Jan 21, 2016
Executives
Kathy Ta – Managing Director, Investor Relations Tunç Doluca – President and Chief Executive Officer Bruce Kiddoo – Senior Vice President and Chief Financial Officer
Analysts
Vivek Arya – Bank of America Merrill Lynch Harlan Sur – JPMorgan Ross Seymore – Deutsche Bank Will Stein – SunTrust John Pitzer – Credit Suisse Blayne Curtis – Barclays Craig Hettenbach – Morgan Stanley Doug Freedman – Sterne Agee Romit Shah – Nomura Securities Ambrish Srivastava – BMO Capital Markets Amit Daryanani – RBC Capital Markets
Operator
Good day, ladies and gentlemen, and welcome to the Maxim Integrated Second 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. [Operator Instructions] As a reminder, today’s program is being recorded.
I would now like to introduce your host for today’s program, Kathy Ta, Managing Director, Investor Relations. Please go ahead, Kathy.
Kathy Ta
Thank you, Jonathan, and welcome everyone to Maxim Integrated’s fiscal second 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 uncertainties, and that future events may differ materially from the statements made. For additional information, please refer to our Company’s Securities and Exchange Commission filings, which are posted on our website or available from the Company without charge.
Now, I would like to turn the call over to Tunç.
Tunç Doluca
Thank you, Kathy, and good afternoon to everyone on the call. We appreciate your interests in Maxim Integrated and thank you for joining us today.
Every year, I visit our global offices to discuss our Company direction and strategy with employees. Today, I’m joining you from Munich.
Bruce and Kathy are in our headquarters in San Jose. As we published in our press release earlier today, our revenue guidance for the March quarter reflects continued growth in automotive, a sequential increase in our comps and data center and consumer businesses and the seasonal uptick in industrial.
Maxim’s high performance power management products are a key contributor to this growth. Now turning to the December quarter, we achieved several milestones in our $180 million cost savings plan.
First, we announced the proposed sale of our fab in San Antonio to TowerJazz. The sale was expected to close within our March quarter.
This transaction enables us to maintain production of qualified products at San Antonio for years to come and improves our future utilization of our remaining internal fab in Oregon Second, we sold our development fab and equipment in San Jose for $39 million. The closure of this fab enables us to begin to reflect sequential gross margin improvement starting in the March and June quarters of this fiscal year.
These two actions are part of our manufacturing transformation, which will increase our flexibility, reduce our costs and improve the Company’s gross margin performance to the mid-60s% range. Third, we’re executing our plan to optimize our product launch and organization for better return on R&D investments.
As a part of this plan we announced the proposed sale of our Energy Metering business for $105 million. We are well underway in optimizing our R&D and sales organization to reduce funding in non-core areas, while continuing to fund key growth product lines.
We are focusing on enhancing the company’s franchise in power management, where Maxim is a leader. With these milestones achieved in the December quarter, all components of our $180 million annual savings plan are on track.
Bruce will provide more detail right after me. Let me turn to our quarterly results and outlook by major market.
First, I’ll comment on automotives. Our December quarter automotive business was flat better than seasonal performance.
Automotive was up from the same quarter of last year by 34% reflecting solid content growth across a diverse set of geographies, customers and products. As was evident at the consumer electronics show in Las Vegas, the electronic content in cars continues to grow driven by new infotainment, drivers systems and safety features that consumers see.
At CES, we showed customers several new products including a new high speed Video Serializer, Deserializer solution, with a 30 times faster response for ADAS applications. New efficient LED drivers for visually, standing, lighting applications.
And USB chargers that significantly shorten device charging times and are robust in the automotive environment. All of the new features in car electronics require a high performance power management to fit many supply rails into tight spaces and decrease battery drain.
The growing requirements for power management support applications processor power, video transmission, USB ports and LED lighting are provided in robust growth opportunities for Maxim. In the March quarter, we expect automotive to be strongly up in line with seasonality, primarily driven by a variety of infotainment products.
Let me next turn to the industrial market. Our December quarter industrial business was down with core industrial seasonally down.
In the March quarter, we expect our industrial business to be strongly up due to seasonality, normalizing for the sale of our Energy Metering business. This strength is driven by both core and vertical industrial markets and this guidance assumes the close of the divesture of our Energy Metering business in February.
I would like to share the reasoning on our proposed sale of our metering business to Silergy. When we performed our portfolio analysis last year, we determined that the dynamics of the energy metering market provide limited growth potential for Maxim.
We concluded that it was in the best interest of all parties to find that buyer that was committed to making a long-term investment in the technology and the products. We believe that this transaction will be good for customers, good for the team, and a winning strategy for both Silergy and Maxim.
Let me now provide some commentary on our distribution business. Our largest distribution partner, Avnet, is again our largest account at 19% of total company sales.
Globally, resales were up 1% sequentially. Overall, we observed seasonal patterns, with the exception of weaker than seasonal and market bookings through our Avnet, North America distribution partner.
However, our visibility regarding the effect of macro events on end market demand remains limited. Globally, we ended the December quarter with 52 days of inventory in the distribution channel, which was in 11 - which was down a 11 days from the September quarter.
This reduction in the number of days signals a return to a more normalized level of channel inventory. Please recall that the September quarter channel inventory increase was primarily driven by Avnet North America’s 14-week quarter.
Together automotive and industrial markets contributed 46% of revenue in the December quarter, a record high percentage for Maxim. Next, let me discuss Communications and Data Center.
Our December quarter Comms in Data Center business was strongly down. We’re now experiencing a broad-based recovery in this market across our products in networking and Datacom, cable and optical for the data center.
We expect that our March quarter will be strongly up sequentially. In the long-term, we expect cloud data center to be a growth driver for Maxim.
We continue to see significant customer traction in multiple product opportunities from high-current power management to new optical applications as customers demand smaller and more power efficient solutions to reduce their overall cost of ownership. Looking now, turning to Consumer.
We expect Consumer revenue to strongly increase in the March quarter due to improved diversification in tablets and fitness wearables and by an expected product launch. We continue to expect the wearables will be a growth market 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 market controllers. These design wins are at leading companies in the fitness and healthcare markets.
To summarize our view for the March quarter, we expect Automotive and Industrial to both be strongly up in line with seasonality. We expect Comms and Data Center to be strongly up due to broad-based demand.
We expect Consumer to be strongly up with improved wearable and tablet diversification and the expected product launch. In closing, we remain financially strong and have compelling margin expansion opportunities in our control.
From a market perspective, power management is the largest and fastest growing area in analog. With Maxim’s strong technology franchise in high performance power management, we’re well positioned for growth.
With that, I’ll now turn the call over to Bruce for his summary of our financial performance.
Bruce Kiddoo
Thanks, Tunç. I’ll first discuss Maxim’s second quarter financial results.
Revenue for the second quarter was $511 million, down 9% from the first quarter, but above the midpoint of our guidance at Auto and Industrial came in a little stronger than expected. Our revenue mix by major markets in Q2 was approximately 29% from Industrial, 28% Consumer, 21% Comm and Data Center, 17% Automotive, and 5% Computing.
In the December quarter, our Automotive business was flat sequentially with multiple customer ramps offsetting normal seasonality. Our Industrial business was down sequentially reflecting normal seasonality in our core business and softness in the utility meters.
Our Comm and Data Center business was down sequentially with continued broad-based weakness and our Comm infrastructure market and enterprise servers. And finally, our Consumer business was strongly down sequentially due to a decline in flagship smartphone shipments, and lower wearable shipments as expected.
Our largest mobility customer’s revenue as a percent of total company revenue was down from the prior quarter. Turning to the P&L.
Maxim’s gross margin excluding special items was 60.5%, down from 61.6% in the prior quarter. Gross margin was impacted primarily by lower utilization.
Special items in Q2 gross margins included intangible asset amortization from acquisitions and restructuring charges related to our cost reduction initiatives. Operating expenses, excluding special items, were $187 million, down from $193 million in the prior quarter and down 13% compared to the same quarter a year-ago.
The decrease in operating expenses was driven primarily by the more selective and product line investments. Special items in Q2 operating expenses included normal acquisition-related charges and restructuring charges.
Q2 GAAP operating income excluding special items was $122 million operating margin of 23.9% of revenue is down from the prior quarter due to lower revenues but is up from 22.2% in the same quarter a year ago. The Q2 GAAP tax rate excluding special items was 18%, fixed rate since the beginning of FY16, GAAP earnings per share excluding special items was $0.32 in line with the midpoint of our guided range.
Turning to the balance sheet and cash flow, during the quarter cash flow from operations was $182 million or 36% of revenue. Inventory days ended at 124, up one day from Q1 while inventory dollars were down 5% from the prior quarter.
Gross capital expenditures were $14 million in the quarter. Proceeds from the asset sales were $50 million primarily from the sale of our San Jose fab and the facility in Batangas, Philippines.
As a result, net capital expenditures worth of cash inflow of $36 million. Capital expenditures are well below our normalized level of $29 million per quarter of depreciation enabling free cash flow to outpace earnings and in line with our long-term CapEx to revenue model of 1% to 3%.
Trailing 12-month free cash flow ending in Q2 using net capital expenditures was $703 million, or 32% of revenue and up 6% year-over-year. Our free cash flow yield is approximately 8% at yesterday's closing stock price.
Share repurchases totaled $23 million in Q2 as we bought back approximately 640,000 shares. We also paid $0.30 in dividends per share, which totaled $86 million in the quarter.
The dividend yield is approximately 3.9% at yesterday's closing stock price. Overall, total cash, cash equivalents and short-term investments increased by $165 million in the second quarter to $1.77 billion.
Moving on to guidance. Our beginning Q3 backlog is $329 million.
Based on this beginning backlog and expected turns, we forecast Q3 revenue of $535 million to $575 million. As our guidance indicates Q3 revenues are expected to be significantly higher sequentially led by seasonal growth in Industrial and Automotives, a broad based pick up in our Comms and Data Center markets and improved diversification in known product cycles in consumer.
Our Q3 revenue guidance is consistent with expectations. At the time of our prior earnings release except for smartphone volumes, which are lower.
Q3 gross margin excluding special items is forecasted at 60% to 63% up from the prior quarter. Special items in Q3 gross margins are estimated at approximately $17 million primarily for amortization of intangible assets.
Q3 operating expenses, excluding special items, are expected to be flat from the prior quarter with ongoing cost reductions offset by increased profit sharing accruals due to our guidance for strong sequential revenue growth. Special items in Q3 operating expenses are estimated at approximately $3 million primarily for amortization of intangible assets.
Our tax rate for Q3 and all of fiscal 2016 excluding special items will be 18%. For Q3 GAAP earnings per share, excluding special items, we expect a range of $0.38 to $0.44.
For fiscal year 2016, gross capital expenditures are expected to be within the target range of 1% to 3% of revenue. And finally based on our commitment to return 80% of free cash flow to shareholders, we expect our buyback to increase significantly in Q3 from the prior quarter.
In summary, we look forward to a strong revenue quarter in Q3 driven by solid performance across all our end markets. In parallel, we continue to execute on our manufacturing transformation and cost reduction initiatives, and are on track to achieve our $180 million in annual cost savings plan.
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 enables us to maintain very low capital expenditures for the foreseeable future. Combining this manufacturing transformation with our operating expense reductions and controls, we expect to deliver operating margins in the mid-30 long-term.
With that, I'll turn the call back over to Kathy.
Kathy Ta
Thanks, Bruce. That concludes our prepared remarks, and we will now open the call up for questions.
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. [Operator Instructions] Our first question comes from the line of Vivek Arya from Bank of America Merrill Lynch.
Your question please.
Vivek Arya
Thank you for taking my question. Tunç, are you still going through a strategic review from an M&A perspective, is that complete and let’s say the output is of that process is to be a standalone.
Do you think Maxim has the base parts to grow topline on a sustainable basis different than what you have experienced in the past.
Tunç Doluca
Well, I mean what we are doing basically is working on making sure that, we grow the value of the company like taking the actions that we talk to you about, I think the company has the size and the scale to be able to grow on its own. And we’re shortening our strategic plan that we outlined and we actually give more details of at our Investor Day coming up.
Really gives us a position to be able grow the company both with our internal plans but we always do have our eyes open to whether they are good opportunities for acquisition for us as well.
Vivek Arya
I see. And your outlook for March, I guess other than the lower smartphone volumes and that Bruce highlighted, it sounds seasonal and this is what we have seen from yourself and a number of your peers that, there is sort of sense of seasonal calm and stability versus what the headlines suggest?
So how is - how are the booking trends so far have you seen any impact from the volatility, any color on demand by geography would be, very helpful. Thank you.
Bruce Kiddoo
Yes, I will take that question. I think, when we look at kind of the business obviously, the guidance that were providing is seasonal in all of the kind of normal market Auto and Industrial and even in some of the ones that are more demand driven like the Comm and Data Center market right, we are also seeing that strongly up as well.
As far as trying to understand the macro situation usually looking at distribution is our best indicator of that. In general, we’re not seeing anything too worrisome with the exception of North America, where we did see some kind of weakness in kind of bookings on various customers.
That said, they brought their inventory down 12 days, re-sales were in line in the December quarter. So its sort of mixed message right now.
China everything we’re seeing there is basically kind of Maxim specific due to our specific product lines and we don’t see any kind of macro trend line there. And EMEA was in line with seasonality as well from a distribution point of view.
So in general, we’re not seeing it that said we’re pretty far down the supply chain as a Analog component supplier. So we’re probably not the first ones to see it.
Vivek Arya
Alright. Thank you.
Kathy Ta
Thanks Vivek.
Operator
Thank you. Our next question comes from the line no Harlan Sur from JPMorgan.
Your question please.
Harlan Sur
Hi. Good afternoon.
Thanks for taking my question. On the gross margin front, slightly came in at the lower end of the range in December due to the lower utilizations that you mentioned Bruce.
But given the 9% sequential growth guide in March, I assume that you are taking up your utilizations is that a correct assumption and I know there are mixed effects, but should we expect gross margins closer to the 61%, 61.5% range as the quarter plays out as you anticipate.
Bruce Kiddoo
Sure. I mean we gave the guidance range of 60% to 63%.
So I think for the third quarter, so I think the midpoint of that is kind of right about what you are suggesting for the third quarter. Absolutely, we’re seeing the benefits of the San Jose fab closure, that said utilization in the second quarter and the December quarter was kind of low-50s.
And certainly as you know, we only had 25% of that unfavorable variance in the current quarter and 75% rolls out to the next quarter. So that’s really what’s impacting the Q3 gross margin.
I think we knew this kind of going in that we would have this one quarter impact in Q3. Obviously as revenue picks backup that was start to - benefit us going forward.
Harlan Sur
Got it, okay. And then Tunç within your Automotive business, the team has been driving kind of 30%, 40% year-over-year growth in this segment, but the teams still has a lot of opportunities ahead of it namely penetration into the U.S.
and China Auto markets. Can you just help us understand first of all, how you think about the growth of your Auto business this year is 20%, 30% year-over-year growth rates achievable this year.
And when do we start to see the incremental growth coming from design wins with some of your new U.S. and China Auto customers.
Tunç Doluca
So just to give you a little bit background, so we feel good about our growth trajectory as we’ve got a broad set of products and many different customers. So its broad - being broad-based is what gives us confidence in the growth in this business.
We’ve got great opportunities, we see in power management and I’ve actually been visiting some of our Automotive customers while here in Germany and it looks like we’ve got very good solid position both there and in our Service products. And by the way, these are mostly on programs that haven’t even ramped yet, so that’s why we’ve got confidence into the future.
We’re seeing some design wins and penetration in China for our Battery Management system products as well. So I’d say that our efforts to really get design wins in addition to the ones that we have here in Europe as well as those in Korea, those programs are going very well.
The customers when they see the capabilities that we provide in an all their areas, they are really impressed. And they can see that - it makes the difference for the products that they are trying to build whether it’s trying to fit an engine controlled unit in a very confine space or trying to save the battery life when the system is off with our very low quiescent power products.
I say that it’s not broadening into other countries and regions as well. So in terms of the growth rate we’ve had a really good quarter, several years we’re in the 30s% year-over-year.
We can see us growing at a pretty high double-digit rates for at least several more years. I think as we get bigger and bigger it will probably moderate from 30% to something less.
But it will still for many years to come I think will be more than double the rate of the we're going after. And we believe that December going after, even the Automotive was projected to grow 6% a year, our SAM is more like 8% a year.
I think long-term we could probably be double that for many years.
Harlan Sur
Great. Thanks, Tunç.
Thanks, Bruce.
Tunç Doluca
You are welcome.
Kathy Ta
Thank you, Harlan
Operator
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank.
Your question, please.
Ross Seymore
Hi guys, congrats on the solid rebound in March. The one area you mentioned was the smartphone side being a little bit weaker.
Can you give a little bit of color in that? Is at anything company specific or is it more customer dynamic?
Bruce Kiddoo
Yes, I’ll take that Ross. So I mean it was from the expectations that we had in our prior earnings, from a content point of view, from a timing point of view, from the sort of kind of the types of models that are going to be available, none of that really changed.
It was all just lower volumes on both sort of expected new launches and on the older phones as well. So it was purely a volume issue on both old and new phones.
Ross Seymore
Got you. I guess my follow-up switching over to the restructuring side of things.
Bruce, can you just walk us through what the next steps would be you mentioned to an earlier question that you had some of the benefits of the San Jose fab sale in your gross margin in March but that was being outweighed by some of the utilization in December. So I guess can you just talk us through the next steps on both the gross margin side and the OpEx side.
Bruce Kiddoo
Sure. I think the San Jose fab rate was about $45 million in savings that’s roughly two points of benefit and clearly as we work through any of this under utilization are - we’re burning off a little bit of inventory will see that, will see that full benefit as well near-term.
Longer term to get from the kind of the 63 up to mid 60s or get full the other two points of benefit that we highlighted that’s really dependent on two things. One starting to get the full benefit from our - sale of San Jose fab and we’ve indicated, that’s going to take some time right, you know as sort of TowerJazz is able to qualify their other customers products in increasing utilization there.
And then the closure of the Dallas fab in Dallas in March of 2017, so kind of - tying all that up is it, we’ll probably be in the 63% range mid in calendar 2016. We’ll probably give - start getting up to at least a point benefit up in calendar 2017.
And probably exciting 2017, we’ll have the full benefit of the, all four points benefits.
Ross Seymore
Thank you.
Kathy Ta
Thanks Ross.
Ross Seymore
Yes.
Operator
Thank you. Our next question comes from the line of Will Stein from SunTrust.
Will Stein
Thank you for taking my question. In the consumer end market I’m hoping you can talk a little bit about the diversification currently as it relates to handsets versus other products and also maybe remind us the percentage of revenue that comes from your top customer?
Tunç Doluca
Okay. So, I’ll take that one.
In terms of the diversification plan, if you recall now where we’ve set a plan in motion to diversify both into technology fund and in the customer fund as well as the markets that we were serving end products that we were selling into. So in general that plan has gone the way we expected for some of it and not exactly the way we expected some of the other pieces.
So we have been able to diversify and get more revenues in Tablets, at one of the leading customer and you can see that in teardowns. We’ve been able to get a lot of design wins in the variable space.
I commented about that a little bit in my prepared remarks. These were a lot of wins in especially in power management, where we provide very small solutions with high integration as well as very sleep mode power, so those have gone well in terms of the design wins.
In think in terms of diversification into China, even though we’ve got some penetration there, it really is not as well as we thought it would be in general. So the revenue base is diversifying at a rate, it’s a little bit less than we thought, but it’s definitely happening and we’re pleased with those results.
In terms of the revenue by customer, I think we’ve kind of decided not to give that out every quarter. But you can tell that last quarter that percentage was pretty low.
And it was in the low teens and I think that it can be around that range going forward especially because at that largest customers we’re continuing to invest where we have strong incumbency and very differentiated products where we can maintain the level of profitability that we’re expecting. And since we’re not expecting or counting on a strong growth with our largest customer.
This diversification is going to help us in terms of lower the risk of any kind of revenue bumps in the future.
Will Stein
That’s helpful. If I can just do a follow-up, the seasonality is pretty different this year in that end market.
I think there was a timing difference in the release of your top customers, one of their flagship products. Would you expect that seasonality to - the different seasonality to repeat next year or do you have any sort of comment as to how we should expect that to play out over the next few quarters?
Bruce Kiddoo
Yes. So I’ll take that.
This is Bruce. I think when we think about our largest customer and we just think about smartphones in general.
Obviously it’s difficult to forecast and predict even a couple of quarters out. So we’re going to stay pretty focused from now on just we’ll give you our guidance for the current quarter and just leave it at that.
So I hope its going to be very difficult, our history is not very good at predicting it long-term and so we’re not going to try to do that anymore.
Will Stein
Well thanks, that helps. Appreciate it.
Bruce Kiddoo
Yes.
Kathy Ta
Thanks, Will.
Operator
Your next question comes from the line of John Pitzer from Credit Suisse. Your question please.
John Pitzer
Yes. Good afternoon, guys.
Thanks for letting me ask the question. Maybe I can go - Bruce, sorry, maybe I can go back and just get a clarification from Ross’s question.
Originally when you had guided the March quarter and the handset strength, correct me if I’m wrong, but I thought the presumption was that an earlier than expected launch, would take what would have been June revenue and pulled it into March. I just want to be clear.
So I understand what happened is it that the launch is now not happening when you thought or is it just the volume of the launch is lower than your thoughts. So you are still pulling some revenue that historically might have fallen to June into the March quarter?
Bruce Kiddoo
So the volume of demand from that customer is down from what we expected both in the new phones and the older phones. The timing is going to add as we thought from that point of view.
And as far as what that implies for the fourth quarter, as I just indicated I think at this point it is very difficult to predict that because it is about end demand for those phones.
John Pitzer
That’s helpful. And then Tunç, as my follow-up as part of the restructuring plan from a sort of high-level perspective, you are taking a pretty good cut in the R&D spend.
And from our perspective looking in that somewhat counterintuitive in your initiative to try to grow more quickly. And if you look over the last four years or five years, the Auto market has been a clear stand out for you guys from a growth perspective.
Your other end markets have not been as strong on the growth side. So can you help me I guess better understand how you are redirecting a smaller R&D pool to help kind of reenergize or re-grow segments or end markets that you’ve had some issues showing decent growth in overtime?
Tunç Doluca
Okay. So let me try to explain this.
So essentially what we decided to do on a - when we did our strategy review last year was that we really observed at many customers and many markets, the power of incumbency. And we decided that in markets where either we weren’t the incumbent or we didn’t really have a very clear significant differentiation of the customer valued.
We decided to kind of reduce the investments in those areas or even sell some of those product lines that you’ve already heard about. And really shift those resources into areas where we have a much stronger brand in the customer base.
And obviously one of those was power and I already talked about that. And the other one what we’re seeing very good traction at customers was Automotive.
So we took some of those resources into Automotive and really strengthened our R&D and in areas that we’re as I say, either in power or where we have a big higher success forecast in terms of differentiation. So even though we have reduced R&D spending in the company, we’re deploying it in areas that are lower risk in my view and that’s really the big difference.
And frankly doubling down in areas where we are seeing traction and good response and feedback from customers. So one of the areas that we really did increase as you mentioned was in Automotive and mostly in the areas of our management there and sureties where we got excellent traction as I observed today, or yesterday, at some customers here.
So that’s really what’s happened and I believe that this strategy has a much better chance of success than we had in the past. And mainly because we are investing in areas where we are strong and really going for high-performance products where there’s less of a resistance for customers to design in our products.
I’m already seeing that being successful in many areas in my trips now.
John Pitzer
Helpful. Thanks, Tunç.
Tunç Doluca
Yes, you are welcome.
Kathy Ta
Thanks, John.
Operator
Thank you. Our next question comes from the line of Blayne Curtis for Barclays.
Your question, please.
Blayne Curtis
Yes. Thanks for taking my question.
Just want to follow-up on that comments. The guidance turned out really that have strongly it sounds like it includes two months from the smart metering business.
Just wanted to make sure that was correct and then if you could just provide any color as to what impact that would be into the June quarter as it comes out?
Bruce Kiddoo
Sure, thanks Blayne. So our guidance at the mid-point of 555 includes the impact of the smart meter divestiture i.e we took out revenue.
We assume the transaction would close in February. So you can assume that’s about kind of half of the revenue when they were at about a $10 million or $11 million a quarter run rate.
So we’ve kind of factored out $5 million to $6 million from that run rate when we gave our guidance. So when we looked at the kind of the industrial business, and if we normalized it, if we took the smart meter business out of both Q2 and Q3 to get kind of a normal view of kind of the health of that market, that increases up strongly.
And so that’s why we wanted to try to makes your folks understand given all the concern about macro conditions right now that we’re clear in what we’re seeing from a trend point of view. So definitely appreciate the question if we weren’t clear.
Obviously, when you look out to the fourth quarter and beyond it’s the impact of that full run rate.
Blayne Curtis
Got you. And then I just wanted to follow-up on the consumer business.
Just curious - it seems like your leading customer changes things up until the end versus maybe the other guy who sets this part in advance. Are you at this point shipping to the new SKUs so you have some concrete insight as to what you’re going to get and when you are going to ship it or you just have forecasted this one?
Bruce Kiddoo
At this point, obviously, we have the orders on the books. They usually give us orders kind of two to four weeks out.
And of course we have forecast as well. So the barn [ph] is frozen and we have orders so I think we have confidence in our guidance.
Blayne Curtis
Thanks Bruce.
Bruce Kiddoo
Okay.
Operator
Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley.
Craig Hettenbach
Yes, thanks. Question on the Data Center and Comm.
Can you just talk about just what specific growth drivers you see in that market and then I know at the time of the Volterra deal though is, you guys were looking for potentially repurpose some of that technology and understanding is a much longer tail but just how those efforts are going?
Tunç Doluca
So we’re executing on the plan that we had put in place at the time we did the Volterra acquisition. We’re still on track to start to see revenue in the latter half of this calendar year but as I’ve said earlier - it’s kind of the initial revenue will probably not be that large but it will go from there.
I think you alluded to the long time costing that we see in markets such as this one. We have in the space if you look at from a products standpoint we’ve got some excellent products to offer in the power management space, which is coming from Volterra technology, including design process and architecture.
And customers are really valuing the fact that we saved them on energy that’s wasted in these design centers. So, on the power management side especially the cloud customers are very interested in the value we can add in power management.
On the other side we’re also investing on optical products. These optical products are basically laser drivers and receivers converting basically the optical signals to electrical.
And in that space we’re also seeing some great success. Customers there again care about power dissipation of our products plus how fast we can go.
And we’ve now delivered samples to customers of our newest generation products our under G products and those have been received very well. I’m seeing traction on both the power management side and on the optical product side, but as you said yourself it does take a few years for all that to ramp up.
The most important piece for us is to make sure we’re getting the design wins, and we feel very good about that.
Craig Hettenbach
Got it. Appreciate that color.
Just as a follow- up in consumer on the diversification efforts into tablets and wearables, do you think those will be remain kind of niche markets over time or is there some market within consumer that you do think could materialize in greater size longer-term?
Tunç Doluca
I think on the consumer side it’s really those markets are kind of defined. I mean in tablets I think the unit sales are really not going up in fact there somewhat going down.
So there our wins are basically about getting some market share and basically only in areas that we’re adding value. So that we can get the profitability goals that we want to achieve.
On the wearable side I think that market is going to grow. I think it is - there’s a lot of value we can see in fitness and healthcare medical type products.
And those opportunities for power management for our very specialized secured market controllers and some of the sensor products we are developing. I think that’s going to grow whether it’s going to be the size of a Samsung probably not, but any diversification that we can get obviously in that market is very helpful for us.
So I say there is growth there, but it’s not going to be the massive growth that we saw in our smartphone business. As a matter of fact that we were modeling our long-term consumer growth, we believe it’s going to be about in line, the total is going to be about in line with the company revenue growth.
Craig Hettenbach
Okay. Got it, thank you.
Tunç Doluca
You’re welcome.
Kathy Ta
Thank you, Craig.
Operator
Thank you. Our next question comes from the line of Doug Freedman from Sterne Agee.
Doug Freedman
Hi guys, thanks for taking my question. When we look at all the changes that you are making in the operations of the business the fab closures the tightening down on R&D.
If I could swing over to the balance sheet how do I think about that being impacting sort of the working capital that you need? Are we going to see inventory coverage share need to be higher given the fabless nature of the business.
How should we be thinking about those aspects of the business going forward?
Bruce Kiddoo
Yes. So when we think about primarily inventory.
I think there is two trends, there one we are looking to get more efficient. We’ve been running at a high level.
We did some build-aheads as a result of the fab closures. We were at 124 days in December and even if you adjust that for the build-aheads we’re at about 118.
So we think there’s an opportunity to bring that down significantly both from 2015 more efficient. And the second area is as we move to a more fabless model just the accounting is that kind of with work in process inventory shifts off our books and onto the foundry partners.
So both of those factors just getting kind of better at managing our inventory and be moving more to a fabless model should help bring down our inventory and our goal is to get back as close as possible to 100 days. And certainly as we achieve that, that will provide rather significant working capital benefit to us and book kind of the one-time step down and then going forward as we grow the business.
DougFreedman
Great. And I guess on Bruce my follow-up really on that it’s almost along the same lines.
How is the cycle time expected to be impacted? Is there any lead time changes and anything you can talk to as far as maybe progress on sort of new products versus old ongoing programs.
What you are seeing maybe in the marketplace in the uptick of new products and if that’s having any impact on average lead times?
Bruce Kiddoo
Yes…
Tunç Doluca
Let me see, I want to make sure we understand the question first. Are you really asking about manufacturing cycle times or product development cycle times and are you also asking about lead times from customers?
DougFreedman
So I would say asking about manufacturing cycle times and the outsourcing that you will be doing. And then asking about sort of the product portfolio in terms of whether you are seeing an increasing uptick through this cycle and sort of newer products that tend to carry maybe longer lead times and say run rate products where you clearly would be shipping from inventory?
Tunç Doluca
Okay. So in terms of manufacturing cycle times we are really not seeing much of a change from either internal fabs frankly or from external foundries.
So that’s not having much of an impact. And in terms of getting design wins and maybe that’s the question you are also asking it’s not - we’re really not seeing much of a change frankly in terms of the patterns of our customers.
So consumer remains everything goes pretty quickly and you get to revenue other markets still have from the time you win a design to revenue is longer in these other Industrial and Automotive market. So that’s really it’s not usually changed for the company.
Now having said that and looking at some of our Automotive and customers that I spoke with you when I was traveling, they were mentioning that they have goals to actually increase the speed at which they produce or get new products to market. But that takes some time for us to actually see.
DougFreedman
Great. Thanks for that clarity.
Tunç Doluca
Right. You’re welcome.
Kathy Ta
Thank you, Doug.
Operator
Thank you. Our next question comes from the line of Romit Shah from Nomura Securities.
Your question please.
Romit Shah
Yes. Thank you, Tunç.
Yes, the near 30% growth that you’re seeing consistently in Automotive, my sense is that your high share in Infotainment has been a primary driver. And you guys mentioned CES there was some suggestion there that the strong Infotainment cycle we’ve seen over the last few years is starting to sort of play itself out.
And I’m just curious Tunç if you agree with that assessment and if so what’s the implication for growth in your Automotive business?
Tunç Doluca
So I think from what I’m seeing from talking to customers there is still more desire from consumers to get the best infotainment systems they can get. It’s actually amazing how these things like both dashboard displays as well as the center console displays with all the maps and multimedia items.
Those are going to higher and higher resolutions and it’s amazing the level of video content that’s moving in the car. All of that is going to require more data to move between different components for infotainment systems.
It’s going to require all of this to be done, these millions or billions of bits to be moved with the least amount of power possible so I think that content even in infotainment systems is growing. In addition to that we’re seeing traction in other parts of the car especially in driver assist and safety systems and the amount of cameras and sensors that these manufacturers are putting around the cars for that purpose is just increasing tremendously as well.
And we’re seeing more opportunities for battery management systems in hybrid or all electric vehicles too. So I think the Infotainment growth will continue but we have growth factors and other pieces in the car as well.
That’s why we feel good about being able to grow at a rate that’s faster than the market by being basically in these three areas that I just talked about.
Romit Shah
Okay, thanks. And Bruce the 180 for OpEx exciting the fiscal year do you think over time you can do better than that?
Is the objective to maybe bring that down further or is it more if we can grow sales we are going to try to grow OpEx at that 180 base at a slower rate?
Bruce Kiddoo
Yes. I think that 180 is the initial commitment that we made and just for to make sure there is clarification is $180 million the only adjustment to that is to the extent that profit-sharing is higher this Q4 than it was last Q4.
So the actual - based on what we're looking at today probably will be up a little bit a few million above that $180 million just because of higher profit-sharing accrual assuming everything comes through from a revenue and profitability point of view. I think going forward it all depends on what happens in the industry and revenue growth to the extent that revenue grows in our Automotive business, Industrial business, Data Center business do well.
Then we’ll see some increase in that OpEx, it will certainly grow slower than revenue. And we’ve really saw that kind of a culture here of being kind of very selective and where we make our investments.
Invest in the growth businesses but be careful not to invest in businesses as Tunç said where we have kind of low market share. So I think this is something that will continue to be a leverage from a profitability point of view going forward.
Romit Shah
Okay. Then if I could just clarify Tunç, did you say that from here you expect consumer to grow at the same rate as the company overall?
Tunç Doluca
Yes. I mean that business is pretty hard to predict but in our models and in our investment into that that's the way we are modeling it.
Romit Shah
Okay. Thank you.
Tunç Doluca
Right, sure.
Kathy Ta
Thanks, Romit.
Operator
Thank you. Our next question comes from the line of [indiscernible].
Your question, please.
Unidentified Analyst
Yes, thank you. First question, so you keep talking about guidance being seasonal, but to me 9% sequential growth is significantly above at least based on your historical performance.
So is there anything else going on is the inventory in the channel too low just trying to understand why this guidance is seasonal.
Bruce Kiddoo
Yes, so Torry [ph], this is Bruce. I think when we looked at Auto and Industrial, this is usually a good quarter for them and it is a good quarter for them, right.
Our guidance is strongly up. When we look at the inventory out in the channel right now, it's actually we were at 53 days in Q2.
Remember we were high back in Q1 and so we’ve brought that down. So that's kind of in line last three or four years we've been in the 50 to 55 days.
So I wouldn't say there's abnormally low inventory in the channel. I think the other piece that is helping is on the Comm and Data Center side, right, which is less seasonal and more just demand driven.
We have seen sort of a broad-based pickup in that business clearly after a weak 2015, calendar 2015, so that so we’re seeing that market up strongly as well. So absolutely overall all of our businesses even if you kind of strip out the smartphone business we’re all doing very, very well and feel good about it.
Unidentified Analyst
Very good, thanks. And my follow-up question is on the R&D line, so I think you cut it about $30 million at quarter by now.
Is this sort of the new level to grow at or whether still be some pruning? I’m thinking about events like you did with your metering business, right.
So I mean is there still something going on there or is this sort of the new level to grow from?
Bruce Kiddoo
Yes. So we haven’t seen the full benefit obviously of the savings in R&D from the meter business, right.
We’ll get kind of half of that or so in the third quarter and the full benefit in the fourth quarter. There are some at least one other business that we are looking to either divest or harvest and so that one as well will have savings for us.
That’s part of the original $180 million plan, so that’s nothing incremental, but there’s probably at least one more divestiture or business that we’re going to look to significantly reduce our investment in.
Unidentified Analyst
Sounds good. Awesome cash flow, guys.
Bruce Kiddoo
Thanks.
Kathy Ta
Thank you, Torry [ph]. Jonathan, I’d like to just to make one clarification.
So I got a question off-line on about Page 7 of the web presentation. So the footnote refers to Industrial strongly up excludes the impact of meters both in Q2 and Q3.
However, the impact of the metering business coming out of our revenue is factored into our Q3 guidance for the revenue range that we gave. So I just wanted to clarify that one point.
So Jonathan, could we take the next question please.
Operator
Certainly. Our next question comes from the line of Ambrish Srivastava from BMO Capital Markets.
Ambrish Srivastava
Hi, Thanks Tunç and Bruce and I’m glad [indiscernible] wisely you are desisting from guiding consumer, good company where all this wrong on if you. But I’m looking at your backlog and maybe help us understand backlog was down 13% year-over-year second quarter in a row and albeit flat after taking a step down in the September quarter.
So what does it tell us about the health of the revenue profile and I know it’s a 90 days and all kinds of cancellations can happen. Can you just help us understand what does it tell us about what to expect for the June quarter upside of Consumer.
And then I had a follow-up on gross margin as well.
Bruce Kiddoo
Yes. So Q3 backlog is always low relative to the revenue guidance compared to other quarters and this is always because of the product launch.
And we get the actual orders in as I said that customer especially during a product launch gives you orders in for like an two four weeks out so from that point of view I would say the backlog is typical for what we would expect at this point in time. It’s very difficult to extend that out and interpret that what that means for Q4 or later.
We have seen as we’ve discussed in our guidance with our markets being strongly up across the board that would imply that we have some good bookings flow associated with that but that’s still all within lead time and so it’s nothing that we can extend out to later quarters.
Ambrish Srivastava
Okay. Got it.
And on the gross margin front two questions. One is given the divestitures what is the internal manufacturing capacity that will remain with the company post the Dallas closure.
And then tried to - I think Ross was asking earlier on, on the profile and you went through the next seven quarters or so but isn’t indeed the other variable as you’ve seen is utilization, and so what’s the revenue run rate do you think you can get to the mid 2016. Thank you.
Bruce Kiddoo
Yes. So the first question I think kind of post the San Antonio fab sale will probably be about 25% internal.
Obviously it depends on the mix of our business and its between what gets still loaded into our Oregon fab and versus external. One of the benefits of course that we are looking for as a result of the sale of the San Antonio fab is will be able to optimize the loading in our Oregon fab and so we think to the extent that we’re successful on that we may deal a little bit more internally.
But I think right now 25% is a good rough number for that. What was the second question?
Ambrish Srivastava
The second question was, the other variable for the margin is topline.
Bruce Kiddoo
Yes.
Ambrish Srivastava
So what is the quarterly run rate do we need to get to the mid 60s?
Bruce Kiddoo
Sure. I think you know currently our goal was to reduce cost and be less dependent on revenue.
That said obviously, when revenue was up $500 million it has an impact as we saw. So I think if we can get back to the historical run rates where we’ve been at which was closer to $600 million.
And I think that would be kind of an adequate range for us. Let’s be clear, right, lots of factors that go into gross margin, lots of puts and takes there.
So let’s not all kind of write down of all cash 600, will be at 65% folks.
Ambrish Srivastava
That’s fair. We understand that Bruce, thank you for the clarification.
Bruce Kiddoo
Yes, absolutely. Thanks, Ambrish.
Kathy Ta
Thanks, Ambrish. And Jonathan, I think we have time for one more question.
Operator
Okay, great. Our final question comes from the line of Amit Daryanani from RBC Capital Markets.
Amit Daryanani
Thanks a lot for squeezing me in guys. I guess two questions from me as well.
Bruce, I think last quarter, you were fairly comfortable that you would see growth in fiscal Q2 from a revenue basis. And so I’m curious in the last 90 days beyond the smartphone volatility, which I totally understand has something changed in the Auto, Industrial visibility that makes you less comfortable making that statement today?
Bruce Kiddoo
As for as two, three goes.
Amit Daryanani
As for the June quarter goes. This is something…
Bruce Kiddoo
So I think for the June quarter actually I don’t think anyone has asked about that yet. Yes, we’re not going to give guidance obviously formally, Industrial and Auto are normally seasonally up in the first half of the year to the extent that they are doing well in the March quarter is a good sign, but it’s not a guarantee.
So I don’t think anything has changed from that point of view and if anything in fact the last earnings call we didn’t have a very good visibility into the Comms and Data Center business. We have seen a pickup on that, that’s clearly demand driven.
So it can go away as fast as it come back. So in general, I would say X smartphones are probably consistent with where we were 90 days ago.
That said it’s still very difficult to predict going forward.
Amit Daryanani
Fair enough. And if I can just follow-up on the smart metering the sale that happened in fab, what’s the margin profile of operating income down that you get from that $45 million that we should think about in a model as we go forward.
Bruce Kiddoo
Yes. So it was a lower profitability business I would say both on the gross margin and the operating margin side and that was kind of one of the factors that we looked at.
I don’t think I want to get too specific on that given that so, there’s someone buying that business who probably from competitive points that he doesn’t want to share in their margin profile.
Amit Daryanani
Fair enough. Thank you.
Bruce Kiddoo
Yes.
Kathy Ta
Thank you, Amit. Okay.
So before we’d like to conclude the conference call, I would like to invite everyone to please plan to attend Maxim’s upcoming Investor Day, which will be held on February 10, Wednesday, February 10 in San Francisco. The event will also be video webcast for anyone who cannot attend in person.
If you need more detail about the event please don’t hesitate to reach out to me. And with that we’d like to thank you for your participation and for your interest in Maxim.
Bruce Kiddoo
Thank you, everyone.
Operator
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program.
You may now disconnect. Good day.