Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Maxim Integrated Products (NASDAQ:MXIM)

F1Q08 (Qtr End 9/29/07) Earnings Call

November 1, 2007 5:00 pm ET

Executives

Paresh Maniar - Executive Director & IR

Tunc Doluca - CEO

Pirooz Parvarandeh - Group President

Vijay Ullal - Group President

Bruce Kiddoo - VP of Finance,

Analysts

Evan Wang - Thomas Weisel Partners

Craig Ellis - Citigroup

John Dryden - Charter Equity Research

Venkat Swami - JPMorgan

John Pitzer - Credit Suisse

Simona Jankowski - Goldman Sachs

Jeff Rosenberg - William Blair

David Wu - Global Crown Capital

Gurinder Kalra - Bear Stearns

Romit Shah - Lehman Brothers

Uche Orji from UBS New York

Sanjay Rajkumar - RBC Capital Markets

Sumit Dhanda - Banc of America

Ross Seymore - Deutsche Bank

Nancy Friedman - Greenleaf Capital

Mike McConnell - Pacific Crest Securities

Steve Smigie - Raymond James

Operator

Good day and welcome to Maxim Integrated Products’ First Quarter 2008 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I will turn the call over the Mr. Paresh Maniar, Executive Director and Investor Relations for Maxim Integrated Products. Mr. Maniar, you may begin.

Paresh Maniar

Thank you, operator, and welcome everyone to our fiscal first quarter 2008 Earnings Call. With me on the call today are Chief Executive Officer, Tunc Doluca; Group President, Pirooz Parvarandeh; Group President Vijay Ullal; and Vice President if Finance, Bruce Kiddoo. There are some administrative items that I would like to 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 would 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 turns orders, revenues and earnings, inventory and spending levels, manufacturing efficiency or capacity, projected end market consumption of our product, the estimated time to complete our restatement projects, 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 the forward-looking statements. Additional information about risks and uncertainties associated with the Company's business are contained in the Company's SEC filings on Form 10-K 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 today's call. 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.

We would like to remind you that the Fiscal Q4 of 2007 contains 14 weeks, whereas the first quarter of Fiscal 2008 was a 13-week quarter. Consequently, whenever the term normalized is used during this call, the sequential information provided will be based on normalizing Q4 2007 data to 13 weeks.

We are pleased by the feedbacks that indicated that the investment community appreciated the reduced length of our last conference call. We therefore request that participants again limit themselves to one question and one follow-up question during the Q&A session.

Before I hand the call over to Pirooz, 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 re-state its financial statements. Since the company has not yet issued its restated financial statements, we are unable to provide detailed GAPP or non-GAAP financials for the quarter ended September 29, 2007.

As a result all numbers contained in our press release and discussed on this call exclude all stock based compensation. These numbers should be treated as estimate only and are subject to change. Regarding the restatement project, we've made considerable profit and the projected completion timeframe remains calendar Q1 of 2008 as stated in our 8-K filing dated September 21, 2007.

No additional comments can be made regarding this issue. I will now pass the call over to Bruce who recently joined us as Vice President of Finance. He will take over the post of CFO when our restatement is complete.

Bruce Kiddoo

Thank you Paresh. Let me start by saying I am excited to be here today at Maxim, a premier semiconductor company with leading edge in mixed signal products, solid revenue growth, high margins and consistently cash flow. I'll review the results of our most recently completed September quarter starting with certain items from the income statement.

Consistent with our guidance, net revenues for the first quarter were $522.7 million, a 4% increase from the same quarter last year and a 6% increase from the normalize level of the fourth quarter of fiscal 2007. This increase was driven primarily by strength in our notebook and cell phone segments. External distribution revenue grew modestly on a normalized 13 week basis, while inventory in the distribution channel decreased.

Q1 gross margins excluding stock-based compensation and non-recurring charges declined by 40 basis points, compared to Q4, consistent with our expectations that gross margins will fluctuate within a stable range. This slight decline was primarily due to change in product mix favoring the notebook PC segment.

On an absolute basis, Q1 operating expenses excluding stock based compensation and non recurring items increased 0.6% sequentially over Q4. While operating expenses grew slightly faster than revenue in Q1, compared to Q4, it is worth noting that several expenses such as [Maxim] expenses and depreciation do not scale with the number of weeks in a quarter. When you compare our Q1 '08 expenses levels with those incurred in Q3 '07, operating expenses increased by 8.4% while revenues increased by 9.9%.

I want to emphasize that we are continuing our focus on aggressively controlling our below-the-line spending. Non recurring items during Q1, included the previously announced program for expiring employee options, restatement related charges and charges related to our San Jose fab impairment.

Turning to the balance sheet, total cash, cash equivalent and short-term investments increased by $49.6 million during Q1, this was driven by strong operating cash flow, partially offset by payments of $60 million for dividends and $57 million for property and equipment.

Average days sales outstanding decreased from 46 days to 45 days, as linearity improved compared to the prior quarter. And importantly inventory declined during the first quarter as we continue to manage it carefully.

Finally, during Q1 CapEx totaled $68.5 million. Our forecast for fiscal year 2008 continues to be in the range of $200 million to $250 million. Regarding bookings and backlogs, during Q1, Maxim recorded net realizable bookings of $523.2 million, up 4.3% from the 13-week normalized level of $501.6 million in Q4.

Our beginning current quarter backlog of net realizable revenue for Q2 is $361.4 million, up 3.3% from the beginning backlog for Q1. Based on the beginning backlog and orders received so far, we expect Q2 revenues to be between $530 million and $550 million. We see strength in our cell phone, computing peripherals and various consumer entertainment segments.

We anticipate that Q2 gross margins will be approximately in line with our Q1 gross margins subject to the normal fluctuations. Our goal is to manage Q2 operating expenses to grow slower than revenue, excluding the impact of the addition of the Vitesse Storage Products development team.

I will now hand the call over to Tunc to provide additional comments and guidance.

Tunc Doluca

Thank you, Bruce. Thank you all for joining our call and good afternoon. I will begin by discussing our Q1 revenues. Our revenues from our four major markets, computing, consumer, communications and industrial were rolled out. As expected, the computing and consumer markets have had you awaiting due to seasonality. I will next provide some color on Q1 revenue from each of these markets.

First, the computing market: As Bruce indicated, the September quarter had sharply higher shipments into the notebook segment. As a result, revenues from the computing market increased 13% sequentially on a normalized basis. Three notable contributors to this growth were Unique Power adaptor chip, a CCA filled driver to support back riding and notebook displays. And a high integration IC that is used to power LCD displays. Each of these devices was a recent design win that is ramping up in production.

We believe our design know-how and process technology creates a significant advantage for future growth in notebook display, notebook battery and notebook mixed signal sockets. We observe Notebook battery and notebook mix signal sockets board power management offers less opportunity for differentiation. Accordingly, we've been expending less of our development efforts in this area and focus more on other opportunities in notebooks.

Next, the consumer market: During Q1 shipments to the consumer end market increased 9% on a normalized basis. We saw strength in the cell phone and consumer entertainment segment. Key contributors to the upside and cell phone revenues were a high integration device that powers most of the CDMA phone, and IC that powers the backlight for cell display, a new USB transceiver chip, and audio amplifiers that drive speakers and headphones and cell phones.

Key upside revenue drivers in the consumer entertainment segment were a high-sensitive satellite radio receiver chip, a high-efficiency device that powers media players, and a device that powers LCD TVs. For the consumer market, we're encouraged by the ever expanding opportunity to integrate multiple functions on single chips for mid and high end handsets. Additionally, we planned continued Maxim investment in new ICs, targeted at the consumer entertainment section.

Third, the industry market: During Q1, shipments to the industrial end market decreased a normalized 2% in addition to medical and automatic test equipment segment. We continue to invest in products for the automotive segment. Here, our initial offerings are now generating revenue. A couple of notable automotive wing include a serial interface product to communicate with the display in high-end cars sold by a leading German manufacturer and an RF receiver product, designed into various models of an American auto maker. These unique, this unique receiver has two independent data paths, and a single device simultaneously provides both remote keyless entry and tire pressure monitoring.

Maxim's technology has been extremely well received by automotive module manufacturers and the automobile companies alike. We expect significant revenue contribution from this segment in the coming years. Finally, communications market revenue was up 4% on a 13-week normalized basis.

Next, I will turn to Q1 booking. The standout market during the September quarter was consumer, where orders increased by 26% sequentially on a normalized basis. This substantial increase was driven by high demand from the cell phone segment. Sequential normalized bookings in the computing and communications end-markets were up slightly while bookings from the industrial end-market were down.

Turning to the five initiative I articulated in our February conference call. We have achieved great success in four out of the five and made further progress on the fifth. First; gross margins have stayed in a stable range for several quarters now.

Second, we reduced our manufacturing cycle time significantly, beating our original goal. We also achieved excellent on-time product deliveries. Customer feedback indicates that they are very happy about our responsiveness and improved delivery performance.

Third, our business units continue to collaborate more closely on joint projects. This collaboration enables us to integrate diverse functions from our broad intellectual property portfolio and has led to key design wins in all segments.

Fourth, we empowered our business unit executives and are holding each accountable for results. We link the compensation of our executives to operating margin and operating profit growth. This raised the importance of these metrics throughout the company.

We will monitor performance of these initiatives on an ongoing basis, and will continually drive for further improvements.

Our fifth initiative to review and adjust our small and medium sized customer sales strategy is making good progress. I would like to end my prepared remarks by expressing my excitement that the recent closing of the acquisition of the storage products line from Vitesse. We added leading edge mixed signal high-speed technology and engineers, customer relationships and market positioning with this acquisition. We expect this operation to become profitable by our fiscal year-end and to contribute significantly to our growth in the computing end-market over the next several years. Paresh.

Paresh Maniar

That is the end of our prepared comments, we could now welcome your questions. Please limit yourself to one question with one follow-up. Operator will you please begin polling for question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tore Svanberg from Thomas Weisel Partners.

Evan Wang - Thomas Weisel Partners

Hi. This is Evan Wang calling in for Tore Svanberg. We have heard that notebooks and cell phones have been strong, and I was wondering if you can comment a bit on whether you see indications that you are gaining shares, or if the growth in your business units there are due to the growth of the market?

Tunc Doluca

This is Tunc, I will take that question. I think it’s a combination in the cell phone market there is growth, but we are definitely gaining share in that market and also gaining that share in a profitable way.

And in the notebook market, we're -- mostly the growth is because that market has grown significantly, and our share gains there, as I indicated in my prepared remarks, is mostly in areas that are not in the motherboard power. So, I'd say it's a combination of both market growth and share gains.

Evan Wang - Thomas Weisel Partners

And my follow-up question is, whether you may have any anecdotal stories you can tell about how your business units may have collaborated to win the share gain?

Tunc Doluca

Well, there is, I mean I can give a few examples. Obviously, I can't be very specific, but one example was where we had a joint project for some small phone tag to Mobile PCs where our groups that make our audio products and the groups that make our power management products, have a joint development, and that was viewed very positively by the reference designed customers that we were working with. I mean that's one example. Vijay can you think of another one that you can...?

Vijay Ullal

I think we have a couple of those kinds of products. And I think there is similar example between our signal processing groups and Michael controller groups. So, we have probably 10 or 12 such collaborative projects.

Tunc Doluca

And definitely, one other area is in cell phones where some of these functions are being integrated together that in our company we are developing in separate organizations but they are working together to make single-chip solutions for the customer.

Evan Wang - Thomas Weisel Partners

And thank you very much.

Tunc Doluca

You're welcome.

Operator

Thank you. Our next comes from Craig Ellis from Citi.

Craig Ellis - Citigroup

Thanks, guys. I'll start with the clarification on the gross margin line. Bruce, could you just highlight what the gives and takes for in the gross margins which declined 40 basis points in a quarter, was there any inventory write-down effect there, or anything else was notable,

Bruce Kiddoo

That was primarily due to mix, due to the strength in the notebook business. We did have, quarter-on-quarter, a slight improvement in our inventory write-down, but we believe that reached a normalized level at this point. So, we're primarily going to be driven by a mix and by our ongoing cost reduction activities which are very active within the company right now.

Craig Ellis - Citigroup

Okay, that’s helpful. And then switching gears to the five initiatives that you outlined in February, you highlighted the emphasis on the global sales plan. When should we expect to see the benefit of the changes that you are making there, and is there any associated operating expense increased with the changes that you make on global distribution?

Vijay Ullal

In terms of the global distribution, our main objective there is to be able to capture more sockets and small and medium size customers through using the distribution channels SAE's and then their sales force. Therefore, that win is going to come slowly, it’s not going to immediate. So, it will be multiple quarters before we can begin to see leverage on selling our existing products. There was some additional hiring in the sales area and distribution managers. But it really is not very significant in terms of what we need to spend below the line.

Craig Ellis - Citigroup

So, is that the rest then to identify additional distributors for your products and leverage that more so than just hiring staff for direct sales?

Vijay Ullal

That’s correct.

Craig Ellis - Citigroup

Okay. Thanks guys.

Operator

Thank you. Our next question comes from John Dryden from Charter Equity Research.

John Dryden - Charter Equity Research

Could you comment on, within notebooks, are margins higher for the increased audio, battery and LCD power sales versus power management on the motherboard, and where did you see the highest area of growth?

Tunc Doluca

Your question was in the notebook area, how do our margins change from those four segments that I talked about.

John Dryden - Charter Equity Research.

Yes sir.

Tunc Doluca

And in general I can say that they are better in some -- those other segments that I talked about, clearly I really don't want to quantify that right now. And I don't think we have right now the data to show which segments contributed to most of that growth. But we did have a lot of motherboard power management wins that have been carrying over. So that's been a good growth area for us this quarter.

John Dryden - Charter Equity Research.

And maybe a follow-up for Vijay, can you talk specifically about the strength in phones, was that primarily from increased units or increased billing materials where you are up selling new products?

Vijay Ullal

I think it's the combination. I think we did get some design wins for new products and of course we are also selling more high integration of products. So it’s a combination for sure. It depends on the customer, at a couple of customers I think the growth has been driven by high integration products. But we have some new customers that are -- who are buying our lower integration products. So it’s a combination.

John Dryden - Charter Equity Research.

Thanks for taking my questions.

Tunc Doluca

Welcome.

Operator

Thank you. Our next question comes from Chris Danely from JPMorgan.

Venkat Swami - JPMorgan

Hi good afternoon. This is [Venkat Swami] sitting in for Chris. I have a couple of questions, the first one is you talked about the strength in the computing and consumer end market segments, but looking ahead what segments are you particularly worried about? Do you see continuing weakness in industrial or in consumer segment?

Tunc Doluca

Well going forward in the future quarters, we expect things to be well balanced, we really don’t have a lot of visibility beyond Q2. It's really difficult for me to be able to say how our mix will change or which segment will be weaker or stronger in [2008] and beyond.

Venkat Swami - JPMorgan

Okay. That’s fair. If I could ask a follow-up, how would you characterize an upturn. Is it slow but steady, do you think its getting better, I know you said you couldn't look beyond Q2, but in general if you look at prior upturns how does this feel relative to the previous one?

Bruce Kiddoo

Well, as I said it has been a steady growth for us for the last two quarters. And if you look at our guidance for Q2 it's about, if you took the mid point, it's about in the 3% range. So anything beyond that is very difficult for us to say. The thing that we have noticed, that some of our customers are concerned about developments, in the macro economic situation.

So, we think that that might influence their stance in terms of their aggressiveness on ordering products and ordering microprocessors. So, I think that it’s best for us to be cautious right now. But as I said visibility is pretty poor beyond Q2.

Venkat Swami - JPMorgan

Okay. Fair enough, thanks. And can I ask one bookkeeping question?

Bruce Kiddoo

Sure.

Venkat Swami - JPMorgan

You may have already mentioned this, if so could you just repeat it. What is your fiscal '08 estimate for depreciation as well as CapEx?

Bruce Kiddoo

For CapEx for fiscal year '08 we've given guidance at about $200 million to $250 million.

Venkat Swami - JPMorgan

Okay.

Bruce Kiddoo

And I don't think we have given guidance on the depreciation in this quarter. Those are around $30 million.

Venkat Swami - JPMorgan

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from John Pitzer from Credit Suisse.

John Pitzer - Credit Suisse

Good afternoon, guys. Thanks for taking my question. Just quickly, relatively to the revenue guidance for the December quarter, does that include the Vitesse acquisition? I guess, how much should we assume? Is $5 million the right number, and then I have a follow-up. Thanks.

Vijay Ullal

It does include the Vitesse acquisition; $5 million is probably a little high. We only have two months of shipments to benefit from this quarter. I would view this as, certainly we're not going to give the exact number, but it’s less than 1% of total revenue. So it's relatively immaterial.

John Pitzer - Credit Suisse

And I guess the second question is, can you just comment on just the inventory. I know you made a comment on the prepared remarks. Was it up in the quarter, and I guess, what should we read for December, just the inventory keeps coming down, what do you think the reload happening? Is that a first-half calendar '08 have been?

Bruce Kiddoo

Yeah and just to clarify, we said that our dusty revenue modestly increased in the quarter and that our revenue -- excuse me and that our inventory decreased. I think, our view from a distribution point of view is that the channel is well under control, and we don't see dramatic uptakes or downturns at this point. We think the distributors are being very cautious in managing their inventory levels, and so we believe it's a more steady growth rate at this point.

John Pitzer - Credit Suisse

Bruce this is a follow-up, if the economy starts to improve in the first half, do you think inventory levels are appropriate to an improving economy or sort of the macro economic environment we find ourselves in right now?

Bruce Kiddoo

As Tunc indicated, I think, right now folks are being more on a cautious side and so I would say that's probably reflective in the inventory levels as well.

John Pitzer - Credit Suisse

Great. Thanks, guys.

Operator

Thank you. Our next question comes from Simona Jankowski, from Goldman Sachs.

Simona Jankowski - Goldman Sachs

Hi, thank you. Much (inaudible), but can you comment on your lead times and also cancellation patterns in the quarter?

Tunc Doluca

Sure, I will comment on the cancellations. Cancellations were actually down for the quarter. So, we have no real issues there. From a lead time point of view, those continue to increase, excuse me, continue to improve, consistent with the kind of pattern we've been seeing over the last couple of quarters.

Bruce Kiddoo

Yes. So, one of the lead times there somewhere between 8 and 9 weeks, and the lead times were given customers a pretty much matching what they are giving us. So, we see a pretty stable environment and then that’s why a lot of them are very satisfied with our performance.

Simona Jankowski - Goldman Sachs

Sure, terrific. And just a second question, Tunc. Obviously, since last time we spoke on this kind of earnings call, you guys did get de-listed. Can you just comment on the impact, if any, does that pattern either employee morale or any turnover or customer relationship or anything of that nature?

Tunc Doluca

Okay, so let’s take that one at a time, Simona. So, in terms of customer relationships, there were a couple of customers that enquired about it. We informed them, we told them about our financial strength and they were satisfied. So, I don’t regard this, that as an issue. Internally, obviously the employees did not welcome that news. But, I think that we've been a few weeks after that now. And I see that any affect that it had right now has really subsided. One thing that has happened, that was positive for the quarter was that, our attrition actually in Q1 dropped substantially from previous quarters. So I saw that as a good sign.

Simona Jankowski - Goldman Sachs

Excellent. And just one last question. It sounded like your OpEx came in just a little bit higher than what you guys had expected, was that due to the attrition rate developing or opportunistic hiring, design activity anything else you can point to?

Bruce Kiddoo

I think a couple of quick comment. As we did say it did come in a little bit. It did grow a little faster than revenue. The issue is that in many of our expenses really don't scale by week. And as you might recall in Q4 OpEx grew significantly slower than revenue for the same reason. So the way we are looking at this is really when you compare Q3 to Q1 and that kind of removes this 13, 14 week issue. And so compared to Q3, Q1 revenue increased 9.9%, while OpEx only increased 8.4%, more just consistent with our business model.

And again, as I said in my prepared remarks, just let me reemphasize again--we are absolutely focused on managing our OpEx to provide the leverage in our financial model. So overall I think we are comfortable with where OpEx came in this quarter and the internal processes we have to control it.

Simona Jankowski - Goldman Sachs

Okay. Thanks very much.

Operator

Thank you. Our next question comes from Jeff Rosenberg from William Blair.

Jeff Rosenberg - William Blair

Good afternoon. Tunc when you were talking about the shift in your design emphasis on the notebook side, what you think that means as you look to your ability to grow that portion of your business in '08, are you seeing that you are like receding market share in the motherboard and as you look out fro the design cycle and do you feel like you have enough new products and other applications to make up for that or do you think you get more modest type growth environment in that end market overall than you are experiencing right now?

Tunc Doluca

Well I think in that particular end market we are probably -- I mean clearly, with the number of products that we are making and the inability to differentiate those products, the market share in that particular segment we expect to go down. But I believe that there are products that we made, investments that we put in other functions in the notebook area. They are going to help us balance that out somewhat. So I think that -- by the way it does not mean that we have completed abandoned making any product, we do see opportunities, I just essentially wanted to say that we don't have the level of emphasis we had maybe three or four yeas ago in that area.

Jeff Rosenberg - William Blair

Okay. And on the consumer side, on the wireless side, you talked a fair amount about products there. It seems there were more power management oriented and other functions. In the past you've had some goals to do more in the RF side and maybe an update there in terms of the high frequency products and what your emphasis that is there for the handset?

Tunc Doluca

On the handset side most of our products specially in the RF segments, in that area, have not been in the signal path transceiver type ICs, most of the design wins we are getting are in functions that are additional functions,. An example might be a TV tuner chip for example, which are becoming increasingly popular in Asia. So, its additional products that are more feature rich and new and that are not really that much driven by standards, where we are getting success.

I also mentioned a few other examples, like the satellite receivers that were used and mostly goes into automobiles for example. So there are other products, other than just power management and audio parts that we sell into consumer applications.

Jeff Rosenberg - William Blair

Has that emphasis changed much over the last couple of years or has your product roadmap with high frequency is pretty steady?

Tonc Doluca

I would say that if you look back three or four years ago, we did have some emphasis on making transceiver chips for CDMA, and I don't know if you recall, but two or three years ago, that was an issue for us in terms of bringing down our margins. So, I would say that in the last few years we have changed our focus from really making transceiver products for cell phones to making the more value-added differentiable type products.

Jeff Rosenberg - William Blair

Okay. Thank you.

Operator

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

David Wu - Global Crown Capital

Yes. I have two questions. The first one is on industrial market, these are fairly broad markets, and there is the relative weakness in industrial, basically a seasonal pattern and we should get better as we move into the first and second calendar quarter of the year?

Tonc Doluca

Well, I think in the industrial market it's usually, those markets are bit stronger in the first half of the year, but I emphasized that word a bit because when we looked at our historical data, even though you could see a pickup in those quarters, it's very slight. So, I think that those markets, we expect, unless there are some macroeconomic situation that they would get slightly better in the first half of the year.

David Wu - Global Crown Capital

Okay. On the cell phone side, I got the impression in the past, that it's primarily CDMA, the phones related. Are you tied to the Korean Handset customers or are we looking at broader range of customers and products these days?

Tonc Doluca

In terms of our cell phone sales whether it be audio or power management, we do have design wins and revenue coming from multiple customers and multiple standards. But I would have to say that, a bulk of that is coming from the CDMA market and most of the CDMA customers happen to be in Korea.

David Wu - Global Crown Capital

Great. Okay. Fantastic, thank you.

Tonc Doluca

You are welcome.

Operator

Thank you. Our next question comes from Gurinder Kalra from Bear Stearns.

Gurinder Kalra - Bear Stearns

Thanks. First question on the OpEx side, you mentioned that there were some math costs which influenced OpEx, is it possible to tell us, how much was the math cost and whether that we should look at that as more of a non-recurring item?

Vijay Ullal

We're not going to breakdown the actual amount of marked expense. It did increase a little bit in the quarter, and one of the issues with [mass] expense as you would probably expect, it’s a little bit lumpy depending on the timing. And this was quarter where the engineers were able to accelerate some tape out, and which is obviously a good thing for us as a company. Going forward, we don’t expect it to -- we expect it to stay within a similar range.

Gurinder Kalra - Bear Stearns

Okay. Second question is on the handset, was that considerable fraction with Chinese handset venders during the quarter also which explains some of the upside.

Tunc Doluca

No. I would say that the large portion of the increase in the handset area was mostly coming from Korea.

Gurinder Kalra - Bear Stearns

Okay. Thanks, very much.

Operator

Thank you. Our next question comes from Romit Shah from Lehman brothers.

Romit Shah - Lehman Brothers

Yeah thanks for taking my question. We guys have had the push off of the expected filing of the restatement on a couple of occasions, looking at it today are you any more confident that you will get the restatement filed by the March period?

Bruce Kiddoo

Shah this is Bruce. Our current estimated date is still calendar of quarter -- first quarter and we are still confident. There is a significant amount of effort within the company and with outside advisors to make sure we complete this process. It’s very clear that this is the top priority Tunc has made it very clear to all of us who are working on it. And so our efforts are to complete it within the Q1 time period.

Romit Shah - Lehman Brothers

Okay. And if I could, just to clarify, Bruce are you expecting to generate some operating leverage in fiscal '08, meaning should we expect earnings to grow at a faster rate then sales?

Bruce Kiddoo

Yeah, absolutely our business model is to grow OpEx at a slower rate than revenue and so you should expect to see some leverage in fiscal year '08.

Romit Shah - Lehman Brothers

Okay. Thank you.

Operator

Thank you. Our next question comes from Uche Orji from UBS New York.

Uche Orji from UBS New York

Thanks for taking my question. Let me just go back a bit on the Vijay's point, I know you said the impact on revenue was not material, but if we look below the revenue line on the P&L was there any impact say on that lines in the expenses?

Vijay Ullal

Yeah when we look in….

Tunc Doluca

Which, you are asking about Q1 or Q2?

Uche Orji from UBS New York

I am asking about Q1?

Vijay Ullal

So when we look at the test overall…

Tunc Doluca

Q1 we had enclose that.

Vijay Ullal

Q1 yeah we had enclosed the deal.

Tunc Doluca

It wasn’t in the numbers.

Uche Orji from UBS New York

Right. And if I look at in the coming to this current quarter what type of impact should we expect on the expenses lines. Should we expect if any?

Vijay Ullal

No. We expect it to be slightly dilutive this quarter in Q2, and expect it to be accretive for the full fiscal year, so you will see some impact this quarter from an OpEx side.

Uche Orji from UBS New York

Okay. Let me just ask another question, if I look at the guidance you are giving how much of that, how much turns business you imply in that guidance. And if you can give me a perspective whether that's higher or lower than normal level of turns?

Vijay Ullal

All right. The level of turns business is consistent with what we've had in prior quarters. We no longer kind of break out the exact number.

Uche Orji from UBS New York

Okay. Let me just ask another question on the notebook market. Now this has been a fairly strong market. Do you have any perspective as to the debate going on in the industry now about double ordering within the PC segment? Do you have any perspective about that? What your sense is in that from your product perspective from what you see within the channel, what's your take on that?

Tunc Doluca

Well, I'll take that question. Well, I mean double booking is a natural reaction from customers, when they sense that there is a supply shortage. So, in our case we have been supporting these customers very well with deliveries. And our lead times for the notebook customers have remained constant, they have not gone up. So, all indications from customers are that they are not double booking on Maxim. And weather they are double booking on others, we will not be able to tell that.

Uche Orji from UBS New York

Thanks.

Operator

Thank you. Our next question comes from Mahesh Sanganeria from RBC Capital Markets.

Sanjay Rajkumar - RBC Capital Markets

Hi, guys. This is [Sanjay Rajkumar] calling for Mahesh. Couple of questions. The comment, which you had on strength in the cell phone market. My question is can you give some color on what do you think are the barriers of entry from the competition in terms of both, design of the product, as well as the manufacturing process?

Tunc Doluca

So, in the cell phone market there are several barriers for entry. In terms of our products that are single function or building-block by products, those are really driven by the performance of the part. So to win the socket you need a design team that's knowledgeable in that particular function. And also, process technology that gives that design team the tools to make a better product. So in that scenario where Maxim has invested for years, and we have leading edge process technology that's proprietary. And we have a design team that's very experienced in that area.

On the other hand, if you look at the higher integration products, there, what you need is mostly the ability to put together a lot of these high-performance functions and they might be coming from diverse areas like you might have to put together USB transceivers with power management, with real time clocks, with audio amplifiers, and that kind of diversity is in very few competitors of ours. So we're able to eliminate a large portion of competitors that are trying to come in to the market just by the fact that we can design these complex products.

Sanjay Rajkumar - RBC Capital Markets

Right. If I could turn to the computing section, could you comment on rough terms as to how would you compare your dollar content in notebooks, now versus, let’s say two years back?

Tunc Doluca

We'd have to look at the data. I can't really quantify it, but I do know that our numbers for those business units are higher than they were three years ago in terms of revenue.

Bruce Kidddo

And Sanjay, if I may, I would like to add a comment to the follow-up comment. So, you would have to really compare us against other people in terms of the falling three things like, we have good, really good product definition, because of our close association with the customers. We have really good relationships with customers. We have unique process technologies. Our own internal manufacturing, which gives us process and product differentiation, lower cost, and that we have a wide diversity of IP, which would entail audio, video, power management and all of these things. So, it’s really a triple threat and you would have to, you will have a hard time finding somebody that could do all of those three things. As there is a very limited number of people who can do all three. So, that was the differentiation for Maxim comes about in the cell phone arena. A mix signal, anyway.

Sanjay Rajkumar - RBC Capital Markets

Okay. And if I may, one last question. Can you comment on your capacity or manufacturing capacity available? Do you have enough capacity on line at the moment to be able to taken spikes and orders from the customers?

Vijay Ullal

Hi. This is Vijay. I'll comment about fab capacity, and right now, if you add all our internal fab capacity and you add in the strategic alliance with Epson, we’re running about 75% of our equipment capacity. If you look at what our capacities with respect to what we could do, we outfitted our internal fab completely with equivalent. We’re running at about 46% of our capacity. So, we have plenty.

Sanjay Rajkumar - RBC Capital Markets

Okay. Great, thank you.

Operator

Thank you. Our next question comes from Sumit Dhanda from Banc of America.

Sumit Dhanda - Banc of America

Yes hi, I had a couple of questions. Bruce just I want to ask you about your operating model which seems to be a little bit of a change from the last call where I think Tunc suggested that operating profits should grow inline with the revenues as opposed to faster. But along those lines can you help us understand what specific action you are contemplating to allow for the leverage to flow through the model especially given the diversification in the business model, which I think at the outset requires higher R&D outlays as you pursue some ASSP opportunities?

Tunc Doluca

Let me take the first part and Bruce will take the second. When I was asked that question in the last conference call, I was really referring to what we expected for the just upcoming quarter in terms of our -- essentially what I had said was that our operating expenses have changed pretty much with our revenue change for the quarter. But for longer term our goal is to get leverage and our goal is to grow our operating expense at a slower rate then our revenues. Bruce do you want to add some more color?

Bruce Kiddoo

Sure and the way we are going to achieve that a across all three key metrics right, we are going to aggressively seek out revenue growth. We believe our strategy in our managing kind of our core business along with sort of the high consumer or high growth opportunities will allow us to grow faster than the industry. From a gross margin point of view both by managing this mix of business and by aggressively going after cost reduction activities which we are doing in fab end of line.

Across the board there is a renewed emphasis and with Tunc on board to push very hard from a cost reduction point of view and then of course from an OpEx point of view that's just managing your investments, but I think the key thing we are going to do there is in looking at the different businesses that we are in, make the decisions and make the choices as to where to invest our R&D dollars, to ensure that we are getting the best return for that.

So, I think it’s going to be a very active process, across revenue gross margin and operating margin. And as you have seen from the last couple of quarters, we've been able to deliver this nice consistent predictable revenue growth with stable margins. And really that's the model that we are going to target going forward.

Sumit Dhanda - Banc of America

I guess I'm not clear about couple of things, one I mean the mix of the business, I am not sure how it can get richer given your strategy of pursuing a more ASSP centric model? And then I guess second point, I am not clear on is your SG&A line is a very low percentage of revenues. So I am assuming that there is no cushion or leverage within that particular line or if I am mistaken please help me out?

Vijay Ullal

Yes. So first of all I will do them in reverse order. As far as SG&A to an extent that revenue continues grow above industry average, I would say there is some leverage there, we are doing significant amount of work as far as, we have publicly talked about an SAP implementation. We are looking to drive efficiencies across the entire organization and that's happening in all of our groups.

I think on the revenue side, I think there are two ways that we are going to kind of drive that. One is we're along with, kind of seeking this high revenue opportunities, obviously we are working very hard on our core business as well, and looking for new businesses to enter there and kind of defending the core to make sure that that business stays strong and healthy. And I think the third part from a gross margin point of view, which I mentioned before is again we are very aggressive from a cost reduction point of view. Making sure we have our factories sized appropriately so that they are running as efficiently as possible.

Sumit Dhanda - Banc of America

Okay.

Tonc Doluca

And then to quantify that a bit more, I mean if you look at our SEM, we believe it's going to grow from about $18 billion to almost $25 billion between 2007 and 2010. And a lot of that growth does come from entering markets that we have not entered. So there are opportunities for us to find revenue, and we have a diverse product portfolio, but it doesn't encompass everything that's needed out there. So there are opportunities there, and then there are also opportunities, we believe, in leveraging our small and medium-sized customers with existing products. In R&D, that's already been spent to increase our revenue as well.

Sumit Dhanda - Banc of America

Okay. Just as a follow-up to that 20%, can you update us on what percentage of revenue at this point are coming from your high-volume lower-margin products? My last recollection is it was about 16% in fiscal '05, as you've closed fiscal '07, do you have an update for us?

Vijay Ullal

I think you're referring to the building block versus high integration. And that update is currently around, I think, it's still just below 20%. As far as the core versus high volume, we haven't broken that percentage out.

Sumit Dhanda - Banc of America

Okay. Then one final question for you, Bruce. You -- given the sequential growth within each of the four major segments, any chance we could get a breakout from an exposure perspective for those four segments?

Bruce Kiddoo

So, currently they are relatively well balanced. We haven't split that out specifically in the past.

Sumit Dhanda - Banc of America

Okay. Alright. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Ross Seymore from Deutsche Bank.

Ross Seymore - Deutsche Bank

Hi, Tunc and Bruce. Can you guys talk a little bit about the linearity of orders in the quarter, and specifically you highlighted the notebook strength, I think a prior question asked about double ordering. Rather than double ordering, have you guys seen any slowdown in that as we progress through this quarter?

Tunc Doluca

Okay. If we look at the bookings for the prior quarter, Q1 quarter, I think that if we looked at that, it started up very strong and we’ve got a lot of bookings and orders, in the first part. So, I would say that it was not completely linear throughout the quarter. And it was less towards the end, and that’s why our guidance for this quarter is 3% instead of the -- that 3, but the middle range 3% instead of being a higher number. So, in terms of looking at how Q2 started, it’s really, we really don’t want to talk about those numbers because it’s too small of a sample size to be able to tell anything. So, I won’t be able to give you lot of color on, how the bookings were going on in October.

Bruce Kiddoo

But I think Ross, based on the bookings pattern we're seeing, we're still obviously very comfortable with the guidance that we have given and that booking support that.

Ross Seymore - Deutsche Bank

Great, and kind of like the prior question that was asked, even though you are not going to give the exact breakout of those segments before the computing consumer etcetera, are there any sub-segments within that, those four are bouncers, so are there any sub-segments within that, that are the vast majority of those, anything over, say, half of those segments in and it of itself?

Bruce Kiddoo

I think when you look at the segments, I mean, we’re currently are tracking 19 of those segments. It’s very well diversified across them. There is only three that are above 10%, and none of those three are greater than 20%. And so basically it’s well diversified, there is obviously the three there are a little bit higher than the others.

Ross Seymore - Deutsche Bank

Okay. Thank you.

Operator

Thank you. Our next question comes from Nancy Friedman from Greenleaf Capital.

Nancy Friedman - Greenleaf Capital

Hi thank you for taking my questions. Could you give a little more color on the rational behind the Vitesse acquisition?

Tunc Doluca

Sure this is Tunc. So essentially the particular product line market, which is the storage market, it's an area that we actually did have a product plan to go and pursue. And especially to make one of these segments or one of the functions in that market is called an expander and we were actively developing some products in that area and we found out that we were significantly behind in this technology development internally. And we did see a fairly large market, it is a market where the product really gets sold because of the very high performance of the high three or six gigabit per second, from an interface.

So we really choose the product, the analog performance of that high speed front end. So essentially decided that maybe the best way for us to get a jump start in the product area was to go find who the leader was in that segment and look at acquiring them. And essentially that ended up in us acquiring that division from the Vitesse.

What we also get essentially was a jump start on customer relationships in that particular product area. There are a few OEM type customers and they really trusted the workforce or the design engineers and the applications engineers and the tests. So it really gave us a jumpstart in the market where there are not a lot of suppliers. It’s profitable because it is very difficult to do this high speed front end circuits and we are adding essentially a group of engineers that were already experienced doing that. So we saw it as a good opportunity, their margins were inline with what the Company wanted and it would provide growth for the company in general. Bruce?

Bruce Kiddoo

So, one other thing that probably has not been or did not factor exclusively in to this and we are kind of seeing some of the results of it is that, these particular products are pretty core in the system. And this allows us, we think that, based on our customer relationship that we are developing in the faculties or core products and some of the other products that go around this core product, because we could do a better do a better job of selling those. So, there is a leverage there that probably has not been talked about exclusively. But we hope to see some of that.

Tunc Doluca

Yes, and that’s the benefit, Bruce is absolutely right, thanks for making that comment. But we saw that as a benefit that we could get, but since we couldn’t quantify it, we made the decision basically on the inherent value of the products we were getting. But there is more leverage from that because of this relationship.

Nancy Friedman - Greenleaf Capital

Thank you very much.

Tunc Doluca

You're welcome.

Operator

Thank you. Our next question comes from Mike McConnell with Pacific Crest Securities.

Mike McConnell - Pacific Crest Securities

Thanks. Could you talk a little bit about just general customer behavior in Q4 with respect to the OEMs, and then maybe touch on distributors, just general behavior, build plans, are they more conservative in the way you would normally see, etcetera?

Tunc Doluca

You said Q4, but I think you meant Q1, right?

Mike McConnell - Pacific Crest Securities

Yeah, I'm sorry calendar Q4 -- year fiscal.

Tunc Doluca

Oh, current quarter, yeah, this was down quarter?

Mike McConnell - Pacific Crest Securities

They -- essentially we do send some amount of caution in the customers, but I wouldn't say that they drastically change their behavior, when I'm talking about both OEMs and the distributors. But they are cautious.

Mike McConnell - Pacific Crest Securities

Does it feel like though that the normal step up though and build plans that you typically see in Q4, somewhat muted, are in your fiscal Q2 more muted than you normally see?

Tunc Doluca

It's really difficult to say.

Mike McConnell - Pacific Crest Securities

What about turns? What's the confidence on the turn side?

Tunc Doluca

I think we're very confident on the turn side, again, it's consistent with levels in prior quarters. So we don't see any issue there.

Mike McConnell - Pacific Crest Securities

And it's a fine loaded quarter there, is that right?

Tunc Doluca

Our linearity is relatively good here across the three months.

Mike McConnell - Pacific Crest Securities

Okay. Thanks.

Operator

Thank you. Our next question comes from Steve Smigie from Raymond James.

Steve Smigie - Raymond James

Great, Thank you. You guys have made some investment in CapEx over the past few quarters, and I was curious almost have been -- and you might typically make, it seems that might appeal to some cost risen in terms of giving them actual capacity to work with us. Have you seen a positive impact from that or am I thinking about that wrong?

Bruce Kiddoo

Sorry, what was your question?

Tunc Doluca

Can you repeat the question, please?

Steve Smigie - Raymond James

You guys have made decent investment in CapEx over the past few quarters, I am just curious has there been any positive customer feedback from that or is that merely an operating issue for you?

Tunc Doluca

We absolutely have seen positive responses or comments from our customers. They have seen that we are, A: We are able to deliver on our commitments, and also be able to meet their requirements for build. And then also, they feel very comfortable or confident by this fact that when there is an upside, what we put in place, we can respond fairly quickly. So, they've all commented, they have seen that as a good thing, and they also, additionally, are very positive about the cycle time improvements we made over the last nine months.

Bruce Kiddoo

I think our overall cycle times went down about five week from the beginning of the year, which I think has been extremely positive for the whole company and our customers.

Steve Smigie - Raymond James

Thank you. And my other question was just on ASSP products, do you see that as more of a product, sort of products where there is potentially pricing pressure or was it traditional standard products or more. Your perspective and really price pressure was that the one way to think about it?.

Tunc Doluca

I would say that pricing pressure mostly comes through volumes. It’s not only the type of products, it’s really the volume of the products. So, you could have a single-function product, and if it’s being sold or bought in very high volume by a customer and you're going to have pricing pressure. So, it’s really not coming from being high integration or low integration, it’s mostly coming from volumes.

Steve Smigie - Raymond James

Okay. Great. Thank you.

Operator

Thank you. Our next question is a follow-up from Craig Ellis from Citi.

Craig Ellis - Citi

Tunc, can could just elaborate on what your objectives are with regards to acquisition relative to other uses of cash. Obviously there is no buyback until the financials are restated. But should we expect the company to be more acquisitive than in the future following up another test deal.

Tunc Doluca

Craig in that area -- that is an area where we have made a change. First of all we formed a small business development group and staffed it with a couple of our best people. And our stance really is to look at opportunities essentially either coming from business units in terms of adding technology and Vitesse was a really good example of that and also looking for cases where we might want to add or accelerate some of our process technology, where we might want to add modules to give our engineers better tools. So mostly that groups function is to look at small additions to the company and mostly to buy us time in terms of technology development, whether it be in process or it be in design.

Craig Ellis - Citi

Can you quantify how much that group might be charge with spending or are you thinking there is a level of spend that's a threshold for that group on an annual basis?

Tunc Doluca

Frankly we look at each case. If the group is not -- they are not given a budget, a spending budget and we look at each one of this cases as they come and we also look at that group also will out in seek as the business unit say, it's very interesting technology that we need for our product roadmap to go out and look. But it's really not a budget based system that you might see in some of the larger companies, that have large venture groups for example.

Craig Ellis - Citi

Okay. So clearly more opportunistic. Then just Bruce for you, on the last call there was mention made of an ARP system implementation, should we still expect that, if so when and how should we think about the expense side of that implementation?

Bruce Kiddoo

So, we have kicked of an SAP implementation, as you know those are a long process. So, that will take at least a year plus to get done. And from an expense point of view that's factored in to our business model and will accomplish this within the business model that we have articulated.

Craig Ellis - Citi

Okay. Thanks Bruce.

Operator

Thank you. Our next question is a follow-up from Uche Orji from UBS.

Uche Orji - UBS

My question being answered, thank you very much.

Operator

Thank you. There are no further questions in the queue at this time.

Paresh Maniar

Thank you all for participating in our call. This is the end of our Q1 fiscal '08 conference call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Maxim Integrated Products F1Q08 (Qtr End 9/29/07) Earnings Call Transcript
This Transcript
All Transcripts