National Semiconductor Corp. F4Q08 (Qtr End 05/25/08) Earnings Call Transcript

Jun. 5.08 | About: National Semiconductor (NSM)

National Semiconductor Corp. (NSM) F4Q08 Earnings Call June 5, 2008 4:30 PM ET

Executives

Mark Veeh – Manager of Investor Relations

Brian Halla – Chairman and Chief Executive Officer

Lewis Chew – Chief Financial Officer

Don Macleod – President and Chief Operating Officer

Analysts

Ross Seymore – Deutsche Bank – North America

Chris Danely – JP Morgan

Romit Shah – Lehman Brothers

Srini Pajjuri - Merrill Lynch

Uche Orji - UBS Securities

Krishna Shankar – JMP Securities

Douglas Freedman – American Technology Research

Evan Wynne - Thomas Weisel Partners

Steven Smigie – Raymond James & Associates

Analyst for Mahesh Sanganeria – RBC Capital Markets

Craig Hettenbach - Goldman Sachs & Co.

Operator

Welcome everyone to the National Semiconductor Q4 FY2008 earnings call. (Operator Instructions) I will now turn the call over to Mark Veeh, Investor Relations Manager.

Mark Veeh

Welcome to National Semiconductor’s Fourth Quarter FY 2008 Earnings Call. Joining me on the call today are: Brian Halla, Chairman and Chief Executive Officer; Lewis Chew, Chief Financial Officer; and Don Macleod, President and Chief Operating Officer.

In today’s call I will provide a recap of the fourth quarter financial results, Brian Halla will give an overview of the business environment and an update on the company’s focus and priorities going forward, Lewis Chew will expand the fourth quarter results and provide the background to our outlook for the first quarter of fiscal year 2009, and lastly Don Macleod will then discuss market trends and products in more detail. We will then take questions until approximately 2:30 p.m. PST.

As a reminder, this call will contain forward-looking statements that involve risk factors that could cause the actual results to differ materially from management’s current expectations. You should review the Safe Harbor statement contained in the press release published today as well as our most recent SEC filing for a complete description of those risks. Also in compliance with SEC Reg FD this call is being broadcast live over our Investor Relations website. For those of you who have missed the press release or would like a replay of the call you can find it on National’s IR website at www.national.com.

So now moving on to our fourth quarter results. Sales were $462 million, up 2% from $453.4 million in Q3 FY2008 and up 1% from $455.9 in last year’s fourth quarter. Total revenues for FY2008 came in at $1.89 billion.

Gross margins were a record 65.9% in Q4, up from 64.3% in the prior quarter and 62.5% in last year’s fourth quarter. Gross margin percentage for FY2008 as a whole was 64.4%.

Operating expenses in the fourth quarter were $130 million, net interest expense was $14.8 million, and the effective tax rate for the quarter was 25.8%. As a result National posted GAAP net earnings of $83 million, or $0.34 per fully-diluted share in Q4 FY2008. The fully-diluted share count for the fourth quarter was 246.3 million shares.

Included in the GAAP financial results this quarter are the following notable items: first, a $9 million expense for severances in connection with our previously announced action on April 29, 2008; and second, approximately $6 million of discreet tax benefits realized in the fourth quarter.

So before I turn it over to Brian, there are a couple of administrative items that I would like to highlight. First of all, we will be holding our Q1 earnings call on Friday, September 5, 2008, instead of Thursday, September 4, due to a previously scheduled customer commitment. And second, approximately every six years we must add an additional week to our fiscal year to end on the last Sunday in May. As a result, this year we will be adding one additional week to our third quarter of FY2009, or our February ending quarter.

With that, I will now turn it over to Brian.

Brian Halla

Well, it looks like we weathered through the bottom of this cycle pretty well. Our bookings were up double-digit sequentially and we realized a positive book-to-bill. In the next few minutes I will cover the continuing progress we are making with our business model and some of the actions we have taken to support that model. I will then give a brief outlook that should be a little better than our seasonally down summer quarter. And I will finish up with an update on the company’s progress towards the National 3.0 repositioning and corresponding initiatives.

Well, it would be a bit Pollyana to ignore the impact of the rising price of oil and the financial market debacles. Demand for our products did improve during the quarter allowing us to achieve revenue growth over the prior quarter of 2%, which was just north of the guidance we gave you as we entered the quarter.

The wireless market, which one would assume mirrors consumer spending mentality, sputtered at a couple of customers but in aggregate met our expectation. Resales through our distribution channel also met our expectations, although their inventories are still running at very low levels. Our own inventories stand at 86 days to accommodate what we believe will be a continuing, healthy occurrence rate from this channel through the quarter.

As we look at our gross margins as a kind of report card for how we’re executing the business, we continue to see positive progress. I would like to highlight the fantastic execution of our manufacturing team that continues to reduce cost, even at the current low utilization rates. The modernization programs in our factories, launched back in January, are starting to show improving margins, and not all the good news here is yet reflected.

The mix of higher values and higher ESP product ramping into the marketplace is another key driver of the gross margin games. We have maintained good spending controls even while directing a much larger portion of our spending to the new National 3.0 initiatives I will discuss in a moment. The operating expense actions we announced in the quarter are consistent with this steam of continued control in overall spending while still increasing our investment in our key strategic focus areas.

And of course, the leverage of this richer mix of product combined with our constantly improving manufacturing efficiencies combined with solid discipline in our controlled spending allowed us to achieve a very high fall-through to the bottom line of that sequential 2% revenue growth.

So what is the outlook? We are ending this quarter with a higher opening backlog, improved order run rates, and expectations for reasonable turns. We do expect somewhat of a summer slow down, as always in Europe, but with inventories remaining low in our key market segments seeming to be relatively healthy, we will take a slightly more bullish stance than usual going into a summer quarter.

Our guidance, therefore, will be for revenues in the $460 million to $475 million range, or roughly 0.0% to 3.0% up in the first quarter, given everything we see today. If oil, on the other hand, hits $200 a barrel, your guess is as good as mine.

The most exciting thing for me, personally, is how the organization has embraced the National 3.0 innovation initiatives. The product groups have formalized and fully staffed our new key market segments. These are functional organizations staffed with resources from across the company to drive collaboration. They are chaired by the senior managers of the product groups and their budgets are given top priority. The key market segment organizations drive innovation in such segments as Sensing and Detecting, Healthcare Electronics, Infrastructure Power Management, and of course, Personal Mobile Devices, where we will drive the differentiating solutions in lighting, risk canceling, charging technologies, and display projection technologies.

As we said before, National 3.0 will leverage and exploit our PowerWise family of future and existing products in all of these areas as more and more designers come to us with a power budget.

Being the industry leader in power management in the world entering a clear energy crisis puts us in an advantageous position to make a major contribution in the area of energy conservation.

The new all-electric Tesla Roadster, which goes 0-60 mph in under four seconds, with over 230 miles per charge, is an example of a product with a strict power budget that adopted dozens of National’s PowerWise circuits for their PEM, or power electronics module.

The first major output of our National 3.0 initiatives will be unveiled this summer in the photovoltaic area. Our SolarMagic technology will dramatically improve the efficiency of solar panels, even for example, in shaded conditions, an innovation made possible by utilizing our analog PowerWise power management circuits.

No, we’re not going to make any claims about the short-term revenue impact of the new key segment areas. We will claim that the past half decade of actions we’ve taken are delivering the results and have put this company in a position of considerably higher leverage. We said we would drive this company to a 60/30/30 business model. We did that. And there’s room to grow beyond the record gross margins we announced today.

We said we would manage the company to deliver better than 20% return on invested capital, or ROIC, consistently. We continue to do that and we just completed our fifth year in a row of doing so, at 23% ROIC for the year. Now we’re saying that with our National 3.0 initiatives, we can increase the rate of growth of our top line and see even more of that revenue flow to the bottom line. We will do that.

So we’ve cleared the decks of non-essential businesses and obsolete commodities and commodity-oriented manufacturing equipment and processes. We’ve enriched our mix of products which add more unique value and command a course to earning higher ESP. This past year was a continuation of that kind of leverage. It was a year of margin improvement despite a significant dip in revenues in the January time frame.

So we won’t ask you to believe that National 3.0 and the new key initiatives will drive significant short-term revenue, but we will say that with continued execution, excellent execution, of our product lines, sales force, and service supply and logistics machine, that even with modest growth in the year, we believe that a reasonable objective for the organization is for a 15% to 20% earnings per share growth this fiscal year.

Now let me turn it over to Lewis.

Lewis Chew

I have a few things I want to focus on during my comments today. Obviously I want to go over some more details of what we saw in our business turning to fourth quarter just ended.

I want to spend a little time taking about the distribution channel and activity we saw in our key markets. I will spend a quick minute expanding on our gross margins and I would like to finish up with some observations on our business model.

Let me start by flashing back to what we said at the beginning of Q4 about our expectations. At that time we indicated that we had seen negative activity in Q3, like order push outs and cancellations and we felt that this level of negative stuff would not happen in Q4. We also said that although we were starting Q4 with lower opening backlog, we thought bookings would increase in Q4 and that the turns orders would be better due to low inventory levels in the channel, as well as seasonal improvement in business activity.

Here is a recap of what we actually saw in Q4. Unlike the choppy numbers that we experienced in Q3, the flow of our bookings during Q4 was much more consistent and more linear throughout the quarter. Total bookings in the fourth quarter were 12% higher than Q3, with the month of April and May being a little higher than March, on a per-week-run-rate basis. A portion of the bookings increase can be attributed to a recovery in our turns, which are orders received with delivery requested in the same quarter. And obviously this drove the fact that our revenues came in at the high end of the range that we had projected.

Turns in Q4 followed the same basic theme I just highlighted on the overall bookings. They were much higher in total compared to Q3 and the flow of turns was constant throughout the quarter with solid turns orders every month.

Going back to overall bookings for a quick second, the increase in Q4 over Q3 was reflected in both our OEM order activity, as well as our distribution channel.

Speaking of the distribution channel, our disti resales were up in Q4, which is the trend that we expected. Distributor inventory dollars at the end of Q4 were up very slightly over what they were in Q3 but the number of weeks of inventory was down because this year resales increased by more than the inventory did. So as a result, at the end of Q4, our weeks of inventory in the disti channel was between 9 to 9.5 weeks, where as in Q3 that same figure was in a range of 9.5 to 10 weeks. Are you feeling the love yet?

I mentioned earlier that the overall increase of bookings during Q4 was partially manifested in higher turns orders that were converted to revenue in Q4. But in addition, as Brian mentioned, the higher bookings [inaudible] backlog need to be higher going into Q1.

During Q1 we are modeling the distributor resales that were down slightly versus Q4, which factors in some typical seasonality, like European summer vacations, and overall OEM activity expected to be up slightly. We have a higher backlog there.

Based on what we see today, we are projecting Q1 revenues to range from $460 million-$475 million. The low end of the range would imply lower turns than we had in Q4 and the higher end of the range would require turns similar to what we saw in Q4. Within this projection, we are modeling Q1 disti inventory to remain pretty comparable to what it was in Q4.

So let’s talk about gross margin now. We hit 65.9% in Q4, up 160 basis points from Q3 and well ahead of what we had originally projected. It was also the first time that we finished above the 65% mark and I want to start by giving major credit to our manufacturing organization.

Manufacturing performance in Q4 was better than expected as things like the net cost of scrap was very, very low and the net positive impact from cost reduction activities was earlier than I had originally modeled for our margin guidance. In addition, volume throughput increased as fab utilization was about 70% for the quarter.

Product mix also had a positive impact on margin this quarter. In Q1 we are anticipating the gross margin will range from 65% to 66%. There are a couple of driving factors embedded in that guidance. On the plus side, we will continue to get incremental spend savings in the fabs relating to the action we announced on January 21. On the minus side, we will continue to flow those savings first through our inventory standard cost accounting. Also, about 30 to 40 basis points of scrap-related savings in Q4 won’t repeat in Q1. And on the neutral side, we are currently planning to hold manufacturing volume at around the same level.

The incremental savings from the cost reduction actions that are still ongoing in the fabs should be substantially complete by around the end of Q2 and will benefit gross margin after it flows through inventory standard cost.

Let me now move on to operating expenses. In Q1 R&D expense is projected to range from $90 million to $94 million. SG&A is expected to run from $81 million to $84 million in Q1. Other income and expense is expected to be around $1 million of expense. Gross interest income is projected to range from $2.5 million to $3.5 million, which is down from Q4 because of lower interest rates and lower beginning cash. And gross interest expense is expected to be around $18 million.

Included in the projected Q1 gross margin and operating expense numbers I just provided, are approximately $21 million of total stock compensation expenses, which can be broken down by category as follows: cost of sales, $4 million; R&D, $7 million; and SG&A, $10 million.

And finally, the Q1 effective tax rate should range from 30% to 32%.

Let’s go to the balance sheet. Our capital expenditures in Q4 were about $25 million. In Q1 the capital spending is projected to range from $30 million to $35 million.

Our days in inventory at the end of Q4 was about 86 days, which is up a little from about 82 days last quarter.

Our days of receivables at the end of Q4 was around 27 days, down from about 31 days at the end of Q3.

And our cash reserves ended Q4 at about $736 million, compared to $871 million in Q3.

We bought back $224 million of our stock, or nearly 12 million shares, during the quarter and going into Q1 we still have about $256 million of available buy-back authorization remaining.

Operating margin in Q4 was about 29% compared to about 28% in Q3 and return on invested capital was about 25% in the fourth quarter and about 23% for the whole year of fiscal 2008. All of these figures include the impact of stock compensation expenses.

Going forward there are a couple of key points I want make about the current business model here at National. As we move into a new fiscal year, obviously revenue growth is a top priority. But that’s not all. We can also continue to leverage our gross margin in at least three different ways: one, through the cost reduction actions underway that I talked about earlier; two, by improving the mix of products as we continue releasing new, higher-value analog solutions; and three, through higher utilization as our revenues grow. We are currently at 70% utilization and nearly all of our manufacturing is done in-house.

And beyond gross margins, we took an action in Q4 to help control our operating expenses and improve operating income fall-through. We will continue, in this environment, to manage our spending budgets appropriately. Combining these factors, it’s not unreasonable for us to expect 30% plus operating margins, including stock compensation expense.

And speaking of stock, as we continue to execute our stock repurchase programs, the share count should also continue to decline.

So a reasonable model from all of this is earnings per share growth of 15% to 20% for the year from what we ran in FY2008 and that is assuming relatively tame growth in the top line.

So let me turn it over now to Don Macleod.

Don Macleod

So let me now kind of refresh some of the trends that we saw in our markets and product areas. And then I’ll move on to add more color to the forward business model.

So looking first to trends we saw in market segments. In our largest market segments, Mobile Phones and Other Personal Mobile Devices, our sales to this segment grew sequentially by between 1% to 2%. Year-on-year sales grew to this segment by about 7% and the overall segment represents about 1/3 of our overall sales.

In aggregate our sales to the top five players in the handset market grew sequentially in the quarter. There were, however, changes in the mix between these customers quarter-to-quarter. And looking forward to the summer quarter, based on our booking run rates, we expect to see our sales to these top five players, in aggregate, run at about the same levels, but expect to increase shipment run rates to other specific customers in this marketplace who are introducing new, high-end consumer and business enterprise models to the market.

Sales to the communications network market, which includes both cellular base stations and other networking infrastructure customers, went up 12% both sequentially and year-on-year. They represented just over 10% of our sales in the quarter. [inaudible] was driven by wireless infrastructures customers both from Europe and in China.

From a product prospective, our largest product area, Power Management, representing 47% of our sales in the quarter, grew 6% sequentially. Amplifiers grew 9% sequentially and represented 24% of our sales. Sales in our Interface and Data Converter product categories were about flat sequentially at about 8% and 5% of our sales, respectively. And sales of Application Specific analog products were down about 15% and they now represent about 4% of our sales.

Moving on from the fourth quarter to looking forward to our new fiscal year, FY2009, our focus on our National 3.0 strategy intensifies. Going into this new fiscal year, we repositioned our investments, particularly our R&D budgets, to allocate more dollars to faster growing market segments. Some of these major market segments, such as Personal Mobile Devices, we already have significant presence in. But going forward our R&D dollars are more positioned to prioritize break-away solutions, and last on stand alone analog building blocks, more on the subsystem and system-level systems for the future.

In addition, where we can bring together our capabilities from different parts of the company to leverage the common denominator of all portable devices, which is our powerful energy efficiency. And in the quarter, in case you didn’t notice, we reinforced our PowerWise binding with new broadly available innovative metrics to help our system-level customers chose the very best high-performance and most energy-efficient analog semiconductor solutions.

In other application areas for power management, such as alternative energy solutions, including solar power, and power LED lighting, we substantially increased around the investments going forward. And in addition, we’ve allocated a larger proportion of R&D spending to new market segments, such as safety and protection, medical electronics, and infrastructure power management.

So how does all of this impact our business model? When I refer to these increases in R&D investments, you should not infer that all of this is incremental spending to today’s run rates. These additional funds come from repositioned dollars, i.e. the new R&D budget should not increase, other than the normal inflation. In fact, if you recall from Lewis, earlier in the quarter we took headcount actions to manage and limit the growth of our overall R&D and other operating expense run rates going forward.

Our bigger-picture business model is focused on delivering 30% or better operating margins. Our goal is to enable [inaudible] in today’s modestly growing semiconductor industry environment, i.e. we’re not waiting to get there when, and if, the semiconductor industry gets back to mid- to double-digit top line growth. We are not that far away today from 30% operating margins, if you look at the just completed first quarter. Excluding the charge for headcount restructuring we achieved a roughly 29% operating margin.

There are a number of reasons why we believe our gross margins have more room to grow from where they are today. Our analog portfolio continues its positions to higher-value solutions, our ESPs increased again this quarter by about 2% sequentially and year-on-year. Our factory cost reductions taken in our third quarter are not yet fully reflected in our fourth quarter results. We should be substantially there by our second quarter of FY2009. We will also see additional factor cost improvements in this new fiscal year as we contract of our Texas fab [inaudible] and lead dollars as we begin conversion of our U. K. fab. And as Lewis already mentioned, our fab cost efficiency will benefit through increased capacity utilization.

Add all of this up and you can get to a range of potential gross margins between 65%-70%. The higher end of the range is achievable with quite modest increases from today’s revenue levels. One question might be whether we can sustain this in the light of a new National 3.0 strategy, which is as we said is focused more on growing into faster analog market segments and just continue to expand our catalog of high-performance building blocks. Our answer is that we’ve already demonstrated improvement in our gross margins from the 40%s to the 50%s to the 60%s, and now into the mid-60%s, even as more and more of our sales are now coming from competitive market segments such as mobile phones, which now account for 1/3 of our sales.

So to summarize, in this potentially slower economic growth environment, we are continuing to work and improve our business model. We aim to run our gross margins between 65% to 70%. That means that when our sales increase, our gross margin dollars increase at a faster rate than sales. We are actively managing expenses and more importantly for the longer term, investing for revenue growth. This also means that as sales dollars increase, our operating spending increases at a slower rate.

All of this amplifies the leverage of even modest sales growth and operating margins and when you consider our significantly reduced outstanding share count, also that leverages growth and our earnings per share. As Brian and Lewis have highlighted earlier, we are targeting 15% to 20% in earnings per share for this new fiscal year.

I give it over to you, Mark, to moderate Q&A.

Mark Veeh

At this time I will ask the operator to open up the lines to begin the Q&A session. Please limit yourself to one question and one follow-up so we can accommodate as many people as possible.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ross Seymore - Deutsche Bank.

Ross Seymore – Deutsche Bank – North America

Does your seasonality change given how not only you business mix with N-analog has changed but having gotten rid of some of the more digital and kind of less core businesses?

Lewis Chew

I think for right now we think that the seasonality is still relatively similar because if you look at the end markets we serve, we still have 1/3 of the business going into handsets and another 10% going into infrastructure and we still have some revenues going into displays and PCs. I think for now we are not the kind of guy that has 60% of revenues going into industrial, which might be shaped a little bit differently seasonality-wise. And I think I’ve said in the past that I think over time you might see some change there but for right now I don’t think I would think of it as being dramatically different than even last year’s seasonality.

Ross Seymore – Deutsche Bank – North America

On the gross margin guidance for the August quarter, can you just walk us through again why that would be flat. I know your utilization stays the same but your revenues are growing, you have some of the cost savings working their way through inventory. Could you just walk us through why the gross margin wouldn’t go up a little bit?

Lewis Chew

I would first say that as we work longer-term, beyond the scope of one quarter, we do think that we’re driving gross margins up, independent of volume. In this quarter it just so happens that we were ahead of schedule on the cost saving I had modeled, plus we were able to achieve kind of some unusually low scrap savings that won’t repeat in Q1. So if you want to kind of normalize the Q4 margin to exclude that. That’s why in my prepared comments I highlighted 30-40 basis points.

And then, the incremental savings we’re getting in Q1 specifically, aren’t as large as what we saw in Q4, but then there’s also some ongoing savings in Q2. So I think somewhere in the kind of Q2 timeframe you should expect to see the margins pick up again as opposed to Q1.

Operator

Your next question comes from Chris Danely - JP Morgan.

Chris Danely – JP Morgan

So it sounds like the new gross margin target is 70%. Do you expect to hit that by the end of the fiscal year? Is there some sort of utilization level or revenue level where we can plug that in?

Lewis Chew

Chris, you sure took a lot of liberty with what I think Don Macleod said was 65%-70%. I think one of the things we would point out is, coming off the quarter where we did, 65.9%, we are comfortable in saying we have achieved that level. We’re not putting out there that the target is 70% per se. I think we can comfortably operate the company with our revenue targets with these margins in the kind of 65%-70% range. So at this point, I don’t want us to try to commit to a 70% number, and certainly not by any time frame, by the way.

And going back to even when we had the 65% target, we never said by a certain date. The reality is that right now we are still relatively under-utilized and the mix continues to improve and we still have some cost savings coming. So if revenues grow, the margin will definitely accrete upwards.

Chris Danely – JP Morgan

Can you give us your thoughts on how you expect sort of the end demand to trend throughout the rest of the year? What you see as being particularly strong and maybe where you might have some more concerns?

Don Macleod

Chris, a general comment about end demand, clearly the major market segment that we serve is the mobile phone market and if you look at that marketplace, we are looking at a relatively flat market, calendar Q2 going into the early part of calendar Q3. But, frankly, at this point there is no reason to expect that there won’t be the same normal, seasonable increase in demand in that marketplace calendar Q4 over calendar Q3 as we have seen in previous years. It may not be quite as strong, if consumers aren’t buying as many mobile phones in developed countries, but we think that overall it should be reasonable uptick in that fourth calendar quarter in that marketplace.

I think that’s kind of the key variable in terms of seasonality in our business, other than the usual normal aspects of the broader analog market space.

Chris Danely – JP Morgan

Does everything feel normal to you right now, though?

Don Macleod

I think we said in our comments about the mobile phone market as an example, that overall, the marketplace performed the way the expected, and if you look at the dynamics of our business, the top five mobile phone customers represent about 70% of our mobile phone business. They also happen to represent about 80% of the marketplace, so I think we’re distributed broadly in that marketplace, roughly the way the market itself is, between the large players and the small players. So one guy gains share, the other guys lose it, and I think our overall business reflected that going into the quarter.

Operator

Your next question comes from Romit Shah - Lehman Brothers.

Romit Shah – Lehman Brothers

I think that for the first time you have put out a full year target for EPS. Is it fair to say the reason is because most of the growth is in your control meaning that it’s going to come from manufacturing cost savings and managing OpEx?

Lewis Chew

One of the things we recognize in this environment, Romit, is that growth is something that all companies push for but we can’t ignore the economic scenarios that we’re in so you’re right, we are trying to do things like increase the margins, increase our mix, and control the spending. And we also know that when you look, for example, on what the sales estimates are out there, on National, not that they’re necessarily worth anything, but it’s relatively modest.

I think what we’re trying to say is we continue to drive a model where if we can get a modest amount of growth we will get a relatively decent amount of fall-through and that’s why we decided to put this kind of objective out there.

I would not call it a forecast. I think it would be an objective. To give people a flavor for what the business model looks like. Going back to Chris Danley’s question, we’ve been running for a long time with a gross margin target and now we’re lifting out to be more of an EPS growth target.

Don Macleod

I guess part of the philosophy in the business model is it’s really an investment model at this point. Our view is that there’s significant leverage in our earnings if the top line grows. But at the same time we don’t want to just manage one line in our business model, i.e. just manage the top line. We’re managing the revenue number, we’re managing the gross margin number, we’re managing our expenses, so we’ve set budgets for this year. But it’s just beginning. But significantly we allocate the way we spend our R&D dollars and other support dollars for that. But at the same time set limits on those budgets.

And I think we’re like everybody else, those budgets are there, even if things don’t provide top line growth, but if however they do, and that’s our focus. There’s even significant upside leverage beyond the commitments and earnings per share that we actually talked about on the call. So this is not setting a target; it’s setting a business model that we can work with.

Romit Shah – Lehman Brothers

But putting in a target 15%-20% growth, I would think you have at least a level of conviction that we’ve seen the bottom in sales.

Don Macleod

I don’t want to comment on that.

Brian Halla

In terms of the sales, we mentioned first of all, in our distribution channel our inventory has even decreased again, down to somewhere around 9 weeks and one of the reasons for that is because they can. Because the suppliers have short lead times so they have learned to enjoy that. But what we saw was in the last 2 weeks of Q3 we saw a firming up of orders and then throughout the quarter we saw continues strength in the order patterns and it wasn’t based on any hot new models from anybody, it was across the board and it was relatively solid. And so just if you project that out and say all other things being equal, and of course I said if gasoline doesn’t go to $8 a gallon, we see a pretty routine kind of demand out there and that’s what we’re kind of counting on.

Obviously the last thing you ever want to do is to have to come out and re-guide negative from that.

Operator

Your next question comes from Srini Pajjuri - Merrill Lynch.

Srini Pajjuri - Merrill Lynch

Lewis, you said the mix also helped your gross margins. Just wondering what aspects of the mix helped the gross margin, as you look out to the next couple of quarters as in wireless, we could see stronger. Could that be headwind there?

Lewis Chew

Yes. You know, you bring up a good point, Srini. And I’ve said to many of you who are probably on this call that you shouldn’t expect mix to be just a steady line going one way or another. Over time we always think that our mix will slightly improve. This happened to be a quarter where we did get slightly better mix.

If you look at some of the other comments that have been made so far in the last month, some other analog companies, they’ve indicated that the broad-based business was stronger. That probably helped us a little bit. Going forward, what we’ve modeled for Q1 is a stable mix. We’ve not modeled any degradation in our mix. It can move around a little. I generally don’t think of that as being any particular sort of headwind.

I know what you’re referring to is if we go into Q2 and more of the sales come from things like handsets, is that a headwind. And as we pointed out before, we yield pretty good margins across the board on our portfolio so I don’t see that necessarily as a headwind. But the mix can shift a little but what we’re modeling for Q1 is stable mix. We’re not assuming any improvement in mix in Q1.

Srini Pajjuri - Merrill Lynch

And then the strength in infrastructure. That’s been a common theme for most of the framing guys here. Could you give a bit more detail, what exactly you’re seeing out there, if this is mostly China related, and I guess you also mentioned Europe. Any more color there.

Don Macleod

The wireless infrastructure market, surely we saw stronger business in that market than we expected going into the quarter and I think I refereed to the fact that we saw it from two areas. One a large leader in that marketplace is headquartered in Europe and the other shipments to growing players in China. The end destination of these products isn’t necessarily Europe.

Our European customer tells us that what they are seeing is significant activity in both China and India. And seeing that in fact for GSM base stations and also seeing new growth in this last quarter in 3G, which was not what they were expecting. So I think the other discussion about the fast-growing China [inaudible] in that marketplace is that clearly they’re serving both the China market and increasingly the global infrastructure market. So we are very pleased with the performance in that marketplace. Products to sell into that marketplace have very high margins and great ESPs and really help our mix.

Operator

Your next question comes from Uche Orji - UBS, New York

Uche Orji - UBS Securities

Just building on what you just spoke on, can you just give an idea on what you saw in this market, what your play is in this market?

Don Macleod

We don’t really talk about that marketplace because it’s not one big chunk of identifiable market in our space. If you add up all the numbers that I gave you it basically tells you that that wasn’t where we saw the growth in our business in the quarter.

At the same time, Lewis referred to our distributor activity, which is where most of that, if you want broader industrial market goals, we saw resales through our distributors this quarter meet the expectation we had going into the quarter and we think that’s encouraging because our distributors are actually behaving very cautiously and ordering product very much on a terms basis. Even that their customers are not giving them visibility, but at the end of the day they met their expectations in terms of the resales of our products that we had expected going into the quarter.

And I think that also mirrors the point that Brian made, that we saw smooth and stable activity through the marketplace in that market as well.

Uche Orji - UBS Securities

I know you said your sales in the quarter met your expectations, but as we go into the next quarter, there’s been all kinds of expectations for 3G devices from various players. Did that having any impact in the bookings we’ve seen or we to expect that to have an impact on your performance into the quarter?

Lewis Chew

Are you saying was there an increase in bookings from wireless companies in our Q4 in anticipation of Q1?

Uche Orji - UBS Securities

Correct.

Lewis Chew

We usually don’t get that specific. But I would say that we had revenues grow with wireless in the quarter we just completed and I would say that our backlog of wireless customers, as you would define them, are relatively stable heading into Q1. And beyond that you would almost have to get customer specific. I think Don mentioned in his commentary that we have some movement between . . .

Don Macleod

Actually what I said was that we expect our business to our top five handset customers in the quarter in front of us to be at the same level as the quarter we just completed and that’s built into the guidance. But we did say that we expect to see some increase in business with a couple of specific players in the wireless handset market, who are introducing new models. In one case in the consumer high-end side and then the other in the enterprise business high-end side.

Operator

Your next question comes from Krishna Shankar - JMB Securities.

Krishna Shankar – JMB Securities

Can you sort of lay out two or three of the new markets that you’re focusing on for top line growth and infrastructure. Can you sort of describe some new products which will take up the top line growth going forward?

Brian Halla

As I said in my commentary, we have redirected many forces, we directed a significant amount of R&D budget into what we call key market segments and we mentioned three of those segments were Sensing and Detection, or Security and Surveillance if you want to call it that, Healthcare Electronics, and one of them that we will have an announcement in this quarter is Solar, or Alternative Energy, where we’ve made some pretty significant gains in for the photovoltaic technology. We are right now entering a phase of field trials as well as there is about a six-month certification process with UL and BDE and so we have high hopes that we’ll have smooth sailing through them. But that’s the closest in one, the area of photovoltaic.

Krishna Shankar – JMB Securities

What about hybrid cars and electric cars. Will that be significant in terms of revenue growth in fiscal 2009?

Brian Halla

As significant as the volume of electric cars are, I think it will track. But Testla has been imminent for the last couple of years and as I said in my commentary we had quite a few circuits in there. That will clearly be an opportunity for us but I don’t see anything that’s going to add to the top line this year that will be significant.

Operator

Your next question comes from Douglas Freedman - Am Tech Research.

Douglas Freedman – American Technology Research

Just focusing in on this full year earnings growth, given what we see. Lewis, you referred to street estimates. If I look at street estimates, I’m not seeing much revenue growth at all. So I’m also struggling a little bit with the 15%-20% earnings growth and whether that’s a GAAP number. We’re also facing a tax rate increase, year-over-year. Can you help me decipher the pieces that allow us to get there?

Lewis Chew

Sure. First of all almost everything we do talk about is GAAP because we don’t do pro forma financials. Second of all, you look at FY2008 as a whole, not every quarter looked like the quarter we just finished. I think there is some correlation to our expectation and the fact that there probably are some pretty tame expectations across the board for a lot of companies about gross right now because the environment has been so bad this last six months.

I would say four months ago we probably weren’t even thinking that we would come into this quarter having come off of $460 million and then guiding flat to up. So I think the reality is right now we have got to deal with the numbers in front of us, which is inventories are low, demand is relatively healthy, at this level. I would like to see it better but it’s healthy compared to what it was three months ago.

And what we’ve done is looked at where operating expenses are likely to trend. Obviously we took an action in Q4 to kind of keep those under control and we still believe that the margin has room to go.

And, again, without giving you each individual component, we’ve constructed, as Don pointed out, a business model where we think we can target that kind of growth with modest amount of revenues. But it’s all those working together. I would say probably the biggest item at risk would be, yeah, if you want to take out a big chunk of revenue, obviously that will fall the other way.

But a you pointed out, right now, the consensus estimates on us are relatively flat in terms of sales and our trajectory right now probably doesn’t suggest that but we’ll monitor that as we go along.

Douglas Freedman – American Technology Research

Since we’re talking full year and I do recognize that there appears to be a focus for some new higher growth segment markets, is there an effort, if you were to sort of look at your business make up next year, exiting FY2009, should we expect to see sort of the wireless still running about 1/3 of revenues?

Lewis Chew

One of the things that we’ve done is try to expand from just wireless to point out that we’re very good across the board and in a lot of personal mobile devices. So even if wireless were to fluctuate a little bit, the personal mobile device area is a big focus area of ours right now and so I wouldn’t be surprised if you continue to see, if we do display strength, to see strength in those areas because those are actually some of the areas most close to us in terms of revenue growth opportunities. You know, things that go beyond the traditional handset but are still portable in some way, shape or form.

Don Macleod

The four market segments that we’ve talked about, personal mobile devices, which embraces the whole wireless space, is one of those four, so we’re not walking away from that space. In fact, we’re looking for more growth from that space going forward. So our goal is not to have that diminish as a percent of our overall business. The other way around, in fact.

Operator

Your next question comes from Evan Wynne - Thomas Weisel Partners.

Evan Wynne - Thomas Weisel Partners

In regards to solar, how big is that business expected to be?

Brian Halla

I’m not an expert on solar, we just plan to make a lot of money there, but in terms of how big the business is today, there’s a couple of things that have held that business back. Specifically, to answer your question, 0.4% of rooftops that are available for solar panels, 0.4% in Northern California have panels. If you contrast that with Germany where their subsidies are a lot higher and much more friendly, they’ve already covered 8% of the rooftops. And all of North America, I think right now, solar has expanded as far as 0.04% of the available rooftops, or warehouse tops or whatever.

Clearly the potential is there. The other thing that has kind of held that market back is the best technology out there today is 20% efficient on the solar panel, that’s with silicon crystal and everything else goes down from there, including thin-film, which is like 10% efficient.

So one of the things that has held back the expansion is that there is a lengthy time to pay back because the efficiency of these rays tend to get perturbed by many, many things, including aging, including clouds, and even bird poop. No, we haven’t invented an electronic bird pooper scooper but we have done something that we think is significant in the area of improving efficiencies and we will just have to let that play out and we will let our partners, we’re in field trial, tell us if they agree with us.

Lewis Chew

So, Evan, today that would be an example of an entirely new opportunity for us, which is a fancy way of saying the revenue today is zero.

Evan Wynne - Thomas Weisel Partners

My other question has to do with our channel. Do you have the percentage of [inaudible]

Lewis Chew

It’s going to be in the neighborhood of 55%, give or take.

Evan Wynne - Thomas Weisel Partners

What I was curious about was if your lead time has changed.

Lewis Chew

No.

Evan Wynne - Thomas Weisel Partners

And whether this lower inventory level in the channel, whether you think that the distributors would want to maintain that lower level or do you think that there is a chance that they want to bring, in other words, what is the range that you would be most comfortable with?

Lewis Chew

Well, this last year what we’ve seen it operate in is a range of 9-10 weeks, which is a pretty tight range. I think distis would love to have their inventory remain low, but also love to not miss any upside opportunities and that’s a dangerous game to play when business is good. When business is soft, like it is now, I think it’s easier for them to do that. So we’ll have to see how that plays itself out.

Right now the supply chain is pretty tight throughout. The one thing I’ve noticed is you don’t hear a lot of discussion about excess inventories out there in the channel. And usually when there is you will hear that kind of chatter.

So all I can do is report back to you where they stand and obviously we work very closely with the distributors on what types of stuff they’re carrying. Because even that weeks is an amalgamation of thousands of different parts so maybe mix is even a more important question than what the number of weeks is.

Operator

Your next question comes from Steven Smigie - Raymond James & Associates.

Steven Smigie – Raymond James & Associates

Did you have the stock-based compensation breakout for the fourth quarter?

Lewis Chew

Yes, for the fourth quarter, subject to rounding, it’s very similar to what I gave you for the Q1 estimate. I think it was something like $6 million for R&D and $10 million for SG&A .

Operator

Your next question comes from Analyst for Mahesh Sanganeria - RBC Capital Markets.

Analyst for Mahesh Sanganeria – RBC Capital Markets

I wanted to get some color on the break out of the 12% bookings increase. The commentary which you have given so far says that bookings were up 12% but that’s only 10% of the business. So can you give a bit more color on where those bookings come from?

Lewis Chew

We don’t typically break out all our bookings increases by segments, K.C. What I can tell you is that we had bookings increased double-digits in both disti and OEM so it wasn’t skewed to just one area. And also I would point out that a chunk of that bookings increase was in the form of higher turns. You may recall that in Q3 our turns orders were very low, and turns are a subset of the total bookings, too. Although it did help our backlog grow a little bit heading into Q1, but a lot of that bookings increase was converted to revenue in the quarter. But we’re not going to be able to give you a bookings increase by end market. We don’t usually do that.

Analyst for Mahesh Sanganeria – RBC Capital Markets

On handsets the comment was that you expect the top five customers to be flat into Q1. Can you comment about the remaining percent of the other business?

Lewis Chew

We don’t want to get into individual customer commentary that’s why we try to clump them together. But I think that Don Macleod has already pointed out a couple of times that in addition to what you might of as our traditional top five, which everybody knows who those are, the Nokia, Motorolas, and Samsungs of the world, we do have new designs coming on line with models releasing in other areas as well. But we’re not going to call out specific customers.

Operator

Your next question comes from Craig Hettenbach - Goldman Sachs.

Craig Hettenbach - Goldman Sachs & Co.

Can you talk about growth by technology, so over the next 12-18 months, be it power management, amplifiers, or converters, where you expect to see your highest growth?

Don Macleod

If you look at the company today, essentially half our revenue comes from power management. We tend to not want to look at growth from that product perspective moving forward because we are moving a lot more of our focus to these key market segments that we’ve talked about. And in fact, across the company more broadly.

Other than those key market segments we are organizing ourselves a lot more focused on segment-type behaviors so our focus this year is in looking for growth in marketplaces.

Obviously at the end of the day, the products will enable that growth and they focus on our PowerWise, a grinding umbrella, is enabling that growth is always enhanced by our capability in power management. That’s basically the foundation for essentially for everything we do, going forward, to provide that lowest power budget with the highest possible performance.

So clearly it’s a lever this company has and we will drive that power management focus into these vertical markets and compliment it as much as possible with products in the other places. You referred to amplifiers, you referred to data converters and interface. So that’s kind of the theme that we’re emphasizing going forward.

Craig Hettenbach - Goldman Sachs & Co.

You mentioned that orders steadily increased throughout the quarter and that backlog coverage at OEMs firmed, can you talk a little bit about that, at what point in the quarter did the OEMs start giving you a better backlog coverage?

Lewis Chew

I would go back to something Brian said earlier on, which is we saw some signs of order rates firming at the last part of Q3 but at that point it was a pretty small data point and so we are kind of watching that carefully. And I am happy to say that the bookings run rate throughout the quarter were fairly steady and that we did see increase from both OEM and disti. Maybe a little more on the disti side.

So I would say our Q4 was one that was pretty orderly. There weren’t any major surprises. Maybe there was validation that there was low inventory in the channel and that there was, in fact, end demand for the products we sell into.

And I think your firm talked about end unit consumption was probably running higher than what people like ourselves have been shipping, so I think that was consistent with the fact that we did see steady orders throughout.

Our order rates in both April and May were pretty steady and they were both a little softer in March. So that’s kind of what the pattern was.

Mark Veeh

We are now going to end the call. Let me remind you, the replay is available on our website. Thank you for joining our call.

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!