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Linear Technology (NASDAQ:LLTC)

Q1 2013 Earnings Call

October 17, 2012 11:30 am ET

Executives

Paul Coghlan - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance and Secretary

Lothar Maier - Chief Executive Officer and Director

Robert H. Swanson - Co-Founder and Executive Chairman

Analysts

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Joseph Moore - Morgan Stanley, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

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

Ross Seymore - Deutsche Bank AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

Christopher J. Muse - Barclays Capital, Research Division

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

Parag Agarwal - UBS Investment Bank, Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

JoAnne Feeney - Longbow Research LLC

Terence R. Whalen - Citigroup Inc, Research Division

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

Shawn R. Webster - Macquarie Research

Aashish Rao - BofA Merrill Lynch, Research Division

Operator

Good day, everyone, and welcome to the Linear Technology Corporation Fiscal 2013 First Quarter Earnings Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Paul Coghlan. Please go ahead, sir.

Paul Coghlan

Hello, good morning, everyone. This is Paul Coghlan, Chief Financial Officer. I'll be joined this morning by Bob Swanson, our Executive Chairman; and Lothar Maier, our CEO. Welcome to the Linear Technology conference call. I will give you a brief overview of our recently completed first quarter and then address the current business climate. We will then open up the conference call to questions to be directed at Bob, Lothar or myself.

I trust you've all seen copies of our press release, which was published last night. First, however, I'd like to remind you that except for historical information, the matters that we will be describing this morning will be forward-looking statements that are dependent on certain risks and uncertainties, including such factors, among others, as new orders received and shipped during the quarter, the timely introduction of new processes and products and general conditions in the world economy and financial markets.

In addition to these risks, which we described in our press release issued yesterday, we refer you to the risk factors listed in the company's Form 10-K for the year ended July 1, 2012, particularly management discussion and analysis of financial condition and results of operations. Secondly, SEC Regulation FD regarding selective disclosure influences our interaction with investors. We've opened up this conference call to enable interested investors to listen in. The press release and this conference call will be our forum to respond to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits or other financial matters for the upcoming quarter, as well as how they might impact our income statement model on our balance sheet, this is the time we're free to respond to these questions.

As you can tell from our press release, we're in a flat business environment. We reported revenue results for the quarter at the midpoint of our guidance, up 1.6% from the previous quarter. Although sales increased modestly, bookings did not but rather decreased modestly also. Bookings on a weekly basis were generally flat throughout the quarter. September is historically more robust than this September was. Customers continue to be very cautious and are concerned over general, global macroeconomic conditions.

Going into the quarter, we commented that worldwide macroeconomic concerns were greater than entering the previous quarter. Now, conditions are probably even a little worse, as there has been some deterioration in China and Japan, and the U.S.A. and Europe have not improved. Customers do acknowledge in-demand opportunities, but are in a wait-and-see mode. They are running tight inventories and order to the low end of our lead times.

Activity is quiet. We don't see many cancellations nor pull-ins nor push-outs. As I said, our bookings were down modestly from the prior quarter, and for the first time in 3 quarters, we had a modestly negative book-to-bill ratio. A bright spot is the automotive sector where we are experiencing growth.

Sales increased by 1.6%. Gross margin decreased from 75.4% to 75%. We had roughly similar shutdowns and holidays in our factories compared with last quarter. Average selling price at $1.80 was down from $1.82 in the previous quarter. The change in gross margin was due to several small factors, primarily costs associated with a small reduction in workforce in one of our foreign factories, the modest reduction in average selling price, a slight change in mix and finally, some higher factory spending.

On the other hand, operating expenses decreased modestly by $975,000 or 1%, mostly due to decreases in labor and legal costs. As we forecasted, operating income increased this quarter by $3.6 million or 2%. Operating income at 46.3% of sales improved from 45.9% last quarter. Below the line, interest income and expense were largely unchanged.

Finally, income taxes increased this quarter. Our quarterly effective tax rate was 27% as forecasted, compared with 26.5% last quarter. This change is due to the expiration this year of the R&D credit in the United States. The resulting net income of $105,182,000, an improvement of $1.9 million or 2% over last quarter, is due mostly to the increase in sales. Our return on sales of 31.4% was similar to last quarter's 31.3%. Headcount decreased marginally, primarily in our offshore manufacturing facilities.

In summary, the effect of these items I just listed on the published quarterly results was that revenue was $335.1 million for the first quarter of fiscal 2013, compared to the previous quarter's revenue of $330 million and $329.9 million reported in the first quarter of fiscal year 2012.

GAAP earnings per share of $0.45 increased $0.01 from the previous quarter and decreased $0.02 from the $0.47 per share reported in the first quarter of 2012. Compared with this quarter last year, the current quarter had modest net operating cost pertaining to our acquisition of Dust Networks, and also had a modest, higher effective tax rate due to the expiration of the R&D credits.

GAAP net income of $105.2 million compared with $103.3 million last quarter and $108.4 million reported in the first quarter of last year. Earnings per share would be $0.51 on a pro forma basis, which excludes the impact of stock option accounting and the amortization of debt discount, which is the theoretical difference between the company's convertible debt actual interest and the interest it would potentially have had to pay if it had used straight bank debt.

During the quarter -- during the June quarter -- pardon me, during the quarter, the company's cash and short-term investments balance increased by $116.9 million to $1,319.9 million. The company announced that it would again pay a quarterly dividend of $0.25 per share. This cash dividend will be paid on November 28 to stockholders of record on November 16. In addition, the Board of Directors authorized the company to purchase, depending on market conditions, up to 10 million shares of its outstanding common stock in the open market over the next 2 years.

Looking ahead to the December quarter. General economic sluggishness remains in the United States and Europe and has seemed to spread to China and Japan. We've gotten off a slow start in October, although the last few days have been better. Given our low visibility, this is a challenging quarter to forecast. Our field forecasts from ground level are not too bad, as we appear to be doing well at the program and design win level. However, even though inventories appear to be reasonably tight, customers are very cautious and are running their order commitments very tightly. As a result, we have broadened our forecast range and are currently forecasting our revenues to decline sequentially between 5% and 10% for our second fiscal quarter of 2013.

Now I would like to address the results of the quarter on a line-by-line basis. Starting with bookings. Bookings decreased modestly this quarter and the booking run rate did not accelerate in September as we had expected. Geographically, each major area was also down modestly. We had a slight negative book-to-bill ratio for the first time in 3 quarters.

At this time, every quarter, we give you a breakdown of our bookings percentages by end markets to give you insight into those markets that drive our business. Industrial and Communications continue to be our largest areas. Industrial was 40% of our bookings, down from 41% last quarter. The decrease was broadly distributed, again, reflecting global macroeconomic conditions.

Our industrial business is very broad-based, both geographically and by end products. The Communications area at 22% was up 1% from last quarter, although relatively flat in absolute dollars. Cellphone continues to be a very small part of our business and now rounds to less than 1% of our business. Automotive continues to be a strong area for us, increasing from 16% to 17% of our business this quarter.

By geographical area, Japan had the most growth, Europe was flat and the U.S.A and the rest of Asia were down modestly. The expansion of existing linear parts into new car models and also design wins for new parts and new programs, both in gas-driven and hybrid and electric vehicles continue to help us. Automotive is an area that we have been focusing on, given the increasing electronic content in automobiles. Our battery monitoring products for hybrid and electric vehicles have been successful in the marketplace. In addition, we continue to distinguish Linear as a high-quality supplier in important international automotive manufacturers.

Computer at 12% declined from 13% last quarter. This area has been pretty steady in this range over the last several quarters. Within computer, we service opportunities in notebooks, desktops, in tablets, servers, storage devices and printing and imaging end products. Consumer, which has been our smallest end market, remained at 3% of bookings.

Finally, the Military, Space and Harsh Environment products were unchanged at 6%. The U.S.A and Europe are the predominant geographic areas for this business.

In summary, this is a good distribution of business by end markets for us. Whereas 4 years ago, 16% of our business was in cellphone and high-end consumer related products, now only 3% of our business is in these generally commodity and volatile analog areas.

Note that we have a good balance of where our bookings are actually created, with 43% of them created in the U.S.A. and 57% internationally, generally similar to last quarter. Moving from bookings to sales. Net sales increased roughly 2% from the prior quarter and from the similar quarter in the prior year. Sales increased in Asia-Pacific and were down modestly in the U.S.A., Japan and Europe. In summary, the U.S.A. was 28% of sales, down 1 point from last quarter. Europe at 18% of sales was down from 19% last quarter. Japan at 15% of sales was down from 16% last quarter. And Asia at 39% of sales was up 3 percentage points from the prior quarter.

Gross margin. Gross margin at 75% of sales decreased from 75.4% in the previous quarter. The change was due to an accumulation of several small factors, including costs associated with the small reduction in workforce at one of our foreign factories, a small reduction in ASP, a slight change in mix and finally, some factory spending, somewhat caused by stronger Asian currencies.

The factories had similar shutdowns in this quarter as last quarter. ASP decreased slightly to $1.80 from $1.82 last quarter. R&D. R&D at $58.8 million decreased $676,000 from the $59.5 million reported last quarter, while also decreasing as a percent of sales to 17.5% from 18% last quarter. The dollar decrease was mostly due to lower labor-related and legal costs.

SG&A. Selling, general and administrative expense at $37.5 million decreased by only $300,000, and also decreased as a percent of sales to 11.2% from 11.5% last quarter. Most of the modest decrease in dollars was due to lower legal costs.

Operating income. Operating income, as a result of the above, increased by $3.6 million or 2%, and increased as a percent of sales to 46.3% from 45.9% last quarter. We are still operating at less than optimum capacity, so when we grow sales to our previous highs, we expect the operating margin to improve along with sales.

This quarter's results still reported strong profitability, and clearly put us ahead of our peers in this financial performance measure. Both interest expense at $6.9 million, and the amortization of debt discount at $5.1 million, were similar to last quarter. Interest income of $1 million was also similar to last quarter.

As a result of all the above, the company's pretax profits were $144.1 million, up $3.5 million from the last quarter. Pretax profits are now 43% of sales versus 42.6% last quarter, with the increase due primarily to higher sales volume. As we forecasted at this time last quarter, our quarterly tax rate increased to 27% from 26.5% in the prior quarter. The difference pertains to no R&D credit in our fiscal 2013 effective tax rate since the R&D credit is currently expired.

Looking forward, we expect our quarterly tax rate in the December quarter to remain at 27%. After the election, should Congress reach an agreement on tax reform, the R&D credit may be favorably impacted. The resulting net income of $105.2 million is an increase of $1.9 million from the previous quarter, due mostly to higher sales volume partially offset by the higher tax rate. The resulting return on sales was 31.4%, similar to last quarter's 31.3%. The average shares outstanding, used in the calculation of earnings per share, increased by 713,000 shares. This increase was impacted by shares exercised, related to a large grant encompassing many employees that reached its 10-year expiration date and by restricted shares granted within the quarter. GAAP earnings per share was $0.45, which was an increase of $0.01 from the prior quarter. On a pro forma basis, without the impact of stock-based compensation of $15.9 million and non-cash interest expense of $5.1 million, diluted earnings per share would have been $0.51 per share compared with $0.50 last quarter and $0.53 in the first quarter of last year.

Moving to the balance sheet. Cash and short-term investments increased by $116.9 million. $173.1 million was provided by operations, and $10.7 million was provided from the exercise of stock options by employees, $58.8 million was paid in cash dividends, $3.4 million was used to purchase fixed assets and $5.1 million was used to repurchase restricted stock.

For the 106th consecutive quarter, the company had positive cash flow from operations. Our cash and short-term investment balance is now $1,320,000,000 and represents 67% of total assets. Accounts receivable of $152.4 million decreased slightly by $667,000 from last quarter on slightly higher shipments. Our days sales and accounts receivable were 42 days, similar to last quarter. Inventory at $81.7 million increased $2 million from last quarter. Most of the increase was in work in process inventory, primarily die at assembly subcontractors. Inventory reserves also increased modestly.

Finally, our quarterly average inventory turns improved slightly to 4.2x, up from 4.1x last quarter. Deferred taxes and other current assets of $69.9 million were similar to last quarter. Our property, plant and equipment decreased by $9 million. We had additions of $3,381,000 and depreciation of $12,382,000. Most of the modest additions were for building improvements at several locations.

For fiscal 2013, we continue to expect additions of roughly $25 million and depreciation of roughly $50 million. Other noncurrent assets at $23 million decreased modestly by $2.4 million, largely due to the amortization of long-term intangible assets. Finally, on the asset side of the balance sheet, our return on assets was 21.9%, similar to last quarter's 22.4%. Our current ratio was 8:1 versus last quarter's 8.8:1.

Moving to the liability side of the balance sheet. Accounts payable decreased by $530,000, largely due to timing differences on recurring payable items. Accrued income taxes, payroll and other accrued liabilities of $147 million increased by $29.3 million. The largest items here are our profit sharing accrual, income taxes payable and accrued interest payable on our convertible debt.

Our interest payable accrual increased as we did not have a semiannual interest payment required this quarter. The profit sharing accrual decreased as this quarter's charge to the accrual was offset by the actual payment of profit sharing for the last 6 months of fiscal 2012. We pay profit sharing to our employees semiannually in the fiscal first and third quarters. Consequently, the accrual increases in the second and fourth quarters and is reduced as in this quarter, in the first and third quarters.

Finally, the largest impact on this area was our income taxes payable accrual. As we had an accrual for the current quarter's profitability and we are required to make minimal income tax payments in the first quarter of our fiscal year. Next quarter, we will have 2 quarterly payments as required.

Deferred income on shipments to distribution increased by $1.1 million, of which $1 million was a deferred royalty. Our actual product shipments to U.S. distribution was similar to what they shipped out to their end customers. Our accounting on shipments to U.S. distribution is conservative. We do not record a sale nor income in our results of operations until the distributor ships the product out to its end customer. We continue to closely monitor our inventory at distribution to properly position the inventory relative to potential demand.

Our senior convertible notes increased by $5.1 million. This increase reflects the non-cash amortization of debt discount charged to the income statement. Deferred tax and other noncurrent liabilities increased by $5 million, largely due to an increase in deferred taxes on our convertible note. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, dividends paid and employee stock activity.

The company announced that it will again pay a quarterly dividend of $0.25 per share. The company believes that paying a dividend is an important way to return value to its shareholders. The company began paying a dividend in 1992 and has increased it every year since, and currently pays approximately a 3% yield.

Looking forward. Looking forward, several factors are influencing our guidance. On the cautious side, although we're not economists, as businessmen, we sense that global macroeconomic trends are not improving. There is uncertainty in the United States, the presidential election appears to be close, the outcome could have a significant impact on taxation and how the upcoming fiscal cliff will be addressed. Europe also has its uncertainties and solving this sovereign debt issues without having recessionary implications is a difficult problem. China's growth rate has slowed down with particular implications on imports. Japan is a large trading partner with China, and is feeling the effects of the Chinese slowdown.

Secondly, our distributors are forecasting POS on them to be down, initial forecast to us are estimating high single-digit decreases in the U.S.A. It is not uncommon for U.S.A. distributors to be down in the December quarter due to calendar year-end holidays. However, this year, they are forecasting down a little more than seasonably normal. Europe, Asia and these [ph] Japanese distributors are also forecasting their POS to be down, but not by as much as the U.S.A. We expect many of our customers, particularly in the industrial and Communications end markets, to have year-end shutdowns, and thereby delay inventory procurement into the new calendar year.

On the positive side of our guidance, inventories at our customers appear to be generally pretty tight. They have been ordering on us in line with their own throughput and have not been building inventory. As I said earlier, field level forecast to us depicts steady business expectations, as we have good program penetration and good design win activity. The Automotive business for us has continued to be strong. We're certainly benefiting from the increased electronic content in automobiles.

Finally, Industrial, our strongest market, historically can be slow in the December quarter, but stronger in the first quarter of the ensuing new year. This usually drives some increased booking activity late in the December quarter.

Summarizing these various inputs, coupled with the fact that we are entering the quarter with a modest negative book-to-bill ratio and that bookings have not improved so far in the first month of the current quarter, we expect revenues to be down 5% to 10% sequentially in the December quarter. We expect operating income as a percent of sales to be in the mid- to low-40% range, depending on sales.

As we have demonstrated in other periods of economic uncertainty, at these levels, we expect to maintain industry-leading profitability. In this regard, as is our custom during difficult business cycles, the company will take the necessary measures to curtail spending and limit the impact of lower revenues on profitability. These measures will include limited shutdowns for all employees during the holiday weeks, lower profit sharing and other variable expense controls.

Looking beyond these near-term market difficulties, the major market opportunities that drive our business demonstrate continuing growth opportunity, particularly with higher electronics content in gas-driven and hybrid vehicles and energy efficiency and other technological trends in industrial applications. Increased analog innovation in our other end markets will also benefit us.

Finally, we are very well product and end market positioned to execute our strategy. We are strong in the areas we want to be, which are Industrial, Communications, Infrastructure, Networking and Automotive, and believe that we are in an innovation-driven environment. Our strategy is different from our analog competitors. We dominate in different end markets, we are a more reliable supplier with consistently lower lead times and support, and our technology and support is valued as evidenced by our higher operating margins. I would now like to open up the conference call to questions to be addressed to either Bob, Lothar or myself.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Tore Svanberg with Stifel, Nicolaus.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

First, Paul, you mentioned that you're running sort of at the lower end of the range when it comes to lead times. Can you just remind us what those numbers are? And when is the last time you can remember lead times being this short?

Paul Coghlan

Well, our published lead times are 4 to 6 weeks, and we can typically ship product in a shorter timeframe than that. Right now, our published lead times have been steady for several years. If you go back to the very beginning of the recession in 2008, we probably had a period where our lead times were very, very short. And then as the recession turned into a dramatic uptick, they picked up a bit, but have been pretty steady the last 3 years at 4 to 6 weeks.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. And if we take the midpoint of your guidance range, which would imply $310 million in revenues for the December quarter, is that sort of like a true consumption number of your products? Or do you think there's basically some deviation based on the supply chain being so conservative?

Paul Coghlan

Well, you notice we expanded our guidance. Usually, we're a little tighter than a 5% to 10% or than a 5 percentage point range. So figuring out what the true immediate consumption is has been a bit of a challenge for us. We mentioned in our call that I mentioned earlier, that if we look at our field level forecast, they're saying that business has changed a little bit, but not very much. When we look at the booking patterns, end of September and the first couple of weeks of October, it would imply that at least in the short term, customers are restraining their demand. So our feeling is that, within the range is the true demand of what we're going to ship next quarter, that we are not going to build inventory next quarter, but we really don't have as clear a vision into the quarter as we typically have at this time.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Great, and last question, what should we assume for shutdowns in the December quarter? Will it be similar as the ones you took in the September quarter?

Lothar Maier

I think they'll be similar in some areas and enhanced in other areas. We're planning to do additional shutdowns in our wafer fabs clearly as the sales decline, we'll have to tailor back production there. And as far as the rest of the company, we'll probably doing some shutdowns around the holidays as well.

Operator

And we'll take our next question from Joe Moore with Morgan Stanley.

Joseph Moore - Morgan Stanley, Research Division

If I look at your business over the last 8 or 9 quarters, I mean, you're down about 20% over that period from sort of the peak of late 2010. And if I take automotive out of that, or my extrapolation of automotive, you're down about 25%. And I guess, I mean it sounds like a lot. I know the macro issues are weak, but is there anything -- I mean, if you just step back and kind of look at that, how much of that is sort of -- that there was some inflation of those original numbers? Is there some element of the current numbers that's depressed, that you would expect to rebound? Just how can you put that in some kind of context for me?

Paul Coghlan

Well, I think just as you pointed that automotive has grown in that period. If you go back to the early part of the period, we had some computer opportunities, tablet opportunities that did not repeat. So if you kind of back that out and you back out the automotive, I think that -- I'm not -- I think the peak we showed of 388, I think was probably somewhat inflated by 1 particular business opportunity, so that I don't think the drop off, if you want to take the pluses and minuses that are significant, has been as significant as you alluded to at the beginning of your question. But other than that, business for the last 3 years has been kind of a roller coaster. Business we had a recession, we had a dramatic snap back from the recession, we had global issues with supply chain in -- catastrophic events in Japan and Thailand that caused sales to go up as people built inventory. Then as those issues became alleviated, inventory went back down, so we've had macroeconomic issues that have overridden that in Europe in particular, U.S. to some extent. And now, they're starting to show in Asia and China. So you've had a lot of macro stuff that's happened, Joe. You've had a lot of positive for us in the Automotive side and in the Industrial side for part of that, some negative in the Computer side. So you add it all up, you get where we are today.

Joseph Moore - Morgan Stanley, Research Division

Okay. And if I could follow up on that. The Automotive piece, it looks like you've grown, just extrapolating from your bookings commentary, you've grown well over 20% a year, in the last couple of years. And that's -- I understand the growing content, but you've grown a lot faster than other semiconductor vendors and you've continued to highlight opportunities, particularly in hybrids. And I'm just wondering if you can talk about -- is that hybrid opportunity creating some of that outperformance? Or are there any big, kind of blocks that you can point to that would drive that growth to be so good?

Lothar Maier

Certainly, the hybrid portion is a high visible market, and we've -- we were early providers of these EMS products for hybrid and electric vehicles. And so we certainly have grown there. And I think probably are the leader in terms of providing products there. But it's still all over the vehicles, it's not just the hybrid and electric vehicles. Conventional cars are being packed with more electronics. We still have a good presence in the infotainment portion of the conventional automobiles. And so I think the hybrid and electric vehicles are probably the additive portion to our sales in the automotive market. But in general, we see growth in pretty much all vehicles.

Paul Coghlan

And Joe, I think we've talked for several years not just the past couple, that we thought automotive was a really good fit for our company. Automotive companies, in particular, value quality, reliability, on-time delivery, they weigh those, particularly in Japan and Europe, very, very highly. So that as you've had this transition into more electronics in cars, the suppliers of cars and their Tier 1 suppliers are very concerned about who can do a good job in that area, and that requires not just innovative parts that Lothar addressed, but also executing through the factory. So I think over the last 5 years, we put emphasis on this. We've had some strong suits that we think it plays to, and we think it's starting to show in the numbers now.

Operator

And our next question comes from John Pitzer with Credit Suisse.

John W. Pitzer - Crédit Suisse AG, Research Division

Maybe the follow-up to Joe's question a little bit. As you look at the December rev guidance, is there any end market that's significantly better or worse that you can talk to? And I guess specifically on autos, just given the near-term strength, is there still, within the near-term environment, enough of a Linear specific story there to kind of buck some of the SARs trends?

Lothar Maier

I think, as Paul said, the softness we're seeing is kind of across most geographies and across a lot of the end markets. In fact, probably all of our end markets. Our sense is, at least for the time being, the Automotive is bucking that and will probably continue to buck that for a while. And not because of necessarily the fact that somehow the economy is better for cars. It's because the content of electronics, what Paul said is, is just going up in cars. And we don't see that ending anytime soon.

Paul Coghlan

And in the other end markets, John, it just, we've tried to tell you, we're not economists, we don't like to comment on macroeconomic things relative to our numbers because we try to be as company-specific in talking to you as we can, but all of this stuff's kind of a cloud over everything, and they just seems to be this hesitancy in all of the end markets at the customer level to book a lot now. I think they just feel, in next few months, there's a lot of events that are going to take place, that then give them more clarity as to what to do. And generally, when there's something about to change, people are more nervous then either of the events that might transpire, once the change takes place. So we just feel we're kind of in that sort of malaise at the moment.

Lothar Maier

But on other side of that is that, if you look at it at the customer level and at the design engineer level at our customers, that activity is still strong. I mean, we're being exercised often for new products, giving demonstrations, boards to customers, the, sort of the engineering level design activity is still very, very strong. So what you're seeing on sort of the macro level really hasn't translated itself into what's really happening at the customer level.

John W. Pitzer - Crédit Suisse AG, Research Division

And then guys, maybe you can educate me a little bit. In the computer bucket, there's a lot of subcategories, can you help me understand when you think about notebooks, desktops, tablets, servers, I think you've talked about storage and printing. Is that computer segment kind of skewed more towards one or the other? Or how do those subcategories break out as we get a sense of, whether or not you're not exposed to the good parts of computer, some of the parts that we're worried about?

Lothar Maier

I think the -- our computer business is skewed to storage, particularly solid-state drives, to some extent, high-end notebook PCs and servers. And then to some extent, office equipment.

Operator

And our next question comes from Jim Covello of Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

Paul, I believe you mentioned something obviously, the overall environment is very weak and you mentioned the October orders haven't rebounded at all yet. But I think you said something about the last few days being better, is that just kind of noise? Or is there particular segments that drove that? Or was that -- did you mean anything by that at all?

Paul Coghlan

I obviously put it in consciously. What I meant is, there's certainly, for 2 days, you can't extrapolate much from that. But I -- our feeling was, since we were talking about the early part of October not living up to our expectations, if that's changed a little bit in the last couple of days, then we ought to not leave the impression that it's -- it has been steadily going down and may continue to go down. It's kind of moving around at a low level, a low- to medium-level and it was low-level at the start of the quarter and moved to sort of a medium-level and I can't read much into it. But I did want you to know as a group, that it's just hard to forecast now because there's just, as Lothar said, business at one level feels strong, and then you have to read the orders as they come in, and it doesn't seem strong. And that's across the board, so seems to be macro driven and I think it's going to be choppy for the next couple of months in this quarter, and we have to see how some of these macro events turn out in the new year, turn around and see how we feel.

James Covello - Goldman Sachs Group Inc., Research Division

And when you said across the board, you mean all of the segments? Or is there any 1 segment recognizing it was only a couple of days?

Paul Coghlan

No, there was no 1 segment that made any difference.

James Covello - Goldman Sachs Group Inc., Research Division

Okay. And then maybe a final question for me. On the comm infrastructure segment, understanding it's weak, any geographic differences, any regions that are particularly weaker than others in comm infrastructure in particular?

Paul Coghlan

No. I think comm infrastructure, there's been, I think there might be at this sixth buildout in China. Some talk about that, but I don't think there's anything really major swing in comm infrastructure that we've noted.

Operator

Our next question comes from Chris Danely with JPMorgan.

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

First, just a quick clarification, did you say or intonate that utilization rates will be down a little bit overall in the December quarter? And if things remain kind of flattish, I guess, in the March quarter, would we expect utilization rates to flatten out or go back up? Or -- and then can you give us a little guidance on what inventory would do as a result of that?

Lothar Maier

Yes, I think you've got it pretty correct. As sales go down, we're stuck with the factories we have, so utilization will go down. And typically, looking ahead to the March quarter, and typically March quarter is a little bit better, our hope is that utilizations will go up. But in terms of inventory, our goal is, every quarter right now, is to try to keep the inventory flat or even try to make it go down a little bit in the current market. So from an inventory standpoint, it's flat to down.

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

Great. And then as my follow-up, as you guys point out on these calls, even though we're in, I guess a crappy environment, you're still building I think, call it $100-something million per cash every quarter, even with paying the dividend. So I'm just wondering now that you guys have, I want to say, $500 million in net cash, why not start returning a little more of that excess cash to shareholders in the form of an industry-leading dividend, or I know you announced a buyback, but even if you execute that buyback in the next year, you'd still be generating a considerable amount of cash. I'm just wondering on your thoughts on that. Is there some sort of cash level you guys are comfortable with?

Paul Coghlan

Well, we have $1.3 billion roughly in cash, Chris, maybe 40% of that roughly is offshore. And then I've got a debt payment coming up at the end of -- in the beginning of May 2014 of $845 million. So as we look in the near-term, and I'll define near-term by between here and May 2014, our first goal has always been to return to pay a dividend. We've increased the dividend every year since we announced it in 1992. Second goal is to pay down that debt payment which is in May of 2014, so that will probably consume most of the cash that we would have or we would add and we would have some little cash or some more cash left over from that and the board has authorized us to buy back some more stock. But as you've noted, 10 million is not a lot, and it's typically viewed here in the company as buying back stock to offset the issuance of restricted stock to some extent. So I don't think we have plans to do a major stock repurchase at this time, and don't think it will be prudent to borrow money at this time to do a major stock repurchase.

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

I was more interested in the dividends since you guys are the most profitable semi company, why not have the highest dividend yield?

Paul Coghlan

Well, I mean, I think the first thing investors like is the consistency of a dividend payment. I mean, I guess the first thing they like is 'the' dividend. The second thing they like is the feeling that it's -- when they go to sleep at night, that it's consistent and will probably build as opposed to a dramatic increase in the dividend, maybe followed up by not such a dramatic increase the year after. So at least our philosophy is to be more consistent as opposed to up and down on the dividend.

Operator

And our next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

Just -- first, a question on the end market side of things. The communications infrastructure side, I know you said there wasn't any differences geographically. Historically, you had broken that down into networking and then telecom infrastructure. By that framework, has there been any differences?

Paul Coghlan

Well, about a year ago, I think, Ross, we stopped breaking it down -- or a year or 2 ago. Because some of the customers are in both networking and in infrastructure. If you look at Huawei for example, that's a classic example. So it became harder for us to make a fine bright line between networking and infrastructure. So I think when I look at last quarter, I think both of them were pretty flat so that -- whereas other parts of our business, bookings went down. I think, generally, networking and infrastructure performed about the same and both of them were flat with the previous quarter from a booking standpoint.

Ross Seymore - Deutsche Bank AG, Research Division

I guess then, as my follow-up question, you guys have been having shutdowns in this muted microenvironment, appropriate shutdowns, but shutdowns nonetheless, for quite some time. Is there any credence to the view that you would actually permanently impair some capacity and just, say, having shutdowns for this amount of time is detrimental to the company and you just need to right size to potentially a slower growth environment in a more permanent fashion?

Lothar Maier

We did a little bit of that last quarter. Paul mentioned that we had a layoff in our factories. And so from a labor standpoint, we've made some adjustments there. But we were always very hesitant to do anything permanent like this because the company has invested heavily in the people, in the factories, their experience, they're talented. And it wasn't too many years ago when, right after the financial crisis, our sales dropped 35%, but then we grew, I think, 95% in the next 6 quarters. And one of the ways that was able to be accomplished was the fact that we kept our people in place and we had the capacity in place. So we can sustain doing shutdowns for really an extended period of time.

Robert H. Swanson

And during that period, that Lothar talked about, where sales snapped back 95%, we outgrew the competition during that period by 50%. So it turned out it was a good choice of keeping the factories ready to be restarted quickly.

Ross Seymore - Deutsche Bank AG, Research Division

I guess, one last question quickly for Paul. I know you mentioned that you thought the operating margin would stay in the low to mid-40s range. An incremental color you could provide us on what your expectations are, splitting that up between your gross margin and your OpEx sequentially in the December quarter?

Paul Coghlan

I don't have a lot of color on that. I mean, we did mention that we would have some shutdowns around the holiday periods, so that probably means that our operating expenses, our R&D and SG&A expenses, might run a little less because of that. Gross margin, I don't think there's going to be any disproportionate impact on either gross margin or the operating lines.

Operator

And we'll take our next question from Chris Caso with Susquehanna.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I'm wondering if you could characterize the current slowdown that we're seeing and perhaps compare it to what you saw last year. And I guess last year, you identified -- I guess, you saw some of the weakness earlier, but the sort of the first step-down was followed by some further weakness the next quarter. Can you kind of tell us what you see is similar and what's different from what you were experiencing last year?

Paul Coghlan

I'll take a stab at it. Last year, I think at this time, if you go back 1.5 years, you had the Japanese catastrophes and then about last year, at this time, you had the Thailand flood issues. So that -- whereas now, we're talking about kind of macro events kind of dominate our thinking, perhaps a year ago, we had some of the same macro headwinds but you also had some specifics that had maybe favorably impacted a couple of quarters before this quarter last year. And then this quarter last year, those events seem to have been solved. So this time a year ago, Japan was starting to come back up to full production, had pretty much put the tsunami and the earthquake behind them, which have been done at a little quicker rate than I think most people thought. They did a good job at that. And then the Thailand thing had caused some concerns and I think the thought was maybe that wouldn't be as significant. So that maybe that was a little bit different last year going into the December quarter and a reason for why we could explain that as part of the reduction in last year's December quarter. This quarter we don't have any supply chain issues that I'm aware of, of that significance. It's just more, I think, although this isn't the answer you want to hear, I mean, we struggled with what define it to. It's just, more people are cautious because they think some macro stuff may actually have some input to cause change within the next quarter or so. So they're kind of sitting back saying, let's wait to see what happens because we think something will happen, whether positive or negative. So I don't know if that's a good answer or a helpful answer, but that's about the best I can come up with.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

It is what it is. I guess just a follow-up to that. With regard to the activity by your distributors now, do you feel that they are actually destocking at this point in anticipation of that? Such that, well, I guess, maybe the question is, do you feel that you're shipping at or below consumption levels right now?

Paul Coghlan

Yes, I think the distributors have the same issue that Lothar addressed earlier. The distributors I think aren't sure from a macro sense, like I alluded to. I think, just as Lothar said, we want to be able to respond in our factories if there should be any change. I think the distributors are somewhat in the same mode. So I think the distributors aren't in a reducing or increasing inventory mode. I think they're more in a mode of let's kind of keep it the same, let's tell Linear what we think we'll ship and then let's try to have inventory match what we ship and then be ready to look at the turn of the year and see what happens.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

So with that commentary, from a POS standpoint, down 5% or 10% is probably what you'd expect on the POS side as well?

Paul Coghlan

Yes.

Lothar Maier

Yes, exactly.

Operator

Our next question comes from Ambrish Srivastava with BMO.

Ambrish Srivastava - BMO Capital Markets U.S.

Just one on the bookings. You talked a little about industrial picking up, back half of the quarter, as Q1 is stronger. Can you provide a little bit more color on the other end markets to the extent you can? And then my follow-up is a little bit more longer term. Looking at the autos, what's the addressable content for Linear's products? And kind of where are you there? And how has that trended over the last few years?

Paul Coghlan

All right, I'll address the first question and maybe Lothar will address the second question. Relative to bookings, the comment I made was that normally industrial has a strong quarter in the March quarter. So what we have is industrial gets off to a poor start in the December quarter. They have the holidays that are at the end of the quarter. And a lot of industrial companies, they're a calendar year-end companies. They put together their financial statements to give to their banks, et cetera. So they want to make sure cash is in a good position, that inventory is in a good possession, et cetera, at year end. So that from a shipment standpoint, the December quarter is often not a strong quarter for industrial, but that late in the quarter, the booking start to pick up as these industrial companies want to get in the queue to get product for the March quarter. So that's what I alluded to when I said that, as the quarter nears towards an end, if it's typical and maybe what we would hope, these industrial bookings might pick up in the December quarter but not early enough to impact shipments in December. Relative to the other end markets, it's -- I don't have a lot more color. PC typically gets a little weaker because the holiday season's ending and the March quarter is not particularly strong in the PC markets, as you're aware of. Consumer, which is really small for us, would follow along the same line. Something like communications infrastructure, you could have some new capital budgets that if they are going to spend more money on infrastructure, you might have some bookings pickup late in the quarter. And then automotive, I think, December is normally a pretty much a benign quarter, it's not the strongest quarter, but we have some tailwind because we've got good product positioning there. So I hope that helps. Does that help answer your question?

Ambrish Srivastava - BMO Capital Markets U.S.

Yes, it does, it does. And then on the autos content?

Lothar Maier

When you say addressable content, you mean the dollar content in the vehicle? Or do you mean the application in the vehicle?

Ambrish Srivastava - BMO Capital Markets U.S.

No, I mean the dollar content. So what was it a few years ago? We all know and see it and experience it every day that there's a lot more content, but how much of that is analog-related specifically? And then, how much of that is addressable by Linear products?

Lothar Maier

Well, I don't know if I track what percentage of electronics is. But as we said, it keeps going up. And it's highly variable, it depends on what vehicle it is. Is it high-end vehicle? Is it a low-end vehicle? Is it a vehicle that sells in Japan versus one in Europe or North America? But it's over a large range. In a conventional car, I could say we could have from $5, $20 or $30 of content in a vehicle. For hybrid or electric vehicle, it could be several multiples of that.

Operator

And our next question comes from C.J. Muse with Barclays.

Christopher J. Muse - Barclays Capital, Research Division

I guess thinking about the operating margin that you gave us for December and talking OpEx down a little, it suggest gross margin roughly 73%, 74%. So I guess the question is, if we are seeing down 100, 200 bps relative to kind of the run rate you are doing back in the March quarter, what's driving the downtick there? Is it completely utilization or is there a mix issue here or ASP degradation? How should we think about that?

Paul Coghlan

Well, I'm not saying you got the right number there, in response to your question. But I think that, for sure, since we are going to have more shutdowns, which we've talked about. And for sure, since sales are going to be down and we're going to try to control inventory, what you will have is you will have less absorption running through the factory. So by that, means that there will be probably higher expenses that are unabsorbed through the factory in this December quarter. But I don't think all of this is going to have a dramatic impact on gross margin. We told you our operating margin, overall, is presently in the mid-40s, 46%. We said it to be in the low- to mid-40s. I mean I don't -- I think if you want to apportion that in your models as you see fit, go right ahead. But don't lose sight of the fact that the overall number is not changing that dramatically.

Christopher J. Muse - Barclays Capital, Research Division

No, sure. Just trying to get more clarity on how to model you out. So, I figure it's worth asking. I guess as a follow-up, can you talk about, I guess, the industrial side and maybe split out between emerging markets versus more mature markets? And what kind of trends you're seeing there?

Paul Coghlan

In which market? The automotive?

Christopher J. Muse - Barclays Capital, Research Division

Sorry, no. Industrial mature versus emerging markets?

Paul Coghlan

Okay. Well, that's kind of -- by emerging, you mean emerging geographies?

Christopher J. Muse - Barclays Capital, Research Division

Yes.

Paul Coghlan

So you mean like how is China comparing with Europe? Question like...

Christopher J. Muse - Barclays Capital, Research Division

Exactly.

Lothar Maier

I'll take a stab at that, it's not -- there are a lot of numbers we collect. But really, I would say, the majority of our industrial business is in mature markets and that the majority of our sales come from those markets. We have, obviously in China and other emerging economies, we have a sort of a starting of an industrial business. But really, it's dominated by North America, Japan, Europe and established markets. And most of the growth that we're seeing in that market looking over the longer term is really by the fact that these industrial customers of ours are going through an innovation cycle and they were upgrading their factories, they were adding automation to the factories, they want energy efficiency, they want portability. It's really that feature that's driving the industrial growth that we see. It's not that we're picking up a huge amount of business from emerging economies.

Christopher J. Muse - Barclays Capital, Research Division

Sure, if I could just ask a follow-up onto that. I mean, I guess, the question is more related to your customers' customers and the growth that we've seen on the industrial side led by emerging economies, particularly BRIC countries, and curious whether you have any visibility into those sales and whether the slowdown there may have a disproportionate negative impact to your industrial revenue line item for potentially multiple quarters. So curious, if you have kind of visibility to that?

Lothar Maier

I don't think we have very much visibility to our industrial customers' end customers because our industrial customers are thousands and thousands of different customers, and they fan out to some others. It's hard enough for us to track who our industrial customers are because there are so many and there's so broadly use of our products. How they sell their products, I don't have any...

Robert H. Swanson

I could add just a little color to that. We do know that a lot of the industrial customers, their end customers are the automotive industry. So the automotive industry and industrial markets are connected in a real way. So when one goes down, the other goes down. So if the automotive business is strong, we could kind of predict that the industrial market will have some up draft.

Paul Coghlan

Also, one final input -- to show how tough your question was, you're getting 3 answers. If you look over the last 3 years at the analog business and a breakdown of analog business between consumer, communications, industrial, computer. Industrial was -- and automotive, industrial and automotive were the 2 fastest-growing over the last 3 years. So that if you step back to kind of blend in your macro concern with this, all of these end markets were probably similarly impacted by the macro environment. But yet within this overall relatively poor macro environment, over the last 3 years maybe, industrial grew faster for analog and automotive grew faster than communications, consumer or computer. So that you think, if you're trying to hook up industrial to say, well, if any of the macro stuff gets bad, industrial is really going to fall apart. I think what we're trying to tell you is, compared with, say, 7 or 8 years ago, there's a lot of innovation going on in the industrial work [ph]. Lothar mentioned energy efficiency is a key one. You've heard us talk about going wireless as a key one. So there's a lot of innovation as well that we think helps these markets, and we would anticipate, if you're trying to extrapolate going forward, we would anticipate that once the kind of temporary blips of these economic headwinds come out, that industrial will probably stay as a pretty strong growing segment.

Operator

And our next question comes from Steve Smigie of Raymond James.

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

I was wondering within the automotive segment, I assume a lot of your customers are maybe more on the module side or, as you said, industrial companies that ultimately end up there. But do you have any sense as to which automakers you actually end up more, that maybe a greater proportion? So for example, do you see yourselves more in maybe Mercedes, BMW versus Ford, Toyota? Any sense on that?

Lothar Maier

I think we sell to, virtually, if not directly, but indirectly through the suppliers we sell to, to virtually every car manufacturer that's out there. If there's probably a concentration, I would say, if by geography, it would be Japan, Korea and Europe as being kind of the largest sales. And then if you wanted to slice that a little finer, I would say high-end vehicles because of a lot of the early adoption of advanced electronics goes first in high-end vehicles and then gets pushed down to the medium and low-end vehicles. But I think we sell probably, virtually, to every car company that's out there.

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

Okay. And just in terms of, say, subsystems that you sell into, is there something that you think that Linear is perceived as just dominating. So, for example, do you just dominate ignition versus maybe some infotainment category. Are there certain areas at this point you're just really well known for?

Paul Coghlan

Well, we -- initially, the automotive business for us was around the infotainment. We continue to remain very strong there. We talked about battery management systems. I think we're probably the leader in terms of BMS systems in electric and hybrid vehicles. We were in a lot of stop-and-go, sort of stop-and-start systems. LED lightings, we have a pretty good position in. Some of the safety issues, collision avoidance systems and radar systems, we have a pretty good position in. So we're kind of sprinkled on a lot of places in a car right now.

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

Okay. If I could just squeeze 1 housekeeping one in. I'm sorry if I missed it, but what's your breakout these days, distribution versus OEM, [indiscernible]?

Paul Coghlan

Well we struggle answering that, because we have different types of distributors. So for example in the U.S, you have your classical distributor, where we ship to them and they house the product and ship it out to a lot of smaller customers we don't deal with. We also include all of our Japanese business in distribution, because we sell through distributors. And there, even the big customers we sell to, we sell through distribution for certain logistics points. So I want to -- in answering your question, I think distribution is probably about 60% of our business worldwide versus 40% OEM. But you should understand that with that color I gave you on Japan, that OEM -- we have a lot of OEM business in Japan that we book through distribution to sound like I'm saying an oxymoron.

Operator

And our next question comes from Parag Agarwal with UBS.

Parag Agarwal - UBS Investment Bank, Research Division

Paul, you indicated that the ground level forecast that you collected from you salespeople is a bit optimistic than the guidance you gave. So just wondering if you can quantify the outlook from your ground level forecast. And also how does it compare with the prior historic guidance you have given?

Paul Coghlan

You mean prior-quarter guidance?

Parag Agarwal - UBS Investment Bank, Research Division

Yes.

Paul Coghlan

Yes. I think, this quarter -- what you have is -- first of all, let me give you a backdrop, our field sales forces do a really good job of looking customer by customer, spending a lot of time in giving us a forecast. So they've looked at a forecast for a whole quarter, all 13 weeks of a quarter, and that they gave us those forecasts. And as we looked at the beginning of the quarter, the bookings in the beginning of the quarter weren't tracking what they had forecasted. So that at the upper management level, if you will, looking at more macro stuff, what we did is we took their forecast and we tempered it. So that -- now, that doesn't happen every quarter. It happened perhaps more so this quarter, maybe in other quarters, but it doesn't mean that the field sales force didn't do, their consistently good job at it. It's just that, first, the end of September, the beginning of October just the bookings weren't tracking. We were getting bookings. It's not like the phones didn't ring, but they weren't tracking what the forecast were. So we amended it more so than we did in the past.

Parag Agarwal - UBS Investment Bank, Research Division

Okay. And if we look at the end market, would it be right to say that the industrial is the weakest end market heading into this December quarter?

Paul Coghlan

Yes. I mean, it's 41 -- 40% of our business is industrial. Maybe I didn't understand your question, it's, at 40% of our business, every quarter, it's the biggest end market going into the quarter.

Parag Agarwal - UBS Investment Bank, Research Division

No, no, no. I mean, is it the weakest end market? I mean as compared with other end market?

Paul Coghlan

Yes. It is, but it's not like the bottom fell out of that and others are doing well. As I said to you in my introductory comments, across each geographic region, bookings last quarter were down kind of similarly and across end markets, automotive was a little better, industrial a little weaker, but the change quarter-to-quarter wasn't dramatic. So I want to make sure I answer your question, but give it enough color commentary, yes, industrial is probably the weakest, but it's not dramatically more weak than the other ones. All of them are a little weak and all of them got off to sort of a slow start.

Operator

And our next question comes from Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co., Research Division

Sorry if this has been asked, but can you just expand on what impacts you're seeing from fiscal cliff, if any, working through your order book?

Paul Coghlan

Wow, I mean that's hard to connect that dot.

Robert H. Swanson

It's a pause button.

Paul Coghlan

What we'd feel is that, certainly in the United States, we feel our customers have gotten more cautious and that they haven't canceled programs, they haven't said they don't think there's innovation going on. They've just gotten more cautious. And our suspicion is that's connected with the fiscal cliff and/or the election. And that customers are saying, look let's figure out what the environment is going to be. Let's order as little as we have to going into that, because we think, in the next few months, we'll get some clarity. Whether we like the answer or not, at least it will be clearer a few months from now. But to quantify that is difficult. To tell you that, that's what we feel is going on is less difficult we think that is going on [ph].

Craig Berger - FBR Capital Markets & Co., Research Division

Okay. And then just as a brief follow-up, can you just update us on your efforts to grow the module business? How big is the module business now and kind of what's the latest going on there?

Lothar Maier

We've been making modules now since 2006, 2007. And so it's been pretty much monotonically growing from a sales perspective every single year since then. So the more we're into the module business, the more we realize how many more products that we could make for modules. So when we first said, this could be a $50 million-year business for us, that was a kind of a wild guess when we originally got into the module business. Now we're saying, it could be a $50 million- or $100 million-year business, but it could go beyond that. We've have many, many more module ideas for products than we're able to execute every single quarter. So I think the module business is really a good fit for what's happening in the market. Customers want complete solutions. They have less in-house expertise. The modules package that expertise together. For certain markets like our industrial market, that's made up of thousands of small and medium-sized customers. They certainly don't have in-house analog expertise and this module types of products are a perfect match for them. So I think we're too early to predict really what the limit of sales are for modules and we're pretty optimistic.

Operator

And our next question comes from JoAnne Feeney with Longbow Research.

JoAnne Feeney - Longbow Research LLC

Question, if you could dig into a bit of more of the detail on the computing side. I heard the answer to the ranking of the relative importance of different kind of products. Could you give us an update on how things are going with the solid-state drive, or what you're seeing there at the aggregate level? Are they taking off to the extent that you thought? And Intel remarked that they saw some softness in enterprise servers there in the month of September. I'm wondering if you guys can comment on whether you're seeing the same or whether that part of the server market is not that relevant for you guys?

Lothar Maier

I don't track it particularly closely. But I can tell you, there's a little bit of choppiness to that business. A few years ago, we saw activity in solid-state drives. We've got designed in some solid-state drives, both in the enterprise and the consumer side. Then there were the floods in Thailand. We saw a big pickup as business went -- swung towards solid-state drives because they -- conventional drives weren't available. That situation has reversed itself. And I would say, we've got kind of a steady business there. There's a handful of customers that we sell to. And longer-term, I would say our business is going to be really more focused on the solid-state drives and the enterprise side of the business.

JoAnne Feeney - Longbow Research LLC

And that would include storage as well?

Lothar Maier

Yes.

JoAnne Feeney - Longbow Research LLC

Okay, that sounds good. And then within industrial, I know you've sort of gone in to this in great detail, but how are the margins tracking there? Have you guys seen any change in the composition of your industrial business or is it pretty much steady as it goes, to your history?

Paul Coghlan

It's pretty steady as it goes. We don't see much change in the margin at all in that business.

JoAnne Feeney - Longbow Research LLC

Okay. And similarly in automotive, now that's a growing area for you. You're gaining share. Has there been any shift in the dynamics of margins there as you work your way into new product lines?

Paul Coghlan

No. No, there are also -- we're at the front end of this innovation curve so that the customers want really good products and want them reliably shipped. They care about price, obviously. But they really want a good product and a good delivery and a good quality, that's the first kind of 3 things they ask for.

JoAnne Feeney - Longbow Research LLC

And the design cycles still remain fairly long in the product lifetime. What is that out to these days? Is it still sort of that 5- to 10-year range?

Paul Coghlan

For automobiles?

JoAnne Feeney - Longbow Research LLC

Yes. For automobiles, specifically.

Lothar Maier

Yes. It depends what the application is, and it's actually somewhat dependent on who the end customer is. But typically, it takes between 3 to 4 years for a product to get designed into a vehicle. And then it probably stays in production for, depending on what the application is, 3 to 5 years.

Operator

And our next question comes from Terence Whalen with Citi.

Terence R. Whalen - Citigroup Inc, Research Division

Two quick ones. The first one is, can you elaborate a little bit more on what you've seen in terms of China demand throughout the quarter. Specifically, are there any sort of subsectors within China demand that are actually improving or things still ebbing?

Paul Coghlan

China, I don't think there's any one area that's improving, more than any other. I think there has been some slowness in China. I think there's a little more -- the impact of China may be less internal and more external. If I can elaborate on that a little bit, I think China is kind of trying to cut back imports and make sure it concentrates as much of the growth that it's going to have internally as it can, that's probably impacted Japan a little bit. Now, some of that is political. There's been, as you know, there have been some issues between China and Japan over some islands and the Chinese have become a little bit xenophobic on that, maybe, and that's adversely impacting Japan a little. But I think China, I think we'll see it more on the less imports into China. And that the business is industrial and automotive and that will continue to grow within China.

Terence R. Whalen - Citigroup Inc, Research Division

That is helpful. And then the follow-up question is an extrapolation of that. Looking into March, at this point I know it's hard to call, but what would your expectation be in terms of where you might see the strongest industrial demand across the 3 main markets: Asia, U.S., Europe?

Paul Coghlan

Well, as you said, we're not going to forecast March yet. We're having a hard enough time forecasting December as you can tell from our inputs. But March typically, in Europe for example, Europe from an industrial standpoint, the December quarter has a lot of holidays, the March quarter has next to no holidays. A lot of small businesses are medium-sized, non-public is probably a better word, businesses are in Europe and a lot of them run calendar years and the start of new calendar year is normally a little more vibrant for them as they get out of the shute. So if you're asking from a historical standpoint, what would March typically play out to be? Europe would be relatively strong from a historical standpoint. And to some degree, U.S. distribution would pick up again from a historical standpoint. But we have to see what happens in the next couple of months to see if that's going to hold true for this March.

Operator

And our next question comes from Craig Ellis with Caris & Company.

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

A longer-term one here. Automotive has been a very good area for you and from all the things that I'm hearing on this call, it should continue to be a strong end market, albeit, one with some macro issues in the near term. When you look at your businesses, what other businesses have the potential to increase as a percent of mix, the way auto has, over the next few years?

Paul Coghlan

Well, I'll take a first stab at that. We're very encouraged by the industrial business, but it's already grown a fair bit. So that if you look at automotive, automotive over the last 4, 5 years has gone from mid-single-digits to mid-double-digits. But within that timeframe, industrial has grown from the 30, mid-30s, to 40%, 41% of our business. So now industrial has got a bigger denominator to grow going forward, so it's harder than the automotive denominator. But industrial, even though it's hard for investors to grasp this, there's a lot of innovation going on there with energy efficiency that Lothar alluded to. A wireless stuff that we talked about. We told you we bought this Dust Network. So from absolute dollar standpoint, I would think it will continue to be automotive and industrial that are the best growing sectors for us.

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

And you mentioned Dust, Paul, and I think on the last call, you indicated that some of your customers were looking at projects that were out in the middle or the back half of next year. Can you just update us on how you're tracking with some of the design wins you'd want to have with that business?

Lothar Maier

Yes. The Dust business is very much an industrial type of business for us. And so a lot of the customers we sell to would be industrial customers. So we haven't really seen much changes except for the fact that we find that there's a good match between the Dust products and our energy harvesting products. And that when we get in front of customers, because this is kind of a new and innovative product area, there's just a lot of interest on the parts of customers. Have we've booked a lot of business? Not yet. But we think the opportunity for it is out there. And it's a market that still needs to grow. I mean, you think all of these future connected devices that could be 1 billion more machine-to-machine connected devices and these Dust types of products are really well-suited for that. So it's going to take a few years for this thing to evolve and we think we've got kind of the right product with the Dust product plus married with our products to be successful in that market.

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

So Lothar, in that sense, a little bit like the module business in terms of how it can evolve over time?

Lothar Maier

Yes, I think that's probably a good model. It's just going to be monotonic over time. It's like the module. It was a market that never really existed. It took us a few years to find the right customers and get the right products in the hands of the customers, them to develop products. And then I think once it gains traction, it could be a similar profile.

Operator

[Operator Instructions] Our next question comes from Shawn Webster with Macquarie.

Shawn R. Webster - Macquarie Research

Can you remind us what your capacity is in revenue terms, overall, just in light of the reductions that you're doing on utilization rates? And then can you share with us what your turns requirement is for the December quarter?

Lothar Maier

I'll take the capacity ones. When I talk about capacity, I'll talk about from an installed capital equipment standpoint. And we presently have the installed capital equipment to support sales over $400 million a quarter.

Paul Coghlan

And from a turn standpoint, we have the same turns requirements going into this quarter as we had going into last quarter, which is in the mid-50s.

Operator

And our next question comes from Aashish Rao with Bank of America.

Aashish Rao - BofA Merrill Lynch, Research Division

A slightly different take on a prior gross margin question. The midpoint of sales guidance for December is about 5% below, is above last December's levels, yet gross margin appears to be trending roughly 150 basis points or so lower. Inventory levels are the same, so are ASPs. So just wondering what's driving the year-on-year decline in gross margins? Is it solely attributable to the lower utilization or are there other factors like cost pressures, et cetera, also driving the decline?

Paul Coghlan

To put the decline in perspective, the 1 percentage point or 1.5 percentage point is on a base of 76%, so it's not a big number and it's not about pricing pressures in the marketplace. It is somewhat about just some internal costs. One of the things that's happened over there last year, the dollar has gotten weaker vis-a-vis Singapore dollar and the ringgit, the Malaysian ringgit. We've had a little more equipment expense and spent a little more money on equipment. Depreciation is up a little bit. So I think it's a bunch of small things, but relative to the base, it's not a big change.

Aashish Rao - BofA Merrill Lynch, Research Division

Okay, got it. And then just one more following up also on the fiscal cliff since pending [ph] sequestration question earlier. How do you view the longer-term growth rate for the military and aerospace end market? Perhaps you could give some color on relative exposure to commercial versus military?

Lothar Maier

When previous person asked, what growth markets do we see? Probably military space isn't going to be one of them. I think it's going to hang in there steady. I think as economies have to wrestle with budgets. I think there's going to be spending pressure to not spend money on military and space program. So I think it's going to be stable at the numbers that we're at presently and as a percentage of our sales probably as we go forward.

Operator

And it appears we have no further questions. At this time, Mr. Coghlan, I'd like to turn the conference back to you for any additional or closing remarks.

Paul Coghlan

Okay, well thank you, all for your attention this morning. Thank you, some good questions. We wish you a good day. It looks like it's going to be a bit of a tough quarter in the short-term going forward, but we hope a lot of these macroeconomic issues get resolved and this time, a quarter from now, the conference call, we'll have a different air, hopefully. So have a good day, and thank you again for your attention. Bye bye.

Operator

That concludes today's conference. We appreciate your participation.

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