Venk Nathamuni - Managing Director of Investor Relations Bruce E. Kiddoo - Chief Financial Officer and Senior Vice President Tunc Doluca - Chief Executive Officer, President and Director.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division James Covello - Goldman Sachs Group Inc., Research Division Blayne Curtis - Barclays Capital, Research Division Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division John W. Pitzer - Crédit Suisse AG, Research Division Christopher B.

Danely - JP Morgan Chase & Co, Research Division Aashish Rao - BofA Merrill Lynch, Research Division Doug Freedman - RBC Capital Markets, LLC, Research Division Michael McConnell - Pacific Crest Securities, Inc., Research Division Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division Craig A. Ellis - B.

Riley Caris, Research Division Ambrish Srivastava - BMO Capital Markets U.S. Stephen Chin - UBS Investment Bank, Research Division.

Good day, ladies and gentlemen, and welcome to the Maxim Integrated Products reports results for the first quarter fiscal 2014 conference call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. Venk Nathamuni, Managing Director, Investor Relations.

Please go ahead, sir..

Thank you, operator, and welcome, everyone, to Maxim Integrated's Fiscal First Quarter 2014 Earnings Conference Call. With me on the call today are Chief Executive Officer, Tunc Doluca; and Chief Financial Officer, Bruce Kiddoo. During today's call, we will be making some forward-looking statements.

In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings.

Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty, and that future events may differ materially from the statements made.

For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge. Now I'll turn the call over to Bruce..

Thanks, Venk. I will review Maxim's first quarter financial results, which exclude the September quarter results for Volterra. Any statements we may make during this call regarding Volterra's financials reflect unaudited results. Revenue for the first quarter was $585 million, down from the fourth quarter.

Our revenue mix by major market in Q1 was approximately 43% for Consumer; 29%, Industrial; 16%, Communication; and 12%, Computing. Our Consumer business declined as expected due to weakness in smartphones.

Our Industrial business declined slightly due to seasonal weakness in our core Industrial businesses and declines in our Smart Meter and Medical businesses after strong growth in the prior quarter. Automotive grew for the third consecutive quarter.

Our Communication business was up slightly with strengths in networking and Datacom, offset by reductions in our Cable Infrastructure business after a strong Q4. Finally, our Computing business was down slightly. Turning to Volterra, revenue for their September quarter was $36 million.

Their Server business grew after a recovery from the prior quarter's inventory correction, and their Notebook business also increased from the prior quarter. Maxim's gross margin, excluding special items, was 60.7%, down from 62.3% in the prior quarter due to mix, lower utilizations and higher inventory reserves in Q1.

Special items in Q1 gross margin were intangible asset amortization from acquisitions. Operating expenses, excluding special items, were $207 million, down from $214 million in the prior quarter due to unusually low spending across multiple categories as we continue to tightly control spending.

Special items in Q1 operating expenses included acquisition-related and restructuring charges. Q1 GAAP operating income, excluding special items, was $148 million or 25% of revenue. The Q1 GAAP tax rate, excluding special items, was 17.3%, down from 18.5% in the prior quarter.

GAAP earnings per share, excluding special items, was $0.41 compared to $0.44 in Q4. Turning to the balance sheet and cash flow. During the quarter, cash flow from operations was $96 million, down from the prior quarter due to the payment of our annual employee bonus in Q1. Inventory was 110 days, flat with the prior quarter.

Inventory in the channel, excluding catalog distributors, decreased slightly from 53 to 52 days, as channel inventory in dollar terms increased by 4%, but was more than offset by an increase in resales. Net capital additions totaled $38 million in Q1, up slightly from the prior quarter and within our target of 5% to 7% of revenue.

Share repurchases totaled $154 million in Q1, as we bought back 5.5 million shares. We also paid $74 million in dividends to our shareholders. Overall, total cash, cash equivalents and short-term investments declined by $165 million in the first quarter to $1 billion. Moving on to guidance.

Our beginning Q2 backlog increased to $417 million, including $27 million for Volterra. Based on this beginning backlog and expected turns, we forecast Q2 revenue up $605 million to $635 million, including $35 million to $37 million for Volterra. Excluding Volterra, forecasted Q2 revenue is flat from the prior quarter.

Q2 gross margin excluding special items, is estimated at 59% to 62%, flat with the prior quarter. Q2 gross margin is expected to be impacted by lower utilizations due to lower revenue in Q1 and Q2, and planned inventory reduction, with a potential offsetting benefit from lower inventory reserves.

Special items in Q2 gross margin are estimated at $8 million, primarily for amortization of intangible assets. This excludes amortization of intangible assets and inventory writeups related to the acquisition of Volterra.

Q2 operating expenses, excluding special items, are expected to be up approximately 3% for Maxim, excluding Volterra, due mainly to the impact of our annual merit increase and equity grant. Q2 operating expenses will also include approximately $17 million for Volterra, which include stock-based compensation expense.

We are on plan to achieve synergies of $15 million annually after the March quarter. Special items in Q2 operating expenses are estimated at $3 million, primarily for amortization of intangible assets. This excludes other potential special items that may occur during the quarter, including Voterra acquisition-related expenses.

Our Q2 tax rate, excluding special items, is estimated within our long-term range of 16% to 20%. For Q2 GAAP earnings per share, excluding special items, we expect a range of $0.37 to $0.41. Net capital expenditures in Q2 are expected to be up slightly from Q1 as we invest in new manufacturing technologies.

On an annual basis for FY '14, we are targeting CapEx around the midpoint of our long-term business model of 5% to 7%. We expect to lower our share repurchases in Q2 compared to the higher level repurchases with the prior 2 quarters.

Finally, our Board of Directors has approved payment of a cash dividend of $0.26 per share, approximately a 3.6% yield at yesterday's closing stock price. I will now turn the call over to Tunc to further discuss our business..

Thank you, Bruce. Good afternoon to all call participants. We appreciate your interest in Maxim Integrated, and thank you for joining us today. At the very onset, I'm pleased to note that we completed the acquisition of Volterra Semiconductor earlier this month, and are very excited to have the Volterra team onboard.

We added a highly-talented team with a distinguished record of innovation and product design, process development, advanced packaging and systems expertise.

This team will complement Maxim's internal capabilities by delivering a significant time-to-market advantage in high-current power management application, targeting the enterprise and communications markets. The integration of the 2 companies is progressing well.

And as a direct result of this acquisition, we expanded the market opportunity we pursue by an incremental $900 million in 2017 based on market research reports. Let me now discuss results for the September quarter.

Our September quarter revenue was in line with the guidance we provided, while earnings per share were $0.02 above the midpoint as we continue to exercise operating spending discipline. Let me update you on lead times and bookings next. Our delivery lead times increased slightly, but still remained below our 6-week model.

Customer order lead times increased from the prior quarter, predominantly due to longer lead time orders from our industrial customers. Bookings increased during the quarter, resulting in a book-to-bill ratio above 1. I'll next provide some color on our major markets. Let me start with consumer as customary.

We expect our December quarter consumer end market revenue to increase due to shipments of Maxim products into new tablet, smartphone and e-reader platforms. We project smartphone revenues to be flat sequentially. We have production ramps of new products at our largest customer, as well as at other smartphone makers.

However, this growth is expected to be offset by a decline from older generation smartphone platforms at our largest customer. Our high-integration interface power system-on-a-chip remains best in class, and customized version of this product continued to be designed in at multiple smartphone and tablet customers.

In addition, we are expanding our technology offerings for mobile devices, augmenting our portfolio of power management, optical sensor, motion sensor and touch products. We are now shipping audio amplifiers to top-tier tablet makers. Our next-generation audio amplifiers have also been well received by major mobility customers.

As we mentioned during our prior earnings calls, our product diversification is exemplified by our investment in sensors, both optical and motion. In the September quarter, we began shipping our second-generation gesture sensor into a major smartphone platform at our largest customer.

We're also investing in our motion sensor portfolio to address the growing needs for human interface functions across a range of mobility platforms. From a market segmentation perspective, we continue to -- continue our engagement in the mid-range smartphone market and remain well positioned to participate in this segment.

We're leveraging our technology, design IT and system expertise developed for high-end smartphones. Overall, we're working with multiple customers across a host of technologies and executing on our strategy to extend the adoption of our products beyond high-end smartphones. Second, let me discuss the industrial market.

We project December quarter industrial revenue to be down primarily due to seasonality. We project meaningful growth in our Automotive business, offset by seasonal weakness in core industrial, as well as an inventory drawdown at a medical customer.

Our differentiated strategy in industrial, where we generate roughly half our business from targeted vertical ASSP markets, continues to serve us well. For instance, in automotive, we see ongoing broad-based strength across multiple products spanning multiple applications.

In the area of automotive Infotainment, we have design wins ramping into production for satellite radio and TV tuners at several automotive customers. Our overall automotive pipeline of design wins span a variety of end applications, such as Infotainment, power train and advanced driver assistance systems.

We remain encouraged by the response of our customers to the breadth of our offerings and the value we deliver. Our highly integrated utility meter products, addressing both smart meters and solid-state meters, are gaining good traction at Chinese meter makers.

These customers are supplying not only to the Chinese domestic market, but also are exporting to other Asian markets. Solid-state meters, which are a segment of utility meters, have all the features of smart meters, excluding the advanced communications interface. Let me now provide some commentary on our Distribution business.

After rising slightly in the June quarter, inventory days in the distribution channels decreased by 1 day quarter-on-quarter in Q1. Base of inventory was 52 days at the end of the September quarter versus 53 days at the end of the June quarter. As such, distribution inventory continues to remain well below our target model.

I would like to note that distribution resales were up 5% in the September quarter, as were end-market bookings placed on our distributors. Third, let me discuss Communications. We project Communications revenue to be flat sequentially in the December quarter.

This is driven by an expected increase in business from the networking and Datacom end markets, offset by a decline from cable infrastructure products. Note that we saw a strong uptick earlier in the year in our cable products.

The strength in our Fiber Optics business from the prior quarter is extending into the December quarter, as the China optical market experiencing a rebound in telecom infrastructure spending. Bookings trends remain strong.

The strength in our Optical business spans a range of applications including Passive Optical Network and backhaul to support 4G LTE deployments. Our Base Station business registered a strong uptick in bookings during the September quarter.

In this segment, we're seeing design win activity across our portfolio of RF, signal chain and power management products.

Overall, we're focused on executing our strategy of delivering highly integrated solutions to the communications market, enabling broader coverage, increased capacity and lower cost of ownership to deploy the networks of the future. Fourth, in the computing market, revenues will be up sequentially, driven primarily by the Volterra acquisition.

Maxim's organic business in computing is expected to be down sequentially, as an increase in business from financial terminals is offset by a reduction from notebook PCs. The December quarter will be the first quarter to include Volterra's revenues as part of Maxim's consolidated results.

Therefore, let me provide some additional color on the Volterra contribution. As Bruce mentioned earlier, Volterra's September quarter results were in line with the guidance management had provided as a stand-alone company. Volterra's sequential revenue increases from both the server and notebook markets in the September quarter.

Looking ahead to the December quarter, we expect revenue from the server market to increase, driven by seasonality, as well as new product ramps. And this was partially offset by a decline from notebook PCs. We're very excited that the Volterra team is now part of the Maxim family, and we look forward to their contributions to the combined company.

In closing, we remain well positioned for growth across a broad range of markets. Our business model remains very attractive, and our strong profitability allows us to return a significant portion of our free cash flow to shareholders.

We will continue to focus on delivering winning products and technologies that provide highly differentiated solutions to our customers. Venk, I'll now turn the call back to you..

Thank you, Tunc. That's the end of our prepared comments. [Operator Instructions] Operator, please begin polling for questions..

[Operator Instructions] Our first question comes from the line of Romit Shah from Nomura Securities..

How do we think about seasonality of the Wireless business going forward? There's a view that as the smartphone market matures, the seasonality for the suppliers will be more moderate. So in the case of Maxim, December is typically down a lot in wireless this year, though, I think you're guiding it flat.

And so are we seeing this somewhat take place? And as we think about March, does the same theory sort of apply where March has historically been a good quarter for wireless, but looking forward, maybe the seasonality will be more tempered?.

Romit, so thanks for the question. So in terms of our guidance for the December quarter, we actually projected it to be slightly up for consumer revenue. And in terms of looking at seasonality just for the December quarter, obviously, we went through a major inventory correction in the prior 2 quarters.

So we think that a lot of the corrections that we normally see in December, we believe that we've been through that, and that's why this year seems a little bit different. Now your question was more about going into the future, into March. And as you know, we don't quite like commenting that far out.

There are just too many variables for us to be able to figure out what seasonality or unseasonal results we're going to get. And as you well know, there's all kinds of new models coming in.

Frankly, we don't really know in terms of which sockets we've won or we've been able to keep for those newer models, as well as new functions that we actually are competing for that we were not in before. So it's very hard for us to really project any seasonality or any revenues into March, frankly..

I understand. My follow-up is on dialogue, they announced that Samsung has adopted power management solution in one of the Galaxy derivative phones.

How should we interpret that? Is that a concern for you? And I guess tied into that, how do you -- how does your content at Samsung look at this point heading into next year?.

Well, I mean, I think we've talked about it before, I mean, there is -- there are many sockets available and there are different models across Samsung and across other companies as well. And we do our best to win as many of those sockets as possible, but I've said it before, you can't win all of them.

But in terms of the major platforms, we've got good offerings, and it is competitive, but we've got great technology. And the customers definitely are very interested in our products as well. So I think going forward, we've got a good relationship with the customers, and we've got good technologies.

So that's a good combination when you move forward in terms of winning designs and obviously, generating revenue as a result of that..

And if I'm allowed one more question, Bruce, just on gross margin.

Is 59% to 62% the new range to consider going forward inclusive of Volterra?.

No. The slight downtick in our gross margin really has nothing to do with Volterra. As we said before, its gross margins are kind of very close to 60%, plus it's a relatively small part of our business. Our long-term gross margin model is still 61% to 64%. We've dipped slightly down just because utilizations have dropped along with the revenue drop.

So I think we're confident that as the business grows and utilizations tick back up, we'll be back into our long-term model of 61% to 64%..

Our next question comes from the line of Jim Covello from Goldman Sachs..

A couple of questions, I guess. First, I mean, there's been a dichotomy of -- from suppliers in the Samsung. Some folks had talked about things being very weak, even continuing into the December quarter. You guys are obviously talking about things being a little healthier, along with 1 or 2 other peers.

Do you think that's completely a function of sort of how much medicine you took in Q2 and Q3? Or is there some share dynamics that are allowing you to do better in the fourth -- in the December quarter as well?.

Well, if you look at how big of an inventory correction we did go through, I would say that, that absolutely had some effect on our results versus some of the other companies that are reporting. But I also think there's some effect on who's on which model with which sockets. So as you know, there's multiple sockets that are running.

And there's multiple models that Samsung sell, and they ramp them at different times. So it really depends on those 2. We don't exactly quite follow who's on which socket unless we're competing for it. So for us to be able to predict that, it's pretty difficult. But I think it's 2 factors.

Number one, the one you mentioned, which is that we went through pretty sizable correction; and the number two is, it also depends on which phone they're ramping it, what time and who's in those sockets..

That's helpful. On the follow-up, Bruce, you had mentioned the reason for the slightly lower gross margins with the utilization. Can you give us a -- you said utilization was low.

How much would factory loadings need to come up to get rid of those underutilization charges, if you can give us an idea of magnitude?.

Yes. And to be clear, we didn't take a specific FAS 151 utilization charge, but just utilizations were down and that impacts absorption.

And just some numbers, so in Q1, utilizations dropped down to 70%, right? And then we expect them to drop down again in the second quarter, as we kind of reduce our inventory, as we take it from the 110 days and try to bring that down, at least start closer to our target. So from that point of view, that's really what's driving down the tick down.

To the extent that we get back over 80%, generally speaking, we're able to be within our range of 61% to 64%.

The other thing that kind of impacted us in the first quarter was we did have inventory reserves above our normal range for the second quarter in a row, and certainly, we expect that going forward, that those will kind of return to their normal level.

So I think utilization is getting back up over 80%, and inventory reserves coming in at their normal level will allow us to be within our 61%, 64%, where you saw us kind of operate for an extended time period..

Our next question comes from the line of Blayne Curtis from Barclays..

I was wondering if you could talk about just the pricing environment in mobile. And maybe the second part, if you could just talk about the competitive landscape in -- when you look at your optical sensors, it seems like you got a nice pickup with the tablet win that's ramping.

But do you see any difference with competition with those more integrated parts?.

Well, any of these sockets that actually you -- that are opportunities for suppliers, they're obviously very visible and they're large. So they got big targets on them. And obviously, a lot of suppliers want to win those sockets. So it is always competitive.

But as long as we're ahead of the game by one generation or more, and we're able to provide technology to the customer that's interesting to them, we do better in terms of being able to keep the prices that we need in order to participate in the business. So the short answer is, yes, it is very competitive.

But we've been able to stay ahead and be able to preserve the pricing that we need to participate..

And then on my second question, Tunc, I kind of asked this last quarter, but I'll ask it again. When you look at your Mobile business, you had kind of application processor-based VIN PMIC business, you got systems kind of -- or Power SoC, I guess, you call it, and then you got the optical sensors.

You seem to indicate that PMICs were less of a kind of driver for next year.

But when you look out next year, where do you see the biggest opportunities for you in mobile?.

Well, in terms of opportunities, the ones that you already mentioned, the interface Power SoCs, the one that is pretty much in every phone and provides valuable functions, I think that continues to be an opportunity for us. We think that the advanced optical or gesture sensing products, they're an opportunity for us.

We have -- as I mentioned in my prepared remarks, we won some Audio Amplifier business, so that we believe is going to be -- continues to be an opportunity for us. And we've also, as you know, been working on MEMS sensors. They're better -- will contribute some revenue next year. I'm talking about calendar year now.

But it will be just the beginning, so it won't be a huge contributor, probably. And I think in terms of application processor, PMICs, we still continue to make products for some of the other apps processor companies.

And whether those will turn into large revenue or not will depend on whether they're successful or not in winning at the smartphone companies. I'm talking about the apps processor companies now. So it's a combination of all of these.

I think that when we talk amongst ourselves here, we do have a lot of irons in the fire, and exactly which ones are going to be the ones that give us the best revenue return is to be seen. But there's definitely plenty of technologies we're working on and showing customers.

We're showing it to multiple customers, and we're also showing it, since the products are similar, at all different types of applications, smartphones and tablets, mid-range smartphones, as well as e-readers. So they set lots of irons in that fire..

Our next question comes from the line of Tore Svanberg from Stifel..

I was hoping you could talk a little bit more about Volterra and especially, their Server business. It seems like you have the ability to get some critical mass there, or at least make it more of a scalable business.

So could you talk a little bit about that, please?.

So on the server side, specifically in that area, obviously, we believe that Volterra has some great technology to offer. The company in general has good revenue coming from the top 2 server manufacturers, so good wins there going into the future. These products usually have fairly long lives. It's not like the handset market.

The design wins are done, and then they sell for a long time, which is good. We believe we do have other opportunities in -- for instance, that are really not very well tapped into in areas outside of the top 2 customers, such as cloud, servers and so on, and microservers.

So that's an area that we're really going to go after more aggressively than Volterra could because we have a much wider reach in terms of our sales force. So there's opportunities outside of the top 2 customers, and those are the ones we're going to pursue. But as I said, those design wins take time, and the revenues take time to build as well.

And that's why when we did our announcement, when we said that in terms of revenue growth, it's not going to come in the short term, it's going to come in the long term..

Understood. And my follow-up is on Automotive. It's had 3 nice good quarters now. It seems to be in a pretty strong momentum.

Are you prepared to start breaking out that as a percentage of revenue? Or could you, at least, give us a sense of how big that business has become?.

I'm sorry, I missed the first part of your question, can you repeat?.

Yes. So your Automotive business has been growing 3 consecutive quarters, and it's hitting momentum. So I was hoping you could give us sort of a relative size of the business, so we know how to model it going forward..

Yes. So the Automotive business, we really decided to get into it, and sort of kind of gives you an idea of how long it takes to build revenue in our business. We started maybe 6 or 7 years ago to see some revenue. It was in the -- that's like 1% or 2% back then.

We're getting into the mid-single -- mid to high single-digit range now, and it keeps growing. The good news about automotive is, once you start growing the business, it continues to grow for a while because new design wins are layering up on top of old ones which don't go away. So it is a market that we like.

And as we've said before, the market size is expanding because of contents in the cards going up, and plenty of opportunities for a lot of analog and mixed signal. And a tremendous need for integration in that market, because as you know, the reliability depends really on keeping the component count down.

So it's just playing right into our strategy, and we think that it's going to keep growing going into the future as well..

Our next question comes from the line of John Pitzer from Crédit Suisse..

Tunc, I guess, one of the big issues for, not only you guys, but the entire industry this calendar year was just the fact that expectations for high-end handset smartphone growth this year just disappointed.

I'm kind of curious, do you think that this is going to be -- end up being an anomaly year, and that growth is still there, or that the market is saturated? And I'm really asking the question because you guys, more than most, really exploited the high end of the market.

And so I'm kind of curious if you think about mobility going forward, what's the right longer-term growth rate in that business that was sort of 15% to 25% year-over-year growth for you guys pretty consistently over the last couple of years.

What do we -- what should we think about the long-term growth rate opportunity there now for you guys?.

Well, I think, partially, we all somewhat got spoiled by the fact that we were in a large market growing, depending on which year you looked at it, anywhere from 30% to 40% per year. And we took advantage of it, I'm glad we did. But you know that at some point in time, you can't continue growing something large at 40% per year.

So that growth rate has slowed. It's not like it's a declining market. It has slowed, but it is still growing. And the growth right now, more of it is occurring in the mid-range space. But the high-end smartphones are also still growing, even though at a small rate.

So from our strategy point of view, we still continue to focus, number one, on the high end because that's where all the technology, the advanced technology gets developed. And then we take that technology that we develop and we leverage it into low-end phones.

And the content in the low-end phones obviously is less than high end, because they're mid-range, because there is less functionality, meaning, there's less analog content. So I think our strategy is going to -- is working well because we still have lots of opportunities in the high end.

It will grow slower, but we do have newer sockets and newer technologies we're going after, so that continues. Number two, in the mid-range, we just leverage the technology we've already developed and go to more customers where we can win those sockets as well.

Frankly, we're not -- we're looking at the low-end, and that's not looking very attractive, so that's not part of what we're going after as a strategy. So my view and our view collectively in the company is that this is -- continues to be a good market.

It's not growing 40%, 50% a year, but it's still growing, and there's still plenty of analog content to go for. And the company's overall share, global share is relatively small compared to the available market in smartphones in general.

So I think the way it's going to shape up, in my view, it's going to continue to grow, but not at the levels that we saw in the past 3 years..

And then, Tunc, last quarter, as you guys kind of hit this soft patch in smartphones, you talked about in the conference call, returning to growth in calendar year '14. And from a sequential basis, it looks like you're doing that in December.

I'm just kind of curious, do you think that all of '14 could end up being a growth year for mobile for you? Or the first half compares this year just going to make that a tough accomplishment?.

Actually, thanks for noticing that, because it is -- you're right, it did go up in the December quarter. However, looking deeper into the year, as I said before, I think, Romit had asked that question. There's just too many variables for us to be able to tell. You've got obviously the success of our largest customers' phones.

We've got -- we don't have equal content at each customer, so it depends on how each one of them fares against the other. And finally, we're also trying to make sure that we maintain the current sockets that we own, and we're working on sockets that we didn't have before, new functions that weren't there.

So there's just too many variables for us to be able to predict. But I think that next year, we're looking forward to it, and we're making the right moves to make it grow. But how it turns out, it's very difficult to tell..

Our next question comes from the line of Craig Hettenbach from Morgan Stanley..

This is Anai Crow [ph] dialing in for Craig.

As you guys look to further diversify your handset business, it's like how are you positioning your broad portfolio to participate in the growth in the Chinese handset market?.

Okay. So obviously, there's a lot of customers in China, they're up and coming, they're growing very fast. And what essentially we do for that market is, as I said before, we took our technology that we've developed. For instance, I'll give you an example on the power area, because that's pretty lucrative.

We can take the interface Power SoC we did and we developed for our major customer. And we're really able to take that and customize it for what the top Chinese manufacturers want and offer to them as a great solution.

And that's one example where we can take technology we've got for high-end smartphones and really move it into other markets, other customers, as well as mid-range phones, for example. So we do have relationships, and we are pursuing design wins for all of our offerings with those customers as well.

Now having said that, I said they're growing fast, but they're still -- compared to the 2 large customers in the space, they're very small. And I know that all of you know that, but it still is part of our strategy, as you said, to diversify the customer base, and we're definitely making progress in that area..

And as for my follow-up, on the MEMS sensor side, like, what's the initial customer feedback, and how's the process of sampling going on?.

Yes. So on the MEMS front, we had, in our 6-degree of Freedom product, we did start sampling that. We talked about it on our previous calls. Our customers, in general, liked the performance.

The main advantage that they've seen, and we really worked for, was to provide the level of stability to provide good indoor navigation service to our customers, and they definitely see that advantage.

But it's not -- it is pretty competitive because other companies buying products have some other features and other performance that might be better than ours. So it's really a tradeoff for the customer. And they're looking at our products and the competitors products, and trying to make a decision.

But in general, the feedback we had received was good, but it's not like we were able to beat everybody on every single specification on the product..

Our next question comes from the line of Chris Danely from JPMorgan..

Can you mention the synergies with Volterra? Can you maybe talk about how OpEx should trend after this quarter? And then also, maybe talk about your expectations of Volterra growth versus core Maxim growth after this quarter?.

Sure, I'll handle the OpEx, and let Tunc talk about sort of the long-term Volterra growth. As you know, we've identified about $15 million worth of annualized synergies that we should be able to achieve. I think we feel very confident we're on track for that. We probably got about half of that achieved in the current quarter.

It's offset a little bit by just some integration costs. But I think we're confident that we'll be able to achieve that $15 million annualized target after the March quarter. So from that point of view, that will provide a little bit of a down draft on our current OpEx. As far as the kind of organic Maxim business, we'll have to wait and see.

Obviously, we don't have -- we've kind of made it through and Q2 is when we have the full quarter impact of our merit. And then going forward, obviously, you've seen us kind of being very good at managing and being disciplined in our OpEx.

And certainly, we'll do that to the extent that we see opportunities for growth and our revenue and margin support it, we'll obviously continue to invest in the appropriate growth markets..

So on your other part of your question was in terms of top line of revenue. We do -- I've said this before, when we acquired the company in our justification, we don't really expect the revenue to grow for the next couple of years.

Volterra products in the notebook market are basically going down, and that was a result of Volterra management basically reducing the amount of investment in that space, and that's offset by growth in some of their Comms and their Server business.

So we know going in that for the next 2 or 3 years, there's really not that much growth in the opportunity. But there is, because of wins that we believe we can get, they have very small penetration in the communications market, and their products are very applicable there.

But as you know, when you win those designs, it really takes 2 or 3 years for them to begin to show up as revenue. So that's -- in that space, it's going to take a while. And there were 3 other growth factors, I had mentioned. It was solar space, the integrated voltage regulators, as well as some battery products.

And those 2 will take about 2 or 3 years to become sizable revenue. So we're -- now that we're more into and see the business better since the acquisition got completed, we basically see that, that's -- that plan is -- continues to be valid. And essentially, that's the drumbeat that we're marching to as a company..

And for my follow-up, Tunc, I'd just be interested in your opinion, if we to sort of x out the volatility of Samsung, what's your opinion on what's going on in semis right now.

Are we in a normal seasonal environment? Are we taking a bit of a breather here, and we're below seasonal, and anything you can give us on just the overall demand environment and why?.

Well, I think every company is kind of seeing -- it's almost like many of the companies are on some different cycles than what happened. It's like if we take out mobility, which obviously for us has a huge effect, we, too, see some seasonality in reduction, for instance, in industrial market for this quarter.

But we are investing in some of the other markets, the vertical markets, which kind of have their own pattern. So that's really changing the results that we're getting in terms of our revenue going quarter-over-quarter.

But I think in terms of what we're seeing, like in the industrial core space, it's really not that much different than what others are seeing. And I think that we're not -- there's no surprises in that core business from our point of view.

But what we are seeing is some positive signs from our other markets, especially the vertical ones, and that's really helping us in terms of our results or our forecast for, especially, the December quarter being so different.

Now having said that, we -- one piece of information that Bruce and I actually wanted to share was that, we, in general, the October, so far, bookings have been lower than the average booking rate that we saw in the prior quarter.

And I really believe that, that is -- that's probably what's happening to our other competitors as well, and that probably has something to do with the guidance that everybody else has provided. When we look at historical data though, October usually is a weaker month than the prior quarter average.

So from that point of view, it doesn't look like there is an alarmingly low level going on. But I think everybody has their own way of interpreting the data. And from our interpretation, that's how we came up with our guidance for the quarter, which appears to be higher than some of the peers -- peer companies that we compete with..

Our next question comes from the line of Aashish Rao from Bank of America..

Tunc, why has it been so hard to break into the other big smartphone vendor? You guys have best-in-class integration technology and content is also growing.

Is it a pricing issue, or is it just hard to displace an incumbent at that customer?.

Well, it's kind of hard to really completely take -- separate pricing from hard to replace an incumbent because they're always combined. But being an incumbent is always a better position to be in, and that's certainly something we enjoy at the other big customer.

But it's not very easy unless the incumbent has some major flaw to completely displace them. But as we've said before, I mean, with the second customer, we also -- which we do have business with them, we just don't disclose it, because they want to be very private and we respect the wishes of that customer.

But we do have business with them, and we compete with other suppliers at that customer, and our revenues are significant. But obviously, they're not currently above the 10% level that we -- at which point we do have to report it. So we're working closely. We've got a good relationship.

I have -- I believe that at some point in time, we're going to grow our revenues with the customer. But it is, as you pointed out, incumbents do have an advantage when they're in those sockets already..

Good. And then perhaps, one for Bruce.

Bruce, could you provide some color on what's the current internal capacity on a revenues basis and what end-market products are manufactured in-house? And also is there a manufacturing node transition? I think you've been at, like the 0.18 node for like 3, maybe close to 4 years now, that you can make to kind of improve your cost competitiveness in mobile?.

Sure. So currently, I mean, we have -- with our flexible manufacturing model, and we have probably over $1 billion, right around $1 billion of quarterly capacity. Of course, that depends on sort of the mix of products that make that up. And from what we do internally and externally, we have 3 different foundry partners.

And certainly, our newer technologies, for us, the 400-nanometer and the 180 are the ones that we can do externally. And in general, those are in the consumer and some of the computing space. But some of those do fall into other areas, like automotive, et cetera. And generally, our industrial products are done primarily internally.

Our goal is to always be able to build products in multiple fabs, whether internally or externally, so that we have that flexibility to scale up to the extent that a certain market sees an uptick in demand. As far as the specific nodes, I'll let Tunc talk about that..

So the current workforce for most of our Consumer or Mobility business is, are 180-nanometer BCD processors. We did mention in the past that we're working on a newer generation of that, and I really expect that to qualify into production, probably next year some time. So it's definitely in the works, and it's coming.

And we'll see a transition in the coming years, but 180-nanometer will be most of our revenue generator for awhile..

Operator, given the time constraints, we'll go with just one question per caller, and if there's time at the end, they can always ask a follow-up..

Our next question comes from the line of Doug Freedman from RBC Capital Markets..

Tunc, just to follow on that last question, the 0.18, you said there's a new generation coming.

Is that just an upgrade, and you're going to still be on that 0.18 node?.

No, it's going to be finer line than 0.18..

Okay.

Can you talk about what you guys are seeing out there in the market in terms of inventory outside of sort of your handset customers, and if you think those inventory levels are adequate at this point?.

Bruce, you should take that one since distribution is you..

Sure. Yes, I mean, I think we called out distribution actually went down, from 53 to 52. We actually did see a little bit of growth in absolute dollars in inventory. But resales more than offset that, right, resales were up 5%. And so from that point of view, the days actually went down by 1%. So I think the channel inventory continues to be lean.

It just simply doesn't want to go up, and I think it's just because of folks continuing to -- we're looking at our distributors continuing to be cautious from an inventory build point of view. It keeps getting harder for us to check inventory levels in our ODMs and OEMs, alright.

As these are large customers with manufacturing around the world, it's getting harder for us. So we're not aware of any inventory buildup at this time. But that said, I think it is harder for us to track that at the OEMs and ODMs..

Our next question comes from the line of Mike McConnell from Pacific Crest Securities..

Bruce, looking at something that stood out to me was the 3-month backlog. I think if we adjust for Volterra, it was up about 9% sequentially, which is definitely better than most of your peers and book-to-bill above 1.

Could you kind of talk about what's driving the backlog? Is this just that industrial customer base, kind of calling for deliveries at a later time, or maybe some color there, please?.

Sure. I mean, I think as we went into the first quarter, right, I think backlog was low as we went through the inventory correction, certainly, at our largest customer. And so then as we entered the quarter, we had -- Tunc talked about how book-to-bill was greater than 1.

And so that usually happens where you get some good bookings in the first quarter to really set up kind of the first couple of months in the second quarter. One thing though that you will see is, generally speaking, the turns in our second quarter historically have been less than in other quarters.

And we've seen this trend, and that's for a couple of reasons. One, customers are doing shutdowns, managing their kind of year-end inventory level, and to the extent that our largest customer at some level will continue to manage their balance sheet as well in the month of December.

So I think it's just -- we see the uptick in the backlog, obviously, compared to the prior quarter when business was declining. And we also see that this is a lower turns quarter. So it's typical to start up high and then come down..

Our next question comes from the line of Steve Smigie from Raymond James..

Just a follow-up on the Industrial business you guys have had, a lot of success in terms of driving your application-specific products.

The question is, are there any big, new products coming out in that market? And if you have time, just a quick comment on Volterra, where you guys are seeing some synergies coming through, reducing some stuff, but at the same time you're saying you're going to be adding some resources there.

So what's being added and what's being reduced?.

So in terms of the industrial verticals, in terms of products, I think we talked about previously, where we're investing. I mean, we're investing in smart grid products and meters, and those products are coming.

We've added capabilities in our newer generations to not only do the metrology but also do security, as well as the communications processing of the data. So lots of great technology in the works there and announced already. We've got products coming in the medical space.

We've not announced any of these yet, but we're really making great products that can have -- that have a combination of measuring things very accurately, which is needed in medical. Plus, the ability to do extremely low-power micro-controllers on the same chip.

We've got great technology that we actually recently announced for ultrasound, where we integrated multiple channels into a single package, really reduced the component count by an order of magnitude or more, and we've got newer generations of that coming.

So there's plenty of products and technology in development in all these vertical markets, and I just gave you a few of the more visible examples in the recent past. Your question about Volterra was adding, and I didn't quite understand that last piece.

You said there were synergies? And you said we also talked about adding more resources, I don't think we've said that..

I think you're saying Volterra will be able to leverage what's at Maxim, maybe that's just the sales force or something, but it seemed like you....

So most of that is, obviously, the Volterra, a very small sales force. They were very focused in terms of customers. And what we're really doing in terms of selling their products more effectively is just using our sales force. Remember, we're adding more people.

We already had a very good coverage around the world, and we're going to make sure that we train our field employees so they can effectively sell the Volterra products to the customers. They already are visiting almost on a daily basis. So that's not additional resources..

Our next question comes from the line of Craig Ellis from B. Riley..

Bruce and Tunc, I wanted to understand the revenue mix within the Consumer Mobile business across power sensors and audio, and get your view for how that mix could evolve over the course of next year..

Yes. It's something that we're pretty sensitive about and don't -- we prefer not to disclose that for various reasons. And the most important one for competitive reasons, and the second one is customers wouldn't really appreciate us talking about their -- about the price of these because they're pretty concentrated.

So we don't break out how much of the revenues in each one of the functions.

Is that your question, or did I misunderstand it?.

The question is just trying to -- and it wasn't trying figure out what's going on with your biggest customer. The question was getting at where you thought there could be growth inside the portfolio next year.

So if you can't take that one, then the follow-up question would be, in the Medical business where you've got an inventory issue with one customer, what gives you confidence that it's just a normal inventory issue and not a market share issue?.

Let me see..

So I'll take that one. On the medical side, that's really, obviously, we're able to track to the extent that they shift into various CMs, and this was just an example where they actually had brought on a second CM, right? And so there was just an initial kind of buildup of that.

And now, we're just going to kind of normalize between those 2 CMs, the amount of inventory that each one is keeping. So from this point of view, we're confident from a socket point of view that we have the business, and this was just an inventory rebalancing as they brought on a second contract manufacturer.

So I don't think there's too much worry there. And I would say just a little color on your earlier question.

One of the challenges we have is, to the extent that we're doing integrated products at this point in time, it's actually getting harder now to separate out, I mean, I'll say, internally to say exactly how much we have in power versus audio versus interface. Those are the type of things that -- it's hard for us to even track that internally..

Our next question comes from the line of Ambrish Srivastava from BMO Capital Markets..

Bruce and Tunc, just thinking to the long-term operating model, what is the right way to think about it, because last time, you gave it to us when you had a big consumer ramp in front of you, and now that has slowed down. But the flip side is that your industrial and other businesses should grow.

So longer term, not next year, but just 2 to 3 years out, what's the right way to think about it?.

Yes. Good question. We still firmly believe in our model. And I think to the extent that we're at a 25% operating margin today, that actually provides a nice upside for us. We still believe in and target the kind of the 30% op margin number. We talked about earlier on the call, I think absolutely, the 61% to 64% gross margin is still our model.

And you've kind of seen us demonstrate a lot of discipline around our OpEx. And so from that point of view, driving that number from where it currently is 35% of revenue, right, trying to get that down to something closer to 30% or 32% will provide additional leverage for us as well.

So still, with our mix of business grow a little bit faster, 61%, 64% growth, manage the OpEx tight, and drive the kind of 30% op margin, which is a nice upside from today..

Our final question comes from the line of Stephen Chin from UBS..

A question on the Communications business. You mentioned that you're seeing a little bit of a rebound in telecom spending from China, and it's flowing through to your optical and also your PlayStation business.

I was wondering for the -- for fiscal Q2 and maybe even further beyond this, if you have visibility, if you expect that to be a lumpy business as it's traditionally been? Or if you see a more steady consistent spending patterns going over the long term?.

Yes. The fiber communications products that we sell in the markets that these go into, historically, have always been lumpy. We -- not only because of the spending being lumpy, but also we see lots of inventory in the channel fluctuating a lot, especially in the Optical Module business. So that's been in the past.

And I think it'd be very similar in the future, I don't think the general dynamics in that market are going to change. So it's going to be lumpy just the way that you characterized it, in my view..

Thank you, operator. This concludes our Maxim Integrated conference call. We'd like to thank you for your participation and for your interest in Maxim Integrated..

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