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Analog Devices (NASDAQ:ADI)

Q3 2012 Earnings Call

August 21, 2012 5:00 pm ET

Executives

Maria Tagliaferro - Director of Corporate Communications

Ali Husain

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

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

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

Analysts

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

Ross Seymore - Deutsche Bank AG, Research Division

Parag Agarwal - UBS Investment Bank, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

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

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Shawn R. Webster - Macquarie Research

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

Harsh N. Kumar - Stephens Inc., Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

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

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

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

Terence R. Whalen - Citigroup Inc, Research Division

Amit Chanda - Wells Fargo Securities, LLC, Research Division

Joseph Moore - Morgan Stanley, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Operator

Good afternoon. My name is Diane, and I will be your conference operator today. At this time, I would like to welcome everyone to Analog Devices Third Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Tagliaferro, you may begin your conference.

Maria Tagliaferro

Thank you, operator. Today I'm participating in the call in my role as Corporate Communications Director. Running the ADI earnings calls from here forward will be Ali Husain. For those of you who haven't met him yet, Ali joined the team at the end of May as our new Director of Investor Relations. But he's actually been working at Analog Devices for the past 8 years or more -- a little more than 8 years. So he'll take over as moderator on the earnings call and as the primary contact for investor relations. But I look forward to continuing to work with our shareholders, and also welcome Ali to the team.

Ali Husain

Thanks, Maria. Good afternoon, everyone. It's a pleasure to be part of the team, and we appreciate you and everyone joining us for today's call.

If listeners haven't yet seen our third quarter fiscal year 2012 press release or form 10-Q, both may be accessed through our website at investor.analog.com. This conference call is also accessible from the same page. A recording of this conference call will be available today within about 2 hours of this call's completion, it will remain available via telephone playback for a period of time and will also be archived on the IR website.

In addition, we have updated the schedule on our IR website, which include the historical quarterly and annual summary P&L for continuing operations, as well as historical quarterly and annual information for revenue from continuing operations by end market and product type.

Participating in the meeting on today's call are Jerry Fishman, President and CEO; Dave Zinsner, Vice President of Finance and CFO; Vincent Roche, Vice President of Worldwide Sales and Strategic Market Segments; and Maria Tagliaferro, Corporate Communications Director. During the first part of the call, Jerry and Dave will present our third quarter 2012 results as well as our short-term outlook. The remainder of the call will be devoted to answering questions from our analysts and investor participants.

During today's call we may refer to non-GAAP financial measures that have been adjusted for certain nonrecurring items in order to provide investors with useful information regarding our results of operations and business trends. We have included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in today's earnings release, which is posted on the IR website.

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

The forward-looking information that's provided on this call represents our outlook as of today, and we do not undertake any obligation to update the forward-looking statements made by us. Subsequent events and developments may cause our outlook to change. Therefore, this conference call will include time-sensitive information that may be accurate only as of the date of the live broadcast, which is August 21, 2012.

And with that, I'll turn the call over to ADI's CEO for opening remarks.

Jerald G. Fishman

Well, good afternoon to everybody, and welcome to our third quarter 2012 conference call. As you can tell from our press release this afternoon, our revenues totaled about $683 million, which was up about 1% from the previous quarter and down about 10% from the same quarter last year, and was just very slightly below our plan for the quarter, but well within the range that we communicated in May. Diluted earnings per share of $0.56 was at the midpoint of our earlier guidance.

The good news is that despite economic headwinds and increasing uncertainty in most regions of the world, our business in aggregate remains stable during the quarter. Our bellwether industrial business which now comprises 47% of our revenues, was approximately flat to last quarter, remaining stable after growing very strongly in our Q2.

Our largest industrial customers indicate to us that while their earlier growth expectations for 2012 have modulated in the past few months, they currently see very little deterioration in their business to date, and they don't expect any significant downturn for the balance of the year. Now these customers, the large industrial customers, were for the most part are on plan for the quarter.

Our distribution channel, which primarily serves the industrial market, was consistent throughout the quarter and was stable in July. In fact in July, we saw stronger bookings on ADI from our distributors, indicating that while they too remain cautious, they don't foresee any deterioration in their business in the near term. These trends are very significant for ADI given the importance of the industrial market to our revenues and to our profits.

Our communications infrastructure business grew 9% sequentially, driven by wireless customers that was in line with our expectations for new wireless base station deployments in the United States, in Asia and also in Japan. As I think you know, we're very well positioned with market-leading OEMs in Europe, in Asia and in the U.S. with a product portfolio that addresses both existing technology and also newer 4G deployments, which we will expect will increase ADI's content in those base stations.

Automotive revenues decreased very slightly sequentially, but was up 12% over the same quarter last year. This was also slightly below our plan for the quarter as European manufacturers reduced production in the summer months in response to the uncertain economic environment and also lackluster car sales in Europe.

Safety, including rollover control and radar-based collision avoidance systems, energy efficiency and infotainment all represent great growth opportunities for ADI, and we expect the automotive market to become increasingly attractive for us.

Our consumer business was approximately flat sequentially, which was also slightly below our plan for the quarter. Growth in portable media offset declines in digital cameras, while other subsegments, such as home entertainment and also computing, remained approximately flat.

The good news here is that our backlog for consumer products grew substantially during the quarter, which should provide good revenue growth for ADI in our fourth quarter.

Order rates from our end customers remained solid during the third quarter and totaled approximately $700 million, representing a book-to-bill ratio that's greater than 1. We're generating an increasing amount of our sales from turns orders which are booked and shipped during the same quarter. This is typical in an uncertain environment and when our lead times continue to be very short. In aggregate, there did not appear to be a lot of market momentum in either a positive or negative direction. And in the short term, our revenues will be mostly dependent by the macro economy and to a lesser degree, new product cycles in certain end markets.

In this environment, we believe we're doing a very credible job in responding to all the uncertainty. We continue to make trade-offs to focus our investments on the right products, the right markets and the right customers, to maximize our long-term growth rate. In general, our gross margins have remained very strong and our operating expenses are under very tight control, and we continue to generate significant operating cash flow, which gives us the flexibility to enhance returns to shareholders. And we would expect very strong operating leverage as macro conditions improve.

So that's all I'm going to say in the opening comments. I'll turn it over to Dave now, who will take you through some of the details of our financial results.

David A. Zinsner

Thanks, Jerry. As Jerry mentioned, third quarter revenue increased approximately 1% sequentially to $683 million. Our gross margin was 65.6% in the third quarter. This was up 40 basis points from the 65.2% we reported in the second quarter, driven by slightly higher utilization rates.

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

Operating expenses for the third quarter, excluding approximately $5.8 million in restructuring-related expenses, were $230 million compared to about $228 million in the prior quarter. This slight dollar increase was primarily due to a full quarter's impact of the annual salary increases. We continue to be very watchful of operating expenses during this period of uncertainty and do not plan to grow expenses until we are confident that the economic headwinds have abated.

Operating profits before tax for the third quarter, excluding restructuring related expenses, were $218 million or 32% of sales, up 50 basis points from the prior quarter.

Our tax rate for the third quarter was 19%, lower than the prior quarter's 23%. The lower rate was due to a change in estimates of our future tax liabilities and some discrete tax items. We expect our effective tax rate in the fourth quarter to be in the range of 21% to 22% excluding any discrete tax item.

Diluted earnings per share of $0.56 in the third quarter was at the midpoint of our guidance and up 6% sequentially from the prior quarter. We generated 20% of our revenue or $138 million in operating cash flow.

Capital expenditures were $39 million, resulting in free cash flow of about $100 million or 14% of revenue for the quarter.

While a strong result, third quarter operating cash was impacted by payments related to variable compensation and some income tax payments. Our expectations for the fourth quarter is for operating cash to be significantly stronger, in the range of its historical norms, upgraded in 30% of revenues.

Our accounts receivable balance was up about $16 million versus the last quarter on higher sales, and our days sales outstanding remains roughly flat at 46 days.

Inventory on our balance sheet increased by 3% or $8 million, and we have 121 days of inventory on hand. We have increased inventory to meet anticipated seasonal demand from our consumer customers in the second half of the calendar year, as well as to respond to a new product cycle. By the end of our fiscal first quarter of 2013, we expect the business to catch up to the inventory growth and as a result, days of inventory should be more in line with our model of 100 to 110 days.

Inventory at distribution was approximately flat to last quarter and weeks of inventory and distribution remained flat at approximately 7.5 weeks, which is at the lower end of historical norms.

During the third quarter, we repurchased $17 million of our stock. We also distributed approximately $90 million or 53% of net income in dividends to our stockholders.

Our cash and short-term investments balance at the end of the third quarter was roughly flat to last quarter, with approximately $1 billion available domestically. At the end of the third quarter, we had approximately $857 million in debt outstanding.

On August 20, our Board of Directors declared a cash dividend of $0.30 per outstanding share of common stock, which will be paid on September 12, 2012 to all shareholders of record at the close of business on August 31, 2012. At current stock prices, this dividend represents an annual yield of approximately 3%.

In addition, we have approximately $580 million remaining under our board authorized share repurchase program. We plan to continue to be opportunistic buyers of our stock. Since the start of our share repurchase program in fiscal 2004, the company has repurchased approximately 129 million shares or $4.4 billion of company stock.

In summary, third quarter delivered solid results during challenging times. Our operating model turned a 1% sequential increase in revenue into a 6% sequential increase in diluted earnings per share. At gross margins of 65.6% and operating margins of 32%, including any restructuring charges, we still have leverage ahead as sales increase, factory utilization improves and we continue to prudently control our operating expenses.

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

Jerald G. Fishman

Thanks, Dave. Looking forward in the short term, we expect our industrial, communications and automotive businesses to remain stable in Q4 and be at similar revenue levels to Q3.

In our consumer business, increased backlog and a strong product cycle lead us to plan for growth in Q4. In total, we expect our revenues to be in the range of $685 million to $715 million.

We know, however, that our largest distributors have indicated a wide range of possible outcomes for their quarter ending in September, which reflects economic uncertainty, particularly in Europe. If our growth is mostly from consumer products in Q4 and reflecting what is now planned to be lower factory utilization, we'd expect our gross margins to be in the range of approximately 65%. We're planning for operating expenses to be roughly flat to last quarter. Based on these assumptions, we'd expect our diluted earnings in the fourth quarter to be in the range of $0.54 to $0.60.

In the longer term, we remain enthusiastic for continuing very profitable growth and cash generation based on our better product mix, our customers' enthusiasm for working very closely with ADI to meet their toughest technical challenges and a highly competitive responses capability to meet whatever our customers ask us. In the long term, these attributes will determine our growth rate. But certainly in the short term, it will be mostly about the macro economy.

Ali Husain

Thank you, Jerry. Thank you, Dave. [Operator Instructions] And with that, operator, we are now ready for questions from our participants.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Stacy Rasgon with Sanford Bernstein.

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

Just the first one on gross margins, so you indicated obviously mix and lower utilizations as taking the margins down a little bit next quarter even on higher revenues. I know you said utilizations went up a little bit this quarter. Can you give me some feeling for exactly where they are this quarter? I think they were 70% last quarter. Where are they going next quarter? Are they dropping lower than they were, say, in Q2 when I think they were at 67%? And can you give us some feeling for additional margin drivers, I guess, as we go into the beginning of next fiscal 2013 on revenue levels that hopefully can begin to grow off of here?

David A. Zinsner

Utilization was a little bit north of 70% this quarter. And we're expecting it to be in the range of -- the quarter you cited, which was in the kind of high 60s for next quarter. And clearly, utilization will be one of the bigger factors in driving the gross margins up when we were running in the 80s, we had 67% gross margin. Some of that of course was due to mix but a fair amount of that was due to utilizations, so we'd expect as utilization does improve, our gross margins improve. Also we are in, I guess, a relatively tepid environment on the industrial side. We do expect over time, as the economy improves, that to pick up. That is our highest gross margin end market and should be accretive to gross margins as well.

Jerald G. Fishman

Yes. I think for us, Stacy, the encouraging thing is that even at these levels where we're forecasting a relatively strong consumer quarter relative to industrial and communications, and given the fact that utilization is -- we're going to keep pretty low to keep the inventories down, we can still run sort of 65-type gross margins is a lot different than it used to be, and a positive effect.

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

Helpful, guys. For my follow-up, a question on the common infrastructure space. So it was up this quarter, I think in line with your expectations. Lots of folks have been looking for the potential for bigger acceleration of that market in general into the back half of the year given some of the guidance that's out there right now for some of the carriers, but you seem to be guiding at flat. So it doesn't sound like -- it sounds like, I mean have we seen the list that we're going to see that in that market when we're done? Or do you think there's still the prospect for further growth next quarter maybe if we're going out another quarter to after that? Do you think that there's still opportunity for further growth in that market? Do you think that we're going to see pickups in carrier spend? And is this something -- are the current levels that we're seeing out there sustainable.

Vincent T. Roche

I think when you factor in the -- we have 2 components to our infrastructure business. We got the wireless component that's pretty dominant, about 2/3 of the overall revenue and in the infrastructure sector. And we've got a wired component as well. We've seen much stronger growth on the wireless side. And in spite of the fact that our customers have been suffering from the lack of CapEx spending by the operators, but there are signs that the operators are beginning to spend money, particularly in America and in Asia in the build-out of 3G networks. So I think there may be a little upside in the wireless space in the fourth quarter. And we're starting to see the deployment as well of the TD-LTE systems in China. So expect sometime in the second half of next year we'll see the lift from that. And we're also expecting the fast pace of the build-out of wireless networks in China in the traditional TD-SCDMA sector. So I think what -- we're in about 4Q, I think looking into the next fiscal year, I think we'll see some good upside, particularly in the wireless area.

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

Does that imply that the wired side of things is a bit of a headwind right now?

Vincent T. Roche

It's relatively flat. It's been flat for the last couple of quarters. And that business is comprised of enterprise networking, cable infrastructure, and it's been relatively muted over the last couple of quarters.

Operator

Your next question comes from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

Just a question on the consumer side of things. Could you give us a little more color on what's driving the upside beyond seasonality? And to the extent seasonality comes into that mix, how should we think about the duration of that business being up before it seasonally -- potentially rolls over?

Jerald G. Fishman

Well -- this is Jerry. The -- I think the way to think about it is we, a year or 2 ago, really tried to focus our consumer business on opportunities that were much more sustainable to customers who were willing to pay us a fair margin for. And we've reset that product line pretty substantially. So I think we have a good cycle coming up, we believe. And some of the newer products that we've done in the consumer space that we think really add new types of functionality to consumer products that we believe are going to be very valuable. So of course the consumer business always has its up and downs. And the fourth quarter is typically a good seasonal quarter for consumer products. First quarter tends to be somewhat weaker sometimes. But consumer products is still a relatively small part of our total sales. So I think that as we look over the next period out there, I think in the short term, our results will be much heavier, much more dependent on what happens in the macro economy to our industrial, our communications business. The consumer revenues will modulate with product cycles and buildups for seasonal purchases but I think in the next 3 to 6 months, it's going to be mostly about the macro stuff for us when you factor everything into it. And that is going to be much more relevant to our sales than any of these cycles. I think in the fourth quarter, we are going to get some lift from a couple of product launches in consumer but after that, I think it's going to be mostly dependent on the macro stuff.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And one follow-up, I guess more for Dave on this one. You mentioned about holding OpEx pretty much flat until macro shows some better positive signs of life. As we look into early fiscal '13, in the January quarter, are there any sequential changes that we should be prepared for; FICO taxes, bonus merit, things like that, that pop that up even by a couple million dollars?

David A. Zinsner

No, not really. I mean we'll likely have some inflationary effect sometime next year but it's relatively modest, it adds 1% or 2% to the OpEx per year.

Jerald G. Fishman

I mean our take is for the levels that the business is operating at now and what we see in the near future, we got plenty of OpEx to grow in this business. And for us, it's mostly a question of focusing that OpEx on the right stuff. And so I think that's what Dave's comment is really based on. We got plenty of money we're spending, investing in the business. The real question is just make sure we put it in the right places. That's what we're working on.

Operator

Your next question comes from the line of Uche Orji with UBS.

Parag Agarwal - UBS Investment Bank, Research Division

This is Parag for Uche. Just wanted to drill down further on your consumer business. Are you expecting any ramp in your MEMS microphone business? And is that what is driving the upside in the fourth quarter?

Jerald G. Fishman

Well, we have a good MEMS microphone. We expect the revenues in that to continue to grow.

Vincent T. Roche

Our consumer business again has 3 million components to it. And so we will see a lift in all 3 sectors, basically in the digital imaging, the portable space and home entertainment during the fourth quarter. So the consumer area is one of the spaces that uses every piece of technology and every type of product that we got, so it's actually quite diverse. And we'll see a general lift, I believe, in the fourth quarter, not dependent on any one product or area.

Parag Agarwal - UBS Investment Bank, Research Division

Okay, fair enough. And coming to the industrial business, you indicated that, that business is going to be flat. Just wanted to get a feel of whether this is a temporary pause or you think -- what is the level of visibility into this end market beyond the current quarter?

Vincent T. Roche

I think if you look at our business over the last couple of quarters in the industrial sector, we had a very sharp rebound of about 12% in the second quarter. We held onto that in the third quarter. From talking to customers all over the world I think, for the industrial sector, there's a lot of optimism about next year. But I think in the very, very short term, our customers are being very careful in terms of placing backlogs, building inventory. So I think there's a very good match currently between the consumption rates and the demand rates in ADI. And I don't see that change much, certainly during the next 3 or 4 months.

Operator

Your next question comes from Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

I guess if I could follow up a little bit on those last comments on the industrial segment, I believe you said the distribution channel actually increased orders in the month of July. So if I heard that right, did that continue into August? And is that at all unusual given the relatively tepid environment? Should we read anything into that, or is that just more a function of kind of lean supply chain at this point?

Jerald G. Fishman

Jim, I wouldn't read anything into that. The weekly distribution orders on us, patterns are fairly erratic. And they go up and down week to week. I think it was -- to us, it was more an indication rather than it's a long-term trend going on there that at least stop being eternal pessimist on this stuff. That at least they don't see their business eroding or they wouldn't be placing those kind of orders on us rather than us standing up and say that's the beginning of a trend.

Vincent T. Roche

I think you've got to look at the end customer bookings patterns. I think if you look over the last 6 months, that's bookings in the OEM and disti sectors at the end-customer level, what you'll see is a tremendous consistency over that 12 months in every region and across the industrial sector. So I think there's just, as Jerry said early on, there's no events in one way or the other. It's just didn't -- very, very stable.

Jerald G. Fishman

I mean the real challenge for us has been in trying to plan and manage Analog. The industrial business, which is a large part of our business, you read all the stories how the world is going to come apart and you get worried about that. So the very positive thing that we took out of really pouring through all the customers and all the geographies, as Vince was saying, is that it's very stable. And I think in this world right now, stability is a good thing. And we didn't see anything in the numbers either through the end of last quarter or the first couple of weeks of this quarter that indicate anything other than stability. And like I said in this world right now, stability is a good thing, right? I would reiterate I'd be cautious about trying to say, interpret that comment about July, the increased orders is the beginning of a trend. I hope it is, but I'm not jumping on that one yet.

James Covello - Goldman Sachs Group Inc., Research Division

Okay. And if I could ask my follow-up, Dave, just relative to the gross margins, if you get gross margins back to sort of the more peak levels, is that -- how much of that is going to be mix-dependent versus utilization-dependent? Is one or the other of those more critical to getting the margins back to the peak level?

David A. Zinsner

Both would be helpful. Clearly utilization would be a bigger component of the, I think, driver of the gross margin.

James Covello - Goldman Sachs Group Inc., Research Division

And is there an aggregate, a certain number of increase in basis points in utilization that's going to drive a certain number of gross margin improvement?

David A. Zinsner

I wouldn't say we have any kind of specific targets. But like I said, utilization was up a little bit north of 80% when our gross margins were kind of running in the 67%. I mean so that's probably a reasonable rule of thumb.

Jerald G. Fishman

And probably if it goes up, the mix will be relatively consistent. So that's probably -- so you can write, do an algorithm for that.

Operator

Your next question comes from Craig Ellis with Caris & Company.

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

Jerry, you had mentioned that distributors are signaling a wide range of possible outcomes here at the end of the year. And I'm wondering is that from a particular geography? Or does that relate to a particular set of end markets? Can you give us some more color there?

Jerald G. Fishman

Our distributors came to focus more on the industrial market. And our overall distribution business is very U.S. and Europe-centric, and the main stream of distribution. So I think it's related to that. And there's 2 big distributors that we use. And I think if you just briefly read the commentary there, saying, "You know things look okay, things look stable." But at the margin, they're packing a little more a parachute on the range of possibilities for next quarter, which is not surprising given all the uncertainty out there. But certainly, it's hard for us to get -- be more certain of the guidance when they're not very certain of their guidance. And they're not an insignificant portion of our business. But again, I think you can look at it 2 different ways. One sense, you say that sounds very uncertain. On the other hand, even the range of guidance they put out indicates that they think business is stable. So we tend to focus on that commentary as much as the precise numbers they are putting out.

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

Okay, that's helpful. And then switching gears to the automotive end market. It looks like we're taking a breather here after what was a really strong trailing 4 quarters. How should we think about automotive’s potential to reaccelerate over the next couple quarters? And how big can automotive become as a percent of mix in the next couple of years?

Vincent T. Roche

Yes. Well automotive is currently about 17% of the company's revenue. It's grown at double digits for multiple years here, and then we'll do it -- that again this year. What we've seen in the last couple of quarters, I think, is really related to the European market and European car manufacturers. So we've seen the manufacturing output reduced in Europe due to the economic uncertainty. And I think as well the lackluster performance we've seen in Europe has been offset to some extent by strength in other areas, such as Asia where we're beginning to see some good momentum build for the company finally, so in Japan, as well as the China and Korea. So I think our momentum bodes very, very well. And that's coupled with the recovery that is likely to happen in Europe. I think -- I hope that even next year, we should do quite well. Also, the new product pipeline and the design pipeline that we have would lead us to believe that the kind of growth we've been seeing in the 12%-plus area per year, we can keep that momentum going.

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

And what is the geographic mix of the automotive business across Asia, U.S. and Europe?

Vincent T. Roche

Off the top of my head, it's probably -- U.S. and Europe combined are probably 70%, 75%, and the rest is Asia.

Jerald G. Fishman

I mean I think the trend that we can rely on is what Vince was saying is that direct product content growth is going up. There's an awful lot of analog and mixed signal content and all the sensors, all the engine controls, all the battery, monitoring, all the communications links, all the safety features, cars are going to have rollover control pretty soon legislated that consumes a lot of gyros. So I think that there's a lot of macro trends in the automotive market that really will help us accelerate our sales. That will be to some degree at least to our close approximation, much more relevant than how many more cars get sold this year or next, which doesn't change all that much. So I think the macro trends in the automotive market and the positions that we're continuing to build with the largest suppliers to the automotive market here in Europe, in Japan recently and in Korea recently are such that I think we'll do very well, if those trends continue.

Operator

Your next question comes from Vijay Rakesh with Sterne Agee & Leach.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

A couple of questions. One if you look at the distributor side, what are the inventory levels on the distributor side? And the industrial, when you look at the different segments within industrial, where do you see strength and where do you see kind of weakness or kind of limited visibility in those -- in that market?

David A. Zinsner

So I'll answer the first. I think Vince will answer the second. Inventory was on an absolute dollar basis slightly down and on days of inventory -- weeks of inventory is what we typically measure that, it was about 7.5 weeks, which is consistent with what it was last quarter.

Vincent T. Roche

Okay. And on the industrial sector, the area where we saw most weakness was the energy sector, both metrology as well as the transmission distribution part of that. We expected some rebound in the -- at the industrial automation area, it didn't happen. So most of the other subset of industrial were relatively flat for the quarter, 1 or 2 a little up, but energy down.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Got it. And just making out a little bit to the last question there. When you look at the January quarter, any thoughts on what seasonality typically is? And are you seeing anything out of the ordinary in terms of trends as you look out?

Jerald G. Fishman

I mean not at this point in time. I mean we're trying to get through the fourth quarter right now, and then we'll give you an update on what we think about the fourth -- the first quarter when we get through this quarter.

Operator

Your next question comes from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - BofA Merrill Lynch, Research Division

First one is on OpEx growth, and I'm trying to think how to conceptually model it going forward. So let's assume your sales growth 10% next year. With that kind of sales growth, how should we think about OpEx growth?

David A. Zinsner

Well, I mean we don't have an exact target. I would tell you that in the near term, given a lot of the uncertainty that exists, we're trying to keep it relatively flat with where we're spending today. If the business begins to recover, we'll look -- likely grow expenses, but we're trying to keep it at a rate that's significantly below whatever the revenue growth rate is. So our goal is -- from the 32% operating margins that we operate today on a non-GAAP basis, our goal, if we start to see some recovery, is to see the operating margins begin to expand.

Vivek Arya - BofA Merrill Lynch, Research Division

Got it. And next one on the wireless infrastructure business, I believe you mentioned good growth opportunities there. How much does 4G or LTE contribute to that? And how much content expansion can you have as the mix shifts more towards LTE deployments?

Vincent T. Roche

The lion's share of our business today is 3G. At the present time, 4G is just rolling out. It's less -- it's quite a bit less than 10% of our wireless revenue, but it will become a very significant contributor over the next couple of years. So I think what you'll see is our business today is composed of 2G, 3G and now 4G. But I think in the next couple of years, you'll see a predominance of 3G. I think we'll still be 3G dominated for the next 2, 3 years. But LTE will become a significant part. I can only expect that it could be 20%, 30% of our revenue in that area in the next 2, 3 years.

Jerald G. Fishman

Certainly that's the fastest-growing parts of our wireless business right now, so it all depends on just how that grows relative to the more traditional 3G stuff.

Vincent T. Roche

The good news is we have a lot of content with more content specifically in a 4G system than we have in a 3G system, and all of these regular subsets are become enormously complex. And of course there's a lot of -- each one's got to handle the legacies as well. So the complexity of the silicon we're delivering increases generation by generation, and that will handle more frequencies, more bandwidth, more economic range. So the bottom value is increasing as well persistent. So as these 4G systems build out, we're very optimistic about our revenue growth potential there.

Vivek Arya - BofA Merrill Lynch, Research Division

Is there any way to size that expansion? Is it 10% more, 15% more, 20% more as you grow from 3G to 4G?

Vincent T. Roche

More than 20%.

Operator

Our next question comes from Shawn Webster with Macquarie Research.

Shawn R. Webster - Macquarie Research

A lot of my questions have been answered already. But I was wondering if I could ask some more on the content growth story. You've highlighted the wireless segment and you've tried to quantify that. I was wondering if you could quantify some of the other areas that are non-automotive related in terms of content growth and maybe specifically, call out like industrial control systems or military equipment or other areas where you're also seeing a generation-to-generation content growth story.

Vincent T. Roche

Yes. Energy has been a good growth story for the company in the industrial sector over the past 5 years. And it's not a very big part of ADI's business. But the growth has been good, and it's a great long-term bet for the company. We see parts of the industrial automation sector, particularly in Asia we've done a good job, I think, connecting with our customers and the key applications there in the Asia region, so that would be a very good contributor for the company. In the wired infrastructure area, we've been investing heavily in building a portfolio in the observation control area, in areas like timing clock controls, timing generation clock controls. And these controllers, we have a dominant position in the controller circuits that monitor optical systems and cable infrastructure systems. So they are just a couple of spaces. Automotive of course, we've good position in powertrain, in infotainment, as well as safety. And all of those sectors are growing at a fast clip for the company.

Shawn R. Webster - Macquarie Research

Now is this -- I'm sorry to interrupt. I was going to ask is this a case of the complexity of your devices is growing as is your price in the system? Or is this your shipping more units into a box and displacing other kinds of devices? Or what's the dynamic happening within the box itself?

Vincent T. Roche

There's a little bit new -- I mean there's a lot of new features we have. As you know car companies are largely selling their cars in the basis of electronics technologies today. So there's a lot of new features that we're being asked to address. So again, I think the way to look at it is the complexity of the circuits and the products that we're shipping generation to generation is increasing and allowing us to increase our form value generation on generation there.

Shawn R. Webster - Macquarie Research

Okay. Maybe just one quick follow-up, and I'll go away. The consumer business is going to be up double digits based on the math you kind of laid out for us, which would be a seasonal increase. I'm just trying to come to grips on what seasonal build versus some of the new product cycles you've highlighted. Can you specifically call out how the product cycle aspect of it, the new business you're getting is affecting your outlook for Q4?

Jerald G. Fishman

Well, I think it's really both. It's very challenging to try to give you a breakout of that and say half of that or 1/3 or whatever. I think the only takeaway is we're going to get some lift in the fourth quarter. We think we have a good product cycle. It's a seasonally strong quarter for us, and we'll wait and see what happens after that.

Operator

Your next question comes from Steve Smigie with Raymond James.

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

With regard to your exposure on the wireline, you mentioned a little content on the optical systems, just wondering if you could talk about, is that more centered around like 40 or 100G? Or is that more like passive optical network-type systems? And to the extent that you're in the PON systems, is that you're seeing any pickup in the China build-outs?

Vincent T. Roche

Most of our business in the wired infrastructure area is not particularly in the data path, we’re -- it's mainly observation control, timing -- timing generation control, some data path solutions. I think it's true to say that in the optical subsystem area, we've seen -- I think over last 4 quarters, we've seen just a stable -- no growth, stable pattern, same thing as in the cable infrastructure market. And I think we certainly are playing in the China area. We've seen a little growth in China. I think which is then offset by some decline in America, largely due to ASP side.

Jerald G. Fishman

I think if you look at longer term in the wireline communications market, I think the real opportunity for ADI is going to wind up being integration of a lot of stuff we do. And we have a lot of the -- as Vince was saying, a lot of the stuff we do now is pinpoint products that are relatively standard products for that market. But I think increasingly as we get a much better insight into what our customers really need and want, there's an opportunity to take multiple technologies and integrate them for many of those customers. So I think that's where the breakout opportunity in that business for us exists. If it's just selling basically catalog products to customers that might be picked out for a particular usage, I think it's -- there is an opportunity. It's not huge growth opportunity. I think if we could accomplish some of the things that we're setting out to do now in terms of the level of integration that we could accomplish for those kind of customers, I think that's where we get an inflection point to the growth rate in that market.

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

Great. And just for my follow-up, you talked a number of times here about the new products in the consumer market. Can you give us a little more detail about what's changed or what specifically you've done that's new, what innovations you have made that's allowing you to get this big bump?

Jerald G. Fishman

Well I think we have a lot of different applications in the consumer market. We saw products that are in the audio signal chain, which are real important to a lot of customers, given that audio is a more important application than it's ever been in a lot of consumer products. We do a lot of video in the consumer area. We have products that range from relatively simple pinpoint products to highly integrated products that go into these applications. We sell MEMS products into consumer applications. So it's really a mixture of a lot of different things that go into our consumer business. The real challenge in the consumer business for all of us, I think, is developing or having products and customer relationships that last a long time from generation to generation and that turn out to differentiate our customers' products so that we can earn a fair return on them. And that's where we're focusing our effort. We're seeing some benefit of that focus coming up.

Vincent T. Roche

Given the life cycles of most of the systems onto which we ship in the consumer segment, virtually everything we do is a new product.

Jerald G. Fishman

That's both a good news and a bad news, right?

Operator

Your next question comes from Harsh Kumar with Stephens Inc.

Harsh N. Kumar - Stephens Inc., Research Division

Jerry, I think you talked about the areas in industrial that are not doing better. But I was wondering...

David A. Zinsner

That was Vince actually. Vince is the one with the Irish accent, not Jerry. If you can't tell that one, then we got to get you a phone line.

Harsh N. Kumar - Stephens Inc., Research Division

I was wondering if you guys could talk about areas in industrial that are actually doing well rather than to the normal industrial business.

Vincent T. Roche

Yes. Energy was doing very, very well, I'd say, at this point in time. We run R&D investment over the last 3 years in industrial to get a much, much sharper, more intense focus in areas like factory automation and process control. And they've actually done well for this company over the last couple of years. The last 3 quarters have been -- the last 4 quarters have been tough. But as I said earlier, energy has been a good growth story, double-digit growth for the company for the past 4 or 5 years. And it's our expectation that we'd be able to get the industrial automation sector into kind of the 8% to 10% compounded growth over the coming years.

Jerald G. Fishman

To me, one of the encouraging parts of the industrial market right now is that when Vince goes out and visits these customers and occasionally convinces me to go with him, what you hear from those customers is that they’re always dragging us into some of these applications that we've never been in before because they understand that they're very challenging and they have a lot of respect for some of the core technologies that Analog has that they think is very applicable in some of these segments. So some of them are just -- we make the highest speed and most accurate converters and amplifiers as we always have and some of them are actually asking us to do a lot more integration for them than we've ever done in the past, either for reasons of speed, performance or cost or size. So I think increasingly is that the industrial business, which if you go back 5 years used to be, we have a lot of customers and we sell a lot of products to, I think increasingly there's an opportunity for us to really do a much more systems-oriented approach to some of these consumer -- some of these industrial applications. And certainly, we have one of the best capabilities in the world given our core technology to do those kinds of things for those customers. And when they look around and they look at the whole universe of companies that really have that level of technology and commitment to the industrial business, despite all the press releases and rhetoric out there, it's a very short list of companies that could actually do that for them. And we're certainly high on their list, I think, to do that.

Harsh N. Kumar - Stephens Inc., Research Division

Got it, that's very helpful. And again a question for either Jerry or Vince. I'm curious if there is anything like any kind of normal seasonality left in the industrial business at this point in time. Any quarters that are stronger than others that you've noticed in the past 2 or 3 years?

Jerald G. Fishman

Well, I would say that our second fiscal quarter is historically -- if you go back many years in the absence of any macroeconomic headwinds or tailwinds, our second quarter is typically our strongest industrial quarter because it has the most days in it basically. And when a lot of the systems comes to distribution, a lot of it is how many days of sales we get. But I would say right now the dominant factor remains the macro stuff. And I continue to believe that seasonality right now is a trap for everybody because other effects dominated much more so than seasonality.

Operator

Your next question comes from Doug Freedman with RBC Capital Markets.

Doug Freedman - RBC Capital Markets, LLC, Research Division

If you could, Jerry, you've been through a lot of cycles and if we look at this cycle, you've mentioned that clearly macro is weighing on it. Are there any things outside of macro that you think we should be looking towards to see when we're going to start to resume what we call sort of normal semiconductor growth patterns? And I'm referring maybe to the aging chart that you guys typically have shown investors that show the adoption of newer products in the market and details on your older products. Are you seeing any changes to those product uptakes?

Jerald G. Fishman

No. I mean I don't really think so, Doug. We've looked at that business chart every quarter quite methodically. And it turns out that all the reasons why that chart has been the way it is for the better part of 25 years, or longer actually, I think is still in place today. In industrial products, the average usage for application is relatively low. The performance criteria are very high and customers don't like to change. Even though they develop new products, they tend to bring along the level of technology that they're familiar with. So I think all those factors are still a very dominant factor in the industrial business. I think the only change, if there is one, is one of the comments I made just a little earlier in reference to the industrial market is I think there is an increasing opportunity to provide more systems level capability in the industrial market that is more tailored products to particular segments in the industrial market. And I think that's another just growth opportunity for Analog that I think didn't exist 5 or 10 years ago. So that's a very slow building phenomena. I still say the industrial market is very similar to the way it was 5 or 10 years ago. And I think if we continue to really win at the core technology level in amplifiers and converters and some of the other product areas that we're in, I think we'll continue to do extremely well in the industrial market, which values those characteristics probably more so than a lot of other markets.

Doug Freedman - RBC Capital Markets, LLC, Research Division

That's a good segue into sort of my next question. Over the last 5 or 6 years, you've done quite a nice job of sort of pruning and focusing your product segments that you're attacking. We saw you move a little bit out of DSP. It's sort of interesting, DSP is still holding on to a decent percentage of revenue there. It's a little better than I might have expected.

Jerald G. Fishman

That was always the goal.

Doug Freedman - RBC Capital Markets, LLC, Research Division

And how do you feel about the positioning of the company now to service the new growth opportunities? Are there pieces missing? And are you -- do you need to focus some more effort again back into power management to deliver some of those solutions?

Jerald G. Fishman

Well I think there's always pieces missing in the puzzle. And we have a lot of opportunities to fill some of those pieces, either with acquisition or investment. I think in the power management part of the business, we've -- I think as we've mentioned previously, we've changed our strategy quite a bit over the last couple of years to really attach power management where we already control a large part of the bill of material than trying to compete in the broad based power business, which increasingly is getting overcrowded, and there's too many competitors in there right now. So I think our power management business now, we have some very talented people, but they are very focused on where we are in control of the signal processing bill of materials to add power capability. And we're getting very good take for that from our customers. I think in other areas, we've just made an acquisition in the very high performance clock area, which is an area that we're very familiar with. Every -- a large part of our converters are clocked by something. And we think there is some new technologies out there that can fundamentally change the game in clocking. And that's obviously a natural thing to sell alongside of our converters. We've made other acquisitions that we think will change some of the dynamics in the -- what you can deliver for what power dissipation and signal processing. So I think the areas that we'll continue to pick away at where we see either new technology emerging or holds or what we're trying to do for our customers. And I think we've done that in the past couple of years, and I think we'll continue to do that in the future.

Operator

Our next question comes from Romit Shah of Nomura.

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

Maybe a question for Dave, since Jerry and Vince are stealing all the airtime here. Dave, inventory were 120 in the quarter. You mentioned it would be down, but it's higher than a lot of your peers which are running below 100 days. And I guess my question is what is it about your mix that requires 4 months of inventory on hand? The implication would be that gross margins are inflated.

David A. Zinsner

Well we do carry a bit more inventory. We generally carry 100 to 110 days of inventory. We do that because we have a ton of different products. And we are very much focused on our ability to deliver in kind of short lead time environments. We think that in a lot of cases, it differentiates us from some of our competitors. So that's one primary reason why we keep -- we just generally keep a higher level of inventory. And that's quarter-over-quarter, so that doesn't necessarily inflate margins. We have built up inventory here in the near term, maybe a little bit higher than we would typically coming into several product cycles within the consumer space. And we need to be ramped in order to meet that demand. So that's the other driver. Most of that production is actually done outside. So we really don't get much in the way of absorption benefit from that. So that really didn't necessarily drive the gross margin, it more was a general factory utilization increase, which didn't have a huge impact on the inventory levels in the quarter.

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

So lead time then for the company, you would estimate would be lower than a lot of your peers, and that ultimately translates into better revenue growth? Is that the way to think about it?

David A. Zinsner

Well it depends on the environment. Right now we're probably all in similar lead time environments. So when cycles turn up, we tend to be able to maintain our lead times within a 4- to 6-week period. We see a fair amount of our competitors see those stretched out. I think the last big cycle we had, some of them stretched out about 20 weeks. So we don't like that. We don't think that's good for our customers. So we try to control that as best as we can through just careful inventory management.

Jerald G. Fishman

The other part that Dave didn't mention is that the inventory doesn't go bad on us. We build inventory and very long life cycle products. I don't remember the last time we wrote off inventory in Analog of any consequence. So I think the trade-off that we make is we want to be able to keep our lead times short, it makes our order patterns more predictable. It makes the factories run smoother. It helps our gross margins from the standpoint of keeping the loading levels where -- that are stable. And we think ultimately that really helps us competitively.

Operator

Your next question comes from Tristan Gerra with Robert W. Baird.

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

So you mentioned earlier that the key candidate to gross margin was going to be utilization rates rather than mix. Did you say what your gross margin will be if your utilization rates were to go back to the 80% level? And then if we need some additional mix improvement as well for you guys to get closer to 70% gross margin level, where would that mix opportunity come from?

David A. Zinsner

All we said was that our utilization when our margins were up in the 67% range, we're slightly above 80%. So I think that if our utilization was to get back over 80% given that a fair amount of that will be mix beneficial as well because industrial tends to drive utilization, we think our margins would be in that range. Outside of that, our goal is certainly to improve gross margins. We do have a number of things that we're working on to improve it. But we don't have any set target on gross margins per se. Really the function of why our margins are where they are is the function of our strategy of highly differentiated products in markets that we think value that -- those differentiated and high-performance products.

Operator

Our next question comes from Chris Danely with JPMorgan.

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

Just a couple of quickies. Vince, can you give us a rundown of the linearity of bookings during the previous quarter and why you guys feel confident in guiding for normal seasonal growth this quarter? Did things just kind of erode during the first couple of months and then stabilize in July and getting better in August? Or was it a step function down in stability after that? Maybe just a little color there.

Vincent T. Roche

Chris, it was remarkably consistent over the past 2 quarters month by month in every region, across the 2 major channels. There was no -- I mean there were no anomalies, and it's remarkable in its steadiness.

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

And so given the fact that you came at the low end of the range last quarter, why guide for normal seasonal growth this quarter?

Vincent T. Roche

Sorry, say that again?

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

Given that you guys came in towards the low end of the range of guidance for revenue last quarter and I believe you're going for a close to normal seasonal growth this quarter, was there something that gave you some more confidence that things wouldn't erode like they did last quarter?

Vincent T. Roche

Certainly on the consumer side of things, we're expecting a lift this quarter. We're confident about that. And that would be the primary chunk of any increase we got this quarter in revenues.

Jerald G. Fishman

Well we have -- the most important thing is you have a larger opening backlog that we already booked, which we think is secure, and although you'll never know. And the projections that we're making about next quarter are based on that backlog. We're in a very high churn environment, so you never quite know what's going to happen in detail in distribution. But as Vince said, the trends are pretty stable and all that's a good thing. So I mean but there is -- the reason there's a range there is because nobody really knows. And we feel we have a pretty good -- if we knew we say what we know, but we're just telling you what the range of possibilities as we see it right now is it's based on a bunch of assumptions about most of the other businesses being about flat, which could change one way or the other. It's based on the backlog we have at consumer, which we think is good, but could change also. So I don't think we can get away from the fact that there's a lot of uncertainty in trying to predict revenues that our size -- plus or minus $10 million in the quarter is very, very challenging.

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

That makes total sense. And then you guys said that the inventories were about 7.5 weeks essentially flat sequentially. Have you seen any change up or down from what you can tell in OEM inventory?

David A. Zinsner

Well the best way we can track it is just looking at their aggregate inventory. We don't have a visibility obviously into how much of our products is being held on their balance sheet. But their inventory levels just -- what we tend to do is take the top customers and track their days of inventory. And it was generally consistent with the prior quarter.

Operator

Your next question comes from Terence Whalen with Citigroup.

Terence R. Whalen - Citigroup Inc, Research Division

Two quick ones. The first one is you're expecting consumer to drive the entirety of growth in the October quarter. Is there any reason to not think that January revenues would be down sequentially then?

Jerald G. Fishman

Well, I think it all depends on what happens in the macro sense. If the macro stuff we -- the consumer stuff, it really depends on what happens with the product cycles in consumer and the macro economy. So one could say that might happen, but I can't say with any confidence that, that will happen. We'll have to just wait and see. But clearly, typically in normal times without any specific product momentum, you'd see the first quarter consumer being lower than the fourth quarter. On the other hand, some of those other businesses could go up in Q1. So we just don't know yet. And we're not prepared to sort of get ahead of this thing and go up with a forecast for Q1 while we're in the third week of Q4.

Terence R. Whalen - Citigroup Inc, Research Division

Fair enough. The follow-up question I had was regarding your process technology announcement with TSMC in a co-development of 0.18 process. Can you explain the rationale in making available jointly developed process to competitors potentially? Is the motivation of that to garner any sort of a royalty stream?

Jerald G. Fishman

Could you repeat the first part of that question? I didn't quite get it.

Terence R. Whalen - Citigroup Inc, Research Division

Sure. You had a press release this quarter about a co-development of a 0.18 process with TSMC that is being made available, I believe, to some of your competitors. I want to understand the motivation for that process development in making that available to competitors...

Jerald G. Fishman

Sure, I understand. Well some of the larger chips we do requires more advanced digital lithography, and so it's not a predominant part of what we do. Most of what we do with TSMC is 1 or 2 generations behind the most advanced stuff. But 0.18 is no longer the most advanced digital technology out there now. There are many companies working at 28 nanometers. So I would say it's a progression of what we've been doing with TSMC for many, many years. It's not really changed. And I think a lot of the stuff that's proprietary to Analog stays proprietary to Analog. That's the most important takeaway.

Terence R. Whalen - Citigroup Inc, Research Division

Are you garnering royalty stream for that? Is that the motivation?

Jerald G. Fishman

No, I do think the motivation is a royalty stream.

Operator

Your next question comes from David Wong with Wells Fargo.

Amit Chanda - Wells Fargo Securities, LLC, Research Division

This is Amit Chanda, dialing in for David Wong. Can you update us on your recent acquisition of Multigig in terms of your traction there for the high-end clock timing business?

Vincent T. Roche

We have -- at this point, we have fully integrated the team. We're very, very pleased with the progress that we're making in terms of incorporating the intellectual property that we acquired from Multigig. And we're actually starting to see -- the very, very first generation of product that they developed, we're starting to see some modest revenues. And we've moved them aggressively now into second-generation product design. So at this point, we're very, very pleased with what we see and what we're getting.

Amit Chanda - Wells Fargo Securities, LLC, Research Division

Okay, great. And then as a follow-up, Dave, in the context of today's macroeconomic environment, can you maybe talk about your expectations for ADI's R&D budget in FY '12? And I guess should we be modeling R&D at 17% of sales over the long run?

David A. Zinsner

Well I think what I said before, it's pretty accurate when we focus in on one of the line items within operating expenses, which is we're looking to kind of contain OpEx in the near term given the uncertainty in the macro environment. If things improve and revenue starts to grow, we're likely to grow both on the R&D and SG&A line to some level, but at a level that trails the revenue growth. Ultimately, we probably will want to run somewhere in that 17% of sales for R&D.

Ali Husain

Folks, we have a number of people still waiting to ask questions. If we're not able to get your question in the allotted time you can reach me, Ali Husain, after the call at (781) 461-3282. And before we take the last few questions, I would like to mention that our fourth quarter 2012 earnings release is scheduled for November 27, 2012, after which we'll host and our conference call will begin approximately 5 p.m. Eastern Time that same date. Now we're ready to take the additional questions.

Operator

Your question comes from Joe Moore with Morgan Stanley.

Joseph Moore - Morgan Stanley, Research Division

I wonder if you could update us just on your latest thoughts on the cash balance. I know you've been returning a lot of it to shareholders, but I know you've also been looking at options to return more. Can you just give us your latest thoughts there?

David A. Zinsner

Well I'll comment. I'm sure Jerry will have a comment as well. I think we've been focused in both ways in returning cash to shareholders, both through share repurchases and dividends. We just increased the dividend 20% a couple of quarters ago to ramp up that part of the equation. We have been buying back stock from quarter to quarter. It tends to be a little bit volatile depending on what the stock price is and how we're feeling about the world. We do have plenty of cash on the balance sheet in the U.S., which is where we would normally get the cash for repurchases. We have $1 billion. We also have capacity on the debt side, if we want to take advantage of that. We have a $585 million authorization to repurchase stock. So I think you'll see us be – active repurchases of stock over time. It might change from quarter to quarter depending on the environment but over time, we will certainly be buyers of the stock. We'll also be very committed on the dividend side, I think, as well. We ramped up the payout ratio. I think we paid out plus 50% this quarter in terms of dividend, and I think you'll see us be fairly committed to the dividend. We talked to a number of our largest shareholders over -- clearly over the course of years, but certainly within the last few quarters and really felt like a significant portion of them seems to favor an increase in the dividend, and we responded to that by increasing this a couple of quarters ago. So that's really the goal. Clearly we are still focused on periodic small tuck-in technology acquisitions as well. And so certainly some portion of the cash will be used for that purpose as well.

Operator

Your next question comes from John Pitzer with Credit Suisse.

John W. Pitzer - Crédit Suisse AG, Research Division

Guys, I just -- I'm curious about the utilization dropping in the October quarter. Just given your comments about stability in the business, at the midpoint, your sequential growth for the current quarter is actually going to be higher than the prior quarter, and you talked about inventories being in decent shape. So how do I read the drop of utilization? I apologize if it's nitpicking. I know it's only going to be down a little bit, but I was just kind of curious if you can give any color on that.

Jerald G. Fishman

Well I think the increase we're going to get on the sales line at least in the forecast right now is primarily consumer stuff. We primarily fabricate that not in our own facilities. So we looked at it and we say, we'd like to keep the inventory down more towards the 100 to 110 day area, as Dave said. And that -- and the reason we like to do that more than anything else is it gives us a lot more leverage on the upside when business gets better as compared to selling old inventory when business gets better. So we've -- in the old days, we would have just kept building it or leave it at the air. But I think now, we sense keeping it down to those levels is the best long-term decision for us. So that's what we're doing. I mean it doesn't really indicate either our enthusiasm or pessimism about the future. It's much more a question of that we have 121 days, we want to get it down to about 110 days, and most of the growth in Q4 is going to come out of stuff that we don't fabricate ourselves.

John W. Pitzer - Crédit Suisse AG, Research Division

And then guys just as a follow-on there. The cycle time through a fab is about how long?

Jerald G. Fishman

We have 350 processes we run in on those fabs, each has a different cycle time. But I think they range anywhere from probably 8 to 15 weeks depending on the complexity of the process.

Ali Husain

And that concludes our Q&A session. We appreciate your participation. We look forward to talking to all of you again during our fourth quarter 2012 earnings call scheduled for November 27, 2012 beginning at 5 p.m. Eastern Time. Thanks very much.

Operator

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

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