Oct 22, 2015
Executives
Kathy Ta - Managing Director-Investor Relations Tunç Doluca - President, Chief Executive Officer & Director Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Analysts
Harlan L. Sur - JPMorgan Securities LLC Ross C.
Seymore - Deutsche Bank Securities, Inc. Blayne Curtis - Barclays Capital, Inc.
John William Pitzer - Credit Suisse Securities (USA) LLC (Broker) Vivek Arya - Bank of America Merrill Lynch Ambrish Srivastava - BMO Capital Markets (United States) Craig M. Hettenbach - Morgan Stanley & Co.
LLC Amit Daryanani - RBC Capital Markets LLC C.J. Muse - Evercore ISI
Operator
Good day, ladies and gentlemen, and welcome to the Maxim Integrated First Quarter of Fiscal 2016 Conference Call. At this time all participants are in a listen-only mode.
Later we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder today's program is being recorded.
I would now like to introduce your host for today's program, Kathy Ta, Managing Director, Investor Relations. Please go ahead, Kathy.
Kathy Ta - Managing Director-Investor Relations
Thank you, Jonathan, and welcome everyone to Maxim Integrated's fiscal first quarter 2016 earnings conference call. With me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer, Bruce Kiddoo.
I would like to highlight that we have posted a supplemental financial presentation to our external Investor Relations website. The information in this presentation accompanies the financial disclosures in our earnings press release and on this conference call.
During today's call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings.
Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty, and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge.
Now I'll turn the call over to Tunç.
Tunç Doluca - President, Chief Executive Officer & Director
Thank you, Kathy, and good afternoon to everyone on the call. We appreciate your interest in Maxim Integrated and thank you for joining us today.
As we published in our press release earlier today, our guidance for our December quarter is well below expectations. Our soft outlook for the quarter reflects three underlying reasons.
One, an unusually high decline in consumer revenue due to product cycle timing; two, normal seasonality within Automotive and Industrial; and three, continued weakness in communications infrastructure. Looking ahead to the March quarter, we expect a strong rebound of our business driven by upcoming product cycles in Consumer, continued growth momentum and visibility in Automotive, and normal seasonality in Industrial.
As a result, we expect our 2016 March quarter revenue to be similar to the revenue of the March quarter of 2015. We are on track to achieve the $180 million cost savings we described last quarter.
Our manufacturing footprint reductions are enabling us to simultaneously improve flexibility and profitability. And we are executing our plan to optimize our product lines and organization for better return on R&D investments.
In manufacturing, we ended production at our San Jose fab ahead of our original plan. For our San Antonio fab, we are in advanced discussions with a strategic foundry partner and expect to announce the sale before the end of this year.
Our collaboration with manufacturing partners in technology development is proceeding as we expected. All aspects of our manufacturing transformation are on track, and Bruce will provide more detail right after me.
When our plans are fully executed, the changes to our manufacturing structure will expand the company's gross margin percentage to the mid 60%s and enable us to maintain very low capital expenditures for the foreseeable future. Turning to R&D.
We are well under way in optimizing R&D and sales organization to reduce funding in non-core areas, while continuing to fund key growth product lines with a particular focus on enhancing the company's franchise in power management, where Maxim is a leader. Now with that overview of our business, let me now turn to our quarterly results and outlook.
Our September quarter revenue performance was slightly below the midpoint of our guidance. Revenue in smartphone was a bit stronger than we projected, offset by a very weak communications infrastructure market.
Our core Industrial business performance was seasonally down, but in line with our expectations, and Automotive grew strongly as forecasted. Let me provide more color by major market.
In Consumer, shipments for a new generation smartphone from our largest mobility customer were slightly stronger than expected and benefited from an earlier product ramp this year compared to last year. Improved diversification beyond smartphones enabled September quarter Consumer revenue to grow over the same quarter a year ago.
However, wearable shipments were down sequentially in line with forecasts. We expected wearables will be a growth driver for Maxim.
We recently won new designs with our high efficiency and high integration power management solutions, as well as low power and specialty secure microcontrollers. These design wins are at leading companies in the fitness and healthcare markets.
In the December quarter we expected demand for the latest generation flagship smartphone at our largest mobility customer to ramp down after its initial launch. This will result in substantial decline in smartphone shipments, only partially offset by improved tablet shipments.
Our wearables revenue is expected to be down in the December quarter. Overall, we forecasted our Consumer segment will be strongly down in Q2.
Let me next turn to the industrial market. Our September quarter Industrial business was down from last quarter with core Industrial seasonally down.
In the December quarter, we expect our Industrial business to be seasonally down as well. Let me now provide some comments on our distribution business.
Our largest distribution partner, Avnet, is again our largest account at 19% of total company sales. Globally, end market bookings were down 4%, and resales were down 3% sequentially.
Overall, we observed mostly seasonal patterns, except for North America which was impacted by discrete items. Globally, we ended the September quarter with 63 days of inventory in the distribution channel, which was up six days from the June quarter.
The North America region drove the majority of the increase in days of inventory. The increase was due to shipment timing of Avnet as they reported a 14-week September quarter, and by timing of product shipments to a large customer through distribution.
We also observed an inventory increase in the European region, which is a typical seasonal pattern. Next, let me discuss Communications and Data Center.
Our September quarter Comms and Data Center business was strongly down sequentially. We continue to see broad-based weakness in this market.
We expect our Comms and Data Center business to be strongly down in the December quarter with continued broad-based weakness in comms infrastructure. Within this market, we expect that the enterprise server business will be flat from the September quarter.
In the longer term, we expect cloud and data center to be a growth driver for Maxim. We continue to see significant customer traction in our highly integrated, high-current power management solutions, as well as our 40-gig and 100-gig optical products.
Leading cloud computing customers demand smaller and more power-efficient solutions to reduce their overall cost of ownership, and we clearly deliver on this. Next I will comment on Automotive.
Our September quarter Automotive business was strongly up. In fact, it was up from the same quarter of last year by 40% and up 9% sequentially.
This performance reflects solid content growth in high-end and mid-range cars. We are benefiting from the number of electronic control units continuing to grow with new infotainment, driver assistance, and safety features in cars.
The increase in the number of electronic control units per vehicle requires many power supply rails to fit into tight spaces and provide less battery drain. More data has to be moved from sensors applications processors and then to larger LCD displays in the car.
We provide the high-speed interconnect chips that deliver the most robust, low-power and highly integrated solutions. We also benefit from widespread adoption of multiple USB ports and LED lighting in cars, and these functions do need robust power management solutions from Maxim.
In the December quarter we expect Automotive to be flat off a strong September quarter. In the computing market, September quarter revenue was strongly down sequentially.
We expect computing to again be strongly down in the December quarter. Computing remains a small percentage of our business and as you well know, we have not been investing in it for several years.
To summarize our view of the December quarter, we expect Automotive to remain flat. We forecast Consumer to be strongly down with the expected decline of flagship smartphones that are leading mobility customer, and lower wearable shipments.
We expect Industrial to be seasonally down. Communications and Data Center and Computing are expected to be strongly down as well.
In closing, while our near-term outlook is soft, we expect a rebound in our business in the March quarter. We remain financially strong and have compelling margin expansion opportunities in our control.
Through our cost-saving initiatives and R&D focus on high-return investments, we are taking the necessary actions to drive the long-term growth and profitability of Maxim. With that, I'll now turn the call over to Bruce for a summary of our financial performance.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Thanks, Tunç. As Tunç outlined, while Q2 revenues are unusually soft, we strongly believe that Q3 revenues will trend significantly higher led by product cycles in Consumer and good visibility in Automotive.
As a result, we expect our Q3 revenue will be similar to revenue Q3 last year. From an operational perspective, we continue to execute on our cost reduction initiatives and are on track to achieve $180 million in annual cost savings.
Even in uncertain macroeconomic times, we are maximizing our return on R&D through lower overall spending while increasing resources in focus areas like power management across the end markets we serve. Additionally, the changes we are making in our manufacturing strategy are enabling sustainable improvements to gross margin for the company at any revenue level.
Let me summarize our progress on our cost initiatives. As Tunç mentioned, we have stopped production at our San Jose fab, which will enable us to realize $45 million of annual savings starting with our third quarter results.
We plan to announce the sale of the San Jose fab before the end of this calendar year. Also, we are in advanced discussions regarding the sale of our fab in San Antonio to a foundry partner, which is proceeding on track to our expectations.
We plan to finalize this transaction before the end of this calendar year as well. Finally, we are qualifying external packaging suppliers to enable the closure of our small packaging line in Dallas, delivering cost savings in fiscal 2017.
Moving on to the operating expense part of our plan. We are on track to achieve our $80 million annual savings plan.
In Q1 operating expenses were at $193 million, lower than the normalized $200 million run-rate of last quarter, and 12% lower than the same quarter a year ago. Through this plan, we are either reducing funding or divesting of non-core businesses, achieving efficiency savings in SG&A and downsizing our facilities.
Through a combination of planned divestitures and other internal cost savings, we continue to expect to achieve $180 million per quarter operating expense net of any change in profit sharing by the end of the fiscal year. Over the longer term, we expect that our manufacturing and operational cost initiatives will enable us to target gross margin percentages in the mid-60%s and operating margin percentages in the mid-30%s.
Now I'll turn to Maxim's first quarter financial results. Revenue for the first quarter was $563 million, down 3% from the fourth quarter and slightly below the midpoint of our guidance.
That sequential decline was primarily driven by continued weakness in Communications and Data Center, smartphone product cycles in Consumer and the seasonal decline in Industrial, partially offset by continued strength in our Automotive business. Our revenue mix by major markets in Q1 was approximately 32% from Consumer, 27% Industrial, 20% Communications and Data Center, 16% Automotive, and 5% Computing.
In the September quarter our Consumer business was down sequentially due to a decline in flagship smartphone shipments, partially offset by the ramp of a new generation smartphone and low wearable shipments as expected. Our largest mobility customer's review as a percentage of total company revenue was approximately flat with the prior quarter.
Our Industrial business was down sequentially, reflecting seasonality in our core business and weak financial terminal shipments, partially offset by other Industrial verticals. Our Communication and Data Center business was strongly down sequentially with broad-based weakness in this market.
Our Automotive business was strongly up sequentially above seasonality. As we continue to gain share across a broad base of customers and products.
And finally, our Computing business was down sequentially. Turning to the P&L.
Maxim's gross margin including special items was 61.6%, up from 60.9% in the prior quarter. Gross margin benefited from lower manufacturing spending.
Special items in Q1 gross margin included intangible asset amortization from acquisitions, the write-down of our San Antonio facility, and accelerated depreciation from the closing of our San Jose fab. Operating expenses, excluding special items, were $193 million, down from $194 million in the prior quarter.
The decrease in operating expenses was driven primarily by our cost reduction initiatives. Special items in Q1 operating expenses included normal acquisition-related charges and restructuring charges related to our cost reduction initiatives.
Q1 GAAP operating income, excluding special items, was $153 million. Operating margin of 27.2% of revenue is slightly down from the prior quarter and is up from 23.6% of revenue in the same quarter a year ago.
The Q1 GAAP tax rate, excluding special items, was 18%. The FY 2016 fixed rate down from 19% in the prior quarter.
GAAP earnings per share, excluding special items, was $0.42, a penny above the midpoint of our guided range, primarily driven by lower operating expenses. Turning to the balance sheet and cash flow.
During the quarter cash flow from operations was $117 million or 21% of revenue. This is always lower in Q1 due to the payout of our annual employee bonus.
Inventory days ended at 123 days, up eight days from Q4, reflecting product build-aheads related to the San Jose fab closure. Adjusting for the build-ahead, inventory was at 114 days, roughly flat from the prior quarter.
Inventory dollars were up 1% from last quarter. Net capital additions were $15 million in the quarter.
Capital additions are well below our normalized level of $38 million per quarter of depreciation, enabling free cash flow to outpace earnings and in line with our long-term CapEx revenue model range of 1% to 3%. Trailing 12-month free cash flow ending in Q1 was $664 million, or 29% of revenue and up 3% year-over-year.
Our free cash flow yield is approximately 6% at yesterday's closing stock price. Share repurchases totaled $40 million in Q1 as we bought back 1.2 million shares.
We also paid $0.30 in dividends per share, which totaled $85 million in the quarter. The dividend yield is approximately 3% at yesterday's closing stock price.
Overall, total cash, cash equivalents and short-term investments decreased by $17 million in the first quarter to $1.61 billion. Moving on to guidance.
Our beginning Q2 backlog is $329 million. Based on this beginning backlog and expected turns, we forecast Q2 revenue of $490 million to $520 million.
This outlook reflects our expectations of lower smartphone shipments at our largest mobility customer, a very weak communications infrastructure market, and a decline in wearable shipments. We expect that all of our end market segments will be down in Q2.
However, based on strong product cycles at our largest mobility customer and good visibility in Automotive, we are confident that we will see a substantial recovery in Maxim's revenue in Q3. Q2 gross margin, excluding special items, is forecasted at 60% to 63%, flat from the prior quarter.
Special items in Q2 gross margin are estimated at approximately $17 million primarily for amortization of intangible assets. Q2 operating expenses, excluding special items, are expected to be down 1% to 2% from the prior quarter, more than offsetting our annual merit increase in the second quarter due to our ongoing cost reduction initiatives.
Special items in Q2 operating expenses are estimated at approximately $4 million primarily for amortization of intangible assets. Our Q2 and all of fiscal year 2016 tax rates, excluding special items, will be 18%.
As I highlighted last quarter, we changed to a fixed tax rate, excluding special items, to minimize quarterly variations driven by timing of discrete items and tax law enactment base. For Q2 earnings per share, excluding special items, we expect a range of $0.29 to $0.35.
For fiscal year 2016, gross capital additions are expected to be within the target range of 1% to 3% of revenue. We expect to continue to repurchase shares in Q2, consistent with our buyback matrix.
In summary, looking back the current quarter, we are confident in achieving our expected revenue range for Q3 and in our ability to grow long term. In parallel, we are executing on our cost reduction initiatives, and at the forecasted revenue ranges we fully expect to achieve our 30% operating margin target within the current fiscal year.
With that, I'll turn the call back over to Kathy.
Kathy Ta - Managing Director-Investor Relations
Thanks, Bruce. That concludes our prepared remarks, and we now will open up the call for questions.
I would also like to remind everyone that as always, we are open to discussing M&A in general terms; however, we will not comment on rumors or speculation. In the interest of reaching everyone in the queue, please ask just one question with one follow-up.
Jonathan, please begin polling for questions.
Operator
Certainly. Our first question comes from the line of Harlan Sur from JPMorgan.
Your question please.
Harlan L. Sur - JPMorgan Securities LLC
Hi. Good afternoon and thanks for taking my question.
I'm not going to ask an M&A question about any specific companies, but obviously there's been recent news reports around Maxim and the potential for consolidation with some of your peers that are of similar size. Texas Instruments, for example, has size.
They've got scale. No matter how you look at it, P&L scale, sales force and channel scale and market diversity, so on and so forth.
I think investors are asking, does the Maxim team have the necessary scale to maintain its competitiveness and drive a less volatile revenue and earnings trajectory against some of these larger competitors? Or does it make sense to get together with some of your peers to drive the scale necessary to compete with somebody like a Texas Instruments, and would the Maxim team be open to something like this?
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Thanks, Harlan. This is Bruce.
I'll take the lead on that. Clearly we believe with our size, even with the volatility that we've seen this quarter, we have the scale, profitability to be independent as a stand-alone company.
Even in this quarter, right, you can still see very strong operating margin and EBITDA margin, and it's generating substantial cash flow. And with the strong recovery in the third quarter as we've indicated, we'll continue to grow free cash strongly year-over-year in FY 2016 over FY 2015.
So, very confident as a stand-alone company. That said, we have talked about in the past and – about consolidation in this industry.
We understand that. We understand the reasons for that.
And so we've talked about in the past our ability to acquire other companies. Certainly we have the capacity, the cash flow, the balance sheet to do that.
And as we've discussed, really look at companies that have the same strategic fit as us, similar margin structure kind of in the analog business, the ability to create value through synergies and to add some diversification, to your point, about kind of better managing the volatilities. As far as somebody acquiring us, that's something we can't control, right.
What we are focused on is just maximizing our value internally through our growth initiatives, through our cost reduction initiatives, and we think that's probably the best strategy for us as a management team for the shareholders of the company.
Harlan L. Sur - JPMorgan Securities LLC
Great. Thanks for that, Bruce.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah.
Harlan L. Sur - JPMorgan Securities LLC
My second question, you seem to be relatively confident on the re-acceleration of your business in the March quarter. I mean, if you guys deliver March quarter revenues next year that was in line with this year, I mean, we're talking about 14% sequential growth.
It's pretty early here in the December quarter to be calling an inflection. I guess the question is, what gives the team the confidence level?
I know, obviously, you have the next generation flagship smartphone ramp at your largest customer, but do you guys have backlog coverage? Do you guys have good forecast visibility to drive the confidence?
Any color here would be greatly appreciated. Thank you.
Tunç Doluca - President, Chief Executive Officer & Director
Yeah, I think that – I mean, you gave part of the answer yourself. In terms of the confidence, though, we've got for the March quarter, it's coming from a couple of – actually three areas.
Number one is on the Consumer front. We do have about similar content as the previous generation phone in that major launch, our largest customer is going to have.
It is expected to launch a little bit earlier than previously thought, and we do think that the volume actually might be a little bit higher because of the way they're actually launching the product. The details we can't get into, obviously.
So about the same content, a little bit earlier and a little bit higher volume. So that's something that will help us and that's what – has confidence built in the Consumer side.
On the Automotive side, we have much better visibility in that than many other businesses, frankly, because the programs are set sometimes six months to a year in advance and you know those companies are going to make cars, for sure. So the visibility on what's going be sold is there.
We do have a little bit longer backlog in that market, as well, which helps us with confidence. And we continue to grow share in that market.
So that's why we think Automotive is an area we're confident of. Industrial a bit harder to predict, but seasonality for years has told us that that's a stronger growth quarter for us and our competitors.
And we also have a little bit more visibility in that as well, because the lead times given by customers to us are also longer than some of our other markets. So those are the reasons.
We do see a – our business units are forecasting growth and a bounce-back in Comms and Data Center. But frankly we decided to take a haircut on that one in our predictions, as well.
So if you consider all of those that I just told you, that's why we feel good about the March quarter that's coming up.
Harlan L. Sur - JPMorgan Securities LLC
Thank you, Tunç.
Kathy Ta - Managing Director-Investor Relations
Thanks, Harlan.
Tunç Doluca - President, Chief Executive Officer & Director
You're welcome.
Operator
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank.
Your question, please.
Ross C. Seymore - Deutsche Bank Securities, Inc.
Hi, guys. A somewhat related question in that last comment that you just said, Tunç, about kind of discounting what your business unit leaders said on Comms and Data Center.
What's driving that to be as weak as it is? You said it's broad based, but we've heard from a number of other players that they've seen a little bit of a rebound, albeit with a bit more of the base station side than you guys have.
I'll admit that. But overall that business has been a very big headwind for you.
Can you give a little color about what's going on there? Is it share loss?
Whatever the explanation is, any more color would be helpful.
Tunç Doluca - President, Chief Executive Officer & Director
Yeah. First of all, in the Comms and Data Center, and especially on the infrastructure side, it's really hard to predict share loss unless you look at a longer period, and unless there's industry reports given out.
And we didn't really see that in the last calendar year. And then calendar year 2015, numbers are not really out.
We don't believe we have share loss, but we'll see the data when the data comes out. That is a market that's been troubling for a lot of our competitors.
Some of them – or not even our competitors. They're in the same field, but on the digital side of that market.
And that market's growth relies pretty heavily on how spending is done in China, for example. And we don't really have a lot of insights into how that's going to rebound.
That's the reason why we decided to be cautious for next quarter. But if the other companies in the market are correct and it does rebound, we'll benefit from it just like everybody else will.
But as I said, we just decided that we should be a little bit cautious right now because we don't have the visibility.
Ross C. Seymore - Deutsche Bank Securities, Inc.
So I guess my second question would be on the Industrial side of your business. Obviously, it's a core driver of not only revenue, but more importantly, profitability.
If I look at what the implied calendar year is for your Industrial business versus peers, it appears that you'll be down a bit worse than peers year-over-year for this calendar year. I know you fell earlier in the year than most, but can you give any good explanation as to why Maxim would be below the group and is that something that is a concern going forward?
And if not, why would you have the confidence that it's not a concern?
Tunç Doluca - President, Chief Executive Officer & Director
Well, again, you do have to look at the full year and there is timing differences, you pointed them out, between the companies. When we look at our tables to see how we're doing versus companies that do report in terms of how they're doing by market, we're really not seeing something – any different than what the margin of error tells you.
So, even though – when you look quarter by quarter, it looks like it is that way. When you look over a longer time, which we do, we don't really see that.
So the question always comes up, is there a market share loss going on? We don't believe so.
We've gained in share in most of our Industrial submarkets in 2014 and as I said, the 2015 numbers are not out yet. But I think we've got a good product portfolio.
We think we will be able to continue and gain share in the future. We have great products in power and in interface and as Industry 4.0 kicks in at our customers, we've got a great lineup to be able to gain share in the future.
As I said, what's happened this year is so far from the data we've looked at, we're within the margin of error of the measurements of each company's reports.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah. And Ross, this is Bruce.
In addition to what Tunç said, which I absolutely agree with, we've also talked about, in the reorganization last spring the creation of a core product business unit, which is really focused on selling the general purpose products which go into, in a large sense, that industrial market. And that focus and really, the channel management strategies with our distributors, making sure we have good collateral and tools to make it easy for these small customers to design in our products, we strongly believe that's going to help drive growth in those general purpose products which, candidly in the past maybe didn't get as much attention as the new product introductions.
So we think that's another opportunity for us to grow the Industrial business, which as you indicated, is very profitable. And if you look at the general purpose products, they're extremely profitable.
Ross C. Seymore - Deutsche Bank Securities, Inc.
Okay. Thank you.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah.
Kathy Ta - Managing Director-Investor Relations
Thanks, Ross.
Operator
Thank you. Our next question comes from the line of Blayne Curtis from Barclays.
Your question, please.
Blayne Curtis - Barclays Capital, Inc.
Hey, good afternoon. Thanks for taking my question.
Just two. On Autos, you're actually up in a seasonally down period.
So you just talked about this content gains and then you talked about also in Q1, or March quarter, sorry, another increase. Is that customer diversity or is it content gains?
What's really driving that outperformance? And then, on wearables I was just curious.
I thought that would be maybe an offset for you in a seasonally stronger period. You said it was down.
Are you feeling there some inventory there?
Tunç Doluca - President, Chief Executive Officer & Director
Okay. So, let me take the Automotive and maybe Bruce can help on the wearable side.
In Automotive, if you look at our numbers clearly for multiple years now, we've been growing about roughly three times to four times the total market growth. It's kind of interesting because our BUs are pretty conservative in the Automotive.
They always are saying this is going to slow down next year, but next year doesn't seem to come. And I've got enormous confidence in our Automotive business because we keep winning designs in multiple applications and that's why we're in this gain share mode.
And when the Automotive business seasonally goes up, it will go up again with that and we'll be able to maintain our much-above market growth rate next year. What the customers are really interested in and have designed in for Maxim are mostly going into infotainment applications.
But they're also applications for safety or driver assistance, as well, where we're able to gain share and get sockets in, many of which, or many of these that are kind of new electronic control units that are being built into these cars. But they really need solutions that are going to give them the power supply rails needed for all these applications.
And they need them to be very efficient in terms of the power conversion and the (34:25) currents and that's an area of specialty for Maxim because we've done that for years in other battery-operated equipment. And most of these safety and driver assistant applications also need vast amounts of data to get moved from one location, be it the sensor to the applications processor, and also from apps processors to even bigger displays that we see in cars today.
So all of that gave us the opportunity to showcase our products, win a lot of designs and we see that many of our products are in new cars, and we're giving even more sockets as the number of control units go up. So it is a market where we definitely have got momentum and we're – next quarter, the March quarter, it's going be another step-up again if you look at our BU or business manager forecasts, which actually have turned out to be more conservative than our other business units in the past.
So I think that gain share in that market is going to continue for us for quite a while.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah. And, Blayne, on the wearable question, I think as we have in prior quarters, we don't have good insights in maybe what the end demand for the products are.
I mean, basically we just forecast based on what the subcon has, wants from us. And so from that point of view as we expected, right, the revenue was down in the September quarter.
And we actually – based on the backlog position that we have expected to be down significantly in the December quarter as well. But we can't provide any more – we don't have any unique insight on the end market.
I think it's also worth noticing when we talk about the rest of the wearable market, that's actually been a good opportunity for us. We believe we have kind of business in four of the five top wearable suppliers, whether that's in power management or microcontrollers or other analog components within those wearable devices.
So we think that's a good long-term business. I would say those other wearable accounts are still small, but we do believe there's good long-term growth opportunities there.
Blayne Curtis - Barclays Capital, Inc.
Thanks, Bruce.
Operator
Thank you.
Kathy Ta - Managing Director-Investor Relations
Thank you, Blayne.
Operator
Our next question comes from the line of John Pitzer from Credit Suisse. Your question please.
Mr. Pitzer, you might have your line on mute.
John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)
Can you hear me now?
Operator
Yes.
John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)
Yeah, I apologize, guys. Tunç, Bruce, thanks for letting me ask a question.
Tunç, I just wanted to go back to the expected rebound in Consumer in the March quarter. It doesn't sound like that's being driven by more content of your parts in the flagship phone.
It also doesn't sound like it's necessarily being driven by an expectation of more demand as much as timing of launch and scale of launch. And so I guess my question is, doesn't that lead to sort of a problem in the June quarter?
And I guess longer term, again, if you can't diversify the consumer market, is it a good market to be in? And help me understand how you diversify that consumer market, so you're not still tied to the fortunes of this one player?
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
So, John, I'll take the first half, the Q4 question, then I'll let Tunç talk about the overall mobility business. To the extent that there is some pull-in or timing of the ramp, that may have some impact on Q4, which has historically been our strongest growth quarter.
We still expect Q4 to grow. Obviously, it's dependent on the acceptance of the products.
In addition that's always a quarter with strong growth for Automotive, which as Tunç said, generally outperforms our expectations and Industrial, as well. Tunç?
Tunç Doluca - President, Chief Executive Officer & Director
So on the longer term question that you've asked, so obviously, we're well aware that there's going to be volatility in this business and you can see it on how strong the product cycle looks like it's going to be in Q3. But obviously, always strong cycles can be followed by weaker ones, which we've seen as well.
We've done several things. First of all, we've moved to a lower, more variable cost structure to optimize profitability and flexibility through these product cycles that are inevitable in this market.
And I want to let you know or remind you that we've been in this mode of working on diversifying the revenue base through multiple methods that we've used to lower this dependence. We've got design wins in multiple platforms, in tablets and wearables that we talked about.
We're looking at growing revenue and have grown revenue at the other larger OEM, in other fitness and wearable customers. As a result of all that, Samsung is now down to about 15% of revenue, so it's less effect than it was in the past.
And obviously, we're investing in three product areas in mobility to get the diversity also in a technology base. We're very strong in power, and we've grown the audio and sensor business as well.
So we're taking the steps to diversify the business as much as we can, and we're also taking the steps so that we're less sensitive to the up and down cycles in terms of revenue. So that's the plan.
We've shown that as our long-term strategic objectives, and we're marching to achieve those things that I just talked about.
John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)
That's helpful, Tunç. And maybe as my follow-up just to get into a little bit more detail.
You guys had great initial attraction with the flagship wearables that's out there, with (40:58) is what you get in the phone. I'm kind of curious when you look at these new wearable design (41:04)
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
John, you're breaking up.
John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)
How should we think (41:10) content, and if you look about sort of the timing of the rep on some of these wearables, when would you expect that in the (41:17) timeframe?
Tunç Doluca - President, Chief Executive Officer & Director
Yeah. So outside of the flagship wearable, the design wins we've got in other fitness and healthcare type customers, those wins, some of them we have revenue on already, but most of them we don't.
That's more in the future. The dollar content of these are, obviously, not as high as the phone.
And if I quoted a number, I probably wouldn't be exactly correct. But I can tell you that they're lower than a phone in general.
But they're wins where we do have significant advantages for a customer in turn for power and microcontroller products, and these are sustainable advantages that we've got. And obviously, the volumes are not as high as what we see in terms of what we get from a flagship product like the one you mentioned.
But the good news is, it's on multiple platforms, and it's at multiple customers, so it really goes towards the diversification question that you asked. So it gives more stability to the business and it will help in terms of the diversification of both the customer base and the platforms that we're on.
So those revenues, some of it we'll be – starting to see probably by the end of this year, and some of it even maybe earlier, and then the unit sales clearly we don't – it's really hard to predict. That depends on how they get picked up by consumers.
John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)
Thank you. Appreciate it.
Kathy Ta - Managing Director-Investor Relations
Thanks, John.
Operator
Thank you. Our next question comes from the line of Vivek Arya of Bank of America Merrill Lynch.
Vivek Arya - Bank of America Merrill Lynch
Thanks for taking my question. I wanted to ask this M&A question in a different way.
So if you look at the macro conditions and the demand outlook now versus the six months ago, do you think it makes you more or less likely to consider consolidation?
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah. I don't think anything near term drives consolidation.
I think consolidation is a result of our industry maturing, right? And I think it's a result of growth rate slowing down, and the ability to drive double-digit earnings and cash flow growth.
It's harder to do that off of top-line growth only. And so you have to do that through efficiencies in the spending side.
Obviously, we're doing that ourselves through our own initiatives. But certainly consolidation provides additional opportunities to drive those efficiencies and drive earnings and cash flow growth.
So I don't think what happens one quarter or two quarter. I think this is a multi-year cycle that we're currently going through and we'll continue to go through.
Vivek Arya - Bank of America Merrill Lynch
All right. Thanks, Bruce.
And then...
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah.
Vivek Arya - Bank of America Merrill Lynch
For my follow-up, just wanted to dig into the Automotive business because that has done exceptionally well for you guys. You have been growing over the last four quarters.
You're guiding to some stability and then growth again. I don't know whether, Tunç, you give us more color, but if you could, can you give us the specific areas where Maxim is taking share?
And if you could give us some sense from who you are taking that share from? I think everyone just wants to know how diversified is this Automotive business, whether it's across specific applications or customers?
Thank you.
Tunç Doluca - President, Chief Executive Officer & Director
The Automotive business that we have is – I would classify it as very diversified. It is not as diversified as Industrial, but clearly far more diversified than Comms and Data Center, and obviously the Consumer market.
We have hundreds of products that we're selling unlike some of these other markets. They're in multiple functions we provide to a customer.
I listed some of them in my prepared remarks. I talked about power management solutions that are more single function or a couple of functions.
We've got products for USB protection, for example, because there's more and more ports and Automotive customers are much more interested in robustness than some of the Consumer customers. We have products that are selling into and winning in LED lighting.
And LED lighting is getting more and more widespread use by car companies. We've got products that we're selling into infotainment systems that are highly integrated power management solutions.
Actually, those are newer designs that we've introduced to the market going alongside applications processor. And those revenues, most of that is ahead of us.
We don't even have significant revenue yet, but we have a lot of design wins. So this is mostly on the power side and mostly on the infotainment side of the business and in safety and in driver assistance.
We also have a very strong business in what I would call – we call them serializer, deserializer. But it's really to move data from sensors, mostly video sensors to these processor units to do either safety or it's just to show the rearview or 360-degree view of cars, as well as get data to the displays.
So that's an area that we've got multiple wins at multiple customers. And then also we have wins for products like Heloscope (47:19).
We have wins in battery management systems for hybrid cars. So the answer to your question about how narrow is it, I'd say it's very broad based both from a customer standpoint as well as our Tier 1 customers and automakers, as well as the different types of functions that we sell, and as well as geographies that we sell into.
So it's very broad based. It's very diverse.
And it's growing very rapidly. So we're really happy with that business.
I'll answer one other question that I get asked frequently. You didn't ask that question, but people also ask, what's the barriers that you've got for others to enter into these markets?
And it really is many, many years of experience of being in it, knowing what all the pitfalls are in terms of product reliability and robustness. It's our engineers' ability to produce products that really deliver the performance that the customers are demanding, and deep application knowledge – the ability to know what's going to get you in terms of the applications of the product.
So we're very happy with that business and have actually increased the investment in it. And we've actually moved some of our engineers from the Consumer groups to the Automotive group in the latest changes that we announced last year.
Vivek Arya - Bank of America Merrill Lynch
Thank you.
Tunç Doluca - President, Chief Executive Officer & Director
You're welcome.
Kathy Ta - Managing Director-Investor Relations
Thank you, Vivek.
Operator
Thank you. Our next question comes from the line of Ambrish Srivastava from BMO.
Your question, please.
Ambrish Srivastava - BMO Capital Markets (United States)
Hi. Thank you.
I just wanted to go back to Consumer and I do apologize, guys, if it feels like being back at the dentist. It's the longer term, Tunç and Bruce, you have laid out a road map for us or sort of a road map.
You are reducing your exposure, cutting down programs, but with added competition, for example, in one of the areas that you have been focused on, which is mobility handsets in China, does MediaTek's acquisition of Richtek change that plan? And what I'm asking is, are you going to accelerate the focus in that segment?
And my second question is a little bit longer term, Bruce, is on the – and I apologize if I missed it. Does the timing change for the mid-60%s margin that you have laid out for us from the cost savings, which was supposed to be by September quarter if I'm not wrong?
Thank you.
Tunç Doluca - President, Chief Executive Officer & Director
Great. So I'll leave the second part to Bruce as you suggested, but in terms of the way we look at mobility, so let me share that with you a little bit.
So the way we look at mobility is, first of all, I think everybody's aware that mobility is comprised of several multiple product lines, not just one product line. And businesses are included in our companywide portfolio management process.
So we don't look at mobility as one big segment, rather it's divided up into multiple product lines. And when we analyze the future, when we make decisions on where we're going invest and where we're not going to invest, we look at the merits of that each individual product line.
The question of whether we've got sustainable advantages, you asked about MediaTek and the Richtek deal, well, in areas where the products are – really don't require a lot of performance, those are areas where we don't invest. And where customers seem like they are not going value the performance of the product, we don't invest.
So you've seen us be very active in terms of making those decisions. We did exit the touch and the MEMS business, for example, because we began to see that the differentiation was getting less and less, and it was pretty crowded, especially in the touch area.
But we do see good returns in power, audio and sensors, but even within those product lines we still have to select carefully, which products we're going invest in and which products we're not. So it's really a continuous evaluation process and when we do see or if we do see that a particular area is getting where we can extract the returns on R&D, then clearly we're going to shift our resources to another area where we can.
So that's the general philosophy we use. We don't really think about it as a decision about mobility.
It's really a decision about product lines and all the way down to individual products, whether we should make them or not.
Ambrish Srivastava - BMO Capital Markets (United States)
Okay, that makes sense.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah, Ambrish, this is Bruce. On the long-term gross margin, we're absolutely still on track to achieve our mid-60%s kind of long-term gross margin target.
We shut down the San Jose fab, which was about $45 million out of the $100 million in savings, and we'll start to see that benefit in the third quarter. Even with sort of the kind of the cyclicality that we're seeing in the second quarter, right.
We're still able to hold gross margins flat. So I think that kind of starts to go to the variability that we've kind of built into our cost structure.
There may be some as that revenue drops in the second quarter that will impact a little bit just for the third quarter. So we might not see the full benefit of the shutdown of San Jose in the third quarter, but I would expect gross margins still to be flat to slightly up in Q3.
And more importantly I think as you go out to Q4 and we talked about the strong recovery in our business, absolutely, we'll see the full benefit of the San Jose shutdown within this fiscal year. And as we had said, the savings from the sale of our San Antonio foundry was more kind of two years out from that timing.
And so that's really a longer term benefit that will get us the remaining distance up to the mid-60%s. So long answer of saying, we're absolutely on track.
We're still executing on all of our cost reduction initiatives in the manufacturing side. And if anything, what we've seen in the current quarter just reinforces the need to do what we're doing, and to execute on our plan.
Ambrish Srivastava - BMO Capital Markets (United States)
Thank you.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah.
Kathy Ta - Managing Director-Investor Relations
Thanks, Ambrish.
Operator
Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley.
Your question, please.
Craig M. Hettenbach - Morgan Stanley & Co. LLC
Yes. Thank you.
Just following up on the Automotive market, anything to note in terms of as you look at the visibility into next year whether it's from a customer or a supplier, increase number of models? Just things that you're growing very strongly that you can kind of keep up some of that growth even at kind of a higher base?
Tunç Doluca - President, Chief Executive Officer & Director
It's more of the same. I think the mark – the types of functions we talked about, I mean, those are going to continue.
The beauty of the Automotive market is it's not dominated by a single product or a single customer. So it's kind of hard to give examples of it's this thing that's going to cause us growth.
It's really a collection of a lot of things, which is why we like this business so much. So I think you're looking for some new application maybe that we're in.
Currently our forecast are really getting more content in our current customers and maybe adding a few more, but it's very diverse. It's hard to give an example.
It says here's the one silver bullet that's going to grow our business next year.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
The GM who runs this business loves to say it's a business of singles and doubles, right? He loves that type of business, and he's been extremely successful at doing that, and that's why we've been able to build up this business, grow this business, have confidence in it.
But it is sort of like Industrial. It's always difficult to explain a specific product cycle within Industrial that's driving that growth.
Craig M. Hettenbach - Morgan Stanley & Co. LLC
Okay. And as a follow-up, you mentioned just the distribution market and increase in inventory.
Can you give a sense in terms of do you think you worked that back down to normal levels this quarter or is that more into the March quarter from an inventory perspective? And then also, any different divergence you're seeing by geography would be helpful to call out.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Sure. I mean, as we talked about, as Tunç talked about kind of days was up six days from 57 to 63.
Five of those six days were in North America. About half of it was due to Avnet had a 14-week quarter this quarter.
And so to the extent that their quarters aren't perfectly linear that had some impact on our quarter end from that point of view. So they have, they carried some more inventory.
And then we have actually just one medium size customer, but large for distribution that goes through Avnet North America. And that was just the timing issue, where they build up some inventory as well.
We do expect that our inventory to come back down over the next couple of quarters. I think we've indicated in the past that this has been kind of tightly controlled by the distis, around kind of mid-50s days.
If you look at the current quarter and you take out kind of the North America effect, kind of the rest of the world was up one day. So it's kind of no big change there.
Craig M. Hettenbach - Morgan Stanley & Co. LLC
Okay. Thank you.
Kathy Ta - Managing Director-Investor Relations
Thanks, Craig.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Thanks, Craig.
Operator
Thank you. Our next question comes from the line of Amit Daryanani from RBC Capital Markets.
Amit Daryanani - RBC Capital Markets LLC
Yeah. Thanks a lot, guys.
Two questions for me. One, just on the gross margin side.
Could you, perhaps, talk a little bit about what's enabling the stability in gross margin in December despite the revenue shortfall, sequentially at least? And then as you get to the March quarter, there's obviously two dynamics.
One is you have a big revenue tailwind, but it's very consumer heavy. So how do you think gross margin stack up in the March quarter as well within that 60% to 62% range that you've talked about?
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Sure. For the December quarter, we are – in addition to the fab closures, we've absolutely been reducing costs and just kind of blocking and tackling, and I think the team has done an excellent job.
So we continue to benefit from that. As I'm sure you know, to the extent that we have low utilizations in the fab in the current quarter due to the low revenue, some of that is impacted in the December quarter, but actually a little bit more than 50% actually rolls over and will impact the March quarter.
So we don't see the full impact of this kind of lower utilization in the December quarter. When you get out to March, yeah, we'll have some impact due to that kind of that carryover, the low utilization.
But at the same time: A, we do expect revenue to be stronger, which will help us; and B, we were going to start getting the full benefit of the San Jose fab closure, and so that will more than offset any utilization impact, and therefore we expect gross margin to go up again in the third quarter. I think all of this just reinforces, we haven't taken our eye off the ball from the cost side, and we're continuing to execute.
And our goal is to deliver, if not overachieve, our targets.
Amit Daryanani - RBC Capital Markets LLC
Got it. And if I could just follow up on your free cash flow expectations.
I mean, you talked about September being light in line with seasonal patterns. How do you think the next few quarters shake out from a free cash flow perspective, because you still have a fairly different revenue volatility this year than you've seen in the past.
I'm curious how you think December and March shake out from a free cash flow basis?
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah. So I think without getting into the quarterly variations, we were at 29% free cash flow on a trailing 12 month as a percent of revenue.
We certainly expect free cash flow to grow strongly throughout the year and such, I think we'll – it's a reasonable expectation that we'll meet or beat our 30% target for free cash flow as a percent of revenue. We're still continuing to kind of manage CapEx at this 1% to 3% level and we expect that.
And then, obviously, as the margin improvements work their way through the P&L, those savings, those cost-savings benefit cash as well.
Amit Daryanani - RBC Capital Markets LLC
Perfect. Thank you, guys.
Kathy Ta - Managing Director-Investor Relations
Thanks, Amit. And, Jonathan, I think we have time only for one more question.
Operator
Certainly. Our final question comes from the line of C.J.
Muse from Evercore ISI.
C.J. Muse - Evercore ISI
Yeah, great. Thank you for squeezing me in.
On your last call, you guys discussed pursuing alternatives for several other non-core assets. So just curious if you found any resolution there?
And if so, if we should be thinking about the funding there being – put into distinct (01:01:20) businesses and/or additional cost savings?
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Sure. I think when we look at the $80 million in annual savings for OpEx, part of that is for – we looked at either the harvesting or divestiture of certain businesses.
We're going through that process right now. Nothing to announce at this point.
The only thing I would say is to the extent that we're able to kind of monetize the value of some of these businesses that were good businesses just not strategic for us, we'll certainly do that, and I think we have opportunities for that right now. Obviously, we're working those issues.
If we're not able to find a good buyer for these businesses, we will take the appropriate action to reduce the spending in that area and either reallocate the engineers where we have needs in our growth markets or to the extent take that savings to the P&L. But just like I think with all of our other cost savings to the extent that we're looking at divesting certain businesses or harvesting certain businesses, that's on track.
And I guess it's just more of a watch this space.
C.J. Muse - Evercore ISI
Okay. That's very helpful.
And I guess as a quick follow-up, Bruce, in I think prepared remarks or to a follow-up on a question, you talked about the 30% operating margin absolutely on target within fiscal 2016. I know a quarter ago, we were talking about 33%.
Is that still on the table, and if so, what kind of top line would we need to see in Q4 fiscal 2016 to kind of hit that higher run rate?
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Sure. I mean, I think when we look at it from a cash flow – I mean, cash flow – from an op margin point of view, obviously, at the revenue levels that we've guided to for the back half of our fiscal year, and the gross margin and OpEx we've talked about clearly you get to a 30% or higher number.
I am not going to give precise numbers around this, right. Obviously, you can, I think, do the math on that, but I think the important point is we're still on track to achieve that profitability target.
We're confident in it that we will be able to achieve it this fiscal year. Obviously, that's a key milestone for us.
But that's just kind of one step along the journey to get to the mid-30% op margin.
C.J. Muse - Evercore ISI
Very helpful. Thank you.
Bruce E. Kiddoo - Chief Financial Officer & Senior Vice President
Yeah.
Kathy Ta - Managing Director-Investor Relations
Thanks, C.J.
Kathy Ta - Managing Director-Investor Relations
Okay. And so with that, Jonathan, I'll just close off the call.
So before we conclude the conference call, I would like to invite everyone to kindly save the date for Maxim's upcoming Investor Day, which will be held on Wednesday, February 10, 2016, in San Francisco. And with that, I'd like to thank you for your participation and for your interest in Maxim.
Operator
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program.
You may now disconnect. Good day.