Analog Devices F4Q06 (Qtr End 10/28/06) Earnings Call Transcript

| About: Analog Devices (ADI)
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Analog Devices, Inc. (NASDAQ:ADI)
F4Q06 Earnings Call
November 14, 2006 4:30 pm ET Executives March 1, 0000 ET

Analysts

Louis Gerhardy - Morgan Stanley Dean Witter

David Wu - Global Crown Capital

Simona Jankowski - Goldman Sachs

Doug Freedman - American Technology Research

Bill Lewis - J.P. Morgan

Steve Smigi - Raymond James

Craig Ellis - Citigroup

Romit Shah - Lehman Brothers

William Conroy - Sanders Morris Harris

Ahmed Saraf - Credit Suisse

Evan Wang - Piper Jaffray

Sumit Dhanda - Banc of America Securities

Joseph Osha - Merrill Lynch

Wayne Jervis - Jamco

Dennis Reed - Cleveland Research

Mona Eraiba - TCW

Uche Orji - UBS New York

Operator

Good afternoon. My name is Gerald and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices fourth quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the opening remarks, there will be a question-and-answer period with our analyst participants.

(Operator Instructions)

I would now like to turn the conference over to Ms. Tagliaferro, Director of Corporate Communications. You may begin your conference.

Maria Tagliaferro

Hello, everyone, this is Maria. If you do not yet have our fourth quarter 2006 release, you can access it by visiting our website at www.analog.com and visiting the investor relations page from that home page.

This conference call is also being broadcast live on the Internet and from analog.com. Again, go to the investor relations page to access it through the microphone icon.

A recording of this call will be available today within about two hours of the conference call’s completion, and it will remain available via telephone or Internet playback for approximately one week.

Participating in today’s call are Jerry Fishman, President and CEO, and Joe McDonough, Vice President for Finance and CFO.

We have scheduled this call for 60 minutes and we will begin in a moment with Mr. Fishman’s opening remarks. The remainder of our time will be devoted to answering questions from our analyst participants.

Analysts participating via telephone can press star and one on their telephone at any time beginning now to queue up for questions.

I would like to point out that under the provisions of the Private Securities Litigation Reform Act of 1995, this conference call will include forward-looking statements. These statements are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions which are difficult to predict. Risk factors which may affect our future operating results are described in the company’s most recent annual report and Form 10-K, filed with the Securities and Exchange Commission.

Also, this conference call will include time-sensitive information that may be accurate only as of the date of this live broadcast, which is November 14, 2006.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted account principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our website at analog.com.

With that, let’s begin with opening remarks with Mr. Fishman.

Jerald G. Fishman

Good afternoon, and thanks for joining us today to learn more about our Q4 and the outlook for next year.

For those of you who have had the time to review our press release, you will note that it is really chock full of detail regarding our business. Given that extensive disclosure and the analysis that we published, I am not going to go through the results here number by number, but I will instead focus on the highlights of the quarter in summary form.

I will also focus on the longer term trends in our business and the opportunities for revenue and for earnings growth and higher returns on capital.

Our Q4 revenues totaled $644 million, which was down 3% sequentially and in line with the revised guidance that we provided a few weeks ago. Revenues from our broad base of industrial customers, comprising 43% of our sales, were approximately flat sequentially.

Consumer revenues, comprising 19% of our sales, grew 13% sequentially as a result of strong sales of digital cameras, home entertainment, and new game consoles, where ADI technology continues to provide new sight, sound, and other user experiences for our customers.

Revenues to computer customers, which are 12% of our sales, increased 6% sequentially.

Communications revenues, comprising 26% of our sales, were down 18% sequentially, primarily as a result of lower revenues from wireless handset customers during the quarter.

Revenues from base station customers also declined sequentially after a very strong third quarter, and in fact, a very strong 2006 in earlier parts of the year.

Overall, our core analog business is very strong. During Q4, our analog product revenues grew 2% sequentially, 14% year over year, and represented 84% of ADI’s total revenues.

General purpose DSP products grew 3% sequentially, 15% year over year, and represented 9% of our Q4 revenues.

The weakest area in our corner were wireless chipset product revenues, which declined by 45%, or $30 million sequentially, as our largest customers significantly reduced their inventory in a very short period of time. Handset chipsets now represent approximately 6% of our revenues.

On a full-year basis, comparing our fiscal 2006 to our fiscal 2005, our analog product revenues grew 13%, converter sales grew 10%, amplifier sales grew 19%, power management sales grew by 3%, and other analog products, which often contain combinations or integration of converter, amplifier, and other analog technology, grew by 24% year over year.

For the full year, DSP revenues declined 11%. General purpose DSP revenues grew by 10%, while wireless chipset revenues declined by 10% for the year. During the year, we also exited the broadband ASIC DSL business, which we talked about in previous calls.

Our gross margin for the quarter totaled 59.4% of sales, which was down slightly from last quarter, primarily as a result of lower utilization and additional inventory reserves as demand weakened at year-end. We also experienced higher sales to consumer customers, which tend to carry somewhat lower gross margins than our industrial customers.

Nevertheless, we expect gross margins to return to over 60% in Q1, as cost reduction programs that we initiated last year begin to positively contribute.

Our operating expenses grew slightly sequentially as a result of acquisitions we completed in the second-half of the year. Without those acquisitions, our baseline expenses were down slightly sequentially.

Our operating profits totaled $159 million, or just under 25% of sales. Our diluted earnings were $0.39 per share.

Our inventories grew very slightly, despite the sales shortfall. Our accounts receivable declined to 47 days.

During the quarter, we purchased $357 million of our stock, representing 3% of outstanding shares. During the quarter, we paid out $56 million in dividends and $142 million for previously announced acquisitions. For the year as a whole, we purchased $1.025 billion of our shares, representing 9% of the outstanding shares, and we paid $201 million in dividends.

Cash at year-end totaled approximately $2.1 billion.

At year-end, we always take the opportunity to reflect on where we have been and to look at the trends and opportunities that will drive our sales and our returns in the future.

I think first and most importantly, for the full year of 2006, our sales to our broad base of industrial customers have increased 15% from 2005. Revenues from industrial customers for the year represented 42% of our sales, and industrial applications remained one of the most fragmented markets in the electronics industry.

Within this overall category that we call industrial products, sales to instrumentation customers was up 20% year over year, motor control was up 23% year over year, medical was up 24% year over year, power metering up 16%, and sales into defense applications increased 17%.

While sales to automotive customers increased only slightly last year, our newest products are designed into many new platforms that will begin to appear in 2007 and 2008 models.

Our sales to ATE customers increased 11% year to year, but ATE continues to be a very challenging market, as semiconductor capital spending still remains very choppy.

For 2006, our revenues to consumer customers increased 16% over the prior year and totaled 17% of our sales for the year. Cameras, advanced home audio and video products, and new gaming products all contributed to strong year-over-year growth. Consumer electronics remained a very important opportunity for ADI going forward.

The communications market, which totaled 29% of our sales, in aggregate was up 2% for the year. Our sales to base station customer increased 16%, optical revenues increased 49% on a very small base, while network product revenues fell, primarily as a result of exiting the DSL ASIC business. Networking revenues, excluding DSL, grew for the year.

Wireless handset revenues declined, as I mentioned earlier, for the reasons I indicated.

Computer revenues totaled 12% of sales in fiscal 2006 and declined 10% year over year as a result of refocusing our power management portfolio, lower sales of PC audio codecs, and overall sluggishness in the PC market.

Looking forward, as our portable power products continue to gain traction, and the new Microsoft Vista software, which heavily utilizes our new codecs, begins to ship, the computer segment should recover for ADI.

In summary, we have a very strong product position and some of the fastest growing new applications across many markets, while we continue to benefit from the stability and the very strong margins from our industrial customer base. Our overall growth rate, which has been reduced by under-performing product segments, could accelerate as we continue to shape the mix of our business going forward.

I would like to take the opportunity at this point to focus your attention on some of the longer term revenue trends in our core analog business.

Our analog product revenues, which comprise 81% of our revenues for the year, have grown at a compounded rate of 12% per year for the past three years. Our converter revenues have grown at a compounded rate of 16% per year, amplifiers at 13% per year, other analog functions, which include RF and MEMS, at 16% a year, while power management revenues are actually declining, as handset power management functionality has been integrated on a cellular base band and we shifted our product mix towards higher margin power management products.

Our converters and amplifiers have outgrown the market for the past three years, despite increased competition, and our product position to date remains extremely strong.

As we have refocused our power management efforts, we have the opportunity to sell many power management products alongside of our converters and amplifiers, and thereby accelerate our overall analog growth rate, even above the rates of the last three years.

ADI’s great breadth of analog technology uniquely positions us to benefit from all the trends that are going on in the analog market.

Our general purpose DSP revenues, which comprised 8% of our revenues in 2006, have had a compounded growth rate of 9% per year over the past three years, which is certainly below our original forecast. General purpose programmable DSPs generally have very long design cycles, and new architectures take a long time to produce revenues.

I think it is very well-known in the industry that our Blackfin core is a very competitive core and it has attracted thousands of design-ins in a wide range of industrial, communications, automotive, and consumer applications.

The recently announced new IP teleconferencing system that has been designed and promoted by Cisco is powered by multiple Blackfins processing high definition video. This signal processing intensive application is really a very cogent example of the real power of Blackfin. Today, our Blackfin design pipeline is full and our GP DSP growth rate should accelerate as these designs move into production.

This year we have added a four-year summary by major product line to our investor website this afternoon, which we believe will help investors to better understand what has happened over the past few years and even more importantly, what some of the opportunities are for the future. I think we also included that in the press release.

As we begin our fiscal 2007, we are planning for a good year. We believe that the end markets are currently stronger than recent ordering patterns at semiconductor companies would indicate. We believe that most of the current order weakness that we have all experienced has been the result of decreasing lead times, customer inventories being too high, and a general feeling of uncertainty amongst many of our customers.

If the economies remain strong, we believe that 2007 will be a typical year for semiconductor companies.

At Analog Devices, we have a list of priorities that we are working on for 2007 that I would like this afternoon to at least summarize for our investors.

In our analog products business, we are going to continue to leverage our product breadth in all the product categories that we are very strong in and our market share is high and we are planning to build market share in low power products, power management products, MEMS products, and radio frequency products.

We significantly raised our internal investments in all these areas over the past few years and have made a few key acquisitions to help accomplish this goal. We should begin to see the results of these investments during 2007.

In our DSP business, we will continue to focus our resources in areas where we can earn a good return on investment, particularly on our general purpose DSP products, which are sold to a wide range of customers in a variety of end markets.

While we have made some progress to date on this goal in 2006, we recognize there is much more to be done in 2007 and we are focused on that effort throughout analog devices.

We will continue to improve our overall cost structure for both offensive and for defensive reasons.

Offensively, we have the opportunity to earn higher margins, given our mostly proprietary product lines, where our products often allow our customers to differentiate their product, and therefore garner higher prices for their products. Today, over 40% of our analog revenues are derived from a very broad base of 50,000 customers, which tends to keep our margins relatively stable.

Defensively, we will continue to look for product and infrastructure cost improvements, as our products are designed into some very high-volume applications that are of course more price sensitive.

We made very good progress on the cost line in 2006 by consolidating our wafer fab operations and other measures we took, which should provide good gross margin leverage as revenues continue to grow.

As I mentioned earlier, our gross margins should be above 60% in Q1, and should continue to remain strong during the year, as we increase factory utilization and achieve the benefits of cost reductions that we took last year.

We are also planning to aggressively manage our cash in 2007 to raise the return to our stockholders. During 2006, we bought back 9% of our outstanding shares. We are currently paying a dividend with over 2% yield, which is amongst the highest in our industry.

Our first quarter in 2007 will be influenced by a number of factors. Our opening OEM backlog for Q1 is down $11 million from the beginning of Q4 as the result of generally lower bookings during the quarter, primarily as a result of excess inventory in infrastructure, handset and automatic test equipment [inaudible] our customers.

While distribution bookings were also weaker in Q4, end market re-sales remain stable, indicating continuing firm demand from our broad base of industrial customers. Our end customer book-to-bill ratio was approximately 0.98 for the quarter.

Our lead times have decreased again during Q4, which would imply a greater percentage of our revenues will be derived from turns business, which is business that we booked and we shipped in the same quarter. I think this is very typical at this point in the cycle.

Our Q1 will also be a 14-week quarter, which occurs once every seven years to adjust for the fact that 52 weeks is slightly different than 365 days. This should provide a revenue boost which could offset the normal seasonality due to the holiday period that we usually experience.

Also, as mentioned in our press release, during Q1 we will record a $35 million revenue as a result of a recently completed license transaction. This will not be repeated in future quarters and will also be excluded from our non-GAAP measures.

As a result of all these factors, when you add them all up, our revenue plan for Q1 is in the range of $635 million to $670 million, which does not include the one-time $35 million license fee.

We are planning for our gross margins to increase to between 60% and 60.5% in Q1, and expenses to increase by approximately 5%, to accommodate a 14-week expense quarter. Without the extra week of expenses in Q1, our expenses are planned to decline sequentially.

At these revenues, our non-GAAP diluted earnings per share should be in the range of $0.38 to $0.44.

In summary of my comments this afternoon, the pervasiveness of ADI’s signal processing technology continues unabated as the new sight, sound, and sensing applications are really and continue to be at the core of virtually every new type of electronic equipment, which I think bodes well for our revenue growth in future years.

That is all the prepared remarks we had for this afternoon. We would now be happy to entertain any questions to either Maria, Joe McDonough, who is here with me, or myself.

Maria Tagliaferro

Thank you, Jerry. During today’s Q&A period, please limit yourself to one primary question and no more than one follow-on. We will open up for a second round of questions once we get through the initial group. Operator, we are ready for our first question.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Louis Gerhardy of Morgan Stanley.

Louis Gerhardy - Morgan Stanley Dean Witter

Good afternoon. I might have missed it, but when you were talking about your fiscal ’07 outlook, I did not catch the commentary in terms of the application-specific DSP business, so if you could comment on that. Then, as there has been some disappointments in the wireless handset area there, have you been scaling the expenses down as the revenues decline so that the loss there is not growing larger? Could you comment on that?

Jerald G. Fishman

I think what I said, Louis, in the comments is as far as I can go on that to date, is that the GP part of our DSP business has been below what we would like, but certainly is moving in the right direction for us, and we think with the proliferation of the design wins we have, that is going to be even better in the future.

I think certainly we are focusing our resources in that part of the DSP business where we can earn what we think is not only a good return but a much more stable return than we have been able in some of the vertical markets.

We have taken some steps last year to get a better product mix in our DSP business, and I think there is a lot more to be done in that in 2007. I think that is about all I can really say about that business at this time.

Louis Gerhardy - Morgan Stanley Dean Witter

Okay, if I could just ask you a question on the licensing then, was that a lump sum payment for use of patents in the past and you will get a royalty going forward? Maybe if you could just say what product area or patents.

Jerald G. Fishman

Well, it is not a royalty-bearing future license. It is a paid up license in one area for the company that we are whereby agreement, not at liberty to talk about the details of. It was a $35 million one-time payment.

Louis Gerhardy - Morgan Stanley Dean Witter

Okay, could you say analog or DSP?

Jerald G. Fishman

I really cannot.

Louis Gerhardy - Morgan Stanley Dean Witter

All right. Thank you.

Operator

Our next question comes from David Wu of Global Crown Capital.

David Wu - Global Crown Capital

Yes, good afternoon. Jerry, on the guidance in the first quarter, even though it is a 14-week quarter, you are talking about a quarter that has Christmas and New Year’s in it, so if I were to adjust for the holiday period, that extra week really does not do you much good. Are you saying the current business would give you a roughly flat quarter if this was a 13-week quarter?

I have a question on the vertical DSP part of the business. We have had problems in the handset business. This was not the first year they had problems. I was wondering whether longer term, you really need that business to amortize your R&D or you can basically one year say we are gone, no more handset, or things in more profitable verticals, like base station and general purpose, and we will run the smaller, more profitable business?

Jerald G. Fishman

I think Joe is going to take the question about the guidance.

Joseph E. McDonough

On the question of the 14-week versus the 13-week, you know obviously 14 weeks is 7.5% more potential days of sales, but as Jerry said, this 14th week being in the first quarter of this year, the way we are looking at it more or less offsets the normal seasonality that occurs in the first quarter. So if it were a normal 13-week, then the revenue guidance would be down sequentially, but with the 14th week, the guidance is as we mentioned, $635 million of product sales to $670 million of product sales. Then, for GAAP purposes, we have the additional $35 million of revenue that we mentioned.

David Wu - Global Crown Capital

But your fourth quarter did not include a holiday period. Your first fiscal quarter does, right?

Joseph E. McDonough

Yes.

David Wu - Global Crown Capital

So if we do not have any holidays on Christmas and New Year’s, would your revenue be down sequentially?

Joseph E. McDonough

We do not look at it that way because the first quarter always has the holidays, so as we are doing our planning, we are obviously taking the holidays into consideration throughout the operations. There are other ramifications of it. As Jerry mentioned, we are planning for the expenses to be up 5% sequentially with the 14th week, but if you only had 13 weeks, that would actually be a decline of 3% for operating expenses. Some of that decline is a result of some of the actions that we have taken to constrain expenses, some of it is a result of just the fact that it is the holiday season and people do not travel as much.

Jerald G. Fishman

I think the answer to your second question on the DSP in the handset business is our goal has always been to get the general purpose part of the DSP business to be self-sufficient, and that remains our goal. There is a good business there, and there is an amount of expense that you can associate with that business that ought to allow that business to be a good business going forward.

The handset business has helped us amortize some of the core investments in DSP up to date, and that is about all I am going to say about that.

David Wu - Global Crown Capital

Okay. Thank you.

Operator

Our next question comes from Simona Jankowski of Goldman Sachs.

Simona Jankowski - Goldman Sachs

Thank you very much. I wanted to ask you first about your strategy on the power management side as far as how you think it is going to play out in 2007. In other words, do you expect that the increases on the portable side as a result of your recent investments are going to be kicking in in ’07 and offsetting some of the other areas which you are exiting? Also, some of your other strategies as far as the content, tying it along to the amplifier/converter side of the business. Do you think that might net out to a double-digit growth in power management, or do you think that is still further out?

Jerald G. Fishman

I think there is certainly that opportunity for us. We will have to see how it goes through the year. Our sense has always been that in a lot of ways, the systems are configured around the converters, because they dominate in some cases the performance -- in many cases, the performance of the system.

As I think I have mentioned before, we have a lot of customers, particularly in portable products, that really wanted to buy our power management. We just have not had the right portfolio in place. So that has been an area that Analog has underperformed our expectations in. It is a growth area in the market and I think we can get some pretty good sales growth from that.

We have increased our investment levels in that business substantially. We have a very focused team of very experienced people in that business. I do not think there is any future rationale for that business not performing to our expectations.

Simona Jankowski - Goldman Sachs

Thank you, and just a quick follow-up on the MEMS side. Could you comment how big that is as far as percent of sales, and also, how much of it is related to game consoles at this point?

Jerald G. Fishman

Today, the MEMS stuff is probably about 5% of our sales, roughly. It has been like that for a while.

I think the game console is certainly one application for MEMS, and I think we mentioned it was in the new Nintendo system, which it appears like it is selling very well, but when you really see what accelerometers our MEMS products can do for the user experience in any consumer product, if you have ever tried the new Nintendo game, it is a pretty interesting experience, and most of that is made possible by the MEMS products in what used to look like a joystick.

There are many new applications for MEMS technology in a wide range of consumer products. I would say also in some new industrial products, certainly there is tremendous opportunity in automobiles for MEMS technology. So our sense, you know, after being mostly limited to the automotive market for many years, that is a tremendous opportunity for MEMS technology, just a whole range of new applications which we are expecting that business growth rate to accelerate as a result of.

Simona Jankowski - Goldman Sachs

Great. Thank you.

Operator

Our next question comes from Doug Freedman from American Technology Research.

Doug Freedman - American Technology Research

Thanks for taking my question. If you could, I am trying to still get my arms around the way in which we should look at the 14-week versus 13-week. I recognize that you recognize revenue basically on a sell-out basis worldwide. Should we think of the April quarter as possibly bucking the up-seasonal trend, due to the fact that you are going to lose 7.5% of the shipping days?

Joseph E. McDonough

I think the way you should look at it is this year is different than other years, simply because there is an extra week in the year, and that occurs, as Jerry said, every seven years just due to the calendar.

Normally, our first quarter suffers from the fact that the holidays are in it, and therefore, we would typically look at that as a quarter that had fewer selling days and therefore less revenue opportunity.

The second quarter is a quarter that has a complete, there are no holidays in the second quarter. It typically is a very strong seasonal quarter, and at this point, we do not have any outlook for you on the second quarter, but there is nothing about it at this point that we would think is abnormal.

Doug Freedman - American Technology Research

I am just recognizing that the second quarter has been up anywhere from 4% to 6% or 7%, which is that extra week, and that was the concern. All right, I guess if I --

Joseph E. McDonough

This is not -- the semiconductor industry and the end markets that we serve do not lend themselves very well to statistical extrapolations of the past. I know we all have tried to do that. I can do it myself inside Analog Devices, but there are -- the reason we have tried to lay out quite a bit of information about our product portfolio, the end markets we serve, is because at any point in time, there are different elements of our business that are more challenging than others, but what we do have is the core of our business, which continues to do very well and is finding its way into many new applications with lots of customers over a broad spectrum of end markets. We would expect that to continue through the year.

Doug Freedman - American Technology Research

Would you help us understand a little bit some of the trends that you are seeing on the distribution resale side and what you are seeing of your customer base there?

Jerald G. Fishman

Without trying to monetize that, because it is a complex formula there, I would say that our distribution business has been stable, and that is coincident with our industrial business being relatively stable as well.

We have not seen anything that would indicate that that is going to sort of accelerate or anything so far that indicates that is going to decelerate. We had a good, strong industrial year. There are always concerns about what is going to happen with the economies in 2007, and that could impact that business, I suppose negatively, but so far, our distribution business seems to be pretty stable.

At least what I am talking about is resale. The order rates from distributors into the company tend to bounce around a lot in this part of the cycle, but the resales, which are the only thing that really matter, look stable.

Joseph E. McDonough

I think that is a benefit that we have. We are looking every week at the product sales leaving the distributors as the basis for which we recognize revenue at Analog Devices, and the order pattern, as we mentioned in prior quarters from the distributors on to us, to Analog Devices, are often out of line with the ordering patterns from their end customers or the shipments going out the door.

For instance, in the second and third quarter, as we mentioned on prior telephone conference calls, we had a lot of bookings from the distributors during those quarters that was in excess of demand from the end customers. We did not necessarily ship all of that to the distributors, and so this quarter, that normalized itself and the bookings from the distributors went back to normal.

The inventories I think were over-inventoried a bit in the third quarter at the distributors. They have less inventory at the end of the fourth quarter than they had at the beginning of the quarter, but that had no impact at all on the revenue that we recognize or the shipments out to the end customers.

As Jerry said during his remarks, when he talked about the book-to-bill ratio, he was relating the end customer book-to-bill ratio, which is a ratio that we derive by looking at the end customer bookings that the distributors get relative to their revenues, and then we add in the bookings that we get from our OEM customers and put all that together, and that is the book-to-bill ratio that we think is most relevant, and that was about 0.98 in the fourth quarter. I think it was about 1.0 in the third quarter.

Doug Freedman - American Technology Research

All right. Thank you.

Operator

Our next question comes from Bill Lewis of J.P. Morgan.

Bill Lewis - J.P. Morgan

Thank you. So just I guess on that topic, maybe a little bit more. Could you talk about what your turns requirement is for this quarter? It sounds like it is a little bit higher, but I am not quite sure. It is looking sort of weak. Then, I am interested in Jerry’s comment, particularly where you noted it is more inventory related and not a demand problem. If you could elaborate on why you think that. I think some of your competitors have said otherwise.

On that topic, this disti book-to-bill of 0.98, given that it is below 1, would seem to kind of indicate that demand is slowing and kind of looking at the macro picture, so I would be interested in your observations there.

Joseph E. McDonough

On the composite book-to-bill ratio first, so I can complete that topic, that is a composite of the end customer book-to-bill ratio that the distributors have and the book-to-bill ratio that we have with our OEM customers. We put that together and create a composite end customer book-to-bill ratio. That is the 0.98. That is down from 1.0 last quarter. It was above 1 in the second quarter, so certainly the trending of that is downward a bit. That, we believe, is a reflection of, as Jerry said, the contraction of lead times, some inventory changes at some of the end customers, and just some general concerns that exist in the economies.

When we look at the turns business, that is the new bookings that we had during the quarter that we did not have at the beginning of the quarter, and they come from either our distributors or from our original equipment manufacturers, and so the turns this quarter were slightly below 40% of our revenues came from turns bookings. Last quarter, it was slightly above 40%.

Bill Lewis - J.P. Morgan

But your expectation is for slightly above 40%?

Joseph E. McDonough

It will have to be larger, higher than 40% next quarter, based on the revenue guidance that we have, but that seems reasonable, given where the backlogs are at this point.

Bill Lewis - J.P. Morgan

Fair enough. Then, just relative, Jerry, you mentioned you think ’07 is going to be a typical year. What is a typical year for you?

Jerald G. Fishman

Well, it really depends on the mix of business we get. We have talked about that we believe the long-term growth in Analog is somewhere in the 15% range. Over the last three years, it has sort of been 12%, but it has been burdened by poor performance in two major areas for us, and that has lowered the aggregate growth rate, certainly the growth rate of our analog business has been close to those levels.

When we go out and we look at the end customers and you just sample what both end customers are saying and what some of our competitors are saying, it seems when we summarize that, that people have seen the PC market be weaker on the average than they thought, mostly because of delays based on software coming out. That is going to probably reverse and help a little bit.

The large communications infrastructure companies have done well this year. On the wired side, we looked very carefully at Cisco’s results, which were pretty good. We talked to our base station customers about their plans for the year. They seem okay. We talked to our largest industrial customers, and while I think everybody is cautious about next year, they certainly have not at least indicated to us that they have seen any marked change in their expectations for the year other than it would be a normal year. It was probably a little bit strong in the first-half than the norm and a little bit weaker in the second-half than the norm.

I guess our sense is that if the economy started to really tank, then we are not going to evade that or escape that. Our business, our industrial business will suffer as a result of that, but that is certainly not the kind of information that our customers have been telling us recently.

When I listen to most of the commentary from our competitors, I think they tend to be along those lines. There is a lot of commentary about the handset business where most of the growth lately has been in the very low-end. That has removed a lot of silicone content, because the high-end phones have a great deal more silicone content than the low-end phones, so that has created a whole bunch of dynamics with different people in the industry that have different product portfolios.

I think most people believe that the consumer space is going to be okay. The TVs are selling. Cameras are selling. The new games, they are lining up to buy, so in the absence of just an overall disappointing economy next year, where industrial customers start to pull back and as a result, consumer customers pull back and do not buy the TVs and the games and all that stuff, at least our planning for next year is going to be about average.

Bill Lewis - J.P. Morgan

Great. Thank you very much.

Operator

Our next question comes from Steve Smigi from Raymond James.

Steve Smigi - Raymond James

Thank you. I am not sure if you detailed in the press release or if I just missed it, but could you talk about the gross margin guidance and if that includes the impact on the extra $35 million?

Joseph E. McDonough

The gross margin guidance that Jerry talked about in his comments were gross margins of 60% to 60.5%. Those are the operating gross margins. If you include the $35 million of revenue that essentially has no cost of sales associated with it and add in some of the stock option expenses that find their way into cost of sales, the guidance for next quarter is 61.2% to 61.6%. We would call that our GAAP gross margin for next quarter and we would refer to the 60% to 60.5% as our non-GAAP gross margin guidance.

Steve Smigi - Raymond James

Great, thanks. Assuming you could talk a little bit more about your converter space and how that looks over ’07 with competition coming in, and maybe where you think from an end market perspective you guys might out-perform and where you might feel a little bit more competition?

Jerald G. Fishman

I think broadly speaking, when you look out at all the product segments, converters are where most people want to be. It is certainly the space that offers good growth at reasonably good margins, and it is the place where most of our competitors are very under-penetrated.

Our share in converters, depending on which survey you look at, you could say is anywhere between 40% and 60%, but it is way up there. We continue to invest at a very high rate in converters, both the standard converter products, products that are the fastest and the widest dynamic range and the lowest power converters, which is something we have been investing in very heavily, including an acquisition recently, to other converters that become part of more integrated solutions where the converter is one part of the solution. A camera would be a good example of that, and some other consumer products would be good examples of that.

Our mission in converters is to win the high performance applications and also take our converters and integrate them to more vertically oriented products. There is always competition out there. In some ways, that is a good thing. That keeps us on our toes. But we have one of the best converter teams in the industry -- if not the best, the most experienced. We have people that really understand how to not only design converters but what our customers really want beneath the headline of performance.

There are a lot of competitors who can talk about we have this speed or this whatever, but you really have to understand how converters are applied to get the right balance of performance into your converter products, so when your customers use it, it meets their performance criteria.

There is certainly nothing that has happened over the last year that we have seen that gives us any indication that we are not doing very well in the converter business and that we would continue to do well in the future.

There is going to be competition. There is a lot of competition in power management, too. The analog space is a space where a lot of people want to be, and we should expect to have competition, and we do. Our goal is to continue to beat the competition. I think if you look at the growth rate of our converter products over the last couple of years, it is pretty good, relative to the market. I think our goal is to continue that streak.

Steve Smigi - Raymond James

Thank you.

Maria Tagliaferro

Steve, I would just point you to the press release. We did include a summary of the estimated non-GAAP data for the first quarter of ’07 in the press release, you know, page down a couple of tables and you will see estimates for the three months ending February 3, 2007, and that will get you some of that gross margin GAAP information you are looking for.

Steve Smigi - Raymond James

Thank you very much.

Operator

Our next question comes from Craig Ellis of Citigroup.

Craig Ellis - Citigroup

Thanks, guys. Maybe shift the discussion a little bit to the gross margin line. Joe, could you just quantify some of the gives and takes in the fourth quarter as it relates to gross margins? You identified a number of things. I did not hear you mention a favorable mix impact on the DSP side, but I would imagine that would be a positive. How do those span out as we look at the net 70 basis point change in the quarter?

Joseph E. McDonough

First of all, the 70 basis points is a pretty narrow range on a gross margin that is comprised of a lot of moving pieces. Some companies that have many fewer products give out guidance that is 2% and do not have too much ability to resolve the differences there.

When we look at it, as we mentioned, there were a number of moving factors. We reduced the running rates in some of our back-end facilities as the quarter evolved, so that changed the utilization on the back-end. The front-ends continued to operate at a utilization that was similar to last quarter, but we will be reducing the utilization in the first quarter of some of the front-end facilities.

We had the mix changes, as we mentioned. You mentioned the wireless handsets. There were the consumer products, the industrial products were relatively flat. We had a pretty significant change in the demand picture looking forward. If you go back a couple of quarters, certainly we expected our revenue base to be a lot larger today than it is, and most other companies did as well. Some of the inventories that we have been building up in anticipation of that demand picture called for some reserves this quarter.

None of those factors are significant of themselves, but in the aggregate, that gave rise to the 70 basis point change in the gross margins. As we look forward to next quarter, we have the benefits coming of the fab in California that has shut down as scheduled. That production has been transferred to our other facilities. We did build up some inventories to bridge the transition from that fab to the other fabs.

We are getting the cost savings. The cost savings will find their way into our future P&L as the old inventories, the bridge inventories are sold off and the newer inventories that we build start finding their way into the P&L. We will get the benefit of those cost savings as we ramp the utilization in our facilities as the year evolves.

That is about the best I can do on what are relatively small numbers.

Craig Ellis - Citigroup

Okay, helpful color, so we are still looking for $37 million in fab shutdown savings?

Joseph E. McDonough

Yes, we are actually realizing the spending savings that we had expected, and the spending savings are occurring in the first quarter.

I think the right way to look at is our gross margin would be a lot lower in the first quarter if we hadn’t shut the fab down. Then these would be coming through as variances as we reduce some of the utilization.

Jerald G. Fishman

But also we are not seeing the full benefit of the cost savings in the gross margin in the first quarter because it takes a while for that inventory to move through the system.

Joseph E. McDonough

And we are going to be reducing the utilization rates a bit in the first quarter, rather than increasing them.

Craig Ellis - Citigroup

Then, on the buy-back, very intense this quarter relative to prior quarters. How should we think about buy-back potential as we go through the year?

Joseph E. McDonough

I think the best way to think about it is we have $2 billion authorized. We have utilized a little under $1.7 billion, so we have $312 million, I think, of authorization that remains. So we are working on that program. If there are some further decisions on that, we will communicate them when those decisions are made.

Craig Ellis - Citigroup

Okay, thanks, guys.

Operator

Our next question comes from Romit Shah of Lehman Brothers.

Romit Shah - Lehman Brothers

Thank you. Jerry, you are planning for a good year, despite some of the recent order trends. Are customers more concerned about inventory today than they were three months ago?

Jerald G. Fishman

Well, I tell you, certainly they are more concerned than they were six months ago. We have seen a lot of customers stalling over the last two quarters on the order rates, which indicates that they are burning some inventory off.

I think the feedback that we are getting, which these things, you never know until you know, is that their inventories seem to be okay. How that plays out in the first and second quarter, we will have to wait and see what happens.

All we can communicate is what a lot of customers in a lot of diverse markets seem to indicate to us. Clearly, for example, in some of the markets that we talked about, there was a huge inventory reduction. How that plays out in the future quarters, we will have to wait and see what happens. We just do not know.

Romit Shah - Lehman Brothers

Okay. Could you just elaborate on weakness in the base station business, as well as the tester business? I know that particular business was impacted by one customer last quarter. Are there lingering issues with the same customer?

Jerald G. Fishman

First of all, just to keep perspective on the base station business, for the year, it is going to grow 16%, which is a pretty good year.

The way to think about it is there is a bunch of consolidation going on in base stations. There are a lot of companies, a lot of the infrastructure companies have been bought and sold over the last couple of quarters, and there is a lot of confusion about which platform are they going to get and they are all trying to get rid of the old platforms and the like. I think that is part of it, and the other part of it is simply that they bought up inventory in the first-half and they utilized it more in the second-half.

That is the feedback we get from our largest customers. It is not really related to any particular customer at any particular geography. Clearly in the first-half of the year, a lot of people built some infrastructure. They are waiting to utilize that infrastructure and they bought a little too much inventory. That is the feedback we get from our base stations customers.

If we listen to the commentary of many of our competitors, they seem to be saying about the same thing, those competitors that have a significant presence in the base station business, that is.

Romit Shah - Lehman Brothers

Okay, and on the tester business?

Jerald G. Fishman

The tester business is choppy. I think that is the polite way of saying it is not so good right now. That is not surprising, given all the choppiness in the whole semiconductor capital equipment thing is as all the people who use semiconductor capital are trying to respond to these wildly gyrating order rates, mostly due to supply and not necessarily demand. I think that business started moving up. It started really getting squishy in the last quarter.

If you look at the forecasts of some of the large AP customers, you see that in their order rates, and those order rates get transmitted to us with some magnification, let’s say.

That is what we are seeing in that business.

Romit Shah - Lehman Brothers

Thank you.

Operator

Our next question comes from William Conroy of Sanders Morris.

William Conroy - Sanders Morris Harris

Good afternoon, and thanks for taking my call. Joe, a quick one for you -- what kind of tax rate are you looking at as we go into the new fiscal year?

Joseph E. McDonough

Something in the 22%, 23% range is our best estimate at this point. It was 24% in the fourth quarter on the non-GAAP operating results. As we indicated in the press release, we did settle an IRS exam during the third, and some exams in foreign countries during the fourth quarter, and so we had a benefit to our income in the third and fourth quarter. In the two quarters combined, there was a tax benefit of $35 million. That is in our GAAP results. It is not in our non-GAAP results.

William Conroy - Sanders Morris Harris

Got it. That is helpful. Jerry, let me switch gears and come back to the wireless business, really the vertical DSP business in general. It was not too long ago when we talked about this business and you were mentioning that ADI has to bring an awful lot to that market. I am thinking specifically of handsets here, besides just the silicone or maybe it is what is contained within it, but you have to bring an entire package here, and I think at that time, you were saying the returns on some of that stuff that you generated were not quite there, but yet that was one of the costs of doing business.

It feels like here we are, back again in that situation, a few quarters hence. Could you give me a sense of your long-term thinking for this business? With the volatility that you see, how do you position yourselves to generate an acceptable return in this business?

Jerald G. Fishman

As I said earlier, and I chose my words reasonably carefully in the comments I made, that is an area of great focus for us. We understand that our wireless chipset business has not performed at least to our expectations and certainly our investors’ expectations, since 2004. 2004 was a great year for that business, but the last two years have not been strong years for that business, given our customer mix.

That is a high priority for us to resolve this year, and we are working on it. That is about all I can logically say at this time.

William Conroy - Sanders Morris Harris

I can appreciate that. Thanks, Jerry.

Operator

Our next question comes from Michael Masdea from Credit Suisse.

Ahmed Saraf - Credit Suisse

Good afternoon, this is Ahmed Saraf calling in for Masdea. All right, you have had a restructuring program going on now the last year, year-and-a-half. Could you just discuss at a high level where are we in that timeline and how much further in terms of cost-savings or restructuring we may see going forward?

Jerald G. Fishman

I think we are going to continue to work to get our costs down. As I mentioned in my opening comments, there is an opportunity on the offensive side to get margins up higher on the broad-based products we have. You know, our average selling prices are higher than many of our competitors because of the mix of business that we have, so on the offensive side, there is an opportunity to do that.

On the defensive side, we have a lot of products that go into some very high volume applications, which we will always have some price pressure, so we have to keep getting our costs down. We are going to continuously work on the product and overall infrastructure costs for the company, much as we did last year.

As Joe was saying, that was a good thing to do, because without that, it would be hard to predict the kind of gross margins we are predicting going forward.

On the product front, we have been working very hard to get the revenue mix to be a higher margin mix, and we have made some moves in that area. I think we will make more moves in that area during 2007.

I think on both the infrastructure costs for the company and the revenue mix that we have, we see that as our job to continue to work on that, and we are planning to.

Ahmed Saraf - Credit Suisse

Got it. Just looking at inventory in the channel, you mentioned earlier that it looks like customers built up inventory. Do you believe that customers as of now have worked down a lot of those inventories, or that will continue to be worked down over the quarter? Where in the timeline do you see --

Jerald G. Fishman

Well, you know, our guess I would say is probably inferior to your guess. You guys go out and you sample all the customers and all the distributors. You get the same data that we get. There is a mix. There are some customers that say we are still not going to buy some for a while. There are other customers that say we have enough, and there is a third group of customers who say maybe we overdid it too much, so we better start ordering something.

I think there is a big mix. We do not really know that any better than you do. All we can do is give you our own sense of the way we are going to plan our business, which we do not really know within a very small range exactly what the revenues are going to be next quarter, and we are indicating that.

There is a wide range of possibilities of what will happen. We report our results very early in the quarter. We do not have a lot of time to get a glimpse of what has happened so far before we make our estimates, but nevertheless, we have to run the company, and that is the range that our product groups, as sort of filtered by Joe and I, have come up with. It takes in a lot of factors.

Some of the products, some of the markets, some of the customers, and we try to come up with a mix that tries to give investors a range of what the possibilities could be. Sometimes we are right. Sometimes we are wrong, but that is the best range we have right now.

Joseph E. McDonough

One point that I think is worth noting, when we talk about the channel, we are talking about the distributor channel. There, we do know the inventory levels that the distributors have, because we get the inventories every week by product. The inventory levels that they have are normal. The turns of their inventories are high turns. They have been turning the inventory faster as they have been working on their own working capital needs over the past few years.

There is nothing abnormal about our inventory at our distributors. When the inventory moves on to the end customers, it is much harder to really gauge how much inventory a particular customer has.

In some of the larger vertical markets, we have an easier time trying to assess it, but it is still difficult.

Ahmed Saraf - Credit Suisse

Got it. Thank you.

Operator

Our next question comes from Tore Svanberg of Piper Jaffray.

Evan Wang - Piper Jaffray

Good afternoon. This is Evan Wang for Tore Svanberg. Thanks for taking my questions. Just to follow up on the distributor inventory question again, are you saying that, at least based on what you can see at the distributors, their inventory levels are matching consumption? So there is a rise in market demand that could translate to stronger orders?

Jerald G. Fishman

We look at the inventory as simply a stocking point for our parts. If there is a rise in demand from their end customers, we simply have to supply it, either out of our own inventory or out of their inventory. We typically have a significant die banks of most of the type of products that are sold through the distribution channel, and there is a fairly short lead time to convert those die banks into finished goods. We can be fairly responsive if the end demand from the distributor customers were to increase significantly. That is a problem that we think we are prepared to deal with.

Evan Wang - Piper Jaffray

What is the lead time right now?

Jerald G. Fishman

It is all over. It depends on the products, it depends on the quantities that are ordered. The lead times are shorter than they were at this time last quarter, is probably the best way to describe it.

Evan Wang - Piper Jaffray

Thank you. Then, another question about the outlook. The factors that you mentioned earlier that you used to make your projections seem to show less strength. You cited lower backlogs, more turns necessary -- I am just curious. Is industrial typically strong for you in the January quarter, because at least a good portion of that guidance is --

Joseph E. McDonough

As Jerry mentioned, the fact that we have a 14-week quarter this quarter offsets the normal seasonal weakness that we would expect. The industrial end-market is certainly a place where we typically see a weaker seasonal pattern in the first quarter, but with the 14th week, our expectation is that would offset that.

Evan Wang - Piper Jaffray

I am wondering if I could ask you one more question about your power management business? What was your power management year to year growth for ’06? I missed that.

Jerald G. Fishman

We just put that on the site. In power management --

Evan Wang - Piper Jaffray

Was it 3%?

Joseph E. McDonough

3%.

Jerald G. Fishman

Yes, it was attached. There was a schedule attached to the press release.

Evan Wang - Piper Jaffray

Okay. Would you consider that to have fallen short of your expectations?

Jerald G. Fishman

Yes.

Evan Wang - Piper Jaffray

That is still a focus for the coming year?

Jerald G. Fishman

Oh, it is certainly a focus. I think if we would have had the right products, we would have done a lot better in that business. As we began a fairly significant sort of re-look at the business, we focused in on that business a year ago. I think what we are seeing is the natural evolution of some of the products that were not very good margin products, that were focused on areas that the margins were poor or disappearing, and some of the new products are just beginning to sell.

I think that is an area in 2006 of under-performance for ADI, relative to the market and also relative to our original expectations. But I think as you look forward, all those things are turning in the right direction, so we ought to be able to get a lot more power management revenues than we have. I mentioned here we raised the investment levels. We have a real strong team working on that right now, very focused on what to do.

I think what has been an area of weakness in the future could easily become an area of strength for us.

Evan Wang - Piper Jaffray

Thank you very much.

Operator

Our next question comes from Sumit Dhanda of Banc of America Securities.

Sumit Dhanda - Banc of America Securities

Just a couple of questions. First, on your converter business, you have given a very helpful breakdown of the individual sub-segments within analog. But you know, the CAGR has been 16% of -- my initial read is that it is somewhat distorted by the outsized growth in 2004. The growth has been a little slower here recently. Do you think that is more in line with what the market has done? Has your growth within that particular segment slowed down? How should we think about what --

Jerald G. Fishman

Well, I think probably the way to look at the -- 2004, that business grew 33%. That is not a good indicator of what that market can grow by a long shot, or any market we serve.

I think in 2003, it was 13%, 2004 was 33% -- I think the right way to look at it is half of 2005 we shipped in 2004 when the lead times starting stretching out on those products. I think 2006 was a more typical year of what kind of growth that market can support, and also what kind of growth people were forecasting for that kind of market. Call it 8 to 10, call it 10%, call it 12% -- those are the estimates out there of what the average growth rate of those products has been on average and will be going forward.

I think that is a reasonable estimate.

Sumit Dhanda - Banc of America Securities

Okay. Switching back to your handset business, and I know there have already been some questions on this, but if I heard it right, you are saying it is now, the handset chip business is now down to 6% of revenues on a run-rate basis?

Jerald G. Fishman

That is correct.

Sumit Dhanda - Banc of America Securities

At what point do you really draw the line and say that this is not worth investing in on a sustained basis going forward? Are there any milestones that you are looking at internally within the company to try to determine that going forward?

Jerald G. Fishman

I think what I said before I am going to stick with. We are focusing intensely on that business, as we do on a lot of our businesses from time to time. As soon as we figure it all out, we will let you know. That is about as far as I can go today.

Sumit Dhanda - Banc of America Securities

Okay, one final question. You mentioned something about opportunity with Vista as it relates to your codec product. Could you expand on what that was and what you are exactly referring to?

Jerald G. Fishman

We historically have served the PC audio market with some very good products, which in the last PC cycle got very commoditized, so we did not get very aggressive on those products, but as you look forward, the world of audio is becoming so critical in PCs with the new Vista software that we have an opportunity there. We are well designed in with Vista products, and we think that is going to help us, whereas in the last two years, that business has declined for us.

Sumit Dhanda - Banc of America Securities

Thank you.

Operator

Our next question comes from Joseph Osha of Merrill Lynch.

Joseph Osha - Merrill Lynch

Three quick questions. First, if I look at your DSP business, in particular base stations, how is the effective end of TigerSHARC affecting what you do there? My understanding was that Blackfin was really not a part you could sell into that base station market, although perhaps I am wrong.

Jerald G. Fishman

Well, I think in the future it might be, but today it is mostly TigerSHARC.

Joseph Osha - Merrill Lynch

But I understand that you have rationalized your investment in your R&D in that part.

Jerald G. Fishman

Yes, we have, but we still have some very competitive parts for the base station market in there that are doing pretty well. Actually, they are better than we thought, in some ways.

Joseph Osha - Merrill Lynch

Okay, so we are kind of at an interregnum here in terms of your high-end 32-bit --

Jerald G. Fishman

Yes.

Joseph Osha - Merrill Lynch

Okay. Thank you. Second point, on power management, a big market in dollar terms, but gosh, I am seeing a lot of competitors out there struggle to earn the kind of margins in it that I think you regard as acceptable from your analog business. Is there maybe some danger that you are jumping on this just at the point at which the market is becoming difficult to make money in?

Jerald G. Fishman

I think we have to be very selective in that business. We have been the route of selling power management products that have sub-standard margins. We are not likely to head there in the future.

I think the companies that really have good products in that area and that try to stay out of the most competitive parts of that business, which are the ones with a built-in linear markets out there, I think still make pretty attractive returns, relative to what we would expect in that business.

I think your question is a good one. It is a question of really focusing on the areas that we can make money. It is not like we have this billion dollar business that we need to grow at 15% a year. It is a couple hundred million dollar business where if we put on another $100 million or $200 million of revenues in very selected areas, going forward, that would make a big difference to us, but not force us into the commodity part of that business.

Joseph Osha - Merrill Lynch

So the idea is to put it on [mid-single-digit] gross margins --

Jerald G. Fishman

That is our goal.

Joseph Osha - Merrill Lynch

Okay, great. Then, lastly, it seems like, you have seen a lot of cycles and so have I. Whenever they kind of kick you out, we always go through this sort of kabuki about is it a one quarter downturn, which it never is. I am looking at the --

Jerald G. Fishman

I am losing you here, Joe. Did we lose the line?

Maria Tagliaferro

Operator, did we lose him?

Operator

It looks like his question was withdrawn.

Maria Tagliaferro

He must have pushed a button by mistake. He should come back and we will take his question.

Operator

He is now back in queue and I will open his line again.

Maria Tagliaferro

Thank you.

Joseph Osha - Merrill Lynch

Hello, is that me?

Jerald G. Fishman

Yes, Joe, we got caught off here.

Joseph Osha - Merrill Lynch

It seems like whenever we head into these moderate downturns, we kind of always go is it a one quarter downturn kabuki, which it never is, and I am looking at almost always we go negative year on year. I am just wondering what the point is if you are coming into a seasonally soft period with a book-to-bill of below 1, of setting an aggressive bar. Is there some risk here that you just have to kind of pull on your horns later in the quarter?

Jerald G. Fishman

Well, it is certainly possible. As Joe was saying, we have a 14th week here, which is an anomaly in the first quarter. I think if you just look at the 13th/14th part of this, which is I think what Joe was trying to say, it would indicate that it is not all that aggressive, so we will have to wait and see what happens.

Joseph Osha - Merrill Lynch

Yes, just let me, and I will go away here now, but if I just kind of look at my handy-dandy year on year chart and back at what you were saying, it kind of suggests to me that without that 14th week, we ought to see Q1 revenues here at kind of the $500 million, $590 million to $600 million range. That would sort of square all of this, and there is maybe $40 million or $50 million of revenue benefit from this extra week. Am I thinking about that right?

Joseph E. McDonough

Well, I think if you do the math and you take the low-end of our range and the high-end, to just normalize it to 13 weeks, you do get a range that is $590 million to $622 million.

Joseph Osha - Merrill Lynch

Beautiful. Thanks a lot, Joe.

Operator

Our next question comes from the line of Wayne [Jervis] of [Jamco].

Wayne Jervis - Jamco

My question has been answered. Thank you.

Maria Tagliaferro

We are actually passed our hour. We just have about four people left in the queue, so we will keep on going. Take the next question, Operator.

Operator

Our next question comes from Dennis Reed of Cleveland Research.

Dennis Reed - Cleveland Research

Thank you for taking my call. One question in regard to the handset business and the inventory correction. I am trying to look and understand if it is a mix shift between high-end and low-end, it is just general softening here ahead of the holiday period? Any color you could provide would be great.

Jerald G. Fishman

Again, I do not know a lot more about that. Our customers sort of shut down in terms of buying stuff. They said they were over inventory at the end of last quarter which, of course, we found out after the end of the quarter, and they did not order much until the very end of the quarter when the order rates picked up a little bit.

Other than that, what you read about is all we know. It seems like there is a very clear message out there that the lower end phones are selling more than the higher end phones, the less feature-rich phones.

Beyond that, I do not have much more commentary. It is getting to be a pretty small part of our business and I think probably the guys that have that to be a large part of their business will probably have more than offer on that.

Dennis Reed - Cleveland Research

Then, just lastly, in regard to utilization rates, could you provide any color on what they were in the quarter and what [inaudible] take into next quarter?

Jerald G. Fishman

Well, they were in the same range as last quarter, which I think was 75% or 80%. They are different in different facilities. Those come down slightly next quarter. I do not have a pinpoint number for that.

Dennis Reed - Cleveland Research

Thank you very much.

Operator

Our next question comes from [Manish Goyle] of Crest investment. Manish, your line is open.

Maria Tagliaferro

I think we will go to the next one.

Operator

Our next question comes from Mona Eraiba of TCW.

Mona Eraiba - TCW

I have a question about the general DSP, the profitability of that product area, how is it relative to other areas. Also, I know you have a very competitive product in the SHARC family. That is a result of better investment in R&D over the last few years. Going forward, do you think you will be able to maintain this investment and stay competitive with the product line?

Jerald G. Fishman

That is certainly what we are trying to do as we go into the 2007 plan. We have made a lot of investments. We think the core we have out there, as I think you noted and we commented on earlier, is a tremendously competitive core. The take-up rate of the product, the design rates are good.

On the other hand, we have to be able to live within the revenues that we can generate on that thing. The gross margins of our general purpose DSP products are good, so now it is up to us to fix the rest of it, and that is what we are planning to do.

Mona Eraiba - TCW

So the focus is to fix this rather than to de-emphasize it?

Jerald G. Fishman

Yes. That is an important business. It is up to us to figure out how to make that profitable on the general purpose DSP side.

Mona Eraiba - TCW

Thank you.

Operator

Our next question comes from Uche Orji of UBS New York.

Uche Orji - UBS New York

Most of my questions have been answered, but just one question on the wireless DSP front. I know you have talked about inventory correction by your customers as part of the reason, but do you think there is some market share loss going on here as well? Within that, could you explain to me how you think your business will position against single-chip solutions, which will be launched next year -- well, starting this year. We have seen some already from [inaudible]. How do you position this business against that kind of competition?

Jerald G. Fishman

At the risk of saying things a couple time, I think I said about as much about the handset business as I am going to say on this call. It is 6% of our revenues. We are working intensely on trying to sort out the right strategy for that business. When we do, we will let you know.

Any questions on the other 94% will be welcomed, but I have said all I can say about it and be prudent, so that is what I am going to stick with for now.

Uche Orji - UBS New York

That is fair enough. Thank you very much. I appreciate it.

Operator

Our final question is a follow-up from the line of Sumit Dhanda of Banc of America Securities.

Sumit Dhanda - Banc of America Securities

Joe, just a follow-up. I do not know if you alluded to this, but the operating expenses are going up with the extra week. On an apples to apples basis, they would have been down sequentially. How should we think about April in that context?

Joseph E. McDonough

As Jerry said, we are continually reviewing all of our different expenses with the focus of trying to reduce the operating expenses, or just hold them to minimal growth.

In the second quarter, that happens to be the quarter of the year, as we mentioned, that typically is seasonally the strongest quarter of the year, and so that also is the quarter when the annual raises take effect for our employees. It will be tough in the second quarter to hold the expenses on a running rate basis down to the level of the first quarter, but if we have the normal seasonal boost in the revenues, or if we continue with a strong, end-market demand for our products and we have a good quarter, we should be able to more than offset the impact of the raises that typically happen, that will happen in the second quarter.

Sumit Dhanda - Banc of America Securities

I guess I am a little confused. With the extra week going away in April, you get no benefit or relief on the operating expenses?

Joseph E. McDonough

I am sorry. I thought we were talking about on a running rate basis. If I look at the first quarter, one way to think about it is the expenses in the first quarter will be up 5% quarter to quarter. That is the non-GAAP operating expenses. If that were normalized at 13 weeks, it would represent a 3% reduction in the operating expenses. So perhaps you are right, that if you look at it from the first quarter to the second quarter, I do not have those numbers here, but certainly if you look at the 14 weeks worth of expenses in the first quarter and 13 weeks in the second quarter, it is reasonable to expect that they would be in the same vicinity, despite the fact that raises would take affect in the second quarter.

Sumit Dhanda - Banc of America Securities

Thank you.

Operator

Ladies and gentlemen, there are no further questions in queue.

Maria Tagliaferro

Great. Well, that concludes our call for today. Thank you everyone for joining us, and we look forward to speaking with you on our next call, which is scheduled for February 15, 2007, and we will release the first quarter results. Thank you.

Operator

Ladies and gentlemen, this concludes today’s Analog Devices conference call. You may now disconnect.

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