $226.1 million, a great result given an extra week of expenses. Holiday shutdowns and tight control of discretionary items helped keep expenses in check.

Operating profits for the fourth quarter were $183 million or 28.3% of sales compared to 32.9% of sales in the prior quarter. Operating profits were down both in dollar and percentage terms as a result of the lower revenue and reduced factory absorption in the first quarter.

Other expense was $3 million in the first quarter compared to $4 million in the fourth quarter and reflects the ongoing run rate of our net interest expense.

Our tax rate for the first quarter was 22.6%, in line with expectations we communicated for our 22% rate in fiscal 2012. We expect our effective tax rate, excluding discrete items, to be approximately 21.5% for the remainder of fiscal 2012.

Diluted earnings per share of $0.46 in the first quarter was slightly lower than the midpoint of our guidance, as tight control of operating expenses provided some relief against lower revenue on gross margins.

Cash flow in the first quarter continued to be strong. We generated 33% of our revenue or $215 million in operating cash flow. Capital expenditures were $25 million, resulting in free cash flow of $190 million or 29% of revenue for the quarter.

Our accounts receivable balance decreased from the prior quarter by $46 million due to lower sales, and our days sales outstanding increased by 2 days from the prior quarter to 46 days.

Inventory was carefully managed and increased by only $2 million or less than 1% despite lower sales. Inventory at distribution also declined by approximately 7% and is at the lowest point since 2010.

During the first quarter, we repurchased $78 million of our stock, and we received $49 million in proceeds from stock option exercises. We also distributed $74 million in dividends to our stockholders. Our cash balance at the end of the first quarter was approximately $3.7 billion, of which approximately $1.1 billion is available domestically. At the end of the first quarter, we had approximately $870 million in debt outstanding.

On February 21, our Board of Directors declared a cash dividend of $0.30 per outstanding share of common stock, up from $0.25 last quarter, which will be paid on March 28, 2012, to all shareholders of record at the close of business on March 9. At current stock prices, this dividend represents an annual yield of about 3%. This significant dividend increase represents our strategy to improve returns to our shareholders and also our confidence in our continuing ability to generate significant free cash flow in the future.

In summary, our operating model includes significant variable costs that have helped ADI achieve record-high margins during the upturns in recent industry cycles, and equally as important, during the inevitable downturns. Our results in the first quarter continue to demonstrate the strength of our model as tight expense control, variable compensation and a highly responsive manufacturing infrastructure have ADI well positioned for the emerging recovery.

At current operating margin levels, we have significant operating leverage as sales increase, and we begin to reload our factories, while keeping very tight control of operating expenses.

And so now I'll turn the call back over to Jerry to discuss recovery in terms of ADI's outlook for next quarter.

Jerald G. Fishman

Well, thanks, Dave. Although we are certainly in a challenging business environment, we do see improvement on the horizon. We now believe that our inventory levels at both OEM customers and distributors are below consumption rates, and we're pleased to report that our order rates have improved and increased significantly over the last 6 weeks.

For the second quarter of 2012, we believe revenue to be in the range of $655 million to $675 million or up 1% to 4% sequentially. Considering now we're going from a 14-week quarter to a more normal 13-week quarter in Q2, this sequential revenue growth at these levels is significantly higher on an apples-to-apples basis. We're planning for higher sales and a higher mix of industrial products, which leads us to our gross margin plan of somewhere between 64% and 64.5% for the second quarter.

While utilization will increase in Q2 compared to Q1, it's expected to still remain below 70%, which indicates that we still have significant remaining gross margin leverage as sales improve in future quarters and as utilization expands.

We anticipate that operating expenses will remain flat in Q2 to Q1 levels and also to Q4 2011 levels at about $226 million. Given that the macroeconomic environment still remains uncertain, as Dave mentioned, we will continue to aggressively monitor and control our expenses in Q2 and for the balance of the year.

Based on these estimates that are excluding any onetime items, diluted earnings are planned to be in the range of $0.48 to $0.53 in our second quarter.

So in summary, the fundamentals of our business remained strong during this cycle. And as growth returns, we believe our customer relationships, our technology portfolio, our better market focus, our terrific service levels and our financial model will all contribute to higher profitability and we believe, increasing shareholder returns.

Maria Tagliaferro

Great. Thank you very much, Jerry. [Operator Instructions] Operator, we are now ready for questions from our analyst participants.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of James Covello from Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

I guess first question, Jerry, can you give us some sort of idea of how much you think we can grow revenues here just from customers kind of going back to consuming at their own shipment levels? So in other words, if production and consumption levels kind of come back in line, how much can we grow? And then beyond that we're going to need sales growth, how much do you think, just kind of catching back up, can you give us some growth here?

Jerald G. Fishman

Well that's a very complicated question to answer, so I can only really speak qualitatively about that. One way to think about it, I think, Jim, is that if you look at our industrial revenues from the peak of where they were before the cycle sort of collapsed to where last quarter wound up, our industrial revenues are down 20-plus percent. If you look at our customers' results in the industrial business, none of our customers' results are down anything like that. In fact, many of our larger industrial customers particularly -- well, customers in the United States and Europe and China, we look and their industrial revenues are up. So there's been a pretty significant inventory reduction at our customers. When you couple that with their most recent outlooks -- and after I finish, I'll turn it over to Vince who just came back from another long week on the road talking to a lot of those customers, I think most of our customers are really not pessimistic about the next couple of quarters. I'd say they are not jumping off the tables and saying that everything is great, but they're -- so they expect to get some growth and some little sooner, some a little later. I think the early adapters in this business to what's happened will be the industrial business, but I think soon after, it could be followed by the communications business. So it's really very hard to put a crisp number on it, but some of the largest customers have had enormous inventory reductions, well beyond what would be indicated by any potential slowdown on their sales. So I think there's a reasonable amount of just snapback, just to get back to normal consumption levels. But Vince, you have some comment?

Vincent T. Roche

Yes. Just a couple of points for color here. I think it's true to say that the first -- or let's say, the second and third quarters of the year just gone -- customers were trying to get ahead of the supply issues and a lot of over-inventorying was done. I think the second half of the year was very much dominated by the debt crisis in Europe to a large extent, a lot of our business is done in Europe with the industrial customer base, particularly in the areas of automation. I think the confidence is generally good with our customers out there that this is going to be a pretty good year, maybe modest growth. But I think also some customers still believe that their burning off inventory, and it will take probably another couple of months to get the inventory out of the pipe. But I think certainly second and third quarters, we're expecting to see some positive movements in terms of industrial customers based on their confidence and certainly the order rates that we're seeing from them.

James Covello - Goldman Sachs Group Inc., Research Division

That's terrific. If I'm allowed a follow-up I guess I would ask how much margin expansion should we see for every, say, $50 million of incremental revenue growth from here, assuming mix stays the same with industrial being a little bit higher of a percentage than it was at times in the past?

David A. Zinsner

This is gross margins you're asking?

James Covello - Goldman Sachs Group Inc., Research Division

Correct.

David A. Zinsner

Well I know, I mean we're obviously -- first off, I think the gross margin, if this is indeed the trough, we're pretty stellar relative to previous troughs. In fact, I think, now our previous troughs -- our previous peaks are like much our current troughs. So we've done a lot to fundamentally improve the gross margins from where we were, say, a few years ago. Going forward, clearly I think the utilization were down to -- a lot of this is going to be driven off utilization -- were down below 70% when we were at our peak at 67%, a little over 67%. We were -- our utilization was up past 80%. So really the fundamental driver in getting the margins up, I think, will mostly be a function of getting that utilization up. And as Jerry said, we're still even next quarter operating at relatively low utilization, and I think our expectation is that we'll ramp back into the levels that we saw in prior periods where the margins were up into the high 60s.

Jerald G. Fishman

Jim, the other comment I'd make is that we're working hard to really manage the inventory very carefully here. And we want to make sure that we have enough so -- because in these kind of cycles, you can get a very quick snapback or changing customer sentiment, and everybody starts loading you up again. So you got to be careful that you don't see both ends of the seesaw here. So we're trying to keep the inventory levels at reasonable levels, so that: number one, we'll get expansion on the gross margins when we really do load the factories, but also that when customers do decide to make changes, and history shows they make those changes very quickly that we can be as responsive in this cycle as we were in the last cycle. We still think that's the best policy for ADI.

Operator

Our next question comes from the line of Shawn Webster.

Shawn R. Webster - Macquarie Research

Just a little bit, maybe more on the gross margin question. So Dave, could you quantify what your utilizations were in the January quarter? And is the full utilization rate for you guys north of 80%? And did you have any one-time kind of markdowns or inventory effects impacting gross margins for your last quarter?

David A. Zinsner

Okay. So utilization in the first quarter was 67%. Like Jerry said, we're expecting it to be north of that, but below 70%. So hard to pick the exact point, but somewhere between 67% and 70%, we're expecting utilization. We did have a little bit of a inventory write-down more so than we normally have in the first quarter. It probably was -- contributed about 50 basis points of the decline in gross margins, certainly will help us because we don't think that's going to repeat again in the second quarter. As far as maximum utilization goes, I guess, theoretically, if you get to a 100, rarely do you get to that level, so something in the high 80s probably, or 90% is probably where we'd like to -- where we feel comfortable and think we can keep our lead times to the place we want to keep them.

Jerald G. Fishman

Yes, we've operated our manufacturing facilities very well at 90% utilization. And then just by adding small amounts of incremental capital, we can get the overall capacity up quite quickly. So 90% is quite comfortable for us.

Shawn R. Webster - Macquarie Research

Okay, great. And then on the inventory question, it sounds like some areas from your perspective, if I heard it correctly, are getting lean, in some areas, there are still some or what your customers are communicating to you as they're digesting inventory. What are the areas that still seem like they're still in the process of burning down inventory?

Vincent T. Roche

I think particularly in the small customer base, which is largely industrial and some of the larger industrial customers themselves, but I think it's very much industrial and possibly health care as well.

Jerald G. Fishman

But all the signals we're getting is, that's really winding down. So we're seeing -- when the inflection point on the bookings occurs broadly as we've seen, that's usually an indication that there's still might be a little inventory out there in couple of the customers, some of these end markets as Vince mentioned. But that's going to not affect the results nearly to the extent that it has affected them over the last 3 quarters. So I think we're all -- even if they are still burning off a little inventory, the net results that we can achieve is quite a bit better than where they were, where the mentality 6 to 9 months ago was just get inventory down as fast as you possibly can. We had many of our largest customers that went through a quarter or 2 and didn't order anything because they just didn't want any more inventory. And that really accelerated what we got into November and part of December when they were facing year end. We monitor our customers' inventory in aggregate pretty carefully. And when you look at the inventory levels of some of our large industrial customers are carrying in aggregate, this doesn't necessarily make a comment about ADI products specifically. It's quite, quite lean right now. So there might be some more to go. It might take another month or 2 in some of the accounts, but I believe and what we're seeing in the order rates is most of that is behind us.

Operator

Your next question comes from the line of from Tristan Gerra from Robert Baird.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Could you talk about the segments this year you think are for the best growth opportunities? And also on a geographic basis, do you expect to catch up in Japan over the next couple of quarters as the supply chain comes back?

Jerald G. Fishman

I didn't get the first part of your question, could you repeat that?

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

The first part of the question was just to talk about some of the segments that you think are for the best growth opportunities for ADI this year? Any color by end market?

Jerald G. Fishman

Sure, I think was that the question...

Vincent T. Roche

Sure. I think in general, yes. So your question is the best growth opportunities across the globe. So clearly automotive has been a standard growth contributor to the company over the last couple of years, and I expect that will continue this year and for the next few years at least anyways. Demand is very strong in all the geographic markets. And particularly the America, we saw strong growth in the quarter just gone. In fact, I read a statistic in the last couple of days that the average age of a car now in America is over 10 years, so there's a replenishment cycle going on there very, very clearly. And we're expecting in Japan and China as well growth in the region of 9% to 12% for this year. There's, again -- in China, there's a lot of demand for mid- to high-end cars that we're very prevalent in supplying products to. And Japan as well there's a very, very strong replacement activity going on there. So I think automotive will be strong. Communications infrastructure, I believe, in the second half of the year as we start to see the calendar year, as we start to see the continued data explosion and the need to put hardware in places. As Jerry said earlier, there's been kind of an optimization cycle in the past quarter or 2, but the operators who have the cash are going to have to start putting hardware into place over the next 2, 3 quarters. So I think we'll see some decent growth there. And industrial, as I said, it could be modest but at least we expect some growth during the remainder of this year.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then a quick one could you give us the breakdown of your communication revenues?

Vincent T. Roche

Well it's roughly -- 2/3 of the revenue comes from the wireless infrastructure sector and 1/3 from the wired infrastructure sector. And wired is really the composite of optical and cable infrastructure and some enterprise business.

Operator

Your next question comes from the line of John Pitzer from Crédit Suisse.

John Pitzer - Crédit Suisse AG, Research Division

Yes. Quickly, Jerry, the first question I have is just relative to the January quarter. You guys came in at a little bit late of the low end of guidance. Was that all the Thailand? And the reason why I ask is a lot of chip companies actually saw some strength in the December, beginning of January. So I'm just kind of curious as to why you guys came in at the low end of your guidance for the January quarter. And then I have a follow-up.

Jerald G. Fishman

Well I mean, it's hard to say what other people did one way or the other. We weren't even around the last 2 weeks in December. We had most of our factories closed and not much of our sales guys out there. But we began to see the increase in very early January, starting with the first week in January that we came back, and we've seen that to be relatively strong since then. So it's very hard for us to say why somebody's orders were stronger one week versus another. It's hard to get into that level of granularity. I'm just happy to see that our orders began to pick up in early January and it has continued strong into mid-February. That's the best I can tell you.

John Pitzer - Crédit Suisse AG, Research Division

A follow-up, just going back to the utilization, below 70% for both the Jan and the April quarter, can you do -- can you help us, remind -- for every 100 basis point improvement in utilization, what that might mean for gross margin? And I guess given the strong mix of industrial in the April quarter, does mix come into a play that perhaps dampen cyclical leverage beyond April?

David A. Zinsner

Well clearly the second quarter will have a strong industrial component to it. And that will help gross margins from a mix perspective. But we think or we're assuming that industrial was at a low point in the first quarter and that we will see recovery beyond the second quarter. So my guess is mix is not a headwind going forward, if we're right that we're in the early stages of a recovery. But I guess maybe the best way to describe the utilization to gross margin ratio is, back when we were operating in the 67% gross margins, we were running kind of high 70s to 80% utilization.

Jerald G. Fishman

It's not a strictly linear relationship of x number basis points for each point of utilization. It just -- does not the way the factories are run, that's not the way the costs are generated. But I think Dave's comment is illustrative of the kind of gross margin leverage that's out there as utilization improves. But we can't model it linearly for you.

Operator

Next question comes from the line of Craig Ellis from Caris & Company.

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

The first question is just a follow-up on the communications business. Vincent, can you talk about the types of projects that you're hearing about for the back half of the year? Are those 3G projects? Or are those LTE projects? And the color that you're getting, can you provide some insight on whether that's based on OEMs in particular geographies, or on the projects in particular geographies? Or is it more broad-based?

Vincent T. Roche

Well I think all of the major players in the wireless space are attacking the market with a broad range of technologies. Some are more heavily focused on 4G, some of them got out of the starting blocks earlier on the 4G, but I think everybody has some level of offering across 4G, 3G and even 2G. In India today, we still see deployment of 2G. But my sense is that this year or next year, we're going to see largely a move out of 2G into 3G, and I think most of our sales over the next 3 or 4 years will be dominated by 3G and particularly 4G. I think it's true to say that in the more developed economies, the deployment is really 4G at this point in time. It's to get the data into place that people need to be able to move all these massive quantities of mobile video and high-bandwidth data.

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

Okay. And then switching gears and a question for Dave. Dave, real nice increase on the dividend, 12%, $0.30 a share. As we think about the dividend generative capacity of the firm and the balance that you want to strike as you think about the right level of payout and the cash that's available in the U.S. to fund that dividend, how do we think about an upper control in that forward, what the dividend payout might be as we think about ADI's business?

David A. Zinsner

How do we think about what?

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

The upper control limit. Is there a free cash flow payout that you wouldn't want to go over? Or what are some of the parameters that you're looking, as you think about what the potential payout is on your dividend?

David A. Zinsner

Well I mean the issue with using payout ratios on cash flow is every quarter it can be up and down, depending if you have onetime tax payment, things like that. So generally historically I think -- someone mentioned that we've been paying -- we've paid out around 40% of our net income in the form of dividends, and what we'd like to see is that number to be higher. We don't have a rule of thumb for every quarter, but we're trying to push the dividend to be more and more compelling to shareholders, return more and more of our cash flow to shareholders. And that's really the way we think about it versus some sort of scientific ratio that we apply. We think that investors, at least the ones we've talked to particularly over the last, say, 6 months has been really interested in dividends as a means of returning cash to shareholders vis-à-vis buyback. So we've taken the approach to really put a little bit more emphasis on the dividend.

Operator

Next question comes from the line of Uche Orji from UBS.

Uche X. Orji - UBS Investment Bank, Research Division

Jerry, can I just ask you a few subsegment questions? So my first question is on the infrastructure area. You did mention some of the events last year that led to a slowdown in basically the wireless infrastructure. As you go in through this year and you talk to your customers, what is the expectation for recovery there, particularly in North America and in China. Is there any comment on wireless infrastructure will be helpful.

Vincent T. Roche

Yes. Because of the situation in the U.S., there would be the whole situation surrounding AT&T and T-Mobile, there was obviously a great lull in procurement of equipment or deployment of equipment and procurement of products. But in my sense is some point in this -- in the next number of months, we're going to see, as I mentioned earlier, some level of deployment of hardware because there just aren't enough base stations deployed, particularly in America and Europe to have -- handle the data requirements that are in place. Now our -- the operators and our customers have been trying to optimize the equipment that's already there through pretty much software techniques, just to get the capacity to where it needed to be. But I think we're going to see a pretty strong deployment of new hardware, particularly in Europe and the America in the area of 4G in the second, third, fourth quarter of this year. But I think in Europe and America, we're pretty much 4G; Japan, 4G; and in China to be a mixture of 2, 3 and 4G.

Uche X. Orji - UBS Investment Bank, Research Division

In terms of the leverage you have as we go into -- as we deploy 4G, I know that some of that component suppliers will have higher leverage. Do you think as we go into 4G -- there are 2 questions here, one is how much more leverage do you think you have within that segment? And also in terms of the base of that over 3G, I mean I'm just trying to see if there's any way to understand how ADI could leverage this growth beyond just about that in the 4G deployment. I'm not sure if that's any more incremental leverage for you.

Vincent T. Roche

SO I think it's actually very good for ADI. The more complex the problem becomes, and the problem does become more complex in terms of delivering performance when you get to 4G levels. That's good for ADI. We participate in pushing the performance envelope in all of these radio systems across the globe with all the major players. So the move into 4G is very, very good for ADI. And of course it won't stop there either. There will be more generations coming on top of that in the years ahead. So in terms of being able to put a specific quantity in there in terms of leverage, all I can tell you is that the content increases for ADI in terms of ASP per system, the higher level of the system, and that is certainly true in terms of 4G from 3G, for example.

Jerald G. Fishman

Well I think the other part of it is that not only does that require higher performance components, as Vince said, but we have a much wider spectrum of products that we supply in newer systems. We've talked previously about our RF portfolio, which I think in the early generations of wireless infrastructure was quite minimal, but in the more recent and most advanced deployments, our RF products are very, very important, and very often the differentiator in the system that differentiates our product offerings from our competitors. We also have many other new products like clocks and other types of things that go around converters that we never had, really, in the early 2, and in some cases, 3G deployments. So I think that we're getting the benefit of number one, that you need higher performance components; number two, in many of the new systems, there are more cards per box than in the older systems; and thirdly, the product offering is much broader in the newer systems than it was in the older systems. So the combination of all those 3 things happening simultaneously does give us a lot of leverage on the upside as newer systems get deployed.

Vincent T. Roche

There are 2 dimensions to the products that we supply to these systems. We have, of course, the data path products that allow the performance, the speed and the bandwidth performance requirements to be realized. But also there are control and observation circuits that are required that become more and more sophisticated as the standards continue to increase in performance levels. So it's good on both sides of that -- on both those dimensions for ADI, both in terms of the data stream, but also the sophistication of the components required to keep these systems stable and secure.

Jerald G. Fishman

I would just make one final comment on that. That when we visit all the large infrastructure accounts, we are one of very, very few competitors that can offer the breadth of products they really want. And as you look forward, the deepness of the relationship that's going to be required between the suppliers, in this case, like ADI and the manufacturers, who well-known in this business is getting to be much, much tighter every year. And the strategic rationale of buying one part from one vendor and another part from another vendor and picking the rest of the catalog in that business, I think is more indicative of what it's been than what it's going to be in the future. So I think that the deepness in the strategic engagements that are required to really penetrate new applications in that business is much, much greater than it's been. And in that sense, the breadth of the portfolio, the reputation of the vendor, the share that the current vendor has, the build of materials, the technology roadmaps in terms of not only single products but very integrated products that integrate analog technology and RF technology and a bunch of other things on either the same chip or the same package is going to be a very important differentiator going forward. And In that sense, we think that's one of ADI's long-term, very significant competitive advantages.

Operator

The next question comes from the line of C.J. Muse from Barclays Capital.

Christopher J. Muse - Barclays Capital, Research Division

I guess first question, I was hoping to maybe get some color on whether you saw any changes in order patterns post-Chinese New Year, whether any business performed better or worse. Would love to hear color on that.

Jerald G. Fishman

I don't think so. I think what we typically see is business was very good for quite a while. The Chinese New Year came and businesses in Asia weakened for a week, and then it came back very strongly the week after. So I don't think we saw any trends in the Chinese New Year that are not very typical to what we have seen normally.

Christopher J. Muse - Barclays Capital, Research Division

Okay, that's helpful. And then I guess as my follow-up, I was hoping maybe could talk a little bit about some of the recent acquisitions, Lyric, AudioAsics, et cetera. Any contribution there that's noteworthy that we should be thinking about in terms of future growth?

Jerald G. Fishman

Well I think some of the -- the second one you mentioned has been long ago integrated and cataloged as an important part of our product offering. Lyric is much more of a longer-term play where we really believe that the kind of technology they have really enables performance that without that type of technology, it just isn't possible on many, many dimensions that are very critical in signal processing. We're just now beginning to embed that type of technology in our products. We have a couple of areas that we picked out where we think it's the most relevant. So I think as we get out toward the end this year and into 2013, we will begin to see Lyric technology deployed in a wide number of ADI products that will really -- that technology will really make a huge difference in power [ph] participation and other characteristic signs that people really care about. So the proof is in the pudding, and it's always hard to predict exact quantitative numbers long in advance. But everything we've seen so far substantiates the value of that technology ultimately to Analog Devices and our customers.

Operator

The next question comes from the line of Steve Smigie from Raymond James.

Jonathan Smigie

Jerry, you mentioned that you'd expect a quick snapback on the industrial side. I was hoping you could talk a little bit about the piece of how that would look. I mean is it you get the bulk of that recovery in one quarter? Or will it take at least over a couple of quarters?

Jerald G. Fishman

I think it will be probably, if history is a good example, it will be a gradual recovery, eventually it gets to the point where people's psyche changes a little bit and they start saying, "Oh my God, there's not enough supply out there." Then we can see more rapid acceleration. But at least from the data that we're getting from the customers and Vince, as I mentioned, just visited a bunch of our large industrial customers in the last week or 2. I think what we're expecting or at least what we're planning for is a gradual recovery in our industrial businesses as we've seen in many other cycles. Vince, do you have anything else to...

Vincent T. Roche

I think just to add a little more color to what Jerry said, we have -- we characterize the industrial sector across the areas that have automation, energy instrumentation and aero. And we've seen since this time last year, pretty much all those subsegments are down just about the same level from the peak. The indications are that they're all going to pick up. As Jerry said, they are down roughly about 25% over the past year. Now we're expecting that the recovery will be fairly gradual, and I would say in the next 2 or 3 quarters we'll see the recovery gather steam.

Jerald G. Fishman

Of course Vince is just saying that because he wants me to raise his sales plan. Our experience is that is typically what happens.

Jonathan Smigie

Right. And my follow-up, with regard to the telecom recovery you're talking about for the second half, is there a particular geography you'd expect to see a sharper or more meaningful recovery?

Jerald G. Fishman

I don't know. I mean my own sense, I'd be curious to hear Vince's views on that. It will come up where it went down the most first because some of that recovery is just going to be the end of the inventory reduction. I think longer term, everyone can make their own prediction about which economies are going to grow faster, what's going to happen in Europe, what's going to happen in the U.S. as the election gets closer, what's going to happen in China in terms of government policy. So there's a lot of unknowns about what the macro issues are going to be in each of the regions. But I think right now, what we expect is that the places that have done -- have had the most significant reductions will have the most significant increases at least in the short term. Vince?

Vincent T. Roche

Yes. So the industrial business that we've talked about a lot is very intertwined in Europe and America, in particular. Those 2 regions have seen the sharpest declines over the last few quarters, and they are the regions that I would expect to see improve, see the benefit of the improvement over the next number of quarters most compared to the others.

Jerald G. Fishman

I think just to try to quantify that just a little bit. If you go back to the fourth quarter, our peak quarter, in industrial revenues, which was about a year or 15 months ago, we were doing -- we did $350 million in the industrial area that quarter. Last quarter, we did below $290 million. In a business with probably 10,000 or more different customers in virtually every geography in the world, that's a massive decline in the short period of time. I mean that's a market that tends to move at glacial speeds. So that just gives you a sense of what it is that is possible for us over the next couple of quarters. But we'll just have to wait and see how that happens.

Operator

Your next question comes from the line of Stacy Rasgon from Sanford Bernstein.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

I had just a quick one first on, I guess, the effect of the 14th week. So as I recall from last quarter, you'd suggested that holiday shutdowns and I guess the Asia holidays as well would mitigate or eliminate any potential upside from that 14th week, but you don't seem to be suggesting that now when you're giving color on the seasonal growth embedded in your guidance. Can you give us some feeling for how much additional revenue in this quarter that you just reported that 14th week actually provided, so we can get some better feeling for what the apples-to-apples seasonal growth comparison ought to be?

Jerald G. Fishman

I mean it's purely a guess is what I'd have to say. We believed that probably we lost at least a week to maybe 1.5 weeks of revenue last quarter due to the holidays. Some people think it's 2. Some people think it's this. I mean there are a lot of different analyses of that. Of course it's very hard to be specific about that. But I'd say if you took a number of 1.5 week or something, that probably wouldn't be a bad number.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

But wouldn't you usually have that same loss of revenue in this quarter every single year? So that would be normal wouldn't it?

Jerald G. Fishman

Oh no. Yes, partially that's absolutely true. But when you have a year where the economy is really in the tank and virtually every company that we sold to, including us, it was closed for at least a week and maybe, in Analog's case, 2 weeks, and many of our customers. That tends to be exacerbated from what would normally be people think 3 extra days over Christmas off. So I think when times are good, we see periods where we get through that with almost no change in the Christmas period. And when times are bad, we get a whopping big change. So I think this was more in the latter category than the former.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And for my follow-up, I want to touch a little bit on this, I guess, peak-to-trough decline in industrial revenue. So there, you're right they're down 20-plus percent from the peak. But is it fair to say that, that peak itself was potentially elevated as the customers were probably overbuilding inventories? Do you have any sort of feeling for how elevated it might have been and like -- how far below are you? What would tend to be sort of a normalized level of typical inventories? What would that decline be if it was off of a normalized level?

Jerald G. Fishman

You're asking very challenging questions that we really don't have...

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

I do try.

Jerald G. Fishman

I know you do, and you can see. I mean it's very hard because when we were shipping at those levels and we went to the customers and went to our sales folks, and said, "Boy, this looks pretty overheated. Is this really sustainable? And what's going to happen when the inventories rebalance?" And we got a lot of comments that was very specific with the consumer, customers and I'd say the communications customers that this one probably took 10 million too much, this one took 20 million too much. And we did see a long lineup in the lobby of those kind of customers that were desperate for products then. We didn't see that much in the industrial area, because the customers tend to be smaller and more diversified. So in the communications area, it's a little easier to try and be quantitative about that than in the industrial area, but I don't know. If you say I did 350, how much could that be? It could be $10 million, it could be $20 million, I don't know. It could be $5 million. I don't think it's more than $20 million. But I don't know. I just don't know. When there's too many customers, too many different ordering patterns to be real specific about it.

Vincent T. Roche

Yes. I think a couple of things that might have helped us through the upswing, through the cycle. I think our lead times were very healthy as the tsunami crisis hit last year, and we've kept our lead times very healthy as a company over the last 2.5 years. And also, we paid very close attention to the demand rates as per the end customer rather than factoring in the channel demand. So I think those 2 things helped us to some extent manage both the upswing and the downswing.

Jerald G. Fishman

I think the other thing that we look at, Stacy, a little bit to try to smooth this out as we look at what the growth rate of the industrial business has been over the last couple of years on the average, because this owing supply or demand issues on either side of that end. The kind of numbers that we're planning for our industrial business are commensurate with the industrial business that's grown about 8% to 10% a year. Now I think '11 was a little bit overheated. The year before was a little bit underheated. But the sequential numbers are harder to try to predict because of all the things you're saying that what's the long-term growth rate of that business, and I think with the success we're having in some segments of the industrial business, which are growing at quite strong rates. We think long term that's a good grower for us. And it's going to grow at a rate that is higher than most people believed and that we even believed when we looked at it 3 years ago on the average. Years will be better; years will be worse, but the question you're getting out of trying to predict, how much industrial revenues you're going to get based on the bounce back is just -- we just don't know enough to be quantitative about that. I mean there's something there, I just can't pin point exactly what it is.

Operator

Your next question comes from the line of Chris Danely JPMorgan.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Just a quick clarification. If we take out the 14, the 13-week transition, did you guys feel like demand or your revenue this quarter is back to normal seasonality?

Jerald G. Fishman

I don't know. I don't know what normal is in this world any more frankly, but I think what we're -- the guidance that -- the range of guidance that we put out is indicative of the order rates that we're now achieving. That's the best I can say.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

That's fair. And then in terms of the increase, Jerry, do you think that it's all inventory replenishment or all demand improving or a little bit of both?

Jerald G. Fishman

Well your guess on that is probably as good, if not better, than mine. I think there's certainly some inventory replenishment. As Vince said earlier, many of the large industrial customers are indicating that they're planning to grow this year. And so I think there's probably some of that in there. It's probably a combination of those 2, the ratio between those 2, I just don't know.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Okay. And then one last clarification, if I may. On the reported quarter, the reason you guys came in at the low end of guidance, was that because consumer and/or industrial was a little bit lower than you thought?

Jerald G. Fishman

Well I think November and December were worse than we thought at the outset. And then we were worried going into January that we'd miss the lower end of the guidance. I think we had some people around that believed that was the case going into the Christmas period. But January was a better month, and you could really see the inflection point in the order as soon as we came back. So that was very encouraging. And the fact that it stayed strong in the early part or the first couple of weeks in February, which we've now seen is encouraging to us and we're hopeful that continues.

Maria Tagliaferro

Great. Well we just came up on the 6:00 hour, and unfortunately we have quite a few people still in the queue. So I'm going to ask folks to give us a call to the Investor Relations line. And we'll set up a scheduled time, and get back to you today this evening. The number there is (781) 461-3282. And we have a record of who's still on the queue, and we'll be sure to reach out to you.

So thanks again for joining us on today's call. Just for your information, our call for the second quarter's financial results is scheduled for May 22, 2012, beginning at 5:00 p.m. The release will be out at 4:00. Thanks very much for joining us. Operator, you can now disconnect the callers.

Operator

This concludes today’s Analog Device's conference call. You may now disconnect.

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