Feb 16, 2006
Executives
Maria Tagliaferro, Director of Corporate Communication Jerald Fishman, President and Chief Executive Officer Joseph McDonough, Vice President for Finance and Chief Financial Officer
Analysts
William Lewis, JP Morgan securities Sumit Dhanda, Banc of America Securities Romit Shah, Lehman brothers David Wu, Global Crown Capital Louis Gerhardy, Morgan Stanley Tore Svanberg, Piper Jaffray Seogju Lee, Goldman Sachs Tom Thornhill, UBS Craig Ellis, Citigroup William Conroy, Sanders Morris Michael Mcconnell, Pacific Crest Securities Michael Masdea, Credit Suisse First Boston Rohit Pandey, HSBC Ross Seymore, Deutsche Bank Kevin Rottinghaus, Midwest Research Robert Burleson, Think Equity Partners
Operator
Good afternoon. My name is Katina and I will be your conference facilitator.
At this time, I would like to welcome everyone to the Analog Devices First Quarter 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speaker remarks, there will be a question and answer period with our analyst participants. If you would like to ask a question at that time simply press “*” then the “1” on your telephone keypad.
If you would like to withdraw your question please press “*” then the “2” on your telephone keypad. Thank you.
Ms. Tagliaferro, you may begin your conference.
Maria Tagliaferro, Director of Corporate Communications
Hello everyone. This is Maria Tagliaferro, Director of Corporate Communications here at Analog Devices.
If you don’t yet have our first quarter ’06 release you can access it by visiting our website at analog.com and clicking on the headline displayed on the homepage. This conference call is also being broadcast live on the internet accessible from that same page and a recording will be available later today probably in about 2 hours after the call’s completion.
Participating in the call, will be Jerry Fishman our President and CEO and Joe McDonough, Vice President for Finance and Chief Financial Officer. I would like to bring your attention to an important item pertaining to our first quarter results and today’s discussion.
ADI implemented FAS 123R in the first quarter of fiscal 2006 and as a result, we recorded $20.6 million related to stock-option expenses in the first quarter. In the fourth quarter of 2005 and in the first quarter of fiscal 2006 we also recorded charges associated with our previously announced restructuring.
These restructuring related charges totaled $6.9 million in the first quarter of 2006 and $31.5 million in the fourth quarter of 2005. During today’s conference call, our remarks will refer to results excluding these special items, because we believe this will help investors compare our current results to our history and thereby better understand the underlying trends in our business.
In addition, under the provisions of the Private Securities Litigation Reform Act of 1995, this conference call will include forward-looking statements. These statements are not guaranteed of performance and involve certain risks, uncertainties and assumptions, which are difficult to predict.
Risk factors, which may affect our future operating results are described in the company’s most recent annual report and Form 10-K filed with the Securities and Exchange Commission. Also this conference call will include time sensitive information that maybe accurate only as of the date of this live broadcast, which is February 9th 2006.
With that, let’s begin with opening remarks from Mr. Fishman.
Jerald Fishman, President and Chief Executive Officer
Well good afternoon and thanks for joining us here this afternoon. As it’s typical in previous quarters, we’ve provided a great deal of detail in our press release, which is fine large, I don’t plan to repeat.
But I will attempt to provide well more insight into comments that we made in the press release about Q1 and also about the outlook going forward. In general our first quarter of 2006 turned out to be pretty much the way we’ve planned it, the revenues were up 7% relative to the same quarter last year and they were essentially flat sequential.
The sequential growth came form our industrial and our communications customers and inline with normal seasonal trends that we talked about last quarter. Sales to consumer customers and computer customers were down sequentially in Q1 as it is very typical to previous years.
By end market, industrial customers represented about 41% of our revenues, computer about 13%, communications about 31% and consumer about 15% of our revenues. Comparing our first quarter to the same period a year ago, our sales to our very broad base of industrial customers grew 16% year-over-year which we believe reflects a generally good economy worldwide, that is generally stimulating higher industrial capital spending by a large base of our industrial customers.
Our sales to consumer customers grew 18% year-over-year, really few by the popularity of many different audio and video products. Our sales to communications customers increased slightly year-over-year, as growth from infrastructure applications including wireless base stations, central office equipment and optical networking system were offset by a decline in cell phone and broadband modem customer sales during the quarter.
Within communications, base station comprise approximately 10% of our total sales, handsets were 12% of our total sales and this 12% included sales of our baseband chipset, as well as power management products, Display Drivers and radio frequency ICs all of which, all of those of which are analog ICs. The balance of our communications related sales are 9% of sales stem from a very broader rate of optical and networking products.
In January, we announced that we’ve signed a definitive agreement, the DivX, our DSP-based DSL and networking ASIC product line. During Q1, sales of these broadband products are approximately $12 million or 2% of our total sales.
We expect to complete this transaction in the near future. We plan to continue to invest in line drivers and other analog and general purpose DSP products market.
Also as we described in our press release, our sales to computer customers were down year-over-year. During our fourth quarter, sales of our analog products grew 11% year-over-year and were up 2% sequentially.
Converter sales were up 9% year-over-year and amplifier sales were up 18% year-over-year. Power management sales were down 12% year-over-year as we integrated our power management devices for cell phones on to the baseband chip and revenues from our older debt our power management products declined more than our new revenues for portable products increased.
Other analog products such as Micromachine Products, Radio Frequency Products, Phase-locked Loops, Clock ICs, Interface ICs amongst many, many other analog products grew 23% year-over-year. Converters represented approximately 41% of our sales, amplifiers 19%, power management products 7% and other analog products represented 15% of our total sales.
In total, approximately 82% of our sales in Q1 were driven, will drive from our analog products. During Q1, our DSP sales declined sequentially and also year-over-year.
Our general purpose DSP revenues however which represent approximately 7% of our total revenues grew 19% year-over-year. As Maria described during the beginning of the call, in the fourth quarter of ‘05 and the first quarter ’06, we incurred restructuring related charges.
And also during the first quarter of 2006, we adopted the new accounting rules to stock options and began expecting stock options. My remarks will refer, will refer to results excluding these special items because as Maria mentioned, we believe that some investors compare our current results to our history and thereby better understand the underlying trends in our business.
Gross margins for the quarter improved to 59.2% of sales which was up 90 basis points sequentially and 140 basis points from the same period last year, as the mix continues to shift to higher margin products meaning not only more internally manufactured analog products but also a richer mix of general purpose DSP product sales. While our factory utilization was the same as the previous quarter and about 60%, our inventories grew in dollars and days compared to the previous quarter as we purchase more wafers from external foundries in preparation for Q2 revenue growth and also to provide a buffer against the tightening backends of contract of capacity.
We believe that we have adequate wafer capacity both internally and externally, to respond to higher revenues without extending our lead times. Operating expenses were approximately flat sequentially and we’re down from the same period last year.
As a result of higher gross margins and flat expenses in Q1, operating profits grew to 25.7% of sales and diluted earnings per share grew to $0.37 slightly ahead up the plan that we had for the quarter. For the first quarter, cash flow from operations totaled to $175 million or 28% of our revenues, we spend approximately $20 million in capital, producing free cash flow of $155 million or 25% of sales.
During Q1, orders grew approximately 7% sequentially with particular strength from the distribution channel, which represents the broader way of customers, of course virtually all the markets that we turn. We believe that this increase is the result of distributors preparing the strong sales growth in Q2 and also to some degree within response to the ongoing concerns, about the industry backend capacity.
While our lean times are largely unchanged from the previous quarter and remain short, capacity shortages of backend of subcontractors have resulted in extended lead times for some products. We are planning for a good Q2, with particular strength from our analog products which were planned to grow between 5% and 6% sequentially.
We expect the strongest analog growth will come from seasonal strength among industrial and consumer aspects. We are planning for sequential growth in all our analog product categories in Q2.
Our DSP revenues were likely be down slightly in Q2, as we will have divested our DSP-based DSL, ASIC and network processor products, which totaled almost $12 million in revenues in the first quarter. We are planning for sequential sales growth in general purpose DSP products in Q2.
So in aggregate, when we add all that together, we’re planning for our second quarter revenues to be in the range of $635 million to $650 million based on what I’ve mentioned earlier. We are planning for gross margins to continue to improve and to reach our goal of 60% in Q2 as the utilization rates of our factories is planned to increase.
For the balance of 2006, our gross margins will be depending on the mix of our product sales and our factory utilization. After our California wafer fab closes, we believe we will also benefit from further cost reductions which should further positively impact our gross margins in the future.
We are planning for expenses to grow approximately 2% in the second quarter due to annual salary increases which we implemented recently and increase bonus payments inline with our improving operating performance. The benefits of our restructuring actions that we’ve talked about previously are expected to offset much of the annual salary increases.
Increasing margins in minimal expense growth should provide very strong operating leverage, maybe high in Q2, our planning for operating margins to get increased sequentially and for earnings per share to be in a range of $0.39 to $0.41, up from $0.37 for the first quarter. Overall, our plan to 2006 to be a very good year for ADI, our analog product portfolio is very strong and converters and amplifiers where we have high market share and also we’ve been building momentum in other analog product categories.
In power management products, where we’ve historically been under-penetrated will benefit from our customer’s desire, to buy total solutions from a single vendor. Our Micromachine products are gaining significant traction in many new consumer products, where motion and position sensing provide new capability for new applications in cellular phones and also in video games.
And the retail release of our three access product, greatly reduce the complexity and the cost of motion sensed in integration. As you know, we’ve been working to better focus our DSP R&D on markets where we turn on a better and a more consistent return and we are planning to continue to do so.
The momentum building for our general purpose DSP products is the direct result of these efforts. Many new consumer automotive and networking applications should be getting to ramp production later this year.
We believe that we could significantly improve the focus of our DSP business going forward. And that will possibly impact our earnings as the result of this process.
The feedback that we received from the recent Consumer Show in Las Vegas was extremely strong and for those who visited with us, they really saw our first hand, our high performance analog and DSP technology together are at the heart of so many new products. Decreasingly the most sorting at the futures and virtually every type of electronic equipment are enabled by high performance signal processing technology.
ADI’s core technology is quite literally everywhere. Our products help our customer products stand out against competitors, and that’s unique value to our customers, should help us get more than our shift here at the market lead very, very good profits.
Maria Tagliaferro, Director of Corporate Communications
Thank you, Jerry. Turning today is Q&A period.
Please limit yourself to one primary question and no more than one follow on question. We’re expecting the call to last about 60 minutes, and we will try to get all the questions that we have.
We will give you an opportunity to ask an additional question after the first round is complete. Operator we’re now ready for questions from our analyst participants.
Questions-and-Answer Sesssion
Operator
For any of the analyst participating by telephone dialing, if you have a question please press “*” then the “1” on your telephone keypad. If your question has been answered and you wish to be removed from the queue please press “*” then the “2” on your telephone keypad.
If you are listening on a speaker phone please pickup your handset when asking your question. We will pause for just a moment to compile the Q&A roster.
Your first question comes from Bill Lewis with JP Morgan Securities.
Q - William Lewis
Great, thank you. Under guidance for the second quarter, just to clarify how much revenue are you including in your guidance for the DSL business, that’s going to be build better this quarter?
A - Joseph McDonough
This is Joe McDonough there is very little revenue in the second quarter plan.
Q - William Lewis
So, almost the full $12 million on the order of a couple of million dollars?
A - Joseph McDonough
Yeah, I think the way to think about it is, it’s about 2% of revenue growth in the quarter. And that’s what we are expecting to come out of the total.
Q - William Lewis
Okay. And then just on the other components of the revenue, do you expect any, any change to tax rate, and those was slightly higher or interest income which was actually lower, maybe the new thrift in the recent quarter?
A - Joseph McDonough
Next quarter, we would expect the interest income to the up at the non-operating to be in the range of $24 million.
Q - William Lewis
Okay.
A - Joseph McDonough
Non-operating income next quarter. And the tax rate only depends on the mix of business in any quarter it hasn’t moved significantly, it’s in the 20% to 23% range.
Q - William Lewis
Great thanks.
Operator
Your next question comes from Sumit Dhanda with Banc of America Securities.
Q - Sumit Dhanda
Hey, Joe, I had a question on the benefit of restructuring, could you help us understand how much of that benefit is already start go through, something actually you had implemented?
A - Joseph McDonough
Yeah the, the largest restructuring action that we have announced is the closure of California wafer fab. And as we’ve indicated that the process, because on through this year, closed at the end of the year, and we drive the benefit of it, which reduced manufacturing expenses, beginning in fiscal ’07.
All of the other actions have been things that we’ve done in just operating our business in order to try to make kinds of strategic positions that are required. And so they have, had different effects in different quarters.
And what, we are seeing and this is very consistent with what we had expected. But during the second quarter our annual merit increases take affected at the beginning of February.
So that’s the beginning of second quarter. And as you know, merit increases typically are in, somewhere in the mid-single digit range.
And then on top of that there’s benefit, and we are earning more profits. And so that has triggered some more bonus payment.
So, the 2% increase that we are seeing in the second quarter in our plan, either second quarter phenomenal, I think this is the way to describe it because that happened this year in the second quarter, that typically is a quarter, seasonally is a strong quarter for us. So, the salary increases as time for that.
But the 2% salary increase, $0.01 increase that we are planning is less than half of what the salary cost for us.
Q - Sumit Dhanda
I guess another way of asking this, as you look past year for quarter earnings, a delight quarter does it make sense to assume that the way to operating expenses, so dramatically even been able to disclose this at…
A - Joseph McDonough
I think for purposes of planning what we’re trying to do is to hold the operating expenses very flat going forward through the balance of the year. So probably be some slight increase looking for good year revenue growth and profit growth.
So there will be some slight increase of those expenses. But we are trying to hold them to a very low rate.
Q - Sumit Dhanda
Also the, with the, I guess with the divesture of the DSL business?
A - Joseph McDonough
Any doubts?
Q - Sumit Dhanda
Benefits there that you can talk about…
A - Joseph McDonough
Yeah the, those expenses are already factored in the, those benefits are factored into the second quarter plan. That transaction is likely to be close very soon.
Q - Sumit Dhanda
And that’s the full; almost a full quarter was the benefit?
A - Joseph McDonough
Yeah and that quite, they’re almost yes.
Q - Sumit Dhanda
And then one final question, could you tell us what the backlog is in that?
A - Joseph McDonough
See, what we have indicated is that the, the bookings where 7% of the revenues, for the quarter, the booking were up 7% quarter-to-quarter.
Q - Sumit Dhanda
What was the backlog up sequentially?
A - Joseph McDonough
Backlog was up quite a bit going into next quarter as well. And that primarily is in the distribution channel.
As the distributors have placed a quite a few orders on us, as you know we only recognize revenue when the distributors sell the product out, to their customers, so the backlog that we have is simply orders remain to us.
Q - Sumit Dhanda
And those, the effect of count number that were flat versus…
A - Joseph McDonough
The effect, I’m sorry, I couldn’t here you.
Q - Sumit Dhanda
The effect of funds required, I am looking for that?
A - Joseph McDonough
Our returns, in terms of the, this quarter it was a little less than 50%, so little bit less than last quarter, and next quarter we did somewhere in the mid 40% range alternative.
Q - Sumit Dhanda
Okay. Thanks very much.
Operator
Your next question comes from Romit Shah with Lehman brothers.
Q - Romit Shah
Thanks and nice job on the margin side. Jerry ADI’s outlook for the analog business looks like its inline just what we have seen historically for the April quarter.
Can you just give us a sense looking at bookings and backlog, do you think the current momentum is sustainable in terms of seasonality should we think about the April quarter being the strongest sequential growth quarter for the year?
A - Jerald G. Fishman
Well I think, it’s always hard to say because now, in our analog business we have lot of consumer products as well known cameras and TVs. Typically, the strongest industrial quarter for us, is the second quarter no doubt that indicates for many, many years partly because we’ve more days of sales in distribution and that’s just the way the patterns are.
So to the extent that, the mix of business is the way it is to be, the second quarter is usually very strong quarter. I think, now we have, like I said other types of products which changes that a little, but typically even with that, the second quarter usually is a very strong sequential revenue quarter for the analog business third quarter will less, and so in the fourth quarter little lesser than that.
And the first quarter is usually our weakest quarter in the analog business, because we basically lose two weeks of distribution sales during the Christmas period. I mean the fact with the analog business is up sequentially, the order book on the analog side is very strong, all the signals we are getting from the customers the analog business are good.
So I think that continues to make us believe that, the analog business is going to go up clearly the aggregate guidance next quarter was tempered a little bit by losing, almost $12 million sequentially, on the DSP side. But other than that it looks like a very typical Q2 for us.
Q - Romit Shah
Okay. And my follow up is, I was little surprise to hear your power management business is down last year.
Could you just discuss what you are doing to turn that business around, and what your outlook is for the power management business in 2006?
A - Jerald G. Fishman
Well, there are two basic reasons why it was down, one is; we have lot of power management sales in the second quarter last year that was standalone products that we sold into cell phones along our basebands. Right after the first quarter of last year we integrated that power management on to the analog baseband.
So, we saw that those sales try to put on power management into the analog baseband sale. The second thing that’s going on is that, it’s going to vary there, is been a lot of price pressure on the desktop power management product everybody knows that.
And, so even though you got some unit growth, sort of hurt you on the top line. And the last thing is that sort of didn’t offset the, we have a much, much stronger portable mobile power business that we did year ago.
But it just take a little bit more time to those revenues start to ramp, so I think that one of real up side that we are counting on this year on our analog business is much better performance at of our portable products. And, I think once we have that growth, we can’t ever guarantee it but lot of that stuff is based on lot of good design wins with lot of portable customers.
So that’s what the summary likes to.
Q - Romit Shah
Great thank you.
Operator
Your next question comes from David Wu with Global Crown Capital.
Q - David Wu
Yes good afternoon. I was, I want to clarify one thing and that is, you didn’t mentioned anything about the lead times given the segment on the back end, how has you managed to hold your lead times exceeding Q1, and the fact that you are already have 60% gross margin, probably by the second quarter, should I think about it long-term in terms of the margin model that you initiated or discussed a few quarters back, in terms either R&D, percentage of revenue or operating margin?
A - Jerald G. Fishman
That’s about four questions in that David. You know I think first of all, the fact that business got better in Q2 is not a great surprise to us, all round the analog we said during last cycle, we are going to try to position the inventory, so that when business picks up we don’t spend lead times, I think we generally been successful in doing that.
I think we only have to be careful when in our analog business when our pure potential that goes through distribution, that can distributor don’t take around the factories and therefore, wind up building a lot of inventory and scooting around lead times. So we very carefully control what happens in the distribution channel.
I think a lot better, we did in previous cycles. So we are working hard to do that, as I said the main reasons inventories were up this quarter was mostly related to extended wafers that our guidance decided to purchases little bit of hedge, because they were concerned about some of the factoring capacity issue, that I think, I think while we reported in the industry.
I believe that the fact that, we’ve got 60%, $621 million revenues is a good sign.
A - Joseph McDonough
Jerry you’re getting to our next quarter.
A - Jerald G. Fishman
Next quarter, 600 whatever it is 35, good thing I have told you about my last seasonality. And I think last time we’ve got up here we are well over $700 million.
Q - David Wu
And, so if, if you hit $700 million worth, what should I, sometimes in future what should we look forward to in terms of gross operating margin?
A - Jerald G. Fishman
I think if you tell us the mix, we can tell you the gross margin. I mean as you know the business is the gross margins quarter-to-quarter were highly dependent on the mix, driving we will start to look at that quarter-by-quarter, I think what we’ve seen here is a good sign, starting next year we had some good momentum based on this fab closing which is worth, not in significant amount of gross margin, like we said is 40, 45 million cost saving, when those fabs are going down.
So I think we will just have to wait and see how that materializes over the next couple of quarters. As we better understand with the products…
Q - David Wu
I think that is basically is holding pretty constant relative to last quarter.
A - Joseph McDonough
David what was the first part of that comment?
Q - David Wu
The lead times are holding pretty constant relative to the previous quarter.
A - Joseph McDonough
As Jerry, mentioned you have to look across the product portfolio. There are some products that have been affected by the backend situation and therefore the lead time to those products have stretched out.
There are other products that we have kept in stocks and the lead times are still good and we are trying to, our objective continues to be the keep the lead time short. And so we are starting next, next, this quarter, we purchased external wafers as Jerry, said beyond what we had originally planned those wafers are going to move their way through the backend, and in the finished goods in order to try to address some of the lead times.
So, we are trying to hold the lead times down, I don’t think there is any question as Jerry, said that, that the orders the distributors have placed on us, this quarter are probably larger than the appetite that they are currently seeing from their customers, but recognizing the situation with the type backend they want to be in a position to supply their customers, on their customers demand arises and they probably believe that during second quarter.
A - Jerald G. Fishman
I think, Dave, the other way to think about it, we talked about lots of land cycle and the distribution channels that had a control on us. Where, they stop this outward orders, they, we spend all the general lead times and as we got some doublings for orders.
This time in the cycle when you’ve actually got to learn something, in this time of the cycle, we’re working hard not to let that happen.
Q - David Wu
Okay thank you.
Operator
Your nest question comes from Louis Gerhardy with Morgan Stanley.
Q - Louis Gerhardy
Hi good afternoon, nice job with margins. On the last call, with regards to divestitures, you mentioned, when not if and you follow through the DSL move, I’m just wondering if, what’s your answer to the question in this time, this quarter?
A - Jerald G. Fishman
Well, I think the answer is, we’re continuing to try to focus our business towards the highest profit opportunities in DSP, in particularly the R&D that goes into that business. And as we look at all, we look at that constantly and as we decide that’s our business no longer meets our model or if not, well-placed for the future, we, we’ll take action of those.
And that’s if I’d, all I should say.
Q - Louis Gerhardy
Okay. And then just, thinking about the DSL business, now that you’ve divested, if you’re going stay in FDN line driver area.
Have you seen any signs yet that, now that you’re not competing with some of the other chipset companies out there that, is opportunity for your line drivers analog frontends has become that much larger?
A - Jerald G. Fishman
Well absolutely the message I’ve given our sales force, we’ll see how that’s placed out, but certainly that’s going to be conceptually that’s good in issue that might help us but we’ll have to wait and see those, how that really turns out.
Q - Louis Gerhardy
Okay and then just in power management, can you just talk about maybe from a product point of view or just an end market perspective, what some of the areas do you think you’ll see the best growth in over the next couple of years?
A - Jerald G. Fishman
Well again it’s really hard to predict that long in advance, but there’s really two parts of the power management business for us. One is, sort of the vertical part and other is sort of horizontal part.
In the vertical part, in the lot of product areas where we have a large part of the content like phones and TVs and apart some other products, even handsets at some degree. Where we control lot of the billing materials, now the fact that our customers have gone to competitors for those kinds of solutions, it’s not their first choice of what to do.
Now, all our customers who like to buy that stuff and certainly put us on their integration point or integrating lot of that stuff on to some other mainstream products that we already sell them. So I think part of our business will naturally gravitate towards vertical markets where we have a very great strong presence, there is another part of the a power business which is more generic in nature where, you can start off with what we would call sort of standard power cells or standard power products and we slightly lost on little bit different but we modify or in some cases, just outstand standard products to, that’s another part of our strategy.
So, it’s really a dual strategy the longest lead time for us has been to get sort of the course done so that we can rapidly add those course to applications that been developed. We’ve been investing a lot of these business, we’ve bought in some tremendous people to help us do that, to break the others in future.
So, I think that, we’re building some momentum there and, it’s the largest segment in the analog business that we are under penetrated in, I believe its one of the better opportunities for Analog, going forward. Its all most slight to action, we’re working hard to gain some of that.
Q - Louis Gerhardy
Thank you.
Operator
Your next question comes from the line of Tore Svanberg with Piper Jaffray.
Q - Tore Svanberg
Yes. Good afternoon, just to clarify, when you give us those breakdowns earlier, Analog being 82% does that included the ASIC business and the DSP business, correct?
A - Joseph McDonough
Yes.
A - Jerald G. Fishman
I’m sorry?
A - Joseph McDonough
Yes it is.
Q - Tore Svanberg
Okay so, they’re ready for then, that 82% should go up next quarter?
A - Joseph McDonough
Yes. There is current some portion of that business is actually Analog but most of the DSP business.
Q - Tore Svanberg
Okay and if I could just look at your capacity in our external versus internal including some of the restructuring that you’ve done with, when its all said and done, what will that look like, external versus internal on the front-end side?
A - Joseph McDonough
It should look very different in terms of, right now in this course. The sales that we have were derived approximately, its 55, 56% of this, 57% of the sales this quarter were produced in our internal fabs, and approximately 43% were produced externally through our fab, our wafer fab partners.
So, the amount each quarter that is produced internal or external is driven by the demand for our products not by the capacity we have. When we finish the closure of the fab we feel, we’ll have plenty of internal capacity easily, which will easily double and probably even triple our sales with very small incremental capital expenditures.
So there’s not a capacity question with respect to the actions that we are taking. The reason for closing the fab it simply to reduce the overall cost structure of our internal manufacturing occupation.
Q - Tore Svanberg
Okay very well, and looking just looking at the, looking at next quarter, I think you mentioned 60% gross margin and slightly higher utilization what number should we look at for that?
A - Joseph McDonough
I don’t have the exact utilization for next quarter, that’s a combination of all, or different factories, its slightly higher, the 60% gross margin as you know, it’s been our goal for a long time. And we’ve been taking a lot of actions over a long period of time of happening of that, getting ourselves in a position where it looks good, achieve a 60% gross margin and be able to still have this mix of business where we have obviously some products that are in less than 60%, some products are in more, the variable margin obviously on the products we’re producing internally is very high, the variable margin on the products we produced at wafer fabs, that cost us all a, a variable margin.
So, as Jerry said, the gross margin going forward is mostly depended on mix, but we have a quite a few things in terms of just to continue utilization of the internal fabs that helps to improve the margins closing the fab next year will help to improve the margins. On the other hand, the growth of some of these businesses that have the very high volume opportunities are often built at external foundries and the gross like margins we are in there typically a little bit less than the overall company average.
So our gross margins going forward, we think if we can run a business that consistently producing the 6 years driving better gross margins that could break business.
Q - Tore Svanberg
Great, very helpful, thank you.
Operator
Your next question comes from Seogju Lee with Goldman Sachs.
Q - Seogju Lee
Hi thank you, I’ll just follow up on gross margins, just to clarify in terms of the retaining 60% in Q2, you’re talking excluding ESO just talk about that?
A - Joseph McDonough
I’m sorry, we’re talking on the same basis that Jerry, has been discussing at, it does not include the expenses associated with restructuring or stock options.
Q - Seogju Lee
Okay.
A - Jerald G. Fishman
It was 3 basis, we have 59.2 this quarter.
Q - Seogju Lee
Okay great. And then if I think about that in terms of, the benefits associated with the disposal of the DSL and the ASIC businesses, how should I think about what’s the incremental benefit on the gross margin is associated with that?
A - Jerald G. Fishman
Well I think, it’s important to remember that’s only, just kind of our sales.
A - Joseph McDonough
It’s all in the guidance we’ve given.
A - Jerald G. Fishman
Yeah, its in the guidance we’re giving and it helps us, a little bit at the margin certainly but its only 2% of our sales, now you need to, at present moves will need to, on our, when your shipping $605 million very much, but certainly it moves in the right direction.
Q - Seogju Lee
Okay great. And then one last question, in terms of the cash of the balance sheet, just if you can update us in terms of your strategy there.
Thanks, good luck, bye.
A - Jerald G. Fishman
Well, last quarter we basically its upon the free cash flow and 25% of it went back in dividends, and 75% of it went stock purchases, we purchased roughly $125 million worth stock last quarter. You’re constantly reviewing our cash situations, se what the right mix, returning cash to our shareholders are because that’s what we did last quarter and we’ll update you on how we think about that in the future.
Q - Seogju Lee
Thanks.
Operator
Your next question comes from Tom Thornhill with UBS.
Q - Thomas Thornhill
Turning on to gross margins, again, congratulations on that but if we’re getting close to 60 here, if mix stays the same, can you guess the benefit of the California fab should, my conclusion would be ’07 would be some were in the low 60’s on this basis, is that I head it in the right direction?
A - Jerald G. Fishman
Well, there is so many variables here, but directionally, as we said the fab closure in California is worth quite bit of money and it translates into not in significant amounts of gross margin. So, I say that in as prices hold and we’ll treat this rate everything goes in the right way, we’ll get the benefit of that since we close the fab.
Q - Thomas Thornhill
And is that coming through in changes in depreciation or is largely in the out of pocket direct expenses associated with operating of fab?
A - Joseph McDonough
It is largely the operating cost. But let me just come back to this mix question.
The mix really has two different elements to us. One is the portion of product that we manufactured internally or externally.
And so for instance, a converter that used in the frontend of a digital camera is typically manufactured at a foundry, because of the digital CMOS process
A - Jerald G. Fishman
Fine line.
A - Joseph McDonough
Fine line, digital signals. So that kind of product typically has pretty good margins but on the other hand, the variable margin for that is a lot lower than the converter that we manufacture in our internal fabs where cost are mostly effected, there is very little variable cost.
And so that has a big difference which one of those products that we sell.
Q - Thomas Thornhill
Even though they both analog?
A - Joseph McDonough
Both analog products are great products their leadership technology. Now there is also other products and this were we are making some of the strategic decision that the gross margins have been lowered than what we would, the business that we would like to be in.
And those kinds of products tend to be, in some of these very competitive vertical markets, and they can influence the gross margins quite a bit. So, the assumptions that mix things were saying probably the only assumption that it’s not the right one that we make, as we go forward.
If we look at next quarter, some of the factors that influence the gross margins is getting to the 60% next quarter, your elevation rate will go up a bit, the broadband business those products did have a lower gross margins, so that certainly helps the gross margin. But on the other hand, we are looking for resumptions of growth in some of the consumer products and other products that the sales have been lower this quarter, those products were manufactured externally and have a slightly lower growth margins, the overall average so that comes down a bit.
So we put the plan together, we have a loading plan to the factories, we have a sales plan, we put it all together and look at it, and it looks to us like a 60% gross margin plan, and that’s what leads us to say that it looks like next quarter, we believe we can accomplish the goal, that we could shift. Looking out to a year from that now, it’s very difficult because of the mix of the business where it does become the prominent driver.
On the other hand, looking out at the business that we are in and the opportunities we have, we believe we can continue to operate the business for the very strong gross margin.
A - Jerald G. Fishman
So I think for the that, the summary of all those comments is, the midst is very defending, we’ve done a lot of things within the business, to put generic gross margin upward pressure in the business, because we think that the opportunities there, that we are committed to do that’s the reason we decided to close our fab in Santa Clara, California. Now how that all goes through, how much of its consumer growth versus industrial which is especially, which I would say, how much of business is active, is very attractive businesses for us at a very high volume that might run 55% gross margins in Q2.
Our strategy is, we think those are great businesses; we are going to stay inner more and trying to increase those businesses. So, it really does depend on what mix of business that we have and we’re taking an action that, it’s the mixed wholes, will help our gross margins and the mix goes against us effectively, while I have some sort of stuff that helps us on the defensive side.
On each quarter, we will try to update you on sort of mix is, and what are our expectations are, but we sell 10,000 products to 60,000 customers in 6 major vertical markets at least, and trying to get real specific about that within a point or 2 on gross margins looking out in a year is very, very challenging. I think the takeaway really Tom is that we are doing things to fundamentally reduce the cost structure of the company, some of those are pretty significant things, we’re doing that both for offensive and defensive reasons, if the offense part comes true, but we got to be prepared that if, if the business that we have 55%, 58% or 56% gross margin really starts increasing, but certainly not going to walk away from that business because its below 60%.
I think that’s…
Q - Thomas Thornhill
In your judge, the your business is to where you want to put focus that you look at your operating model, is your, the primary metrics at which you make decisions on where to place focus or emphasis, is it gross margin, is it operating margins, is the operating profit dollars?
A - Jerald G. Fishman
I mean, our take, is what investors want us to do is to grow our earnings per share, that’s always been the case, that’s what creates momentum in the earnings and that’s what creates momentum, I think in our stock price. So our fundamental assumption is that if you grow our earnings per share to very rapid rate, everybody will be very, very happy.
Now, I think we do look at gross margins because I believe as at some degree, gross margins are an indication of the quality of rear technology. So I think, it’s a very complicated formula, we don’t have something that says we will never invest in a product that we don’t think, we can get 60 points to gross margin.
On the other hand, we say to over selves, we have a great business and generate a lot of momentum in earnings per share is our strategy, so we’ll have to deal with that as well. So its really not any one thing, it’s really what we really trying to do, with that momentum in our earnings per share, subject to that fact that gross margin to an indication of the quality of your technology.
So that’s the best I can tell to you, that’s the way to think about it when we look at R&D decisions. We are not pinnacle about, we don’t have any, sort of normally that stays with 56, we don’t use 58, we do, well if its 62 its great, but 60.5 is not, but all those are just considerations we look at and when we think about, how did we get momentum in earnings per share.
Q - Thomas Thornhill
Thanks Jerry.
Operator
Your next question comes from Craig Ellis with Citigroup.
Q - Craig Ellis
Thank you. Jerry I wanted to take this a little bit longer term from here, and look at the revenue growth side history, if we were to look out into 2006 and into 2007, you mentioned, when you talked about this year being a good year, traditional analog, the general purpose DSP method, and then it’s a new growth drivers like Micromachine and most of the new products.
Can you focus in on those latter 2 categories, general purpose DSP and some of your new growth drivers to talk about, how those might grow over the next few years?
A - Jerald Fishman
Well again, you are asking for my opinion I guess, because of course, nobody knows, but I think, after we have in the general purpose DSP markets, I believe that that will present an opportunity for above our average growth for us over the next couple of years. I think the micro, with the cycle on the Micromachine side, I think the Micromachine product given the fact that’s, the most of those products here over the years depend in automobiles, I think that were in some of the consumer applications, some communications applications, I believe that business has its potential to outgrow the average as well.
So we’ve done a couple of things out there, that could, through that, there are other areas that who knows, we’ll have to see and wait to see how that happens, but certainly those 2 that you mentioned or if you accretive to our growth rate. On the other hand, in outgrowing big business right now, so you shouldn’t get too carried away with that.
I think another one that should grow with more in our growth rate, is our power management business. We’ve taken a lot of steps, we’ve spent a lot of money, we got some great people in the business.
So, I’d be disappointed, if we couldn’t do, above the market on that. So, that’s where we take.
Q - Craig Ellis
Okay, its fair to summarize that great strong traditional analog business with growth attention in power management, general purpose DSP and things like back polishing?
A - Jerald Fishman
Yeah, I think that’s exactly right, our position in converters and amplifiers is very strong, but we could have 40 somewhat percent of the converter market at 45% of the high performance amplifier market, it’s not to get a lot of growth at share gains. So what’s you are got to do is basically assume either growing line with market on that stuff, you got to assume that other stock is going to grow a little bit faster, that’s basically what happened in the first quarter, we’ve said that the other analog categories, was the fastest growing category in our analog business, and that’s sort of represented here that the point that I am trying to make.
Q - Craig Ellis
All right, thanks Jerry.
A - Jerald Fishman
Yep.
Operator
Your next question comes from William Conroy with Sanders Morris.
Q - William Conroy
Good afternoon, Jerry there’s something you could give us a little bit more detail on the power business, specifically as you look out, and in your opinion, when do you think we get sort of the cross over or return in net growth between what’s going on in your PC power management business and on what’s going on in the portable side?
A - Jerald Fishman
Well I can just tell you our plan so that have been, in second half of the year.
Q - William Conroy
And are the applications on the portable side similar to what you’ve been doing on the PC, it’s…
A - Jerald Fishman
Well, I mean a lot of our sales on PC so far, has been on the desktop. So, a lot of the fundamental technology is not very different but, when you’re building a power part to a portable instrument, it’s a very different challenge when building one on the desktop.
So, its lot of the base technology saying but the application is very different than the requirement and the functionality, I mean even if you look inside a laptop is probably 5 times the power management available market is on a desktop and it’s a lot than in the different products. In some of the core technology staying with product are very different.
Q - William Conroy
And then as a follow-on, hold on changing gears on you, can you talk a little bit about the DSP market, how is that treating here, as source robust as it was with ups and downs, kind of, just give us an update on digital still camera?
A - Jerald Fishman
Digital still camera here is doing very well for us, we have very high market share with largest companies, its interestingly those are smaller companies selling digital still cameras are starting to consolidate as you might expect, fortunately in camera business we have the highest market share with the largest customers. So that business continues to do well for us, our goal in the camera business get just more of the content, beyond the Analog frontend which is primarily what we’ve been supplying, so there’s lot of other functions in cameras, its power functions, its display functions, lens driver, is the things that control some of the lens characteristics, there might actually be some Micromachine products on those in the future.
So our basic goal is sort of hold our share on the frontend and build content on all the other functions in the camera business. So, I think, if we execute, we have regular chance in doing that.
In the general purpose DSP business, for those I know have reiterate for you that you have a lot of sell side analyst in our crew in Las Vegas and I think, John Wynne met with many of you. I think you could see first hand of the multitude of different products that are using some of our newest DSP course.
And, its been a struggle because taking a long time for those products against production but think when you see the real products and you see the take-off of those types of products, I think in every regions to be optimistic in, many of those newer course that are going into many of those applications have pretty good profit goals. So, though we’re trying to predict the exact build up budget, I mean that’s what we compelling on, in the DSP business and die banks, that’s going to pay-off on these they’re doing a help.
Q - William Conroy
Thanks very much.
Operator
Your next question comes from Michael Mcconnell with Pacific Crest Securities.
Q - Michael Mcconnell
Good morning, want to just get some more clarity with respect to trend, near-term it was, you said that primitive sales were very strong, I guess, slightly couldn’t understand whether that’s even in direct sales or a little weaker than you were expecting or with despite the orders were at 7%, I guess I am turning to be aware when I’m getting fully longer guidance, as you able to…
A - Jerald Fishman
Well I think the sales came out pretty much where we have thought, we thought they’re going to be about flat, they turned out to be about flat, perhaps if we didn’t get bought now on the backend, we were about the cumulating dollars were but it wasn’t the significant factor in our shares. So our shares were about where we thought, the industrial stuff and the communication stuff were great, the computer stuff and the consumer stuff, as its typical in our quarter now, was down sequentially.
When the consumer business when we look our backlog going through Q2 ‘06, so that’s why we aren’t idiotic about, that business going forward. I think the way you really got look at our guidance is that we’re 2% off on that just due to the fact that we like to have business that we had last quarter in DSL business, that’s about 2% of growth, if you sort of add that on to what our guidance is, its pretty good guidance in Q2 and you are telling that it looks like we think business is pretty good and we have a good quarter.
Q - Michael Mcconnell
And just a quick one, just on the model tax rate and income applications for cable?
A - Joseph McDonough
The tax rate, our plan is in the 22% to 23% range for the tax rate and the non-operating income next quarter is in $24 million range.
Q - Michael Mcconnell
Thank you.
Operator
Your next question comes from Michael Masdea with Credit Suisse First Boston.
Q - Michael Masdea
Yeah, now just one question, Joe or either one of you actually, last year you guys talked about some changes in the way the customers are managing the supply chain of some group to, or forecast based of sequence and then we heard this week talked about, trying to drive or lead their supply chain, is there changes are seeing in that whole supply chain order management, that we should be aware of our anything that seems different to you, or a different going forward.
A - Joseph McDonough
I missed the…
A - Jerald Fishman
Could you repeat this current quarter?
A - Joseph McDonough
Just on the Cisco comment?
Q - Michael Masdea
Oh yeah, they were talking about driving basically towards the leaner supplies that they’ve been having in the past and some structural changes?
A - Joseph McDonough
Does that mean your, your vendors?
A - Jerald Fishman
I think, less inventory to them and more for us.
Q - Michael Masdea
Okay.
A - Jerald Fishman
I think that’s a main stroke. Yeah, and I think everybody is trying to push the inventory to everybody.
I mean I don’t think that’s changed and when business is in different phases, the power shifts on that but, I don’t think its significant for us Michael like, I think that we’ve tried to keep very good track on what’s going on with distributors, we try to keep very good track on what’s going on with the subcontractors who will get another inventory point and everybody learnt a lot about how to do that, we’re trying to reflect that learning now, we managed both of those channels. So but to redirect in response to your question, we don’t see much of an impact on that companies like Cisco, I think its clearly large companies don’t want to carry any inventory.
I mean that’s a fair definition of supply chain management. On the other hand they want and available with no lead time.
So, welcome to the semiconductor industry.
Q - Michael Masdea
And when you think about that in the cyclical perspective does that preset the inventory data for this industry or to the decrease, now that’s helpful?
A - Jerald Fishman
Well, I think what you really have to do is really work on your cycle phones. Because its clear that customers don’t want to order optimum advance and yet they have demands because they can’t forecast their business at all when compared to any other business that can forecast, and so I think what we have to do is be able to have a situation where we have good die banks which is low cost inventory point, for most of our products that’s not allow our obsolescence risks because we life cycle are so long and we are quite willing take risks on building some die banks because the inventory is vertical there.
So the products that ever short lifetime, there is always a battle on that. In one sense, we know the customers want to quickly and other sense, when out ruling to take a lot of inventory risk, because if were long, we want to beaten the inventory.
So, we’ve done, I think by enlarge a pretty good job stack, we haven’t at any real light offs when the cycle change this time and our goal is to really balance that and make sure that we don’t have those time that’s happen to us, but I’ll tell you to constant that one, the lead times is still short, customers are still ordering with no lead time and they are expecting us to be able to deliver and if you know, its always direct that they’ll just double and triple orders. But I think we are, we’ve been on it quite a while, and we’re moving smart and then we’ll add cycle, now we’re trying to manage that as carefully as we can.
Q - Michael Masdea
Very helpful, thanks a lot.
Operator
Your next question comes from Rohit Pandey with HSBC.
Q - Rohit Pandey
Thank you. Can you give us some more details on the industrial part of the business; how big was the ATE segment and that, and are you seeing, increase the managing segment giving the tight capacity of leverage?
A - Jerald Fishman
Sure. I would say without going to our part of the numerical detail, that, that segment comprises what we call, real industrial products which is products like instrumentation mode of control, medical instrumentation, power leaders and a bunch of other what we would call classical industrial products.
Of the 41%, that’s probably 25 to 41, roughly. ATE business is about 2% or 3% of our sales, automotive sells about 7%, gross sales about 5% to 6%, annually its about 41% of our sales.
Now if you can take each of those categories as financial data because a lot of this stuff goes through distribution sometimes in part to, sort of classify exactly what type of product is going into. Now the ATE business was up for a little bit last quarter, but it’s considerably below with the peak wise was of the last cycle.
And it’s in, it’s a little surprising to our convincing more stress in that given that this backend capacity shortages throughout Asia. But, ATE business is like it’s always been in the past.
We never see it so it hits you over the head. And typically what happens is we are about six month after their demand increases and we are burning off all the inventories and then they come out to you like, kind of they do want everything yesterday.
Now, we’ve talked to our ATE customers, we are going to build out if they want to get our products. They’re going to start letting us know and I’m sure they are going to respond to that.
So it think, at the peak to our ATE revenues were 6.5% of our sales there, below 3% of our sales right now. So I think, we got a long way to go in that business and we’ve really have to see in massive increases in orders although this business did grow well sequentially last quarter.
Q - Rohit Pandey
Shifting gears again at the industry level. Do you and your competitors are actually trying the 60-30 model, sort of, achieving it before your timeline as at your competitors.
So, how much room do you think is there at this kind of margins for Analog? How many clears can be, and be at that kind of margin levels, I think it should become more competitive or…
A - Jerald Fishman
Well I mean the, in the analog markets, we in a sort of bifurcated market were low end, with mid range and the high end. I mean I still believe that in the high end, you can earn very good margins, can earn, on the average 75% or 70%.
I think its hard to tell, but still get growth but, there are many product there, as we, you can’t get those margins or other product areas where total industrial products tend to be the product areas that have the highest gross margins mainly because of the fragmentation, that there is not one big application, there are applications, or, if we can deliver higher performance products, our customers get more money from their customers, like differentiating the product, but mostly because its nominated by products, its very fragmented products that going to a very a fragmented customer base with extremely long life cycle. I think that’s why the gross margins are a size they are.
There was a margin of more people trying to get business absolutely; I think they will do in after last 5 or 10 years. It’s hard to do.
And so, I don’t think you see much changes in the competitive landscape going on in the industrial part of the business. There is a lot of swapping around for the higher volume mixes, there’s peoples in there’s people out with new products.
So that part, sort of the market share is about for Analog for us. But I think with the industrial part of business, where review is the core franchise of Analog you don’t see a lot of shifts in the share, you don’t see a lot of differentiation, will year-to-year with customer base, we have the great reputation in that business.
We have great products, we have great customers. And I think that continues to be the core franchise of Analog devices.
Q - Rohit Pandey
Do you think that the different competitors are approaching the 60-30 model from different end-market?
A - Jerald Fishman
I’m going to think it appears as that.
Q - Rohit Pandey
Right, thank you.
Operator
Your next question comes from Ross Seymore with Deutsche Bank.
Q - Ross Seymore
Thanks guys one quick question on the inventory side of things, you talked about the DSP bookings being relatively stronger area. If you are more or less ordering ahead more necessarily got double ordering but ordering ahead nonetheless on the frontend, because you are worried about the backend and people are doing the same of ordering at in the backend itself, how do you really avoid the double ordering that’s happening on both end of that spectrum affecting you?
A - Jerald Fishman
Well we work hard to really look at, the primary place where we really see that more than 8 houses in distribution that’s what we’ll see in every cycle. And clearly, if we would supply all the stuff and I think distributes one and crank our factories have to do that clearly there will lot more volatility in the business.
We are try to look at the star quoted patents, I mean look at anytime, any company that’s serving the base of customers that we serve certainly backlogs up 12% or 20% or any of those kind of things, that demand hasn’t gone up directly as because we’ve all been doing this for a long time. So, what we are trying to do is a reason that we don’t like to put out of disclosing headlines on order growth or backlog growth or any reasons I think that, people tend to get very excited about is because we low with the generic growth rate of these businesses.
And responding to some of these large partitions in claiming victory that, the world is all of a sudden changed and what was the 15% business is now 40% business. That’s not how we run Analog.
Now, we try hard not to be, not to respond to that. And hopefully, we are going to do that.
So always attempting to respond, because every time it seems like, my God, the world has changed and everything is great and we are back with this range of 30% or 40% year-over-year growth. I don’t think that’s going to happen.
So we work hard not to act like that’s going happen and that’s one of the factors looks like that’s going to happen and, that’s we are trying to do. Well, some of our sales growth, with these kind of order trends pick up the most consumption rate probably but we’re working hard to do better job in the last cycle on that.
Q - Ross Seymore
And maybe a related question if you just look at what you leave the DSP inventory level as actually in your quarter how does that on a week basis or however you want to judge it. How is that compares to any sort of historical average, are we at the normal level above or below did you give color on that?
A - Joseph McDonough
Yeah we are well below because I think the same characteristics that you are talking about whether you are talking about it our customer tracking the inventory down or we are trying to improve the cycle times; the distributors have their own issue with respect to financing corporate capital. And so, for a long period of time, over the past few years they have been interested in driving down the levels of inventory.
What we have been working on is to try to keep this product available the lead times, the shortest we possibly can and we would actually prefer to keep the inventory until the end customer actually needs the consumer. Now that’s the real challenge and that probably never will be achieved.
But that is the challenge; there is no benefit really to anyone, to move the inventory along either to the distributor or to the end customer. If that isn’t needed in the consumption of their product, all that have to provide some sort of false signal that stimulates some other size of the action that didn’t have to happen.
So, we are all working on that, the solution to that problem and I think in general, there is a better job being done today then it was a few years ago, but there is a still a lot of room for improvement.
A - Jerald Fishman
I mean I think turns have been a real hook around the companies this concept which I think is very typical in the industry now that we are lot better holding the inventory than the distributors because we have a much wider reach, and I think slowly but surely that’s the way the model for the industry that we get to, I mean, it used to be that distributors had, inventory in a 100 different places we get it overnight and nobody else could ship it overnight, but they ship inventory on such warehouses, any customers can get the inventory in the same time from us as they catch from a distributor. So that’s not a real benefit of these distributing.
But the distributors have many, many have benefits and that certainly not a big advantage if we keep the inventory centralized, we can sort of much broader rate of customers with lower inventory that putting it out in the distribution channel, we’ve long ago reached the conclusion that a sale to the distributor is not a real sale, so we have no incentive to put inventories distribution at all. In fact, we have a distance benefit from these facts.
So, I think the world is going to change, Joe’s quite right there, their cost to capital, they don’t, they, at the margins they make they shouldn’t at can’t afford to carry a lot of inventories like in the old days. And I think they are very savvy about that, they are not going to do that.
Q - Ross Seymore
Okay thank you.
Operator
Your next question comes from Kevin Rottinghaus with Midwest Research.
Q - Kevin Rottinghaus
Thanks, I’m not saying the topic, I guess maybe what we’re trying to possibly view topics in the beginning about bookings from distributors picking up or they’re ramping up for better sales, I mean, I guess if its not your product, do you think you’re building inventory of other people’s products?
A - Jerald Fishman
Well, I think what I’m saying is that, distributors typically have a very strong Q2, I mean this, the distribution business in general, although we didn’t serve some very large customers through distribution overseas, the distribution business in general was the days business. So you have an excess amount of, you do about staying around for day all the time.
And if you have 10 to 12 less selling days, you have 10 to 12 less selling revenues, kind of 12 days. I think historically since distributors, the largest part of our business that distributors serve is our industrial business; they generally have a good February, March and April.
They typically build some inventories in advance of that. That’s not at all the typical it’s not related to lead times, it’s not related to any of that stuff.
I think the last quarter, in the orders that placed on us and by the way I think the orders been placed on everybody else most likely. They want to get a little ahead of the way as Joe said, I think its quite right that the inventories in distribution are low and they’re little bit afraid of getting caught.
So, I don’t think there anybody, us or anybody else. You have to pay a lot of attention to the orders that people are talking about that they’re getting into some of those orders or orders distributors of pricing on that.
I don’t think it’s a very relevant thing, some of that, I’ve always seen some of the commentary by competitors order rates are up 5%, that’s great. It rolls back to 2000 and everything is wonderful.
I don’t believe that personally, of its truth. But I’m not planning for that to happen.
On the other hand, I think Q2 in distributors are planning aren’t to be good quarter and they’re trying to stage inventory to be ready for that. And I think that’s no different that we’ve seen every Q2 in a normal year.
Q - Kevin Rottinghaus
Okay.
A - Jerald Fishman
Okay?
Q - Kevin Rottinghaus
On your guidance on the PC side, with notebooks, maybe start to hit this drive in the second half, you‘ve talked about fully complexity desktop versus our local versus desktop rather, it’s a local product portfolio and is it inline, start the design wins there for the second half, for those things are kind of develop in the first half and then certainly has a second half.
A - Jerald Fishman
Well I think, I never count our design win and so we actually ship something. For reissuing, everybody claims the design wins on everything.
But I think based on, what I reviewed that business last time and, it was Robbie McAdam who want his Analog business including our power management reviewed it, I mean there’s a lot of reasons to believe that we’re going to get some momentum in the second half of that business based on design ends that are current. Like I think, we’ll wait and see, till we ship the products and we can, quite victory, and then we’ll proclaim victory, I’m always skeptical about everything until we ship it.
So, but I think the product portfolio is launched longer and I think the customer base is good, the customers we’re supplying to, want us to be there, they want our technology, so I mean, I think that’s right now, it’s an opportunity for us for the future that it’s good. And that’s what I really believe.
Q - Kevin Rottinghaus
And then just a last thing, on the general purpose DSPs, on the Blackfin design wins, it seems like they’ve kind of been popping up for the last several quarters, have those started to move to products or do you have better visibility when they will or is it just a seasonal long lead time design wins or…
A - Jerald Fishman
Well they’re certainly long lead times. Of course, not only customers have to buy the chipsets, they go all around software development for what they do.
So it’s been a longer than we’ve thought, I mean I’ve, I’m very frustrated that has actually, experts to say as you know. But I think when I look at the list of products that its been, I look at the customer lists and I look at the diversity of applications, rather good applications, they’re consumer applications, they’re industrial applications, they’re automotive applications, I think you probably sort some of those added, if you’re adding CS, I mean they’re going to go on production and its hard to call these lack orders but I mean, I’m feeling very optimistic about that in the forecast our guidance have are good.
Again, we’ll proclaim victory when we turn those forecast into revenues.
Q - Kevin Rottinghaus
Okay it does not necessarily meaningful driver for this, the sequential quarter?
A - Jerald Fishman
I don’t, well I think our GPDS sales, sales forecast for the second quarter is good. And I think if we make that, well I’ll be even more confident about Q3, is the best way I’ll say.
Q - Kevin Rottinghaus
Thank you.
Maria Tagliaferro, Director of Corporate Communication
Okay great. We actually have a number of people are still waiting to ask questions and what’s coming up on a quite a few minutes past the hour, so we’re just going to take one more question here live and then please give us a call back to us at the office at 71-461-3282 to the rest of the folks who are not going to get to in the queue today.
So operator, can we have the last question?
Operator
Your next question comes from Robert Burleson with Think Equity Partners.
Q - Robert Burleson
With the handsets, can you talk about the performance of your handset business relative, that you would have…
A - Joseph McDonough
Well our performance for handset business is relative to our expectation a year ago was lower, we had a great amount of growth in 2005, I mean 2004, 2005 we didn’t grow the business as fast as our plan was for many, many different reasons. On the other hand actually that, if you look at some of the product announcement that we just made we actually just recently introduced our entire 3G portfolio that’s both for regular 3G and, we think even more importantly for TDSCDMA which is the standard, national standard in China.
Well I see reports in the press and I seen some of the analysts that right on the Chinese market recognize that, we have a very strong position in China, on TDSCDMA and if the, that standard really goes long way people are predicting it well, we have a very strong position, when that happens, we have had a partnership with Dayton which is widely viewed as the largest IP holder of that standard in China and we have some very great product that are really making phone calls, not just part of a PowerPoint slide presentation on that standard, and we are going to be demonstrating many of those things in at the GSM conference, or the 3G conference next week in Spain. So, I think, our goals is always been in that market to up market to areas that we can really get paid for we do, I think some of these new product offerings, both Wideband CDMA and the Chinese standard are we believe we will help us through to better objective.
On the other hand, your handsets are 12% of our sales, 45% of that is analog content, not the Baseband which everybody is spectated on, and that part of the business is doing pretty well also. So, still we are hopeful that with the better mix, we’ll have more stable and hopefully do more profitable business, even though that business’s profit margins have been reasonably good, even thought the sales have been disappointing, in that business in the last year.
Q - Robert Burleson
Great, and just quickly on assembly and test, that’s going to bottleneck all over the place, not just in these sort of Analog and mixed signal space, and I am wondering is there any sort of amounting pressure on the subcontractors there, sort of industry wide space, has actually increased the capital spending?
A - Jerald Fishman
Yeah, there is lots of pressure, subcontractors many of them, even the large ones, don’t have very great capital structures, they got murdered when, in the recession, and they’ve been very circumspect about the having capacity, as a result, but I think if you listen to some of the comments around the industry and the pressures that suppliers are putting them on MTA capacity, they will, they are raising capital they are increasing their capital spending plans and then, they are trying to get ahead of this way before it collapses on their head. So absolutely, I think most spenders are putting a lot of pressure on them to get moved, before it turns into shortage and all the sort of things that happen when there are strategies.
Q - Robert Burleson
Thanks a lot.
Maria Tagliaferro, Director of Corporate Communication
All right and thank you to everyone for participating on our call today, I will look forward to talking with you again during our second quarter conference call, which is scheduled for Thursday May 11, 4:20 PM Eastern Time. Good bye.
Operator
This concludes today’s Analog Devices conference call. You may now disconnect.