Analog Devices, Inc. (ADI) Q4 2006 Earnings Report, Transcript and Summary

Good day and welcome to the Maxim Integrated Products fourth quarter 2006 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I will turn the call over to Mr. Carl Jasper, Vice President of Finance and Chief Financial Officer for Maxim Integrated Products. Mr. Jasper, please go ahead. (There is a technical difficulty with audio for much of the first portion of the call.) : Carl Jasper, Vice President of Finance, Chief Financial Officer: Thank you, Operator. Again, welcome to our fiscal fourth quarter 2006 earnings conference call. With me on the call today are Jack Gifford, our Chairman, President, and Chief Executive Officer; and our two group Presidents Tunc Doluca, and Pirooz Parvarandeh; also on the call today are Alan Hale, Vice President of Dallas Semiconductor; and Paresh Maniar, our Director of Investor Relations. There are some administrative items that I would like to take care of before we cover our results. First we will be making forward-looking statements on this call, and in light of the Private Securities Litigation Reform Act, I would like to remind you that statements we make about the future including our intentions or expectations or predictions of the future including, but not limited to possible statements regarding bookings and turns orders, revenues and earnings, inventory and spending levels, manufacturing efficiency and capacity, projected end market consumption of our products and any other future financial results are forward-looking statements. If we use the words like anticipate, believe, projects, forecasts, plan, or estimate or variations of these words and similar expressions relating to the future, they are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in forward-looking statements. Additional information about risk and is uncertainties associated with the Company's business are contained in the Company's SEC filings on Form 10-Q for the year ended June 25, 2005. Copies can be obtained from the Company or the SEC. Second, in keeping with the SEC's fair disclosure requirements we have made time available for a question and answer period at the end of today's call. This will be your opportunity to ask questions of management concerning the quarterly results and expectations for next quarter, an operator will provide instructions at that time. I will begin today's call by commenting on our financial performance before handing the call over to Jack, Tunc, and Pirooz for their guidance on end markets, strategy, and guidance for Q1 of FY 2007. (The call continues with the speakers mostly inaudible. There is a pause to adjust technical issues on the call. The speakers then start over from the results portion.):

I would now like the turn the program back to Mr. Jasper. Please go ahead, sir.

Thank you, Operator. I apologize for that technical problem. I will pick up again where I start talking about the results. Net revenues for Q4 were a record $511 million, up 6.8% from Q3 and up 27.5% from the same quarter last year. Net income excluding stock based compensation was $159 million, up 6.9% from Q3 and up 25.9% from Q4 of fiscal 2005. Gross turns orders during Q4 were $251 million of which 166 million was shipped for revenues within the quarter. For comparison purposes, turns for Q3 were 245 million of which 161 million was shipped for revenues within Q3. Our twelve-month backlog grew to $429 million at the end of Q4 from 401 million at the end of Q3. Our beginning 90-day backlog for Q1 is $366 million dollars compared to the beginning 90-day backlog for Q4 of $346 million. Regarding profit measures, please noted that in our press release we have disclosed both GAAP and non-GAAP financial results. Non-GAAP results differ from the GAAP results by the amount of total stock based compensation expense calculated in accordance with financial accounting standards 123-R. Our tax rate for Q4 was 32.7% consistent with prior quarters. We expect our tax rate to increase to 33.7% for FY 2007 as the old tax deduction for extra territorial income is being eliminated and replaced with a deduction for domestic production that is being phased in over several years. The tax rate for Q1 may vary from our annual rate by plus or minus 1% depending on the sentence and the President's decision to retro actively reinstate the R&D tax credit in Q1. I will now highlight a few of our balance sheet items. Accounts receivable grew $33 million during the quarter to 293 million. Our day sales outstanding or DSO grew from 49 days to 52 days as a result of alarger share of the quarter's shipments occurring later in the quarter. Our inventories grew $3 million during Q4, ending at 207 million. Inventory days improved from 119 days in Q3 to 110 days in Q4. Inventories at our distributors are turning 7 to 8 times on an annual basis consistent with prior quarters. At the end of Q4 cash and short-term investments totaled $1.3 billion unchanged from Q3. Regarding the use of cash, we utilized $76.7 million to repurchase 2.4 million shares of our common stock and paid out $40.2 million in dividends during Q4. As we had forecasted in our last conference call, fourth quarter capital spending did increase. We purchased $121 million worth of property and equipment and paid 100 million in Q4. Significant portion of these capital expenditures went towards expanding our fab capacity in anticipation of expected continued growth in FY 2007. We have previously issued press releases derivative lawsuits filed against certain former and current officers and directors alleging wrongful back dating of stock option to say certain officers and inquiries by the SEC and the U.S. attorney into our past option granting practices. Due to the legal constraints, we will not be making any additional comments on this issue either during the prepared remarks or in the Q&A portion of this conference call. I will now hand the call over to Jack to provide additional highlights.

Thanks, Carl. In our latest quarter we crossed the $0.5 billion revenue threshold for the first time. Also our fourth quarter earnings before option expensing exceeded the peak quarter we had in 2000 and 2001 by 41%. This was higher growth rate than our comparable competitive companies in the mixed-signal analog business. Our FY 2006 non-GAAP EPS have grown at a compound rate of 24% since 2002 and we're proud of that. Looking at the current quarter or the recently past quarter Q4, our non-GAAP gross margins came in at 68.1%, but this included a $2.5 million one-time benefit or 0.5% due to a settlement with one of our suppliers. Excluding this credit, our gross margin would have been 67.6%. The drop quarter over quarter of gross margin was attributed to two factors, the first one was a 0.8% drop due to a mixed change as Maxim continues to execute its long range plan to grow the top line of high volume products. These high volume products have lower gross margins when compared to our historical mix. We completely believe in our strategy that will enable us to expand our business at above industry growth rates as we provide more highly integrated solutions to our customers. We believe that this rate of decline also going forward will be moderated, this decline due to our product mix. The second factor affecting our gross margins last quarter was a 0.6% drop due to unfavorable manufacturing variances attributed to our fabs which missing their plans in Q3 and as a result this was due to the fact that as you know we've been aggressively installing equipment and capacity and this interferes with the production process when it is done within the same manufacturing fab. We've also been transferring two very important new processes from R&D into production also within the same production fabs, and we have a 6 inch to 8 inch conversion of wafers going on in our Beaverton fab. We believe this trend will be reversed as these three activities are completed and we expect that our fabs will positively contribute to our gross margins in future considers. Operating expenses including stock option expense were 24.1% down from 24.9% in Q3 and 27% in the same quarter a year ago. These expenses continue to increase at a rate slower than our sales growth. Operating margins including stock based compensation expense were 44% unchanged from the previous quarter. We're one of few companies in the world that produce operating margins at this 40% level, our level of revenue. EPS excluding stock based compensation was $0.48 per share up 7% from $0.45 last quarter and up 30% from the same period a year ago. I know that you may be interested in comparing our GAAP earnings to those of our competitors, but to compare apples to apples, one needs to take into account that some of our competitors accelerated the vesting of their out of the money options. Had we done so, our stock based compensation expense would have been $0.04 per share smaller in Q4 and $0.15 per share smaller for the fiscal year that just ended. During Q4 we recorded $557 million of gross bookings, a 4% increase over the previous quarter. This translates to $531 million of realizable bookings, the difference being that the realizable bookings are adjusted for ship and debit which are credits our distributors receive and also adjusted for returns and other price allowances. We expect Q1 revenues to say range between 1 and 3% above our fourth quarter level. At that level of sales we expect to produce non-GAAP earnings of $0.48. This would exclude the impact of the changes that Carl talked about regarding our tax rate and also the unknown impact of expenses associated with auditing our option grant practices and other than normal legal costs. At our analyst meeting at the end of May we had presented a slide that showed the quarterly revenue for the past four years which I just alluded to, and that is a trend line along which the revenue growth over this period has occurred, our strong revenue increases over the last three quarters has put us over this trend line. The seasonally weaker bookings in the summer months will adjust the revenue toward this trend line during Q3. We expect, however, Q4 revenue to reflect customer manufacturing bills for the year in holiday season and spending associated with that. Barring a slowdown in the economy we expect revenue growth in FY 2007 as a whole to be at or above our four-year trend line. During the past year we've introduced a number of ground breaking products, and many of these with high levels of integration, our level of integration is increasing quarterly. To provide a commentary on end market activity and key products that we've introduced in Q4, that were designed to deal with these specific customer needs, I would like the turn the call over now to our two Presidents, Tunc and Pirooz. Tunc.

Good morning. I want to emphasize again that the diversity of our end markets reduces Maxim's sensitivity to demand fluctuations in any single end application. Furthermore, the breadth of our mixed signal cell library makes us the IC supplier of choice when customers seek a source for highly integrated solutions that allow them to produce horrible products that have even more features than their earlier generation offerings. For six straight quarters now we have achieved booking increases. During Q4 the primary contributors to our sequential bookings improvements were the cell phone, network, and datacom, base station, industrial, and GPS end markets. I will now describe and go into some of the exciting and equipment opportunities and a sampling of new products we've introduced during Q4 from the portable computing and instrumentation electronics group for which I am responsible. We introduced a full bridge controller to drive fuse electric transformers to light up liquid crystal displays in ultra thin mobile personal computers providing a highly reliable, compact, efficient, and cost effective back lighting solution. For point-of-load power solutions and networking graphics and servers we added an 8 amp output step down regulator with on chip power switches to our portfolio and furthermore two of these can easily be interleaved for 16 amp applications. We introduced a digitally configurable anti-error reducing filter with a 3 to 1 video multi-plexer and buffer for standard and more importantly high definition television as well as computer display formats and set-top boxes. This is the first device to enable optimization of video quality and also noise reduction. Maxim's new third generation highly integrated power management chips will power the third generation of Intel's ex scale microprocessors for smart phones. Maxim has the leading market share for powering these processors. One of our Dallas business units newest embedded microcontroller battery capacity monitor provides a cryptographic security and charging protection in a tiny package. This solution gives users 15% more runtime especially in smart phone applications compared to conventional solutions. Also Maxim's latest offerings for digital still camera and digital video camera markets will further increase our market share as the world's leading supplier of highly integrated power supply products for these markets. These three new products or six output devices and offer complete power management for lithium rechargeable or double A primary cell powered cameras. Again for the same market one of our Dallas business units new four loose cell nickel metal hydrate charges virtually eliminate the most common mistake which is the charging of alkaline cells. Our proprietary electronic profile identification and charge prohibition of alkaline batteries was a key to this feature. For base stations, Maxim's new digitally controlled variable gain amplifier completes our direct conversion transmit chain. The 65% cost and 50% space savings enable next generation GSM edge design with our complete lineup of digital analog converters, RF modulators, and amplifiers. As to the sampling of our recent design wins, our battery management fuel gauge products won sockets at major Japanese and Taiwanese customers in portable music player and smart phone applications respectively, amounting to several million per year of revenue. With our cell phone and smart phone high integration power management chips, we won designs at a leading U.S. smart phone maker and multiple platforms at the two leading Korean cell phone makers. These wins add up to tens of millions of dollars of annual revenue as well. We won multiple million dollar awards of high integration power management chip sockets at two major digital still camera makers in Japan. Mass production will start later in this year. A major power system chip design was also on in another leading Japanese consumer electronics customer portable latest music player also going into production later this year. Additionally we have been extremely successful in our advance microdevices relationship. Their notebook computer reference designs are exclusively powered by Maxim chips and this is transmitting to virtually a 100% win ratio at our customers using AMD microprocessor chipsets. Furthermore, our recruiting efforts are also going very well. We started two new design centers in Asia, and are pursuing several additional locations. These latest additions brought our worldwide design center count to 31. I will now hand over the call to Pirooz to discuss developments in his business unit. Pirooz?

Thank you. Good morning. As Tunc noted in his remarks, I also see exciting growth opportunities consist of automotive electronics, point of sale from financial terminals, handsets, and personal media players to name a few. I would like to take a few minutes to describe some of the recent product introductions that serve these segments. In the preceding quarter we introduced the industry's first comprehensive security battery backup controller for data and key protection and point of sale terminals. This highly integrated device replaces as many as 40 components used in these financial transaction terminals to detect and react to physical tamper attempts. Proprietary on board memory structure provides an even higher level of protection to extremely sensitive information such as encryption keys. For the worldwide communications network, one of the most critical elements is timing, accuracy and synchronization. We have introduced a product that provides this critical timing and synchronization function for the communications network. This product is the most highly integrated and sophisticated timing element for the stringent central office applications. It integrates the full functionality and performance of a timing card into a single IC. For the notebook market we introduced the industry's first windows Vista compliant stereo Class A B speaker amplifier with direct drive, head phone amplifiers, Maxim's patented direct drive technology eliminates the costly and bulky DC blocking capacitors that are normally required for driving head phones, the performance of this product exceeds all the Vista specs by a comfortable margin and simplifies the system design. For cell phones, portable GPS systems, and personal media players, we introduced the industry's first complete portable stereo Codec that integrates direct drive headphone amplifiers and high efficiency class D amplifiers on a single chip. Maxim's proprietary class D technology substantially reduces the electromagnetic emissions that are inherent to all Class D amplifiers. This reduction in emissions eliminates costly external components and simplifies the design tack for our customers. In the automotive market, there is an increasing interest in using high brightness LED's for interior and exterior lighting. We introduced the industry's first high brightness LED drivers with E2 full programmable fold back current. This family combines the simplicity of linear drivers while maintaining some of the benefits of a switch mode driver. This approach lowers the solution cost, eliminates the electromagnetic interference inherent in switch mode converters and eliminates the need for a microcontroller. We have also had many design wins and I will give you some examples of those. Our quick pop suppressor IC has design wins at several significant MP3 player makers. This product suppresses audible clicks and pops when a handheld device is powered off and off. It is the only product of its kind on the market. We've also had significant design wins or Voicer over IP enabled phones that are powered over Ethernet. This product integrates a PWM controller and power ethernet PD interface. It offers a high level integration, lower volume costs, and high efficiency. During the fast fiscal year we've achieved TS 16949 certification. That not only gives us entry into the automotive market but also establishes Maxim's credibility with customers in the other end markets. As you can see from the various examples that have been given, Maxim's broad product offerings address many needs within these growing and exciting segments. Our close partnership with equipment manufacturers who are leaders and innovators within their fields coupled with our word class design capability, state of the art process and packaging technologies, allow us to bring to market products that are optimized to meet the needs of our customers. I will hand the call over now to Carl.

Thank you Pirooz. That ends our prepared comments. We will now welcome your questions. Operator, will you please poll for questions?

Thanks. Jack, are you saying that Maxim over shipped consumption in the June quarter?

I think we shipped about consumption levels. I could check that for you on our ship demand.

I am trying to get a feel for the guidance of 1-3% growth. Perhaps you can just give us a feel for your customers. Do you think they're placing orders below what their run rates are?

To answer your first question, the ship demand calculated for Q4 was about 511 million. We're projecting the demand being over 560 in the next quarter. Now, that's what they consume. As I talked about, the June and July months were basically slow, kind of a lull period which probably sets up more accelerated bookings in August or September, maybe October. Whether we can react to those within that quarter is problematical. We have again the same issue we had last quarter which is the fact that the customers are actually moving in there lead times on us. They're giving us less time to respond. I think it went in a week Tunc was telling me, right, Tunc.

Yes. It went in about a week towards the end of last quarter.

Which is about $40 million worth of bookings which would probably reflect that.

That is correct.

At any rate, that's making it more difficult for us to react to turns. We went into the quarter, into this quarter with more backlog than we had last quarter. Our ability to turn we don't think is going to be any better.

Would you expect to ship a lower percentage of turns than this quarter?

So you guys are expecting some level of consumer build in the September quarter, it just sounds like maybe it is starting a little lighter than what you would typically see this time of year?

I don't think it is actually starting any later. It doesn't unfortunately line up with all of our quarter ends. It turns out to be an August – September - October build.

Maybe a longer term question for Tunc, you talk about diversity, providing stability in the business. The idea of putting more engineering man months at a single project I guess looks significant because of the levels of integration you would sweep up, for example, in like a camera, but it does seem like those would be higher risk projects. My question is does the velocity of sales and profit growth increase over time for Maxim because of this strategy and how do you mitigate the risk of potentially squandering resources.

This is Tunc. I would like to take that. So far in the particular markets you mentioned the amount of analysis we put in has actually paid off very well, paid off I would almost say better than some of the general purpose products we put it into. Remember that our strategy there is not to invent everything from scratch. What we still have and continue to do is produce very high performance building block products, and our integration tasks are essentially putting those things together. It is not an enormous amount of engineering we spent on one of these high integration, for example, power management product you mentioned for the camera market. I think the return on those is extremely well.

I know Pirooz wants to comment too, but let me get my two cents in here and then Pirooz will give you his view, too. The other thing, there are projects when we're entering new markets where we don't have a foothold or we have to create new cells, that can be very laborious. We have a couple of markets like that. One is the camera imaging market, another one is the digital television market. We've had to invest hundreds of man months to get to create the technical IP, and so there is both extremes, but I think Tunc is more correct than I. If we wanted to give you an accurate weighting, it is more his what he is talking about than what I am. Mine is a much smaller percentage. I think Tunc had some numbers he gave a month or two ago that showed that about 35% of our products are of that level of complexity, and so I think I agree that it is pretty efficient overall.

This is Pirooz speaking. One other thing to note obviously as a company we have instituted a lot of different management systems to make sure that we mitigate the risk of these higher design content projects. So those are getting a lot of scrutiny. There is a lot of sophisticated and very detailed methodology that we pursue to make sure that we are optimizing the use of our engineering resources and we're not squandering it as you had mentioned. I think that's clearly something we pay a lot of attention to as well.

Your question is a good one. Because that is exactly the thing we're focusing on. There is definitely risk of squandering engineering, doing work and having not resulted in anything. We're acutely aware of that, and I think that's been basically the downfall and the bad name that large chips have, they're not efficient. They historically have not been efficient to design. They've missed markets and things like that. We understand that, and we're neurotic about it.

Thank you. Our next question comes from Craig Hettenbach from Wachovia Securities.

On the manufacturing side it looks like there's been a couple instances with the variance with the last few quarters. Can you give us any visibility as to when you expect that to be cleaned up in manufacturing?

I can't. I made a general statement because it is very hard to pin it down to a quarter. I can pin it down to an event. We're ramping all of our fabs so that we can react to our expectations for not only FY 2007, but FY 2008 revenues, and that means we continuously have to install capacity, and we're having to do it in fabs that are running production, and this is the same people that are running production are also involved qualifying this equipment and that sort of thing. It is a disruptive process, and I really hope that I am not coming across as saying blaming saying that our fabs are not running well or they're incompetent. That's not the case at all. We're asking them to do some things which is not abnormal, but these inefficiencies come with that territory. Having said all of that, we believe that we are going to be through these process installations and the 6 inch conversion issue in the next two quarters. We also have installed - well, we haven't qualified it but we installed most of the equipment that we need to, to get through the FY 2007 year, so I expect it to abate. I expect the efficiencies to improve. The disruption I expect to abate in the next couple quarters.

As a follow-up, you mentioned that in order to meet turns business, maybe can you give some examples of some areas where inventory might be too light or end markets where you're seeing demand that whether you just don't have the mix shift or it is coming in stronger than you would expect? Any particular end markets?

Well, this is Tunc again. We are seeing large growth like in the cell phone market would be one of them. As you know, that's a market that even our customers have difficulty forecasting, and a lot of changes in that, and we're also in a lot of new platforms which are ramping, so that's the one that I personally am most concerned about.

This is Pirooz. I would echo the same statements. I think in these fast growth markets like the cell phone market, especially in cases where we have gotten new design wins, and those design wins are ramping up. There is many examples of those, and there is not really any historical basis for that for those shipments. These are essentially new products that are ramping up. That's where we need to react quickly and it doesn't come out of inventory necessarily. It has got to come from new starts.

Let me give you one dramatic example, and again please don't take it out of context. The extreme of the force of what he is talking about is the other day Pirooz was discussing with me this new product that they've developed and it really has just been introduced, and he's talking about he may have to respond and build 100 million of those in the next 10 or 12, not 10 or 12, 13 or 14 months. So this is the kind of stuff. This is exciting, and they're opportunities, but again, these are big numbers, and so we have to probably do that behind before we start with that product, wouldn't you say, Pirooz?

Yes. I think our customers give us visibility to the extent that they can and it is a matter of balancing the risk versus the reward, but we try to do what we can to meet our customer's requirements. Those requirements are very dynamic. That's really where we may fall short because it is so dynamic.

We're in new platforms, and we're in new equipment, and that's exciting, and that means we're making a contribution to these customers, but we have a also a responsibility to try to meet their delivery schedules, but these equipments ramp. This is not 1970 or 1980 where you had a year to get a product into production. These are exciting things, and they're big. It is hard to have. It is hard to have inventories.

Thank you. Our next question is from Tore Svanberg from Piper Jaffray.

Good morning. A couple of questions. Jack, could you talk a little bit about how bookings have fared so far in this current quarter?

Can I? I really don't think we should. We said we were going to stop doing that. What I did say, though, Tore was that June and July tend to be slower months, and they were.

Do you also have a ship demand number for FY 2007?

Yes. It is $2.4 million or billion – hang on a minute. It is $2.36 billion.

Great. Finally do you also have the cancelation number for the quarter?

Yes, I happen to remember that one. It was 11 million, about 2%, 11 million, about exactly what we had last quarter.

Great. Thank you.

Thank you. Our next question comes from Ross Seymore from Deutsche Bank. Your question, please.

Jack, you gave good color to us on what the gross margin trend is going to do in breaking out the manufacturing side versus the long-term strategic side of things. Can you give us an idea where you think the gross margin filters down to you given the long-term strategy side of the equation and then as far as the next couple quarters, do you expect that floor to be reached during that time or just how do we gauge the comments you had about moderating declines from the long-term strategy?

If I had better words I would have used them, Ross. My personal view is that I do think that they will reach this floor in the next couple of quarters. As best we can figure out is that we expect to see a couple of tenths, two to three tenths per quarter due to mixed change maybe, that kind of rate of decline, but there is so many things coming into the equation like our manufacturing efficiencies are going to get much better. That's going to moderate that. We have new products that, well, it is just so hard to tell what new products are going to ramp and what levels and which ones aren't. We have some product that is are just killing our gross margin now that are very strategic to us because they're cores that will create follow-on products that are going to be attractive to us, but we're obligated to continue to supply these products, and they're hurting us, and those will reach end of life, and so this is a lot going on is the problem with answering the question in any sort of more quantitative way.

Is there anything in those core products that you believe are strategic going forward that when you get the manufacturing adjusted either to different processes, larger wafers, et cetera, that the cost structure on those new products will drop significantly?

You know, Ross, Pirooz I will I am sure want to comment on this. That has definitely happened. The costs go down. The other thing that happens, and I am not saying that it is a practice around here, but when you get into a new piece of equipment and you're not in that segment at all, and you have some technology that the customer wants, you're usually having to give him a price concession that you wouldn't want to give or normally give that he will require that, not in all cases but in the cases that I am thinking about, you do, and you under price the product. Now, it is dramatic in some cases because your core, your follow-on derivative products, you're shipping those at 40% higher gross margins, but you sometimes have to buy in if that's what you want to call it, have you to buy into the business. Because you're the new guy on the street. Yet another customer for that same core technology, that business is good business.

This in Pirooz. Let me add to what Jack said. I think with any new product, especially products that are highly sophisticated and also entering markets where the ramp rates are very fast, you have two combinations, the fast ramp rate and the fact that the product is sophisticated. What that means is that during the initial months and quarters of shipments, the yields on the products and things of that sort are probably not as well understood as they should be, and it takes some amount of time to really understand that and take corrective action, and all of these things that we've looked at in those particular products are actually very manageable and it is not like an incur mountable barrier. They are manageable, but it takes time to get the yields improved and the cost structure to where it needs to be. It is a combination of new products, sophisticated products, potentially some on new technologies and fast ramping that affects all of these things.

One follow-up on the gross margin side of things. If we start from the pro forma 676 that you did in Q4 excluding the one-time gain, and we think about that 20 to 30-basis point drop because the long-term strategy per quarter going forward, what's the delta we should think about when you get the manufacturing efficiencies aligned? I guess in this quarter you talked about it being about 60bps if I remember right. The prior quarter was roughly about the same. Are we talking 0.5 point benefit when you get it working, is it 2 points, any color you can give on the magnitude there would be very helpful.

I can't give you color on that. I can talk and ramble about it. The manufacturing efficiency, that one, that would be a material improvement. There is also these other products that are coming into the mix. It would be not to anybody's best interests for me to give you that number. I am not hedging it. It is just we think we're on our plan. We think we're not concerned with it, but there are these prohibitions that occur, and there will be quarter to quarter fluctuations, so we're not concerned, we believe we're on our plan and what's happening is normal.

Then the last question, Jack, you mentioned about FY 2007 that you are on plan to hit a revenue growth rate that was in line with our recent or last five year trend I think is roughly how you characterized it. What is that trend line as percentage growth?

Well, the trend line I referred to is the trend line , the historical line that we showed at this May analyst meeting, and it was a four-year trend line of revenue growth of 17% and profit growth of about 24%. Is that generally right? What was the profit? That was the trend line I was referring to.

Thank you. Our next question comes from Ramesh Misra from C.E. Unterberg.

A question for Tunc, you had mentioned that you have a leading market share in powering the X scale processors. With Marvel's portion are of that business and Marvel having previously talked about pursuing power management, what can you say about your retention of market share over there?

Well, our plan is that once things kind of settle down, we will discuss issues with Marvel and see if we can work together. I think we can because we do have better technologies to make these products. In the end it will come as the result of our discussions with them which have not occurred to this date.

Is it a material portion of your revenues at this point?

I wouldn't say it is that material.

All right. Okay. Then, Jack, can you talk about your FY 2007 capex plans? I guess they've been pretty stable in the past. But looks like there are a lot of projects under way.

There are. They're all tied to our revenue expectations for 2007 and for 2008, and as you know, these plans are plans we say we're going to grow significantly in those two years, and so we're putting wafer fab and test capacity in place to do that, and we would expect that we'll be spending about as much in 2007 as we did in 2006 which is in the cusp, in between $150-200 million.

Okay. Then finally, in the past you've talked about orders by end markets. Can you kind of at least qualitatively talk about orders trends in the different segments.

This is Tunc again. I will take that. In terms of orders trend, I mentioned the ones that were significantly up, and those were cell phone, network datacom, base station, industrial, and GPS. In general we were up on the 20 that we tracked, we're up on 10. We were flat on about 3, and I would say down on about 8, so that's kind of a general picture.

Thank you. Our next question comes from Mona Jankowski from Goldman Sachs.

Just to follow-up and apologize if I missed it. Just when I had first taken a look at your increase in backlog and bookings, I would have expected slightly higher guidance and I just wanted to understand again maybe the couple of reasons why it is a little bit slower. Was it was mostly because of the slowdown in June and July or is it anything in the end markets, anything in inventory, if you can just help clarify that.

That's correct. The June and July months were slower than the previous months, and slower than we expected the months going forward, but the problem is it doesn't give us, since we're not able to turn product that quickly, we're concerned about being able to react to the August/September orders, and that's largely it. Going into the quarter we've got, a $20 million bigger backlog, but we're anticipating that we will, we're not going to be able to turn any better because of the mix issue, and then we didn't really book at the level of June and July which wasn't surprising to us, so it is really having backlog to work on, I think that's the biggest reason for our uncertainty or conservativeness, whatever you want to call it.

Okay. Because I thought also you made the comment that you think you will be able to turn the same percent of your bookings, so is it that you think the bookings that come in during the quarter are going to be maybe not as high as they have been let's say in April, May time frame?

We don't know, but we're trying to plan ahead. We don't want to plan on something that we're not certain of. We would rather plan on a conservative basis, so I think that's an accurate statement, yes. We're in a wait and see mode. We expect August and September to be good booking months, but even if they are, with June and July being slow, it puts us in a tough position to react.

Okay. That makes sense. And then just to clarify another comment made earlier I think by Carl, that distributor turns were consistent with prior quarters at 7 to 8 times. Just wanted to get a little more specific as far as the actual increase in distributor inventories in an absolute basis if you have that number.

Well, let me just tell you what I know and then Carl can give you more information if he knows, if he has better information, but our distributor business was up every where but in the U.S. U.S. was down, but every where else it was up, and our inventories went down relative to the resales. In other words, we sold overall more than we shipped to them. Now, Carl, you might want to clarify that.

I think Jack is right. Again, our inventories are really fairly stable. They jump around a little bit between quarter over quarter, but again that's why the annual turns of 7 and 8 times have been pretty consistent throughout this last fiscal year.

You shipped less to distributors than they shipped out so you think on an absolute basis inventories declined.

We know that. We had an adjustment, a reserve adjustment down because of that.

Okay. Thank you very much.

Thank you. Our next question comes from Steve Smigie from Raymond James.

Thank you. Steve Smigie. I was hoping you guys could comment a little bit on what direction you're going with the hiring you've done, in terms of what end markets you tend to focus on.

Can you repeat that. This is Tunc.

I was just curious with the hiring you have done, is there any particular end markets you guys are focused on, portable applications, handsets, for example?

I would say it is pretty uniform. We've done hiring, if you'll look at these last two design centers we established they're more focused on handsets and high-end consumer, but we've had hiring in many other segments as well. Pirooz, maybe you can comment as well.

We've had hiring in other segments. Some of the other segments besides the consumer oriented segments, the segments that target networking equipment there is a variety of products that we sell into those applications. Our hiring is really intended to focus on where we see opportunities, and I think we see opportunities in many, many different segments. It is not just consumer oriented segments. It is across the board.

Okay. And along those lines, is there specific type of product for example power versus amplifier that matters or is your integrating so much together that it is sort of not the right way to think about it any more.

It is across the map and board. We have, like for instance this quarter we're trying to hire three, almost 300 people, almost 100 design engineers and if I look at I've got in front of me, if I look at where they are, they're every where. Every field that we're in wants to hire 10 people, and so it is just extremely broad. Remember, we've got 71 product lines, and virtually there is not an equipment market we're not in. From amplifier designers to microcontroller, software and hardware guys, literally every field. Nobody is meeting their hiring goals. We did pretty good last quarter. I think overall the Company hired like 70 people, 70 in professional and below the line. Yes. We hired about 70 people below the line last quarter.

Our next question is from Michael Masdea from Credit Suisse. Your question, please.

Jack, I think you made it pretty clear your whole strategy about going after high volume and could be sacrifice in the gross margin line, but I guess the question I have is if you look at your commentary about growing your bottom line faster than the top line and the sort of 17 and 24% CAGRs that you have seen, if you look out over the last couple years, your net margin has deteriorated. Should we assume that we've kind of seen the worst of that and are actually troughing out in terms of net margin and that you're going to start to see the bottom line expand relative to the top line growth?

Mike, I don't think so. As a general statement I said this for a long time, and I generally believe it, that we ought to be able to reduce our below the line at a faster rate than our margins go down, and of course that assumes that we have revenue growth. If the revenue growth isn't there, obviously you don't spend as much below the line, but I don't think there is any disconnect in our plan. We feel comfortable that given that we have revenue growth that we can continue as a percent of sales, be neutral in that regard. I made a comment also that I felt that some people don't always have in perspective, but it is very hard to find $2 billion companies that have 40% operating margins. That's not something to be or 44%. That's nothing to be defensive about, you know. We feel we're on our plan, Mike, and I think if there is concern that we really can't execute the plan, well, there is concern, I guess. There is not concern here.

Is there any level of revenue growth next year? You talked about where you thought the ballpark would be. Is there some threshold level where you think that you would have to start to change your outlook on your spending?

Well, if we had some cataclysmic, or some industry slowdown, a material industry slowdown, it would be prudent to control spending. Historically we've done that many times during our history. We've been fairly good at looking and not spending when we didn't have revenue growth. We'll just manage it like we've done in the past.

Got it. And then the inventory side, given the commentary about your customer lead times coming, it looks like your inventory growth has slowed as you've talked about. Would it have made sense to pick that back up given the delta between your lead time and the customer lead time is getting bigger?

It would. We intend to build inventory this quarter. Mike, the problem of course is getting it in mix correctly, and the lack of visibility, and of course I agree with you, and we actually had a real good quarter as far as inventory last quarter. If you look at the detail of it, we built die bank inventory and we got rid of box stock inventory. We had two numbers going out that cancelled each other. We actually were able to ship out of box stock and we reduced our end of line whip which are finished unit, and we actually built inventory in die bank. The net result was basically neutral. It was a pretty good quarter, so this quarter we're trying to do the same thing, but we're trying to build more inventory.

Thank you, our next question comes from Joseph Osha from Merrill Lynch.

Hi there, folks. Some product questions. First, Tunc, you talked a little bit about what was happening with the AMD platforms. I am wondering on the core regulator side, how are you doing in some of the Intel mobile reference platforms?

Well, we're doing well. We've got many design wins at the major suppliers, manufacturers in Taiwan as well as the OEMs in the U.S. I would have to say that we've been more us successful with AMD than Intel. The good news there I see is that they're gaining market share.

This is really on the turn around mobile that we're talking about here?

Yes.

I heard that you were taking share overall as a result of being fairly aggressive on pricing not just in AMD but also some of the IMPP 4.5 stuff on the Intel side. Is that true?

Well, everybody is being aggressive on pricing. The notebook market as you know is still growing. It is growing 15 to 20% a year, but I also have to admit that the total revenues for that market for us are probably being about stable. In other words, there is significant price attrition there. It is hard for me to comment on something specific when you ask a very specific question.

I would add that, Joe, that we don't believe we're the aggressor here. People want to buy or stuff. They want to use our products, and they ask us to match pricing. We're not the guys leading the pricing parade.

Okay. Okay. Secondly, there was a discussion of LED's and that's an interesting area especially insofar as you look at the really high voltage stuff for automotive and in particular I am curious, are you all positioning yourself for some of these very high voltage drop stuff going for example into big displays? Is that an area that you intend to position yourself for?

Yes. This is Pirooz speaking. The product I mentioned obviously was intended for automotive applications. We find a lot of opportunities there, especially with our ability to integrate and to innovate and to come up with new architectures that solve problems that our customers have. We have looked at alternative markets besides the automotive market. Those I would say are really understudied. I can't say we have really launched a lot of products into these alternative markets such as the large panel displays and things of that sort. It is certainly something we have our high on.

You are in the backlog driver market, right?

Yes, we are. We've got a number of business units that are in that market, and they are at least the ones that I have under my umbrella seem to have made some pretty good progress in terms of design wins.

Okay. Thanks. Last question, I guess either Jack or Carl, I am not sure which, is there some sort of dollar run rate that you're modeling to on a GAAP basis for R&D and SG&A? I am one of these GAAP guys. I am just trying to figure out as I look at that number going forward with and without options expense and how is that going to trend? It kind of follows on from Mike's question. I am trying it get the operating margin right here.

On a GAAP basis?

Well, both. I know what the option expense is. Characterize it either way. If you want to talk about pro forma, that's fine.

I am not sure we understand the question.

What are operating expenses going to be?

In Q1?

In Q1 or let's just think about if you want I have an FY 2006 sort of run rate here. If you want to talk about a pro forma run rate for FY 2007, that's okay. I am just trying to get a handle on how that number is…

I think the operating expenses are going to be 24 to 25% in that ballpark.

On a pro forma basis, so you're really going to manage it to a percentage of revenue?

No. That's why I gave you the range. It could be lower, but.

24 to 25% of revenue in operating expenses on a pro forma basis is the target.

That has to do with the revenue. You tell me what the revenue is going to be, and I will tell you what, I can give you a lot more accuracy on the percentage. I tell you what the spending is going to be. I can't tell you what the percent is going to be.

I am sorry. I am confused then. You just said 24 to 25%, and you're talking about R&D plus SG&A as a percentage of revenue for 2007 assuming of course that the revenue grows at this trend line you're discussing. Is that what you're saying?

I don't know what you said. I said that in Q1 that the operating expense as a percent of sales would probably range between 24 and 25%.

Okay. All I am trying to ascertain is if there is some kind of longer term target to what you are managing that number assuming of course that revenue...

Yes. I mean there is. It is not the number one financial priority of the Company, but we would like our operating – our below the line spending to basically decline at a rate that would be consistent with what our gross margins decline at.

Basically that's the idea is to capture whatever gross margin gives back at the operating line. That's still the strategy?

Right. And it doesn't take a lot of micromanaging to do that. We think it is more natural than forced.

Okay. Last question and then I will go away. When you have your internal counsels, do you look at these GAAP numbers and think about that margin at all in terms of targets or is it not on the radar screen.

Sure we think about it because it is important to some people, and we have to understand and know the numbers. I think the one thought I have is that because we did not accelerate unvested options we're probably going to be two or three years before those, we're on a comparable basis with companies who did do that. That's one observation that I have.

Okay. Carl, is this $51 million per quarter run rate now kind of a steady state or is that number going to go up more in 2007?

No. I would expect that to be steady state at least for the short-term.

Thank you very much.

Thank you. Our next question comes from Tom Thornhill from UBS. Your question, please.

A question back on the issue of turns and turns orders. Implicit in the difference between beginning backlog and quarter guidance is that the shipped turns would be down quarter to quarter. Is this a case of your expectation that gross turns orders would be below the 251 that you saw in the June quarter or is it an issue of looking at your box stock and die bank inventory you think your ability to ship turns is limited into this 150 to 160 million range?

Tom, I think, to answer your question as directly as I can, we're not sure right now that we can book turns at the same level we booked last quarter because we have one month of the quarter that was slower than the quarter before that which had some real exaggeration in the first. If you recall in Q4 the first two months of that quarter was the booking rates were very high, exaggerated. Do you recall that?

I do.

And then this, the first month of this quarter, July, we weren't at that level. So it is like there is a lot of volatility there in the bookings in this period we're talking about. Given that, we're not sitting here projecting turns growth, bookings growth over last quarter because we had such high turns bookings in the first two months of last quarter which were in our view I think everybody's view were abnormal even at the time. Do you follow? Do you understand what I am saying?

Absolutely. Looking at what you've seen in July, this is more…?

July was very much one would expect. I am sure it is probably the same in a lot of companies. They were basically summer months, slow, and the April and May months were aberrational relative to the other direction in turns bookings. I think we booked $50 million. We had some big numbers. I don't have them in front of me. Those first two months were big. I think we've got a basically a wave function going here over trend and a little under. We just can't react, though, we are planning on not being able to react to the turns that we're going to get as aggressively as we did in the previous quarter.

Okay. So even if gross turns orders picked up later in the quarter, given your die bank inventory and box stock inventory.

We're going to have one month less if you can understand. Do you see what I am talking about.

Absolutely.

Last quarter we had great turns bookings in April and May.

That gives you time to respond.

Exactly. This quarter we could have great bookings, but we aren't going to get anything out of July.

Understood. Shifting this staying on this same topic but shifting more into longer term, as you pursue your strategy with your higher volume customers, those are going to be programs that should be more consistent? Won't you have the ability to plan better for them and be able to meet up sides as that occurs? Should you have more flexibility in being able to position die bank or box stock inventory for gross turns in the context of this coming strategy?

Tom, I think that's perceptive. I think you're right. Once you get to some form of steady state. Remember, now, we're emerging into something new for us. All of these orders are new. We're going from having 3% of our business with these kinds of people to having 30%. Once the slope of that curve, once that moderates, your observation I think is correct. It is more predictable.

Thank you, Jack. Take care.

Thank you. Our next question is from Jeff Rosenberg from William Blair.

Hi. You talked about earlier that your customers lead times have come down on you. Did you make any comment about what's happening with your lead times relative to the eight plus weeks you said was the situation last quarter?

I didn't, Jeff, but Tunc knows what they are.

The numbers I do, Carl, you should probably look it up, but the numbers I know is what they gave us.

I know what our lead times are. Jeff, yes, okay. Our lead times went out about a week. Hang on a minute. I can give you accurate numbers here. They went out actually a week.

And you say that in the past tense. As you've added capacity, have you been able to bring them back in?

That was Q4, and are we going to bring them in in Q1?

Is that what you need to do given that the lead times and their requests on you are coming in and I guess I am thinking about that in the context of the initiatives you talked about to be table to be more responsive to these top 20 customers, and to be able to do those things, so I would assume that you're working hard to bring them in. I guess that's what I was wondering about.

Absolutely. We do want to bring the lead time we're giving our customers back in, and a lot of this spending and the expansion, six to eight inch conversion, all of those efforts are being put in place to do that.

Yes. Jeff, a lot of the these major customers, a lot of this growth we're getting is coming in processes that we're ramping in production, and what I spoke of in our prepared comments where we're putting two production, two products and two processes in production, one of those has got major growth plans. We have major growth plans for it in volume this year and next. That's the dog we're chasing.

Okay. And in terms of levels, you talked about it distribution. When you look at contract manufacturers or OEMs, given the situation you're in, have you seen anybody trying to build inventory to avoid any sort of availability issues or how are they responding to the current circumstances?

You mean customers.

Yes.

Let's see, I think Pirooz or Tunc should commented on that.

I can comment on one aspect of it which is when I surveyed my business units and their customers, we at least across that survey we did not see that there was any excess inventory at our customers. Now, the customers I guess maybe about a quarter ago might have tried to build extra inventory, but what we're seeing now is that we're not really seeing any substantial cancellations or push outs or anything of that order for this kind. So that leads us to believe that there is really not a lot of excess inventory in our channels.

Okay.

In terms of major customers that we support from our business unit, I would say the same thing. They're not asking us to delay shipments or push out orders, and I don't really believe they built excess inventory.

Okay. One last thing I want to ask, just another clarification on this four-year trend. When you answered the follow-up on that and said that it was a 17% revenue growth and 24% earnings growth I think you said, obviously in the next year you would expect more of those two numbers to grow in line, so is this a 24% number that you're saying you expect to get back on track with for the full fiscal year for sales and earnings?

Generally you're right. They should be in line longer term they should stay. Revenue should grow EPS should grow with revenues if your shares stay constant. No, we expect to grow as you know, Jeff, between 20 and 30% a year, that's our plan. We didn't say that 17% was our plan. We said that it is what we did.

Right. I guess you just said that when you looked at the two-quarter trend if you will, the expectation of improvement in Q2, you said it would get you back on track with the trend you have had over the last four years, and I thought you meant 24%, and I thought that meant top line, but then when you talked about the four-year trend, then it was a little bit lower on the top line, so that's what I just wanted to clarify, what you meant when you said that.

I was just talking about the revenue growth in the short-term.

Okay.

Using that assuming that people had that trend line they had seen it, so it might have been a bad metaphor or whatever you want to call it.

Is that the number we should be thinking about if it goes the way you're expecting is the 20% plus type number for the year?

Yes. We're planning on growing from what is it, it is almost 25%. That's the plan that we begun the quarter, the year with.

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

Hi, Jack, a couple of questions. You talked about the improvement in manufacturing efficiency going forward. Is this more a function of call it lesser disruption or do you think you got a significant cost benefit as you go from 6 to 8 inches or help us understand what the drivers for improved efficiency there might be?

Yes, it is not going 6 to 8 inch wafers but it is the fact that you've got 50% of your expenses or 40% of them are fixed in a fab, and the variable expenses will scale with volume. You get large economies of scale when you go from 3 million wafers to a quarter moves a quarter to 6 million. Big numbers. The problem that I have pointed out is - I shouldn't probably call it a problem, but what's going on when you're trying to do a lot of things in a fab that have to do with ramping production and starting new processes is you overspend, and you can't get as much productivity out of the equipment that you got in there, so you get an increase in output which gives you a profit contribution, but you expect too much to get it or you didn't get as much of an output increase as you planned to or should have gotten, and you will get, because you haven't yet got it running right, running efficiently. You will get it so that it is spending at the right level, and you will then get the economies of scale of covering these fixed costs. And it is material.

The other question I had related to your comment on as you're trying to be consistent with your new strategy as you're trying to break in being the new kid on the block or however you want to phrase this, your having to offer price discounts, but on the follow-on product, you're able to charge a much higher gross margin. Help us understand why it works that way and then second as you try to continue to integrate your mix of highly integrated product, why isn't this an ongoing issue going forward?

Let me comment a little bit and Pirooz will comment more. This is not a second sourcing activity. We're not going into a situation where we're now the second supplier or the third one and therefore the only way you are going to really do business is by matching or having a price lower than the other suppliers. This is a case where we have been chosen to do something innovative and in some cases you are going to get that initial opportunity at a price lower than what other companies would pay for that product if it were available or as Pirooz pointed out you're not going to have the manufacturing costs going into it as you will have after you've developed the core and the manufacturing technique to make this. So the first article, the first orders and the first customers are always going to be lower margins than the derivative products.

I would like to add one other comment here. When you're getting into new areas and new disciplines and new technologies, there is always a learning curve, and the first generation of a product may not be as optimal as it should be, and we evolve that, and with the second generation we get a lot better. We know a lot more how to optimize that product, so there is that part of the equation as well, especially when you're getting into new fields.

These new fields, this IP is limited in number of people who have it, develop it and who can actually put it into production, so these products we're talking about fundamentally are sole source products. In the universe not many other people can do it, but on the particular application we're there pretty much by ourselves. It is just that we're not efficient yet, and we've been told that we have to match a certain price.

One last question. Implicit in your expectation for the highly integrated products making up about 25% of your total mix for FY 2007 is a pretty hefty growth rate for the segment. My math is somewhere between 60 and 65% depending on how your full year shapes up. I know you went through a lot of the program that are working for you.

Is it your understanding that we've gone from 0 to 25% in one year.

No, no. From 18% or so I think last year to 25, right, so I thought the mix of this highly integrated business was about 18% in FY 2006 for your analyst day. As this jumps to 25% this year, the year-over-year growth implied within that highly integrated product group is fairly high. I am just trying to ascertain here, exactly which programs or which segments in particular may be driving it for you.

This is Tunc. I don't think I can exactly pinpoint what they are. I think the ones are probably very easy to guess would be markets where there is high volume, and there is a need for miniaturization and optimization of space and power, and those are the usual suspects. They're high-end consumer products. They're cellular handsets. They're products, some of them are in notebook computers. They're pretty much all over the place.

They're in the automotive market.

Automotive market.

This ability to do high performance highly complex chips has huge customer value and it gives them smaller size, it gives them lower power, if really enables, it becomes an important core product to their success of their product, and so it can be thought of – the analogy is that it is not that different from how an embedded microcontroller might be to somebody's end equipment. It enables it, and so there is huge customer value in terms of what he can do with his equipment, and the point I want to emphasize is there are very few companies in the world that can execute on these things.

Case in point is recent, maybe about two, three weeks ago we were having a discussion with a major supplier who is making a portable media player, and we were discussing how to save him a millimeter on a package size on his power management, and he couldn't do it by using discreets, and he needed something that exactly fit his particular size they wanted for the end product, so pretty much in many places they are really desperate for these types of advances, and they know that Maxim has the right technology to do these products.

They're also trying to get all of the electronics in one place as opposed to multiple places in their boards for performance reasons, performance reasons, so it is strategic. What we're doing here. We're not doing what we're doing to be another supplier of a given function. That's not what we're targeting at all. We don't target that.

Just one and I promise to go away after this. In terms of, again your strategy here, does the lack of a DSP offering refer to you especially when you're targeting a market like cell phones or is the embedded controller an adequate substitute for a DSP? How do you think about that?

Well, we in the markets we've been going in, the lack of a DSP really has not hurt us so far. What we do in the cellular market, we find partners that we make our products meet with, and that's only if we have parts that are in the signal path. We also have a lot of products that are not really dependent on the DSP, so I think that is not hurting us.

In fact, I would go even further to say that in a lot of the equipment we're in, the customer, if it does need a DSP which I have trouble calling it a DSP, but the customer has already developed his own DSP or his own state machine, so he considers that a IP of his own, and he is reluctant in many cases even to use an off the shelf or a DSP type function that he doesn't have control over, so we don't see that except in the base band for a cell phone. Clearly we don't participate there nor do we want to. We've had many opportunities to, but we will not and are not developing a DSP for cell phone base bands, but we have related products, we call them state machines or they do functions that are specific, and our customers to the extent of processing signals, but our customers also do their own.

Q - David Lou(?), Global Crown Capital: A couple quick ones, please. First one is can you tell us roughly what the customer request for shipment time frame is this past quarter versus the prior quarter, and I have a couple more quickly thereafter.

The customer given lead times? Q - David Lou(?), Global Crown Capital: Yes. The customer given lead times.

What he requests? Q - David Lou(?), Global Crown Capital: Because it came in by about a week, right, while your own lead times gone up by a week in the past quarter. I was just wondering what the actual weeks were and how does that compare with the March quarter.

First of all, the customer given lead times came down only in the last month of the last quarter. It wasn't for the entire quarter.

Tunc is thinking is that there has been a change in direction. They may be shortened, maybe they're bringing in their lead times now in the last month is what he said. Actually not in the last month but the month before last.

I think it was in June.

June, yes. I think, David, it is in the area of eight weeks. Q - David Lou(?), Global Crown Capital: Yes. Okay. And any signs that in fact the number of companies have reported sort of mixed results, some markets have softened for them, and it's shown up in the bookings I guess in your case it is not very apparent, but I was wondering whether in fact if you defect any demand softness out there. I was also curious what decision have you made on those two CDMA transceiver projects that had 90 days to either get the margins up or you will get out of the business?

Okay. On your first question, let me answer your second question first and maybe Tunc can answer your first question. On the idea of the CDMA transceivers, we have done two things. We've raised the prices, and we right now expect but we didn't raise them to the extent that the margins are consistent with our objectives, but the margins, went up and into the… Well, this quarter maybe into the 30% area. They haven't been. The margins will go up and we'll actually see the benefit of the price increases this quarter. We expect to have about the same amount of business next quarter at a higher price or the same price.

It will be about the same.

About the same price, and then after that we'll either have higher margins or very little business. That's the status of those projects.

We also had some reduction in the cost as well.

That's what I meant, the margins went up. We're seeing the benefit of that. We'll see the benefit of higher margins in Q1.

Correct.

Which we didn't have any margin improvement in Q3 or 4 because the things we did didn't flow through production until Q1, so we'll get some help there on margins. Q2 we're going to ship about the same level that we did in Q1 and then at that point after that that problem should go away. Q - David Lou(?), Global Crown Capital: Okay.

Do you want to take the first question?

David, your first question was about where do we see bookings softening? Q - David Lou(?), Global Crown Capital: What I am saying is that when I listen to a bunch of companies before you reported many of them have seen specific end market softness, so if I were to say the bookings in general most companies have reported so far have been mixed, some better than others, but generally they were towards the low end of seasonality, and the guidance is also not that bullish. I would say low end seasonality also, so tells me there is some softening out there somewhere. I wonder what your context of your customer tells you that there is some kind of a minor inventory adjustment like we saw except...

Let me read you something. You can draw your own conclusions. We don't know how to conclude anything from it. We've got 20 equipment segments, and we can give you third quarter over fourth quarter booking changes. Would you like it hear that? Q - David Lou(?), Global Crown Capital: Yes. I think it was 10 up, 3 flat, and 8 down.

Well, I can give you know, cell phones were up 16%. Network and datacom were update up 7% each. Base stations were up 12. Got to look at the side. It doesn't say necessarily that we're indicative of the industry. Our industrial was up 3%. GPS is up over 25. Storage was up 7. Medical was up 3. Set-top boxes were up 5. Notebooks were flat, up 0.5%. Computing and peripheral was up 1%. Telecom was up 0.5%. Military, well, there's no military. Financial terminals were down 7%. Automotive was down 11%. ATE was down 11, 12%. PDA's were down 6%. Home entertainment was down 8%. Cameras were down 11. Instrumentation and measurement was down 24. Everything else which this accounts for everything but about 10% of it, and that 10% was up eight. Q - David Lou(?), Global Crown Capital: I see. Okay.

Now you know everything I know. Q - David Lou(?), Global Crown Capital: Okay. Fantastic. Thanks.

Thank you. Our next question is from Louis Gerhardy.

You mentioned the credit in the COGS line from the supplier. What was that for?

Several companies in the industry had problems with an assembly molding compound, millions of dollars worth of material had to be scrapped over the last five years, and this was a settlement that we came to an agreement with that supplier on, and last quarter.

That's like a one or two-year-old type of case, right?

Five years ago.

Okay. On your turns book, I missed the numbers. Is it 251 or 261?

I am sorry. What is the question?

Your turns orders booked. Was that 251 or 261?

251 last quarter.

Okay. And then from the numbers you just read on GPS, what is making your numbers so strong there?

Because we're very small. Just to put it in context, it is $4 million.

Okay. That's all L&A's, right?

It is what?

We have a base station, I mean a base band, and we've got the receiver. It is a very specific applications. They're basically – let me think. We have a product that is actually a software that is a GPS in the base band and software and people - computer and notebook guys and other guys can put this, they can have GPS without having to have a processor. That's one area, and what is the other?

We sell management chips, we sell realtime clock ships.

It is only $4 million. It can't be that big.

Okay. All right. Got that. Let me just ask you on the order volatility which has come up in a lot of different ways, I got to think your customers understand your ability to respond here, and I am just trying to understand why they're not placing orders here, earlier, and avoid the risk of missing some holiday demand.

I think that, Louis, I think that's what's happening now. I think they're starting to see better orders the last week or so. You're right. I think I would draw that same conclusion.

Okay. That's all I have. Thank you.

Thank you. Our next question is from Krishna Shankar from JMP Securities.

Yes. Coming back to an earlier question can you give us… You mentioned the highly integrated new products. For FY 2006 can you give us again what percent of revenues would be represented by some of these new very highly integrated products?

For FY 2006 year ended?

Right.

It was 17 or 18%, 18, yes, 1%.

Okay. And given that this will increase quite significantly over the next couple of years, to some extent I guess this increases your revenue concentration by customer depending on your customer's product ramp, so how do you folks sort of handle that in your quarterly planning process when you give bookings and revenue guidance given set of concentration?

Well, there are larger opportunities, but there is still a lot of benches. It is not like we're selling 10% into one customer. The good news is that we have much more accurate information from our customer working with specific ones and specific projects.

But I think you're generally right. We're going to do a lot more business with fewer customers. We're going to be doing a lot more business with 20 or 30 customers, or 50 of them. Was that your question.

Yes.

Okay. Maybe I don't know if we answered it or not. Do you want to try it again?

I think so what you have is essentially a group of sort of standard cells which is stitched together with some customization and you have various flavors of that for different large customers, so some of them hit and some of them don't?

Yes. It is not that simple. These standard cells, they're not standard cells. Once we've done a core for an application, a specific application which that core is very sophisticated. It can have 10 A to D conversion or it can have some sort of a state machine, it can have all kinds of variable power supplies. It can have a bunch of stuff on it. It can have 10 sensors, on and on and on. It can have filters on it and each of those and high performance stuff that just as high performance as you might find in a lower complexity integrated circuit, and they will be put together in a way to meet a specific equipment function need that that product, then, could generate derivative products a lot easier for other people making a similar piece of equipment, but it is not like it is a lego set where we throw this stuff together and the cores all fit any application or the building blocks fit any application. It is not that simplistic.

I understand. And you said that initially gross margins there would be lower. Can you give us some sense for how the gross margins in this set of new products defer from the corporate average and operating margins for some of these new products?

We don't think that they're going to be lower than 80% gross margin, but we're not pursuing these things when the margins are below 60%. That's not our strategy at all. So I think there is some confusion about when you talk about large building block chips, people, they quickly extrapolate to what other companies have done historically where they're building blocks of logic that are large or there are multiple people building exactly the same function, and those are products that have 30, 40% gross margins, and they're selling silicon by the pound. That's not what we're doing here.

I understand. I just wanted to get a sense for how the gross margins defer and since you're spinning - the operating expenses are being focused more effectively so operating margins imagine would be closer to the Corporate average?

Yes, absolutely.

I want to clarify something. I think there is some part of it that you maybe missed at the beginning of the conference call. When we mention that we sometimes have to go in with low prices to be able to capture a new technology for us or new market, that's not a majority of these products. It doesn't mean that every high integration product is one of these projects where we're trying to break into a market. I think you're equating the two, and that's not the case. Many of these high integration parts have gross margins that are consistent with what we want. But there are some where we didn't have the technology yet and we just developed it, and those are not many of those. You can count them on the fingers on one hand, so I want to make sure that's clear. It is not like we got 18% with low margin business. That's not true.

That's good, Tunc, that you clarified that. Because, the reason we got into that discussion is because we were talking about specific products that had affected our gross margin, and that was a cause of that, but that's not our trend. That's not what we're doing for a living.

There is only three or four of those.

Even that. Whatever.

That's about it.

Sure.

We clear that up?

Yes. I think that was a very helpful answer, and then my final question. In notebooks I guess you said orders up sequentially only about 0.5%. How much of this is related to some of the new products rolled out by both Intel and AMD somewhat late in Q2 and can you see a catch-up effect there in July and August as those orders start to ramp up more rapidly?

Go ahead, Tunc. You might want to answer that. It is very dangerous to take quarter to quarter, one quarter's change. You need to look at what happened over the last five quarters in notebook, and go ahead, Tunc.

I think in the notebook space, just to give you a general idea is going into the calendar year, the consensus was that we would get about a 20% or 21% type increase in unit sales of notebook PC's, but more recently and also talking to some of my customers, they've reduced the amount of growth they expect this year to maybe around 16 or 17%. It is quite possible that you're hearing the effects of that from other people.

Okay.

But remember just looking at our bookings does not tell you what's happening in the market because we're not only making motherboard power supply products, we're also making other parts that go into notebook computers. Some of those are growing as well so it is very hard to conclude from looking at Maxim's bookings to conclude what's happening in the entire notebook market.

It is a sample, but we are not the bellwether. You can't be with one piece of data. Some of these markets we're important in and some of them we're small in. I gave that information just because to give you color, but you shouldn't take it.

I understand. Thank you.

Thank you. Our next question comes from Craig Ellis from Citigroup.

Thank you for taking the question, guys. Jack, how should we think about the linearity of the $150-200 million capital program in the fiscal year?

Q1 is going to be a big number because again it has to do with we've been talking about the getting this equipment installed to increase our fab capacity. That will be the biggest quarter of the year. That could be as much as $100 million in Q1. Then over the next three quarters you're down, you're probably looking at 30 million a quarter or something like that, $20 million a quarter.

Okay. So you'll see how demand shakes out after you implement the 100 million, and that will determine whether you come in at 150 or 200 for the year?

Well, no. I think what I told them we spent the money to add the capacity to both add fab and test to do our FY 2007 plan, and most of that money we received the equipment in Q3, 4, and Q1. So that money is spent. We have that capacity to do 2007 plan for wafer fab. The other things that we're spending money on, but we're building a new manufacturing facility in the Philippines to do modules which we've been subcontracting out. We're doubling our capacity in Thailand for tests. We do about half of our tests now there. We're going to be growing in Thailand. We're building a significant facility in India. We're building or buying a significant facility in Arizona. We're spending money in those things, too.

Jack, how would we think about the disposition of front end versus back end spend in 2007 versus 2006?

Well, I would say that short of buying another fab, if we don't do that, I would say that we will spend probably more money in the fab - do you have the actual numbers there because most of the - hang on a minute. I can be more accurate. Yes, fortunately the fab numbers for 2007, about $80 million, the back end area is about $50 million and then we've got another $15-20 million for buildings and then we've got another $1 million for software and CAD, and that's another non-technical to those areas. I think that's generally the mix. More for fab than test, but test is a big number.

Either for you or Carl. We had depreciation up to I believe it was $85 million in FY 2006. How should we think about depreciation in 2007?

It will still trend as a percent of revenue. It's been about 3, 4.5%. It will probably stay in that range.

4-4.5%, okay. Thanks, guys.

Thank you. There are no further questions in the queue. I would like the turn the program back onto our speakers.

Thank you, Operator. This concludes Maxim's conference call. We would like to thank you for your continued participation and interest in Maxim.

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