Kathryn Ta Bruce E. Kiddoo - Chief Financial Officer and Senior Vice President Tunc Doluca - Chief Executive Officer, President and Director.

Christopher Hemmelgarn - Barclays Capital, Research Division James Covello - Goldman Sachs Group Inc., Research Division John W. Pitzer - Crédit Suisse AG, Research Division Amanda Scarnati Romit J. Shah - Nomura Securities Co.

Ltd., Research Division Evan Wang - Stifel, Nicolaus & Co., Inc., Research Division Ross Seymore - Deutsche Bank AG, Research Division Craig Hettenbach - Morgan Stanley, Research Division Shaon Baqui - JP Morgan Chase & Co, Research Division Ambrish Srivastava - BMO Capital Markets U.S.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division Aashish Rao - BofA Merrill Lynch, Research Division Michael McConnell - Pacific Crest Securities, Inc., Research Division Mark Lipacis - Jefferies LLC, Research Division Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division.

Good day, ladies and gentlemen, and welcome to the Maxim Integrated Second Quarter of 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, Kathy Ta, Managing Director, Investor Relations. Please go ahead, Kathy..

Well, thank you, Jonathan, and welcome, everyone, to Maxim Integrated's fiscal second quarter 2014 earnings conference call. With me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer, Bruce Kiddoo.

Before we get into today's earnings announcements, I would like to invite everyone on the call to please save the date of Wednesday, May 21, 2014, for Maxim Integrated's Investor Day to be held in Boston. 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 on 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, Kathy. It's great to have you on the Maxim team. I will review Maxim's second quarter financial results, which includes the results for Volterra. Revenue for the second quarter was $620 million, up 6% from the first quarter. The growth was due to the addition of Volterra, as our organic business was flat in line with our guidance.

Our revenue mix by major market in Q2 was approximately 39% for Consumer; 28%, Industrial; 16%, Communications; and 17%, Computing. Our Consumer business declined due to the typical year-end inventory correction at our largest customer and weakness in home entertainment, offset by strength in tablets and e-readers.

Our Industrial business was flat as continued growth in Automotive, up for the fourth consecutive quarter was offset by a seasonal decline in our core Industrial business. Our Communication business was up with strength in networking and Datacom and the addition of Volterra. Finally, our Computing business was up due to the Volterra acquisition.

Maxim's gross margin, excluding special items and warranty expense, was 61.1%, up slightly from 60.7% in the prior quarter, due to lower inventory reserves in Q2. We had $18 million in warranty expense in Q2, which had a 3-point impact on gross margin. This was primarily driven by a legacy design issue with a major customer.

We have implemented corrective actions to prevent this issue from recurring. Historically, warranty expense has averaged around $250,000 per quarter over the last 4 years. Special items in Q2 gross margin were intangible asset amortization and inventory write-up from acquisitions, increasing from the prior quarter due to Volterra.

Operating expenses, excluding special items, were $226 million, up from $207 million in the prior quarter, due to Volterra and the impact of our annual merit increase and equity grants. Operating expenses were lower than expected as we continue to tightly control spending.

I am pleased that we are ahead of schedule in achieving our $15 million target in annual operating synergies from Volterra and expect to achieve this target in Q3. Special items in Q2 operating expenses included acquisition-related and restructuring charges, again, the increase from the prior quarter primarily due to Volterra.

Q2 GAAP operating income, excluding special items and warranty expense, was $152 million or 25% of revenue. Including warranty expense, operating income was $134 million or 22% of revenue. The Q2 GAAP tax rate, excluding special items, was 20.3%, up from 17.3% in the prior quarter, primarily due to Volterra.

GAAP earnings per share, excluding special items and warranty expense, was $0.41, flat with the prior period. Including warranty expense, earnings per share was $0.36. Turning to the balance sheet and cash flow.

During the quarter, cash flow from operations was $234 million or 38% of revenue, up from the prior quarter due to repayment of our annual -- due to the payment of our annual employee bonus in the prior quarter.

Inventory was 110 days, excluding special items, warranty expense and the Volterra inventory write-up to fair value, flat with the prior quarter. Inventory was 104 days excluding special items but including the favorable impact of the warranty expense and the Volterra inventory write-up.

Inventory in the channel, excluding catalog distributors, decreased slightly from 52 to 51 days as channel inventory in dollar terms increased, but was more than offset by an increase in resales. Net capital additions totaled $37 million in Q2, down slightly from the prior quarter and at the midpoint of our target of 5% to 7% of revenue.

The net payment for Volterra was $454 million, and the net proceeds of our bond offering was $494 million. We issued 5-year bonds with a coupon rate of 2.5%. Share repurchases totaled $59 million in Q2 as we bought back 2 million shares. We also paid $73 million in dividends to our shareholders.

Overall, total return on capital for calendar year 2013 was 127% of free cash flow, in part due to higher share repurchases. Overall, total cash, cash equivalents and short-term investments increased by $115 million in the second quarter to $1.15 billion. Moving on to guidance. Our beginning Q3 backlog declined to $366 million.

It is typical for our beginning backlog to decline in Q3 as our largest customer annually reduces inventory and bookings in Q2. Based on this beginning backlog and expected turns, we forecast Q3 revenue of $590 million to $620 million. Q3 gross margin, excluding special items, is estimated at 60% to 62%.

Q3 gross margin will be impacted by the lower utilizations in Q2 which impact gross margin on a quarter leg, offset by expected favorable mix and lower inventory reserves in Q3. Special items in Q3 gross margin are estimated at $23 million, primarily for amortization of intangible assets.

This includes $5 million of inventory write-up related to the acquisition of Volterra, which is fully amortized in Q3 and does not repeat in Q4 or later quarters. Q3 operating expenses, excluding special items, are expected to be down approximately 2% due to continued tight spending controls.

For Volterra, we expect to achieve our annual synergy target of $15 million in Q3 ahead of schedule. Special items in Q3 operating expenses are estimated at $5 million, primarily for amortization of intangible assets. Our Q3 cap rate, excluding special items, is estimated to be within our long-term range of 16% to 20%.

For Q3 GAAP earnings per share, excluding special items, we expect a range of $0.37 to $0.41. Net capital expenditures in Q3 are expected to be down slightly from Q2 as we continue to lower our CapEx as a percent of revenue. We expect share repurchases in Q3 to be consistent with the prior quarter, adjusted for market conditions as appropriate.

And 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 Tunç to further discuss our business..

All right. Thank you, Bruce, and good afternoon to everyone on the call. We appreciate your interest in Maxim Integrated, and thank you for joining us today. Every year, I spend time visiting our global offices, discussing our company direction and strategy with employees and soliciting their inputs. Today, I happened to be joining you from Munich.

Bruce and Kathy are at our headquarters in San Jose. As 2014 gets underway, we are seeing growing design win momentum in our Consumer and Automotive businesses.

These markets were certainly showcased at the recent CES show in Las Vegas where highly integrated, small form factor and low power solutions appeared in mobile devices, wearables and new automotive applications. In addition to our momentum in these areas, I'm very pleased with our progress in integrating Volterra Semiconductor.

As Bruce mentioned, we are ahead of our schedule in achieving operational and financial synergies.

Volterra's employees have already moved into our San Jose headquarters, and as our engineers begin to work together, we're seeing many ways in which Volterra's high current power management technology and expertise is enabling Maxim to enjoy significant time-to-market advantage in enterprise and communications applications.

Let me now discuss the results for the December quarter. We achieved good revenue performance in our December quarter despite a soft industry environment. We exercise good spending discipline, and I would like to thank our team here at Maxim for good execution in the quarter. So let me update you on lead times and bookings.

Our delivery lead times increased slightly but still remained at our 4-week model. Customer order lead times were flat from the prior quarter. Bookings decreased during the December quarter due to an inventory correction in the consumer market as expected. So I will next provide some color on our major markets. Let me start with Consumer as customary.

We expect our March quarter consumer end market revenue to be down significantly with March being a seasonally soft quarter for Mobility products outside of our largest customer. We expect this seasonality to be partially offset by the beginning of a new platform brand at our largest customer.

Current indications are that our content will increase in the new platform. We are diversifying our exposure within the Mobility market in several ways. First, we're growing our revenue and content in the midrange smartphone market with significant growth in China.

Our success here has been driven by the technology, design IT and systems expertise that we developed for high-end smartphones that has now become a requirement in midrange phones as their feature set becomes richer. Second, we continue to expand our technology offerings for mobile devices.

Our portfolio of mobility products includes power management, optical sensor, MEMS, audio amplifier and touch products. We assume momentum in the technology roadmap in the audio amplifier space and in the quarter, received our first order for our next-generation audio amplifiers at a major customer. We continue to develop sensors for new applications.

Our high integration interface power system-on-a-chip remains best-in-class and a customized version of this product continue to be designed in at multiple customers. Third, we are expanding beyond smartphones with games in tablets and e-readers with a significant portion of this business diversified beyond our leading customer.

And finally, wearable devices such as smartwatches are a logical next step in the mobility roadmap, which plays to our strengths in highly integrated small form factor and low power solutions. Let me next turn to the Industrial market.

Our differentiated strategy in Industrial where we generate roughly half our business from targeted vertical ASSP markets continues to serve us well. We predict March quarter industrial revenue to be up strongly, driven by growth in Automotive, favorable seasonality in our core Industrial business and strength in medical applications.

In Automotive, we see broad-based ramps in infotainment and LED lighting applications. Year-over-year, we have grown the number of automotive design wins in our pipeline and have seen the majority of our growth coming from new products.

Our highly integrated medical products, which address ultrasound, blood oximeter and blood glucose measurements, are gaining traction. We're excited about the growing need for portable, low power, and biomedical monitoring devices in medical markets. Let me now provide some commentary on our Distribution business.

Days of inventory was 51 days at the end of the December quarter versus 52 days at the end of the September quarter. These low levels of inventory appear to be the new normal in our industry, and we see strong end market bookings in our distribution channels.

I would like to note that distribution resales and end market bookings placed on our distributors were both up 5%, sequentially, in the December quarter. Now, let me discuss Communications. We project Communications revenue to increase in the March quarter.

We're seeing an uptick in our fiber optics and base station businesses related to the 4G LTE infrastructure rollout in China. We also see growth in our small cell business driven by market traction of consumer femtocells.

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.

In the Computing market, revenues are expected to be down significantly in the March quarter due to an expected decline in the notebook business and some softness from U.S. OEM companies selling servers in China.

With Volterra, we're seeing the high density, efficient power management solutions are increasingly critical in servers, storage and a broad range of applications. And we're excited about the potential of this technology roadmap.

To summarize our view for the March quarter, we expect revenue from the Industrial market to increase, led by automotive applications and seasonally higher core industrial sales. We expect Consumer to be down with seasonal softness, partially offset by our shipments for a new generation smartphone from our leading customer.

Communications is expected to grow from fiber optic infrastructure buildout and base station deployment, and Computing is expected to be down over the period. 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. Kathy, I'll now turn the call back to you..

Thanks, Tunç. That concludes our prepared remarks and we would now welcome your questions. [Operator Instructions] Jonathan, please begin polling for questions..

[Operator Instructions] Our first question comes from the line of been Blayne Curtis, Barclays..

This is Chris Hemmelgarn on for Blayne. First off, could you guys talk a little bit about how Volterra did in the quarter? Last quarter, you disclosed the revenues.

Any color on what contribution they had this quarter?.

Yes. This is Bruce. I'll take that question. So we highlighted in the press release that our revenue was at $35 million which was, in essence, flat with the prior quarter. As expected, we saw the server business up a little bit and offset by the expected decline in the notebook business. We feel good about the integration.

As I indicated, we're ahead of schedule on achieving our $15 million in synergies. We expect to achieve that this quarter, in the March quarter, which is a quarter ahead of our original plan.

And as Tunç indicated, from a business and technology point of view, we've moved the team into our headquarters here and they're already starting to work with the different product lines and kind of distributing that Volterra technology across the company.

So I think from a finance point of view, operational point of view and technology point of view, we feel good about Volterra and believe it's on track..

Very helpful, thanks. Just a quick follow-up then. So you talked a bit about diversifying away from purely handsets.

What percentage of revenue were smartphones during the quarter, and I guess, could you talk about the trajectory of how tablets and e-readers become a little more -- or a greater share of your overall revenue?.

Sure. I'll handle the first one and I'll let Tunç talk about the second one. So cell phones were about 30% of revenue in the quarter.

When we add in the handheld devices, we're probably at about 35% of revenue for the quarter, which is down from when we were in the kind of the high 30s to 40% range as we have continued to, a, this is a light quarter for our largest customer and we've had the continued growth in Industrial. But Tunç, maybe you can give some more color there..

So, I think your question was really what's our projection for tablets as we try to grow other product areas than smartphones on our revenue base. So we've been participating within the top mobile ecosystem players in both tablets and e-readers.

In particular, we've won sockets in power management, overvoltage protection, fuel gauges and audio amplifiers in these applications. And we really see a great momentum in the technology roadmap in the audio amplifiers space. And the quarter received, actually, our first orders for next-generation audio amplifiers at a major customer.

So we're -- I'm quite pleased with the fact that we're growing our revenue coming from tablets and e-readers, which we consider pretty similar in terms of the way they're built. And we really look forward to growing this revenue even further in the future..

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

I guess, just to characterize the weakness at your largest customer, if you could just talk -- give a little of granularity on how much of that is just end market related, in other words, the sell-through of the product versus them still having too much inventory in certain SKUs.

And I know some of that is circular, but if you could give us some color there..

Thanks, Jim. So I think in the -- when you say the weakness, so I think it was the December quarter. We saw the expected inventory correction. I think it was a little bit more than we thought. I think we thought Samsung was going to -- and I think we gave guidance that Samsung was going to be flat for the quarter. And they did end up being down slightly.

And again, I think that was on some of the newer products where I think they were managing their inventory a little bit more than we thought. When we look at the March quarter, I think, as Tunç stated, in the current indication, that our unit content will go up kind of on the new platform versus the S4.

Of course, we can't give any more detail until that phone is announced. But I do think it's also reasonable, I mean, again, indications are, that, that ramp will probably be late in the quarter. And that it may be even more major than last year as they kind of learned from experience.

So I think our view is, I wouldn't characterize our -- that business as a weakness. I think it's doing very well. We feel good about how we're positioned, how we're growing both in the high end and in kind of their midrange phones and in their tablets. So I think we feel good about that business going into calendar year '14..

That's very helpful. If I could ask my follow-up on that point. Obviously, the market's been very concerned with your content coming down in some flagship phones. And obviously, this is a good indication that the content's actually going up in some of the important SKUs.

Can you give any more granularity about which specific products you're seeing the content increase in?.

Actually, no. Until the product's really announced by our end customers, it's really something that they'd like us not to comment on specifically. So we're not going to be able to give any color on what it is until they do announce the product.

And then obviously, the teardown will tell everybody what's in there and what our content of revenue's coming from. So, sorry, but until then, we can't really talk about exactly what functions we have inside the phone..

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

Tunç, I guess, my first question, I know there's a lot of variables that go into this.

But given where you're starting out the year in consumer/smartphones and kind of the trajectory you see throughout the year, do you think this is a year, '14, where you can get back to a resumption of growth for the full calendar year in consumer/smartphones?.

So we actually feel good that adding new customers' content and platforms will contribute to our growth in calendar year '14 from calendar year '13. We've got -- we're competing in new sensors and opportunities that the market hasn't yet seen.

Having said that though, although I'm feeling positive about this calendar year, we can only provide guidance 1 quarter at a time. But the progress I'm seeing that we're making in our business units is very promising and we continue to expand our technology offerings and target market opportunities.

In technologies, we are getting wins and obviously, in powers, continue to do so. But new wins in optical sensors, new wins in audio, as I mentioned, and although small, we are seeing some growth in our touch products. And we have, as I indicated previously on the tablet question, seen good growth in that area as well.

So, we're -- all the right things are happening. But in terms of guidance, it's really not appropriate right now to tell us -- tell you exactly what '14 versus '13 is going to look like. But the indications are positive..

Thanks. And Tunç, I guess, as my follow-up, I want to talk a little bit about the communications end market. There's been a decent recovery over the last couple of quarters, but you're still well below kind of the peak quarterly run rates we saw at the end of 2010.

I'm just kind of curious, there's been some read across about LTE China buildout finally starting to happen.

How do you feel about the trajectory of the comms business from here, and I guess, what needs to happen to see that quarterly revenue run rate get back to sort of that high 120s to maybe even 140 level?.

Well, I think that when you look at the explosive growth periods that -- when we look at that data, what we see is that much of that happened during the bounce back after the financial crisis or the Great Recession, whichever one you want to call it.

We are participating in the 4G LTE rollout in China, basically through the optical and backhaul segments. And we've seen limited deployment so far of our outdoor LTE small cells, that was going to be another growth area that we were investing in.

But we believe that service providers and carriers are in, really, their early stages of testing small cell deployments. So these are still early days and I know we've been saying that for a while, but that's the fact.

And on the other hand, we do expect femtocell shipments to continue to grow, and Maxim has a leading market share here due to our ability to deliver the highest integration, lowest cost and high performance integrated CDMA or 3G femtocell transceivers.

But in essence, those explosive growth rates that we saw were in a period where the whole market was really growing very rapidly after almost 1.5 years or 2 years of little to no investment by the service providers. So I think we're well positioned and sometimes, the question also is asked about base stations.

But base stations are too small of a percentage of our revenue, so they don't really have a huge effect on Maxim overall..

Our next question comes from the line of Terence Whalen from Citi..

This is Amanda Scarnati for Terence Whalen. I just have a question on gross margin.

What are the considerations that we should look for, for Volterra in the future for gross margin and are there any changes for the long-term model at this point?.

Sure. So Volterra free acquisition was about 58%, I think, in their last quarter. And as you know, we don't break out gross margins by our various end markets. And so, kind of going forward, we won't be doing that for Volterra either.

What we -- I think it is fair to say that this is a -- there's a product mix changing right where the notebook business is going to go down and that should be supplemented by the server and in longer-term, by the Communication business.

And so, I think, long term, our expectations are that, that gross margin will increase over time and be kind of right in the range of the corporate average of 61% to 64%..

Great.

And then also on Volterra, are there any new market share projections for this server business given the upcoming Intel platform changes?.

Yes. Actually, we're -- as Bruce said, we're -- we kind of don't want to break out exactly what our product line shares are. So it will be reported in the future as part of our mostly Computing, and we are investing so that we can also grow the communication sector.

But the design win momentum has been good and there's new processor models that are ramping in the near future, it actually have started already. So the content is good for the Volterra products. But just cautioning you for the future, we really aren't going to break out our market share in the server market particularly..

Our next question comes from the line of Romit Shah from Nomura Securities..

It looks like Computing is the biggest drag on revenue share in the March quarter, the other businesses are up or at least better than seasonal. Can you quantify -- I'm assuming this is tied to Volterra's notebook business.

Could you just quantify for us how big that business is and what sort of headwind it might be for revenues in calendar '14?.

Yes. I think it is partly due to the Volterra notebook business, Romit. And I think in the past, right, that's been about a 20% or so of the business and it's declining over time, certainly. The other thing is we do have some legacy Computing business that -- and we have some kind of old TV monitor kind of business that is also slowly declining.

And that's been declining over time, and we actually just -- in the March quarter, there's a step function where a couple of those old designs are going end-of-life. And so that's probably equally contributing to that decline in the Compute business in the third quarter..

So Bruce, if you just add the Volterra piece and some of this TV revenue together, what is it as a percentage of sales?.

So as we reported, for this quarter, Computing was at 17%, including the Volterra piece. So in the past, I think, last quarter it was around 12%, Romit. So you can see that's increased it by about 5 points..

So is it fair to say then that somewhere between 5% to 10% of revenues will decay or go to 0 over time?.

No, I think that's too high of a number. We can talk offline, but I think if you look at the -- kind of the Volterra number, right, if you look at 20% of $35 million, right, that sum number, $7 million, that will slowly decline and I think our experience is that, that decline is slower than people think.

There are these products, the product lines that sort of linger on. So I think that market, that amount will slowly decline, but I think that's less than the percentages you said..

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

This is Evan Wang calling for Tore. I like to first ask about your Automotive business. It sounded like it's a big growth portion of your industrial. I'm wondering if you can give us some more color. Help us to understand your business here, including what percentage of revenue and where your products are being used..

So on the Automotive side, I'll take that in reverse order. We don't currently break out what percentage of our revenue is in Automotive. But we have grown significantly over the past 6 or 7 years. I think that we said that it was about 1% or so maybe 7 years ago. And today, it's approaching the high single-digits type numbers.

So obviously, that's been a great growth story for the company.

But the types of products that we sell, which was the other question that you asked, really is in -- it's pretty broad, but it's mostly focused on automotive infotainment, products like for radio and TV tuner products on the RF side, as well as other products for power management, infotainment applications.

We also have distribution of video content, which are serializer-deserializer product line that's been very successful especially in high-end cars. Obviously -- and good traction we're seeing now in our Keyless Go products. These are for RF Keyless Go products, both on the key side and also on the car itself.

And we also see revenue coming in from other applications for battery charging and monitoring ICs in the future. So these are basically our invest areas in the company.

In terms of infotainment, we also have very rugged, well-protected USB interface products that most of the cars now are beginning to have because of all of us want to plug in our smartphones or our music players in there. So it's pretty broad-based, but it's -- I think the future really looks good because the product lives are long.

And each, since we're beginning -- since we began more recently basically, because of that, every new design-in is adding up on top of old revenues, which are still in their -- in the stages where they're continuing and not falling off yet. So I see this opportunity as a great opportunity for the company to grow its revenues in the future as well..

I also like to ask about your diversification effort in your Mobility business, and you named 2 potential drivers for that. One is the, I guess, diversifying your customer base into others.

The other is just giving to more different types of products like tablets and -- which do you think will be a more important driver for you in this year or in the quarters to come?.

Actually, there was a third one that you missed. And the third one was to diversify the types of products that we sell, meaning technologies that we sell. And I think from my point of view, all of these are going to have a contribution. So it's really difficult for me to quantify which one will, but all 3 will help us this year in our diversification.

As I outlined in my prepared comments, we are getting new customers and that's helping us diversify. We have been selling into products other than smartphones, namely tablets and e-readers and so on. And those are -- many of those design wins are outside of our major customer. And finally, we're getting traction with our other products.

Our optical sensor products, our audio products have been very successful. So it's really tough for me to name which of those 3 areas are going to be the biggest contributors. So I'm going to say all 3 are going to be contributors..

Our next question comes from the line of Ross Seymore from Deutsche Bank..

Same sort of question in the consumer side, for either Turc or Bruce. I believe in the past you said you expected consumer to grow this calendar year or it might have been just your Mobility business so, I guess, the first thing, if you could clarify on that point.

And then if you could just help us walk through a general sense how that would work because it does seem like you'd have to have some pretty massive sequentials built in later this year, if it is in fact for the consumer segment as a whole that you expect to grow..

Yes, Ross, this is Bruce. I'll take the first half of this. But the statement that we made before was that, and this was back in either June or September, around we did expect Mobility to return to growth and certainly, that view was more on a sequential basis versus the year-over-year.

I don't think we ever tried to -- we're not -- our crystal ball isn't that good to be able to forecast out in time, but I think we were confident that what we saw in the summer was more of an inventory correction and that are positioning now based on all the things that Tunç has talked about from a design win point of view in different customers, different technologies, different platforms, market segment.

Allow us to have that confidence. And so I think from that point of view, that's where we make that. I think, like you said, whether it's a year-over-year depending on we really had a strong March last year, which everybody is aware, was an over shipment and then some corrections. So I think we feel good about the business.

I think we do feel like we're going to return to growth. But I don't know if it's going to be -- exactly come out from a year-over-year. As Tunç said, we feel good going into the year and it's up for us to execute now..

So Ross, let me just add some more color to that. Bruce is absolutely right. Obviously, we printed some pretty strong quarters last year, last calendar year, but we also had some weak quarters as well in that same calendar year period.

So if you -- if we look at how we see calendar year '14 developing, if you average the weaks and the strongs last year, we should be able to get back to growth in this market..

Great. Thanks for the clarification on this. That's very helpful. Then my second question is moving over to the OpEx side. Bruce, you said you're 1 quarter ahead of plan on the integration and the synergies with Volterra.

Is the way we're supposed to take that, the down 2% on OpEx that you have, I think that gets you somewhere in the low 220s on a dollar basis.

Is that the new base from which you'd go up or down linked to revenue like Maxim traditionally does or is there any other steps left in the integration that we should build into OpEx?.

Now I think like you said, that low 220s is where that comes in. That's a good number and I think we're going to continue to look for synergies within Volterra and within our own product lines from that point of view. So we continue to manage that.

But I think it's fair to say on a material point of view, this is a good base line in which we're going to try to manage OpEx vis-à-vis revenue growth. And so I think we feel good. In a quarter that's seasonally down, we are able to reduce OpEx in line with that seasonally down quarter.

But certainly, we'll continue to manage it and as we get into the quarters where generally we have stronger growth, we'll manage OpEx to grow slower than that revenue growth..

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

Tunç, on the wireless side, as the high end of the market potentially slows or at least decelerates, do you think the mid-end piece could become a bigger piece of your overall business as you go forward? And can you talk about just kind of a dollar content differential between those segments?.

Sure. I assume by wireless, you're not -- you didn't mean communications.

You meant smartphones, correct?.

Yes, that's right..

Okay. So on the smartphone side, essentially what we're seeing is that we can take the great technology that we've developed for high-end smartphones and take those products and really adjust them for the requirements of the midrange market and sell them.

And in terms of the content, obviously, in a midrange phone, there is less content in analog and mixed signal than in a high-end smartphone. However, interestingly enough, what we're seeing is that many of these features that were not found in midrange phones are beginning to migrate to them in terms of what end users are asking.

And that's giving us great opportunities to be able to win those types of design. But the dollar content is less because some of the functions simply don't exist. So it's -- it doesn't -- it's not there. But the functionality that we provide, especially in our high-integration products and some of our other products that we sell, is required in those.

From a profitability standpoint, actually, they're not much different from a margin profile standpoint. So we've been able to take these blocks and in some cases, really put the right feature sets in them to be able to win designs in the midrange.

And these opportunities are actually coming to us, not only it's our major customers today, but obviously, they're also coming in a lot of the Chinese customers. And we look -- it looks really positive in terms of getting these wins and adding revenue and diversifying our revenue base into the midrange..

Okay.

On the commentary about strength of bookings orders, can you provide any more context to that in terms of how things ended the quarter and then the start of this quarter and any differences by some of the geographies?.

I'll take that. So I think in the December quarter, as traditional bookings slowed down, and so that's normal for us, right, and we usually enter the quarter with a low backlog and then going into that. And then as we get into the quarter, we start to see strength in bookings as kind of the new platform of our customers starts to pick up.

So I think, overall, I think bookings are coming in as expected and certainly support the guidance that we've provided. I think from an end market point of view, we normally talk about that. Our only view into that is really through distribution. And there, we actually saw both end market bookings and resales up 5% sequentially.

And if we kind of break that down, we saw good end market bookings and resales in Asia. Primarily, we're selling into consumer products [Audio Gap] design wins from a mobility point of view, both in China and Taiwan. And so we saw good bookings and turns for seasonal resales. I think in the Industrial side, we saw resales down in the U.S.

and Europe in kind of a seasonally low period, but we saw good end market bookings in the U.S. and Europe, which should lead to the seasonally up resales in the March quarter.

So fundamentally, Consumer, good end market bookings, turns, resales in December; Industrial, in Europe and U.S., low -- good end market bookings supporting resales in the March -- expected resales increase in March..

Jonathan, just in the interest of getting to everyone in the queue, we have about 15 minutes left, so I'd like to limit everyone to just one question..

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

This is actually Shaon Baqui calling on behalf of Chris.

Now that you're in the progress of integrating Volterra, can you rank order your end markets in terms of growth going forward?.

I think that rank order, that's something that I don't really have in front of me. I think the best way to answer that question is maybe for you to join our Investor Day in May, and we'll be able to give a much more detailed view of how we see going forward.

But I think in general, the growth areas that we see for the company, obviously, we have been talking a lot about Automotive. I think that continues to be a great growth area, not only because the content's going up, but because we're coming from a lower base. So I think that's going to continue to grow.

And I've visited some of our Automotive customers while in Europe and I see -- really see good design win momentum at these major customers here. So that's one area that is very positive. We're doing the right things in the Mobility space. So I believe that, that's going to be another good growth area.

Industrial has been doing well because of our ASSP strategy. So if you ask me to pick our most favored child, it'll be tough for me to do, but it's really all of these are doing really good momentum. But we'll give a lot more detail of all that in May. So please join us then..

Our next question comes from the line of Ambrish Srivastava from Bank of Montréal..

Just on the diversification theme. On the handset side, you talked about gains in the middle tier. Can you share with us any data which points to the fact that you are actually making progress, whether it's your mix of that segment on a year-over-year basis.

And then longer term, what's the right way to think about Maxim's end market mix? And then -- not this year, I'm talking 2 to 3 years out..

So let me take that in reverse order. In terms of our end market mix, we really don't put that down as an absolute goal. We want all of our organizations to be aggressive and win business and grow the company going forward. So I won't be able to give you color about what our mix is going to be in 3 years.

In terms of how -- evidence that we're doing well in our diversification, I believe that you're going to see this more going into the next year, but we're definitely growing in our Chinese customer base, for example, and they're almost doubling every year for the -- in the last couple of years and projections for this year, albeit it's from a lower base.

So it's not comparable to Samsung, but we've definitely seen that. And we're also seeing good revenue growth and design wins that you've actually already seen in tear-downs at the other Tier 1 supplier. So definitely, I mean these are things that show that we are succeeding in terms of being able to win at other customers other than our largest one.

And as I said, we're doing the right things and we're seeing the evidence that it really is happening..

Our next question comes from the line of Chris Caso from Susquehanna Financial..

Just a question with regard to the Consumer business and the outlook for the March quarter. Last year, during the transition between some legacy products and some of the new products, you saw some headwind as those legacy products declined.

Should we assume that with the inventory adjustments that happened in the December quarter that, that's fairly behind us? We wouldn't expect that to happen this year.

And perhaps you could just give a little more color about the items within the Consumer part of your revenue that are seeing the headwind as you go into the March quarter?.

Okay. So in terms of the inventory corrections you referred to last year, which was corrections in S III in 1 quarter followed by corrections in S4 in the next quarter. In terms of our conservatism, we're really looking at what our customer's telling us in terms of what's required. And I think the demands from us have really been moderated.

So I don't -- we're not expecting a repeat of what happened last year. Now having said that, we really don't know what the uptake of the new products or the new platform we talked to you about that's beginning builds by the end of this quarter.

But it's -- the picture -- the forecast picture looks different than -- definitely different than what it was in 2013. So I think that we have a model that's more modest right now. And that's the way that we're building our manufacturing model. So what was -- you had another question in there that I would like to answer, too..

The components within the Consumer business that are declining in the March quarter..

Okay. So in the March quarter, essentially, the components are most of the other segments other than this new platform that is going to be ramping, we expect towards the end of this quarter. So if you look at it, it's pretty much all of them coming out of the holiday seasonality. They're mostly all declining.

And the one that we're looking forward to beginning to go up is the new platform launch by our largest customer..

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

I want to take another stab at Ambrish's question earlier.

So as you look ahead over the course of 2014, I mean, do you expect more revenue contribution from the flagship models you're traditionally associated with? Or could you be seeing more growth from midrange phones where volumes are higher and make up for lower dollar content?.

Okay. So the calendar year over calendar year, I think when we look at our future, I think that we are projecting, and it's really difficult to give a lot of accuracy in this thing because there's many variables that go into it. We don't really know the market uptake of the models that these customers make and so on.

And -- but our expectation is that we are going to see revenue growth because of the plan that we put in place last year at customers other than our #1 customer for sure.

So if you kind of look at that statement, it tells you that the growth coming from those is going to be more than the growth that we are planning for in the flagship models from our Tier 1 -- our #1 customer..

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

Tunc, I was a little bit surprised, I guess, during your commentary just not a lot of discussion about SensorDynamics. And on the sensor side of that push, you seem to be a little bit more bullish on the audio amps, but I wanted to see if that's correc,t, one, and how SensorDynamics is doing.

What the landscape looked like competitively for you this year and at what point will you look at maybe possible integration of sensors into the interface SoC?.

Okay. So yes, I didn't have much comments in there, so thank you for the question. It gives me a chance to give you an update. So certainly, the audio revenue has grown more rapidly than, obviously, the motion sensor side.

But just to give you a color about where we're at, we have successfully brought up the MEMS technology internally, which was a big challenge, and our team did a good job of improving the yields and being able to show that we can make these repeatably. We did develop our first 3-degree of freedom products last year.

And we introduced them almost about a year ago and those are shipping in low volume to a customer. And we're really well on our way on our 6-degree of freedom product, which is the one that is really required for most of the Mobility markets. We've kind of turned down our expectations relative to what I was saying a year ago.

The main reasons are, we focused our development on our product providing a much better accuracy and stability on our parts and this was recognized by our customers. Actually, they did comment that we had the best product in terms of stability of the part itself. However, we didn't -- we're not able to beat our customers on every single spec.

So that was kind of a -- put the brakes on the customer's switching to a new supplier. So in that situation, the incumbent is obviously more advantaged if you don't provide advantage in pretty much all of the specs.

So having that input from the field, we actually have gone and made adjustments to our products and we will come back and show these new products to our customers again very shortly. And after that, we'll see where it goes. But I do know that we've achieved quite a bit in a short time.

But in terms of revenue contributions, what I said last year of getting appreciable revenue contribution this year is not going to happen. It looks like there might be some towards the end of the year, but it certainly has been delayed because we were not able to achieve all of the specs that our customers wanted..

Our next question comes from the line of Mark Lipacis from Jefferies..

Bruce, you mentioned you're ahead of schedule on the expense synergies on Volterra.

Can you review to the extent you believe that there's an opportunity for top line synergies in Volterra? And how does that mechanism happen? Is it just merely a matter of putting Volterra parts in the hands of a larger sales force or is there opportunity to leverage technology integration between Volterra and the organic Maxim products? And if you have a product, the new set of products in the sales force's hands last quarter, how long does that take to translate into production revenues?.

So let me take that one. So when we did -- when we announced the acquisition, we had mentioned and we were pretty transparent that the Volterra revenues would really not grow for a couple of years, and it would take us a while for the synergies in terms of our being able to sell the products more effectively.

It would take a while just because of the question you asked, if you do get design wins this year in these types of markets, servers and communications markets and enterprise and so on, it does take 2 or 3 years for that revenue to be able to ramp up. So we knew that going in.

However, the Volterra product line was really undersold around the world because of their limited resources. And we certainly do have a sales force in every continent where there can be design wins now. And that's going to be a contributor to get more design wins, number one.

Number two, because Volterra was a small company, they were pretty much blocked out of some of the customers because, too risky, because they are a small company. And we pretty much opened the door at many of the major communications companies, whether it be datacom or whether it be wireless infrastructure-type companies.

So certainly, from a design win standpoint, that's going to help. But I have to say that it does -- in these markets, it takes a while. It's not quite like the Mobility market, where you can affect revenues next year.

But we look at the product line and we talked to these customers, and they really do like the technology that Maxim has been able to add with the acquisition. So we have to be patient. But this is the type of the market we're in. Once we win those designs, they will pay dividends for a long time.

So it's the type of business that we do like, but it will take a while..

Jonathan, we have time for one more question, please..

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

Tunc, you talked a little bit about an increase in magnitude of dollar content on your platform with your major customer. Can you give some sense of how large that is.

Is it single-digit percent increase, larger or maybe double-digit increase? And then just in terms of -- I know you can't talk about specifically what parts you have on there, but can you talk about if there's been any change on the next-generation phone relative to what you've had in the past?.

It's too bad this is the last question where we actually can't answer the question. Yes, as I said, the current indications are that our content will increase in this new platform. But until the products really come out into the market, we can't talk about the functions.

And even when the products do come out, we don't talk about selling prices or dollar content in general because that gives away competitive information, and we're not going to be able to do that even then.

But we're going to be very happy to talk about what those functions are once the tear-downs are out, and why we won them and why we have opportunities, even more opportunities going forward in these smartphones. So, sorry, but I won't be able to give you the information that you're seeking..

Okay, great.

Is it all right to sneak one more or are we done?.

Well since I didn't answer that one, yes, you can sneak one in..

Okay, great. Just in terms of your overall discussions around being more fully integrated company than some of your competitors out there, can you talk about -- internally you guys have talked about the fact that you need to have better functional blocks relative to everybody else in order to do that integration.

I mean, certainly, if I go to your competitors, they're going to argue they have the best functional blocks.

So how do you go about making sure you do have the better, best functional blocks in each area and what gives you confidence that you actually do have the leadership there?.

Yes. I mean, we certainly do. The analog field clearly has many respectable companies that are good at some of these blocks that are required in these high integration products.

I think that the thing that's really unique about Maxim is that we certainly do have great engineers that have developed very competitive and very innovative functional blocks for the parts. But when we talk about integration and putting these larger chips together, you do need more than just some functional blocks.

First of all, you need a pretty broad IP portfolio. And when we look at many of our customers, you don't see the breadth that Maxim has got. What I mean by that is you need to be able to do all kinds of products, power supplies and audio products. You need to be able to do data converters and signal conditioning chips.

You need to be able to integrate embedded microcontrollers. So when you make a table and say all of these are required and we've done this, you can see where many of the competitors fall out because they don't have this function or that function. So that's number one, breadth of IP.

The second one is that you really need engineering trains to be able to put these complex chips together and that requires many years of changing the way you design these chips. It requires very advanced design -- electronic design automation tools. So we've invested in all that to make our designs go faster than our competitors.

And we -- our customers tell us that in terms of our agility and in terms of being able to put these chips, high-performance chips together, we're doing very well compared to the rest of the industry. And finally, you do need very good understanding of the markets to do this very effectively.

That means that you need to be thinking not along the lines of technologies, but along the lines of the markets that you're trying to serve. And that really requires you to be organized in a way that you're looking at a market rather than looking at the technology.

And those are other -- that's another change that we have successfully gone through in the past 5 years. So if you combine all of those, you can see that the number of competitors that can do all of that is pretty limited. I'm not saying it's none. Of course, there are very capable competitors.

But when you make -- when we make our tables, we can see that we're uniquely positioned to take advantage of this customer demand for higher integration solutions for the equipment they're making..

Thank you for that last question, Steve. So this concludes Maxim Integrated's conference call. We would like to thank you for your participation and for your interest in Maxim..

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