Jul 21, 2016
Executives
Kathy Ta - Managing Director, IR Tunc Doluca - President and CEO Bruce Kiddoo - SVP, CFO
Analysts
Harlan Sur - J.P. Morgan Ross Seymore - Deutsche Bank Diana Chang - Morgan Stanley Ambrish Srivastava - BMO Capital Markets Tom O'Malley - Barclays Capital Adam Gonzalez - Bank of America Amit Daryanani - RBC Capital Markets Toshiya Hari - Goldman Sachs Tore Svanberg - Stifel, Nicolaus & Company Chris Danley - Citi Group C J.
Muse - Evercore ISI William Stein - SunTrust Robinson Humphrey
Presentation
Operator
Good day, ladies and gentlemen, and welcome to the Maxim Integrated Fourth Quarter of Fiscal 2016 Conference Call. [Operator Instructions] As a reminder, today's program is being recorded.
I would now like to introduce your host for today's program, Kathy Ta, Managing Director, Investor Relations. Please go ahead, Kathy.
Kathy Ta
Thank you, Jonathan and welcome everyone to Maxim Integrated's fiscal fourth quarter 2016 earnings conference call. With me on the call today are Chief Executive Officer Tunc 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.
Now I'll turn the call over to Tunc.
Tunc Doluca
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.
I would like to start by highlighting three key takeaways from this call. First, we surpassed a key milestone by exceeding 30% operating margin in the quarter.
As you will recall, this is a goal we set over two years ago. We executed well on our manufacturing transformation achieving 64% gross margin.
We realized the full benefit of the closure of our San Jose fab and are ahead of plan to improve the efficiency of our internal fab in Oregon. I'd like to thank our employees for delivering on all fronts of our cost savings plans.
Our R&D teams remained focused on our technology franchises in power management and key differentiated products in our chosen markets. Second, we were confident in our ability to continue improving profitability and free cash flow growth and to maintain leadership in the return of cash for shareholders.
As a result, we are announcing a 10% increase in our dividends. Third, automotive and core industrial performance in the June quarter was better than expected.
Looking forward to the September quarter, we expect total company revenue to be better than seasonal and flat from the same quarter of last year. Let me now turn to our quarterly results and outlook by major market.
First, I'll comment on automotive. Our June quarter automotive business was up strongly and above our expectations.
We exceeded the $100 million quarterly run rate in revenue for the first time in Maxim's history. Automotive was up from the same quarter of last year by 30% reflecting content growth and strong adoption of new products.
In the September quarter, we expect automotive to be down from our very strong June quarter of the decreased driven by expected shipment timing for battery management system products. We are investing for a robust future into automotive across our focused markets in infotainment, LED lighting, safety, high-speed serial link and battery management systems.
We continue to win designs in all of these markets through our strong technology franchise in high performance power management. The serial link market for infotainment and ADAS applications is developing as we expected.
Leading OEM customers are planning up to 20 video links supporting 10 cameras for high-end vehicle to deliver additional safety and assist for drivers and passengers. The use of our high-speed serial link solutions is also broadening beyond vision systems and high resolution displays.
We see strong interest from customers considering our serial link solutions for new applications such as radar systems. The ultra-low latency and high data rate of our products are the primary reason for this interest.
We believe this could be a meaningful opportunity overtime. As new government mandates increase electrical vehicle and hybrid car sale forecast, our momentum continues in battery management systems, where we have gained OEM wins beyond China, into new geographies.
In emerging hybrid designs we also have customer interest in our BMS products that enabled 48-volt architectures. Going forward, we expect battery management systems to be a meaningful driver of revenue growth, as technology challenges play through our strength and power in battery management.
Let me next turn to the industrial market, our June quarter industrial business was up excluding the impact of the sale of our energy metering business. We saw a core industrial up from a strong March quarter, adoption of new products in factory automation continued particularly in power management and industrial communications, where we provide integrated power efficient solutions for today's modern factories with densely packed electronics.
In medical, our power management products are being designed into various wearable devices. In the September quarter, we expect our industrial business to be down in line with seasonality.
Together, automotive and industrial markets contributed nearly half of total company revenue in the June quarter. We remained watchful for any automotive or industrial market challenges in Europe post BREXIT vote.
However, we have broad geographic diversity across our customer base in a broad set of products both of which should mitigate impact related specifically to the United Kingdom. Next let me discuss communication and data center.
Our June quarter comms in data center business was flat from a strong March quarter. We saw a continued momentum in our optical business, which enables faster connection speeds required in data center applications.
We expect increase in production orders from multiple customers for our 100G application products. In power management, we began shipment of products for 12-volt cloud data center applications in the June quarter and meaningful revenue from 48-volt products is on track for calendar 2017.
The traditional enterprise driven market was slightly weaker than expected in the June quarter. Looking ahead to the September quarter, we expect communications in data center to be slightly up with strength in our cloud data center and cable businesses and a decline in communication infrastructure and legacy products.
Let me finally turn to consumer. Consumer was flat in the June quarter, but lower than our expectations due to ramp timing of audio products shipments for tablets.
Shipments for the newest flagship smartphone were slightly better while shipments for older smartphones were less than our expectations at our largest customer. We believe consumer revenue will be flat in the September quarter with lower revenue to our largest mobility customer, offset by increasing revenue across a range of customers and products.
Since we have been diversifying our product and customer revenue base, we expect our September quarter consumer revenue to be better than seasonal. Looking back on fiscal 2016, we have executed ahead of our plan on our profitability initiatives.
We transformed our manufacturing footprint and are making better use of our internal manufacturing capacity. In R&D, we focused on market opportunities that play through our strengths and power management and other key technologies.
We have a designed a win momentum across the automotive, data center and industrial markets and we are benefiting from improved diversification consumer as the smartphone market matures. With that, I'll now turn the call over to Bruce for a summary of our financial performance.
Bruce Kiddoo
Thanks Tunc. As Tunc indicated, we are pleased to announce that we achieved and beat our 30% operating margin goal set at our May, 2014 Investor Day.
Our results this quarter also demonstrates that we are on track to achieve our updated target of 65% gross margin and 35% operating margin, as we execute on manufacturing transformation and profitability initiatives. This achievement is the result of extraordinary commitment and execution by Maxim's employees.
I'm grateful and proud to be part of the Maxim team. Now I will discuss Maxim's fourth quarter financial results.
Revenue for the fourth quarter was $566 million up 2% from the third quarter, but below the midpoint of our guided range due primarily to our consumer business. Our revenue mix by major markets in Q4 was approximately 29% consumer, 27% from industrial, 21% from comm and data center, 19% automotive and 4% computing.
In the June quarter, our automotive business was strongly up sequentially reflecting better than seasonal performance in multiple customer ramps excluding our smart meter divestiture, our industrial business was up sequentially with normal seasonality and continued strength in factory automation products. Our comm and data center business was flat sequentially after a strong Q3 with continued momentum in our optical products for the data center.
And finally, our consumer business was flat sequentially lower than our expectations due to ramp timing of audio product shipments for tablets. Let me now provide some commentary on our distribution business.
Distribution comprised 40% of Maxim's revenue in the June quarter. Globally resales were slightly up sequentially and end market bookings were slightly down.
We ended the June quarter with 68 days of inventory in the distribution channel, up 10 days from the March quarter. This significant increase in days was driven by China, North America and Japan.
In China, about half the increase was driven by the addition of a new distributor and desired restocking at existing distributors. And the other half of the inventory increase driven by weak resales in the region.
The higher inventory in North America was caused by Avnet's transition to a new ERP system and we see normal seasonal behaviour in North American resales. The increase in inventory in North America did not affect our results in the June quarter as we recognized revenue on a sell-through basis in that region.
In Japan, an increase in inventory was driven by our distribution partners in preparation for gaming and automotive product ramps. Turning to the P&L, Maxim's gross margin excluding special items with 64.1% up from 61.4% in the prior quarter driven by solid execution on our manufacturing transformation.
64% gross margin is an important milestone are a way to our goal of 65% as we achieved some of the benefits of our transformation earlier than planned. Special items in Q4 gross margin including intangible asset amortization from acquisitions and accelerated depreciation.
Operating expenses excluding special items were $185 million down from $191 million in the prior quarter. This decrease in expenses was driven by our efforts to focus R&D and continued tight cost controls consistent with our operational plans.
Special items in Q4; operating expenses included acquisition related charges and restructuring charges. Q4 GAAP operating income excluding special items was $178 million.
Operating margin at 31.4% of revenue is up from the prior quarter due to higher revenue in gross margin and is up from 27.6% in the same quarter a year ago. This is 380 basis point improvement in operating margin over the same quarter last year was achieved at lower revenue relative to a year ago driven by our manufacturing transformation in cost saving initiatives.
Q4 GAAP tax rate excluding special items was 18%, the fixed rate set at the beginning of FY 2016. GAAP earnings per share excluding special items was $0.49, a $0.01 higher than the midpoint of our guided range.
Turning to the balance sheet and cash flow. During the quarter, cash flow from operations was $254 million or 45% of revenue.
Inventory days ended at 102 up two days from Q3 and inventory dollars were down 3% from the prior quarter reflecting overall tight controls. Gross capital expenditures were $22 million in the quarter.
Capital expenditures are below our normalized levels of $28 million per quarter of depreciation enabling free cash flow to outpaced earnings. Trailing 12-month free cash flow ending in Q4 using net capital expenditures was $738 million or 34% of revenue and up 14% over the same quarter last year.
Our free cash flow yield is approximately 7% at yesterday's closing stock price. Share repurchases totalled $90 million in Q4 as we bought back approximately 2.5 million shares.
We also paid $0.30 in dividends per share which totalled $85 million in the quarter. The dividend yield is approximately 3.1% at yesterday's closing stock price.
Overall total cash, cash equivalents and short-term investments increased by $370 million in the fourth quarter to $2.23 billion. Moving onto guidance, our beginning Q1 backlog was $363 million based on this beginning backlog and expected turns, we forecast Q1 revenue of $540 million to $580 million.
As our guidance indicates, Q1 revenues are expected to be slightly down sequentially and flat from the same quarter last year with seasonal performance in industrial and diversification in consumer revenue. Q1 gross margin excluding special items is forecasted at 63% to 65%.
Flat from the prior quarter as we continue to realize significant benefits earlier than expected from our manufacturing transformation. Special items in Q1 gross margin are estimated at approximately $13 million primarily for amortization of intangible assets.
Q1 operating expenses excluding special items are expected to be flat from the prior quarter, as continued cost savings offset the one-month impact of our annual salary adjustments. Special items in Q1 operating expenses are estimated at approximately $3 million primarily for amortization of intangible assets.
Our tax rate for Q1 excluding special items will be 18%. For Q1 GAAP earnings per share excluding special items, we expect a range of $0.44 to $0.50.
For fiscal year 2017, gross capital expenditures are expected to be within the target range of 1% to 3% of revenue. And finally, we expect buybacks in Q1 to be consistent with our commitment to return 80% of free cash flow to shareholders.
With a 10% increase in our dividends at $0.33 per share, the yield is approximately 3.5% at yesterday's closing stock price. In summary, we expect Q1 revenue to be better than seasonal and flat from the same quarter last year.
We continue to execute well on our manufacturing transformation and cost reduction initiatives which enabled us to continue driving profitability and free cash flow growth. We will maintain our leadership in the return of cash to shareholders, as reflected in the 10% increase in our dividend that we announced today.
With that, I'll turn the call back over to Kathy.
Kathy Ta
Thanks, Bruce. That concludes our prepared remarks, so we will now open the call for questions.
We would like to continue the same Q&A process that we used last quarter. We will take one question from each callers, so that we can get to more people in the queue.
If you have more than one question, please hop back into the queue. We are doing this in the spirit of getting to as many of you as we can.
Jonathan, could we please have our first question.
Operator
[Operator Instructions] our first question comes from the line of Harlan Sur from J.P. Morgan.
Harlan Sur
Nice job on the quarterly execution, the margin improvements and the strong dividend increase. On the gross margins nice job there I know the team wasn't anticipating gross margin expansion beyond 63% until you started to get the benefits from the sale of the Bump Fab in Dallas in the first half of next calendar year, but it sounds like San Jose and the Oregon initiatives drove the gross margin improvements.
So I guess the question is, do you guys still expect another 100 basis point step up as you lined down the Bump Fab early next calendar year.
Bruce Kiddoo
Harlan, so this is Bruce. I think the 64% in Q4 some of that was driven by some one-time benefits that helped us out, things kind of fell the right way, but correct when we look at Q1, we're guiding to kind of flat gross margin at 64% as well and that's again some of those benefits from the transformation just taking into account sooner than we had expected.
As we look into calendar 2017, we still expect 65% to kind of be the end game as far as off of the kind of the current activities or actions that we've taken. There might be an opportunities within calendar 2017 to get to that 65% a little sooner than we initially thought.
I think, we had initially said we would hit 65% existing calendar 2017. We might get there a little earlier I think it's still a little earlier just to make that call but certainly the progress is very good on gross margin.
Harlan Sur
Great, thank you.
Kathy Ta
Thanks, Harlan.
Operator
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank.
Your question please.
Ross Seymore
Just wanted to focus on the consumer business I know, you explained why that was a little bit worse than you expected in June. It seems like you're making up for it in September.
Can you just talk about how you view seasonality in that business going forward considering that the mix within the segment as a whole has changed so much?
Bruce Kiddoo
So, Ross when we think about seasonality we always indicated that, with our largest customer right it's stronger in the first half of the calendar year and then it's weaker in the second half of the year. We've seen that for the September guidance that we're still expecting Samsung to be down and even when we look out to the December quarter.
We expect kind of the same seasonality, same dynamics that we saw last year where the Note 7 is launching earlier, is launching in the September quarter and Samsung has their normal inventory correction on older products in the December quarter. So we're still I think excused to more strength in the front half of the calendar year that said, as our diversification continues and we see strength across a number of other customers and products obviously we're able to, I think more smooth out our consumer business and you know the fact that we're able to guide flat and September is a good kind of prove point of that.
I think it's still a little early in the diversification to say that our seasonality has changed permanently, but I think that's the direction we're moving into.
Ross Seymore
Thank you.
Kathy Ta
Thanks, Ross.
Operator
Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley.
Your question please.
Diana Chang
Hi, this is Diana Chang calling for Craig. Just one question, for your [indiscernible] smartphone customer, how do sales by Maxim's dollar content in the next generation of phones, any changes or upgrades from there?
Thank you.
Tunc Doluca
Thanks for the question. So in terms of dollar content the next generation, obviously there is two of them coming up.
One of the larger format, that's coming this quarter and there's one that's further out. It really has become a little bit more difficult to be able to give content frankly, especially onto the teardowns come out, but there is also a dependency on which skew you're looking at.
So we do have functions and the sockets we talked about in the past. Most of those are still products that we are going to sell.
The only difficult part at this stage in the game is to really tell, which skews will have which one of our products. So other than that in the longer term, of course in every generation it's a hard battle that's fought I don't think that's changed, but we do have great products for all the sockets that we talked about in audio power and sensor technologies.
So we continue to have those products in the future. The exact share for [ph] socket is basically to be determined.
Diana Chang
Got it, that was very helpful. Thank you.
Operator
Thank you. Our next question comes from the line of Ambrish Srivastava from BMO Capital Markets.
Your question please.
Ambrish Srivastava
I just had a question on the automotive segment, since you mentioned it will be down due to the impact of the BMS. I wasn't sure, what that meant?
And just remind us it is a growing business and you guys have done a great job and it should seasonally be up in calendar Q3 correct? Thank you.
Tunc Doluca
So, okay there's this several things. There is number one, seasonally automotive sees ramps in the first half of the year and usually in the second half of the year, we do see seasonality go down.
Usually, we kind of beaten that because we're growing the business so rapidly as a company. What we're seeing right now is really an effect of the BMS market is a little bit more lumpy in terms of when you get the demand, therefore we are seeing some of that effect remember that, the previous quarter, the June quarter was exceptionally strong in terms of growth and I think it's normal to see a little bit breather in there, but in terms of our long-term growth it's still looking extremely healthy for the company but the basically effect you're seeing is basically two reasons for this down guidance that we gave for automotive.
One of them is, previous quarter was extremely strong and the second one is that the battery management system business is more lumpy than the other parts of the business that we've got.
Ambrish Srivastava
Got it, thank you.
Kathy Ta
Thanks, Ambrish.
Operator
Thank you. Our next question comes from the line of Blayne Curtis from Barclays.
Your question please.
Tom O'Malley
This is Tom O'Malley on for Blayne Curtis. Can you guys talk a little about the overall industrial trends in the second half and some of the opportunities you guys see there?
Tunc Doluca
So, in the second half basically in the industrial market I think everybody on the call knows seasonality there, it's usually a strong again like automotive in the first half and kind of weakens in the second half, but essentially I think we're doing pretty well. We've had our core industrial business has done really well in the first half grow in Q4 for example the grow in the low single digits and actually it's projected to grow in the high single digits in the September quarter.
So we're seeing good pull for our products but in general, you're asking more of a seasonality question. Our guidance for Q1 reflects normal seasonality for the overall industrial market.
Tom O'Malley
Thanks guys.
Operator
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse.
Unidentified Analyst
This is Steve on for John. Congrats on the strong report.
Tunc, earlier on the year I think at Mobile World Congress, you announced new heart rate monitoring sensor platform. I was wondering I guess within your industrial.
I want to get how medical is tracking and if you're seeing traction for new products like this and what's the timeframe?
Tunc Doluca
So well, I wasn't there in MWC. So I don't remember exactly what was said, but essentially we do have, we've had a heart beat monitor chip that also measures blood oxygen levels in the leading smartphone customer and we've now made versions of that product that are suitable for medical applications as well, as fitness applications and we've introduced those to the market as well.
It's kind of early to say, what the traction is going to be from those products, but you know it is obviously it works really well on a smartphone and on an application where the measurement is from the finger and we're making improvements on measurement methods you can get from wrist as well further application. So our sensor investment continues and I think that, we've got a very good product that ultra miniature and that's what a lot of customers like seeing in many of these applications.
So unfortunately it’s really hard to pinpoint specific win somewhere that's as big as where you get from a Samsung smartphone, but the customer interest is definitely there.
Kathy Ta
Thank you.
Operator
Thank you. Our next question comes from the line of Vivek Arya from Bank of America.
Adam Gonzalez
This is Adam Gonzalez dialing on behalf of Vivek. Thanks for taking my question.
I guess, I just wanted to focus on autos business and more of the long-term trend. So you know over the past couple of years it's been 30% plus year-on-year growth business.
With Q1 guided down, it's kind of setting into the mid-teens do you expect this business to be more like 10% to 15% annual grower or closer to the 30% and how long can that sustain? Thanks.
Tunc Doluca
So obviously as the business grows and as I said in my prepared remarks, we now passed a $100 million quarter run rate for the company last quarter. Obviously that growth is likely to slow, but remember it's slowing down from a pace that's in the mid 20s and it will gradually slow down.
We really don't expect this to, the growth to suddenly fall back to the natural growth rate of automotive. So we still expect this growth rate to be maybe in the next few years coming down to the mid-to-high teens.
So it definitely little slow but it still will be faster than the market growth from our design win pipeline that we see.
Bruce Kiddoo
And this is Bruce, just remember if you're looking at from a year-over-year basis. Last year in the first quarter automotive had a very strong kind of above seasonal quarter, I think it was up 8% sequentially if I recall correctly.
So from that point of view, yes it may look like the year-over-year growth is slowing down. We just had a 30% year-over-year growth quarter and I wouldn't look at the Q1 as some indicator of some kind of rapid deceleration and if anything, we continue do well.
It's a very strong business. As Tunc indicated just now it's over $400 million business, we do expect that growth to slow down, but certainly don't take the Q1 number off of kind of the math you just did and indicate that it's slowing down at a much faster rate than we're indicating.
Adam Gonzalez
Got it, thanks very helpful.
Kathy Ta
Thanks, Adam.
Operator
Thank you. Our next question comes from the line of Amit Daryanani from RBC Capital Markets.
Amit Daryanani
I guess just a question of your operating margin, when I think of the delta from the 31.40 [ph] you guys had this quarter to the 35% target you talked about. It sounds like 100 basis points or so, you should be able to get from cost benefits that you've already done but the benefits have flowed through it appears, what you think enables the rest of the 250 basis point on the delta, is it something in the OpEx line that you soon up to realize or would you just need a higher revenue in it, so what will that number be?
Bruce Kiddoo
Yes, so I think as you said right we're at the 64% gross margin, we'll get another point of out that, so that will get us to the 32.50 or right around in that range and then the rest will come with revenue growth, as we indicated, we're keeping OpEx flat this quarter despite one month of our annual salary increase. So we expect to continue to manage operating expenses very closely and it is then just growing into that 30, getting those final couple points of Op margin by growing into it.
That's why we actually feel good about when the kind of, we look at the quarter at Q1. Obviously you have to measure it in milestones, but we're actually kind of starting to turn the corner on growth and forecasting flat growth year-over-year for Q1 and what has been the last several years, a very difficult quarter for us.
So I think the fact that we're navigating through that just another indicator that we're making progress on that return to growth path.
Kathy Ta
Thank you, Amit.
Operator
Thank you. Our next question comes from the line of Toshiya Hari from Goldman Sachs.
Toshiya Hari
In automotive you guys are clearly benefiting from strong content growth which is great, but have you seen any changes to the overall automotive unit environment. If you can go through each of your geographies and describe what you're seeing from a unit standpoint that would be helpful.
Thank you.
Tunc Doluca
Yes, so let me take that one. Actually what you asked for about going by each region is actually difficult one to answer.
I'm assuming you're talking about car unit sales in each region.
Toshiya Hari
Yes.
Tunc Doluca
We actually don't get that data. Remember, we're selling most of our products for our Tier 1 customers, which then sell it to the OEMs and then, the information on where that electronics ended up usually does not come to us.
So we rely on third party market research, just like everybody else does to really see which region has, what units forecasted. So I really direct you to go to that, but in terms of our - we're looking at in terms of totals, we're really not seeing too much of a change in terms of automotive units sales.
There are some talks of some minor reductions because of global economy concerns, but other than that we're not seeing a whole bunch of change. I would not think that Maxim is really a good [indiscernible] for how the automotive units sales are going.
We're - and especially we're growing at such a different or higher rate compared to car sales, that even calls the picture even more. And we've been asked this question by other investors about the effect of BREXIT for example that also becomes very difficult for us because it is, it's kind of lost in the high growth rate we've got because the content growth in terms of effect.
Toshiya Hari
Great, thank you.
Kathy Ta
Thanks, Toshiya.
Operator
Thank you. Our next question comes from the line of Tore Svanberg from Stifel, Nicolaus & Company.
Your question please.
Tore Svanberg
Great cash flows. So your backlog is up about 10% sequentially, so as far as the guidance is concerned, I guess you're just assuming lower seasonal turns business in summer months or is this also maybe the effect of the inventory in the channel that you just mentioned earlier, Bruce.
Bruce Kiddoo
Yes, I think when we look at kind of beginning backlog as a percent of what we're guiding to, it's relatively inline, it might be couple points above at 65%, but I don't think it's too unusual. I do think as we looked at the September quarter right you know and there is some uncertainty out there, this is something where we want to make sure we deliver on our promises, but I don't think there's, I wouldn't read too much into kind of the beginning backlog position.
Tore Svanberg
Great, thank you.
Kathy Ta
Thanks, Tore.
Operator
Thank you. Our next question comes from the line of Chris Danley from Citi Group.
Chris Danley
Given that you're hitting your or getting really close to your gross margin target earlier than expected, could gross margins go above 65% and maybe could you discuss the drivers that would or could take it there?
Bruce Kiddoo
Sure, I think when we set the target going from 61% to 65% and 400 basis points increase. I think we thought that was pretty good aggressive target.
Obviously we're doing well. I think we'll want to get to the 65% before we extend that target in anyway.
So I think we still believe off of what we've done 65% is the right number. Given that we're now 75% outsourced.
The gross margin line will be less influenced by revenue, that said I just think if you we've had good momentum on cost reductions and optimizing the loadings in our internal fab in Oregon and our test facilities in Philippines and Thailand. So I think that may give you some small incremental boost, but for now I think we're very focused on getting to that 65% and I think that's a reasonable assumption for investors to assume.
As Harlan asked earlier, maybe we get to that a little bit sooner in calendar 2017 and I think that's probably the potential upside at this point.
Chris Danley
All right, thanks Bruce.
Kathy Ta
Thanks, Chris.
Operator
Thank you. Our next question comes from the line of C J.
Muse from Evercore ISI.
C J. Muse
I guess a big picture question as you look into calendar 2017 growth has been a challenge for you guys, but as I look at [indiscernible] now approaching 70% of your revenues and design wins you see there plus diversification, the consumer side. What kind of confidence do you have that you can growth into calendar 2017?
Tunc Doluca
Let me take that one. So obviously we're not providing long range guidance, but let's see what the pieces of the puzzle are.
I think we've communicated what our primary growth drivers are, they're automotive industrial and data center and some of those will clearly grow faster than the industry in our view and some at industry levels. Our auto momentum continues, I think as previous caller asked grew 30% year-over-year and as I said, we're kind of maybe in the next few years go through the low teens or high teens, but I think that transition will be gradual, so that's still going to be a growth driver for the company.
Industrial factory automation is the biggest piece of growth and I talked about how that was in the low to high single digits in this previous quarter than the quarter we're going into, got good growth coming in data centers especially in power management and optical connectivity and that's, some of that is pretty short-term so that's in 2017 frankly. And looks like we're making good progress on stabilizing consumers with this diversification that we talked about.
So this is why, we feel like we're making good steps towards going from really declining in overall revenue in the last couple of years converting over to growing us in the near future. As Bruce pointed out, you have to go through zero first and that's what's happening right now.
So we've got [indiscernible] outlook, but it's kind of hard to say. One of the most important parameter in there is still is our largest customers and the most likely for them is to be slightly down, but I think we're going to offset that with diversification at other customers and other applications in the consumer base.
So that's really the next leg of the profitability increase in the company. I think we're going to get to the margins and then even if we get, some like in the teens growth.
I'm not talking about next year but the timing is hard to say, but if we get that then we'll be getting to our model and I think we have a good plan.
Kathy Ta
Thanks, C J.
Operator
Thank you. Our next question comes from the line of William Stein from SunTrust Robinson Humphrey.
William Stein
Understanding that getting to the up margin target will require growth, could you talk about the company's appetite to achieve that through acquisition and if there is an appetite maybe help us understand the parameters, what are the sort of key characteristics you would look for?
Bruce Kiddoo
Sure, this is Bruce. I'll take that.
Our focus has clearly been on creating value through what we can control our organic steps and certainly we've done that with $180 million we've taken out of the P&L and the focused R&D result in, what we think is kind of return to growth, that said we're obviously aware of slower growth in our industry and consolidation that is taking place and so to the extent that there is opportunities to create value through acquisition. It's something we're certainly able to do, we've done it in the past.
We have the integration capabilities. We certainly have the cash flow and balance sheet to support a reasonably-sized acquisitions.
I think for us right when we look at it, it has to be kind of aligned with our strategic goals right similar margin profiles, similar businesses. We're not going to go buy some non-analog business in the 40% gross margin lines.
And it also has to make sense, right. We have to be able to drive synergies and we can't overpay.
And I think ultimately the challenge for us is the last comment on overpay just because when we look at a lot of the, lot of opportunities out there, everybody knows consolidation is happening in the industry and many of those, I would say $1 billion, $2 billion market cap companies have some premium in there from an M&A. So we'll be patient, all right.
We'll wait for the right opportunity but certainly if that opportunity presents itself we'll take advantage of it.
William Stein
Thank you.
Kathy Ta
Thanks, Will.
Operator
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank.
Ross Seymore
Just wanted to sneak in a follow up about the channel and internal inventory what's your expectation for that, the days in the channel that is up in the June quarter in the September quarter and then how about your internal inventory in September as well.
Bruce Kiddoo
Yes, so I mean we absolutely expect in Q1 for days to come down. Obviously as we've talked about it was high, you think about China half of that was kind of planned increases but the other half was due to lower resales.
We expect that inventory to kind of sell-through in the first quarter. North America was part of that was kind of due to the Avnet and their ERP implementation, so we expect that to sell-through as well.
So we do think, this is partly timing that said we're paying closing attention to it because it is, it's at a high number and we need to make sure we're not messing anything and so we're watching that and taking action to make sure, we're dealing with it and if anything you know, when you kind of look at some of our like automotive being down quarter-over-quarter, part of that is bleeding off some of the battery management system inventory that built up in China. So we're dealing with that problem and that's reflected in our guidance.
Internally, right I think we're at 102 days right in line with our target. We're going to continue to kind of manage that right around that range.
We think that's probably about the right spot, we're still kind of evaluating that after kind of reducing our fab footprint that removed that some of that inventory from our books, but I think for right now the 100 is probably a good number to model.
Ross Seymore
Thank you.
Kathy Ta
Thanks, Ross.
Operator
Thank you. Our next question comes from the line of Harlan Sur from J.P.
Morgan.
Harlan Sur
On the consumer business and fab outlook for the September quarter, obviously good to see the diversification playing up. How much is due to the ramp up things like wearables in your early china handset customers and what are some of the other programs that are adding through the diversification and I guess finally, is there a little bit of catch up as you also start shipping that audio product into your tablet customer that got pushed from the June quarter.
Tunc Doluca
Yes, I'll take that one. Actually you answered most of the questions in that, but you know some of it is, a significant portion of it is catch up on the tablet product that we did mention in our prepared remarks.
There's also some ramps of other products for some are for gaming applications that we are seeing and some are also for wearables. So it's kind of a lot of those types of applications, but the biggest portion is for the tablet catch up.
Harlan Sur
Great, thanks Tunc.
Tunc Doluca
You're welcome.
Kathy Ta
Thanks, Harlan.
Operator
Thank you. Our next question comes from the line of Toshiya Hari from Goldman Sachs.
Toshiya Hari
Can you maybe a talk a little bit more about your data center business, how fast it grew on the quarter. The outlook for September and if you can remind us how you view the 48-volt opportunity going into next year that would be great too?
Thank you.
Tunc Doluca
So let me take the 48-volt and I'll let Bruce deal with the numbers. On the 48-volt application this is really just technically this is a solution where you have a single-stage conversion architecture for the higher voltage which inherently gives you less losses both in the transmission of the power, you know in the server boards but also because it's a single-stage.
We do have an architecture that's very competitive and it provides a great really small solution for our customer and essentially the design, the product samples we've delivered those to customers are evaluating them and it looks like, the current plans that we have or the customers are conveying to us is to really grant those sometime to being ramp in sometime in 2017. So we're beginning to see some meaningful revenue, but I do want to caution everybody that depends a lot since these are new programs it also depends on all of the other challenges that have to be solved for these programs, but especially our products there, customers evaluated it, they like it and now it's the timing of when they ramp and the current plan is really for calendar 2017 sometime.
Bruce Kiddoo
And concerning for the revenue growth for Q4 and data center I think it's not a surprise that our cloud business continues to grow strongly and this is primarily driven by our optical connectivity business 100 Gig kind of within the data center, as Tunc indicated in his remarks we also started seeing kind of this the initial 12-volt shipments into cloud, that was more than offset by weakness in kind of legacy enterprise server and data center business and so that business which have been, had fallen off and we're in kind of balance at the bottom it was down in the June quarter.
Toshiya Hari
Very helpful. Thank you.
Kathy Ta
Thanks, Toshiya.
Operator
Thank you. [Operator Instructions].
Kathy Ta
Jonathan, if there are no further questions then we can wrap up the call.
Operator
And this does conclude the question-and-answer session.
Kathy Ta
Thank you, Jonathan. That concludes today's conference call.
We would 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.