Jul 20, 2017
Executives
Kathy Ta - Managing Director, IR Bruce Kiddoo - SVP and CFO Tunc Doluca - President and CEO
Analysts
Harlan Sur - JPMorgan Tore Svanberg - Stifel Ambrish Srivastava - BMO Christopher Rolland - Susquehanna John Pitzer - Credit Suisse Chris Danley - Citigroup Amit Daryanani - RBC Capital Markets William Stein - SunTrust Craig Hettenbach - Morgan Stanley
Operator
Good day, ladies and gentlemen, and welcome to the Maxim Integrated Fourth Quarter of Fiscal 2017 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. Welcome everyone to Maxim Integrated's fiscal fourth quarter 2017 earnings conference call.
Joining 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 uncertainties, 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. Good afternoon to all our participants.
Thank you for joining us on our call and as always, we appreciate your interest in Maxim Integrated. The June quarter marked the third consecutive quarter in our return to year-over-year growth led by double digit increases in industrial and automotive.
Through solid execution in our manufacturing strategy, we exceeded our profitability targets and demonstrated strong earnings power and cash flow growth. Today we are announcing a 9% increase in our dividend reflecting our continued commitment to return cash to shareholders and confidence in our long-term outlook.
Let me now discuss our business. I would like to highlight that my end market commentary on the June quarter does not include revenue from the transition to sell in accounting at one distributor.
For details on the growth rates by end market please refer to our earnings presentation in our website. First, I will comment on automotive.
As we expected, our automotive business was flat from a strong March quarter and grew in double digits from the same quarter of the last year. In the near term, considering a relatively soft environment we are forecasting our September quarter growth rate to be up in the low teens from the same quarter last year.
Given the softness seen broadly across automotive markets for the second consecutive quarter, we believe it is prudent to assume a low teens year-over-year growth rate for this business. We remain highly confident in the long-term fundamentals of our automotive business and believe we are in the early innings in the electronification of cars.
The industry is driving the need for advanced vision systems in multiple additional sensors deployed in cars for advanced driver assistance and eventually fully autonomous cars. Data from these sensors must be transported within vehicles at high speed and with very low latency.
Our serial link technology and products fulfill these requirements. The rapid expansion of driver data needs more processors which in turns requires more sophisticated power management at core competency of Maxim.
Additionally, the movement toward stricter air quality standards in cities drives unit sales increases the electric vehicles we chose Maxim's differentiated battery management products. We haven’t increased our R&D efforts in all of these areas and continue to expand our pipeline of designed wins.
Let me next turn to the industrial market. Our June quarter industrial business was up sequentially and strongly up from the same quarter last year.
Within industrial the core segment led the growth for the fifth consecutive quarter driven by factory automation products and by progress we have made in our broad market initiatives. We achieved strong growth in the June quarter even when factoring out the sell in accounting transaction.
In the September quarter, we expect industrial to be seasonally down sequentially and strongly up from the same quarter of last year. The factory [indiscernible] recognized our factory automation products enabled direct network access to sensors and actuators on the factory floor.
This allows manufacturers to implement on the fly robot tooling changes and more flexible manufacturing work streams. Maxim's technology enables factory upgrades by using existing wiring and this is highly valued by end users.
Distributed architecture of modern factories also requires smaller form factor power management which is a core competency of Maxim. We see revenue growth in all of these areas and believe we're still in the early days with factory modernization.
We estimate that the total installed base of sensors and actuators that uses modern factory controlled systems is still in the low single digit percentage. Let me now turn to our broad market business then outline some of the recent successes we have had with our distribution partner strategy.
First, we have continued to upgrade our technical collateral and improve our online support and website storefront making it easier for customers to find information on our products. Second, we're increasing the use of analytics to identify, track and maximize the value opportunities within the broad market.
And third, we continue to expand our distribution channel partnerships. In the fiscal year, we added four new distribution partners to extend our customer reach in the Americas, Europe, China and the rest of Asia.
All of these new distribution partners employ expert field application support to help our customers solve problems creating demand for Maxim products. We have begun to see positive results from these improvements.
In fiscal 2017, we increased our resales to customers in the small, medium business category by 12% over the prior year. Fiscal 2017 was also a record year for resales in the distribution channel where we exceeded our goal of $1 billion.
In the June quarter, our combined distribution channel comprised 46% of Maxim revenue excluding the transition to sell in accounting at one distributor. 46% was the highest level for the company over the last decade.
We believe there are multiple [Indiscernible] ahead in achieving profitable growth in the broad market as we execute our strategy. Together, automotive and industrial markets contributed 49% of total company revenue in the June quarter.
Let me next discuss communications and data center. In the June quarter communications and data center was flat sequentially and up from the same quarter last year.
Growth in the same market was again led by data center with strong customer adoption of our 100G optical products used in high speed applications within the data center. In the June quarter communications infrastructure was down sequentially and down from the same quarter last year.
We expect continued momentum in 100G optical products as data rate requirements increased and customer CapEx for cloud data centers increases at a 26% growth rate. In the September quarter, we expect the communications infrastructure market to be broadly down sequentially.
Finally let me turn to consumer. In the June quarter, our consumer business was sequentially flat with lower shipments [Indiscernible] than expected and improved diversification and wearables, gaming and peripherals.
In the September quarter, we expect consumer to be up sequentially with continued growth in wearables, tablets, peripherals and gaming products. During the quarter.
we achieved multiple new design wins with our small form factor power management and audio products across a variety of consumer wearables, hearables and smart home assistance. Keys to our differentiation include high accuracy fuel gauging for batteries, always on capability and highly efficient and power management ICs and boosted sound quality with our audio products.
These wins are evidence that our broad market strategy in consumer is working, leveraging our differentiated IP across multiple customers and platforms. In closing, our performance demonstrates that our strategy to grow revenue in our focused markets is working.
We are growing automotive, factory automation, and 100G optical datacenter in the double digits from the same quarter last year. And we are starting to see new growth in our broad market business as a result of our distribution partnership initiatives and to improve reach to small medium business customers.
Our efficient manufacturing structure combined with our return to revenue growth is enabling us to exceed our profitability and cash flow goals. We remain committed to maximize shareholder value and to lead in the return of capital to shareholders as evidenced by today's announced dividend increase of 9%.
With that, I'll now turn the call over to Bruce for the numbers.
Bruce Kiddoo
Thanks, Tunc. Overall, we continue to successfully execute on our business transformation.
Our fourth quarter gross margin of 67.2% exceeded the high end of our guidance range and operating margin at 35.8% was the highest level in over a decade. Revenue in the fourth quarter was up from the same period a year ago and we are guiding the first quarter to be another growth quarter for Maxim.
Our return to growth, operational efficiency and world class profitability gives us confidence to increase our quarterly dividend by 9% and establish a new share repurchase authorization of $1 billion. We remain highly committed to our leadership and the return of capitals to our shareholders.
With that, let me discuss our fourth quarter financial results. Revenue for the fourth quarter was $602 million, up 4% from the third quarter and up 6% from the same quarter a year ago.
Fourth quarter results include approximately $19 million of revenue for the transitions of selling revenue accounting from one distributor. Split roughly 50% industrial, 30% comp, 10% consumer and 5% each auto and computing.
Revenues grew sequentially and year-over-year even when excluding this benefit. Our revenue mix by major markets in Q4 was approximately 29% from industrial, 25% consumer, 21% comp and datacenter, 20% automotive, and 5% computing.
It's worth highlighting that industrial plus automotive is nearly 50% of total company revenue, up from 37% three years ago, when we began breaking out our automotive business. Let me now turn to the distribution channel.
Distribution comprised 47% of Maxim's revenue in the June quarter. Retails in Q4 were strongly up sequentially.
We ended Q4 with 61 days of inventory in the channel down two days from Q3. The decrease in days was driven by strong retail and tight inventory management.
Turning to the P&L. Maxim's gross margin excluding special items was 67.2% an increase of 200 basis points from the prior quarter driven by strong operational execution on our manufacturing transformation and a modest benefit from the transition of selling revenue accounting in Q4.
Special items in Q4 gross margin included intangible asset amortization from acquisitions. Operating expenses excluding special items were $189 million, up slightly from the prior quarter due to higher employee profit sharing.
Special items in Q4 operating expenses included acquisition related charges and restructuring charges. Q4 GAAP operating income including special items with $216 million, operating margin at 35.8% of revenue is up 280 basis points from prior quarter and up 440 basis points from the same quarter a year ago.
The improvement in operating margin was driven by our manufacturing transformation and focused R&D investment strategy. Q4 GAAP tax rate excluding special items was 15%.
GAAP earnings per share excluding special items was $0.63 just above the midpoint of our guided range and up 29% from the same quarter a year ago. Turning to the balance sheet and cash flow, during the quarter, cash flow from operations was $237 million, or 39% of revenue.
Inventory days ended at 114 up five days from Q3. Inventory dollars were up 2% from the prior quarter.
Gross capital expenditures were $13 million in the quarter, offset by 8 million in proceeds from sale of property. Capital expenditures are well below depreciation of $25 million per quarter.
Trailing 12 months free cash flow ending in Q4 using net capital expenditures was $784 million or 34% of revenue and up 6% over the same quarter last year. Our free cash flow yield is approximately 6% at yesterday’s closing stock price.
For capital returned, share repurchases totaled $76 million in Q4 as we bought back approximately 1.7 million shares. Dividends totaled $93 million in the quarter or $0.33 per share.
The current dividend yield is approximately 3% at yesterday’s closing stock price reflecting the dividend increase. As I mentioned in my opening remarks, Maxim's Board of Directors has approved a 9% increase in the quarterly dividend to $0.36 per share and a new share repurchase authorization of $1 billion.
The prior authorization was nearly consumed and is replaced with this new authorization. We expect buybacks to be consistent with our annual commitment to return 80% of free cash flow to shareholders.
In the fourth quarter, we completed an offering of senior notes with an aggregate principal of $500 million. The notes carry a coupon rate of 3.45% and are due in 2027.
The proceeds of this offering will be used for general corporate purposes. Overall, total cash, cash equivalents and short-term investments increased by $589 million in the fourth quarter to $2.74 billion.
Moving on to guidance, our beginning Q1 backlog was $389 million. Based on this beginning backlog and expected turns, we forecast Q1 revenue of $555 million to $595 million.
Excluding approximately $19 million of revenue from the sell-in transition in Q4. Q1 revenues are expected to be roughly flat sequentially.
Compared to the same quarter last year, Q1 revenues are expected to be up driven by contact growth in automotive and industrial. We expect the final transition to sell-in accounting to occur in Q2 at a similar level to Q4.
Q1 gross margin excluding special items is forecasted at 65% to 68% reflecting continued execution of our manufacturing transformation and without the benefit of the transition to sell-in and revenue accounting in Q4. Special items in Q1 gross margin are estimated at approximately $11 million primarily for amortization of intangible assets.
Q1 operating expenses excluding special items are expected to be flat for the prior quarter with continued cost controls offsetting the impact of our annual compensation review. Special items in Q1 operating expenses are estimated at approximately $2 million primarily for amortization of intangible assets.
Our cash rate for Q1 excluding special items will be 15% flat from Q4. We expect this rate to be applicable for all of fiscal year 2018.
For Q1 GAAP earnings per share excluding special items we expect a range of $0.52 to $0.58. In summary, we expect continued growth in Q1 revenue compared to the same quarter last year.
We are growing content in automotive and industrial and diversifying our revenue and consumer which is helping to lower variability and we can continue to exceed our profitability and free cash flow targets which gives us confidence to increase our return of cash to shareholders. And with that I'll turn the call over to Kathy.
Kathy Ta
Thanks Bruce, that concludes our prepared remarks and we will now open the call for questions. We would like to continue the same Q&A process as we used in previous quarters, we'll take one question from each caller so we can get some more people in the queue.
And if you have more than one question please get back into the queue. Jonathan could we please have our first question?
Operator
Certainly, [Operator Instructions] our first question comes from the line of Harlan Sur from JPMorgan, your question please.
Harlan Sur
Good afternoon and congratulations on the strong free cash flow generation and dividend rates. In automotive you know backlogged earnings cost, I think the team was relatively confident about getting back to kind of high teens year over year growth in automotive, obviously based on the guidance and the commentary looks like you guys are still going to be trending kind of low teens year over year growth this quarter.
I know that auto is typically seasonally weaker in September but I guess after the weak June quarter we thought you could at least hold this segment flat sequentially. Tunc you know you talked about some of the weaker trends kind of broadly, can you just kind of help us understand how much of the sequential decline in this quarter is due to continued weakness in China BMS and how much of the weakness is due to sort of other geographies and in your view, is this consistent with sort of the overall slowdown in global stars or maybe more of a slowdown in some of the Maxim specific product cycles.
Tunc Doluca
Harlan, so I'll take that one, I think you addressed it to me anyway. So, you know last quarter we did give this low single digit growth year over year for that business.
We were coming from a strong March quarter double digit growth for that business and we were coming from a really strong March quarter so it wasn't quite clear to us in terms of whether you know that was going to be a lasting effect or not. But since this is the second quarter where we're seeing that type of demand from our customers it seemed prudent that we really should change and be looking forward reflect that we're going to be growing in the low double-digits this quarter again year-over-year.
The question is to whether -- what are the underlying factors are in that, it actually is very difficult for us to see that. We do as you know a vast majority of that business goes through our Tier 1s and when our product ends up in Tier 1, they get shift to automotive customers or end customers that are in multiple regions and then multiple types of cars; so our visibility into exactly what's happening in terms of market directions for car unit sales is not very good, and I think we all read what everybody else sees, and everybody else reads, and we're going to make those comments last quarter, but now I realize that it's probably better for us to just tell you what we see from our viewpoint and trying to read into what that all means for local automotive markets or general trends is actually I don't think was the right thing to do, so we decided that we'll give the color as we see it for the demand for our products.
But really not try to extend it to what that means for the automotive or the car market in general. So, I'm not going to be very helpful in that case, but we really don't have the visibility because we're kind of two sets removed [ph] from the end market demand.
Operator
Thank you. [Operator Instructions].
Our next question comes from the line of Vivek Arya from Bank of America Merrill Lynch. Your question please?
Unidentified Analyst
Hi guys, this is [indiscernible] dialing in for Vivek, thanks for taking my question. My question is on your consumer business which appears to be decelerating, I'm sorry declining a little bit faster than perhaps you expected, what's the right way to think about this moving forward for next year?
Can you maybe give us some clarification on what your remaining exposure is to your largest customer and what are the trends are outside of that largest customer?
Bruce Kiddoo
If you look at it in the fourth quarter, our consumer business overall was flat sequentially and when we look at it in the September quarter we see that it was -- we were guiding that to be up. Overall, I would say the dynamic that's happening there is we see weakness in smartphones, when we look at the Q4 results, the one area that came in under expectations was smartphones, and when we look at the Q1 guidance we guided smartphones flat basically.
All the other businesses are doing very-very well, if you look at sort of our tablets business, our wearable business, our gaming business, they were all up strongly year-over-year in Q4, and we're guiding them all to be up strongly against, year-over-year in Q1. So, our strategy around diversification within consumer is working, obviously there's sort of the transition from smartphones to a more broader based consumer business, and I think we're kind of in that transitional period right now, but overall we're long term as the kind of the smartphone business becomes a smaller part of our business and I think last quarter us it was at up half of our consumer business which has been coming down significantly over prior years and we have no customer over 10% and our largest customer actually went down sequentially from Q3 to Q4.
So even further reducing our exposure to that customer. So, I think overall, we feel good about kind of the progress we have made on diversification.
And it's really selling our products to multiple customers across multiple platforms [audio gap] whether its power audio or centers.
Operator
Our next question comes from the line Ross Seymore from Deutsche Bank. Your question please.
Ross Seymore
I want to bring it up to a little bit of higher level beyond just the auto or the consumer side and just Tunc or Bruce just talk a little bit about where you think we are in the cycle? This last quarter you had the guidance for June and the automotive news kind of spooked people in cyclical concerns and frankly your revenue guidance -- your revenue report missed the midpoint in June and is below the street for September.
So, you can just talk a little bit about why those numbers are a little bit lower and where you think we are in the cycle that would be great?
Bruce Kiddoo
I'll take the first crack at that and then I'll give some quantitative and then let Tunc give a little color on that. I think when we looked at Q4 and sort of as I mentioned, the miss was all actually in smartphones.
Everything else kind of came is as expected. And on the smartphone side basically we guided to either what our customers told us or in some cases even discounted it to a certain extent.
And yet the actual result came in below that. but everything else when we look at -- our industrial business it came in strong even if you take out the effective DGT industrial is up 12% year-over-year.
So that came in very strong and we feel good about that business. The comps and data center was flat but up 3% year-over-year and of course automotive up double digits as well.
So, I think the Q4 I think it's less of a cyclical issue and I think it’s more just smartphones in both Korea and China being a little bit weak. When we look to Q1 certainly I think the biggest impact is in the automotive.
We are guiding it down at down 2% or something like that when its normally seasonally flat I don’t think that’s a big deal but as Harlan said I think there was an expectation that maybe there will be a little bit stronger bounce back. and I think we felt that as well.
But assumes [ph] said now that we had two quarters kind of low teens demand and that’s what our customers are telling us. So, we think it's just probably the right thing to reflect that.
When we look at industrial its again a couple of points seasonally down year-over-year it's still up double digits. And so, everything that’s happening in the industrial side we feel good about Tunc's kind of commented a little bit on the broad market.
And then I would say the other thing that’s a little bit weaker than we thought for Q1 right now is the comp infrastructure business. We don’t have good visibility into that.
and when we look at that market and our guide there we clearly see the infrastructure side being weak, we still see good growth in the optical side and the data center side. So, we feel good about there, but as most people know, if you look at our common data center, it's about two-thirds infrastructure, one-third data center.
And that two-thirds infrastructure is certainly weaker than what we thought. I don't know Tunc, if I, I said a lot.
Tunc Doluca
That's right. I think Bruce did a pretty good job, but just to summarize the quarter that distended except for consumer came in just as we expected, so that was good.
And if you look at our markets, if you look at year over year numbers, the quarter we're in currently that ends in September. We've got good double-digit growth in both industrials and in automotive, which we look forward to.
There is also growth in comps and data centers, it's more modest in the first two, so that's all good. And there is weakness in consumers for the reasons that Bruce is just outlined.
So, there are always puts and takes in the business, but in general, it's going in the direction that we expected. And if you look at all the measures that we put in place, all the investments that we're making in R&D, we've got even more confidence that we're doing it in the right places in the Company.
So, from that due point despite the very small coming onto what we expected in the last quarter, we feel good about the business.
Operator
Thank you. Our next question comes from the line of Tore Svanberg from Stifel.
Your question please?
Tore Svanberg
Yes, a follow-up to Ross' question and not to hatch too much on the cyclicality aspect, but can you talk a little bit about where your lead times? What you're seeing as far as customer behavior?
Are they kind of ordering two demands? If you could just help us a bit on, on that, that would be great?
Tunc Doluca
So, first of all, I think that if you just look at our numbers and my comments about or about us, I'm not trying to say things about the industry in general. The data that we see is our customer ordered lead times has gone up a bit.
They've gone in the last six months. They've extended by an additional week.
This is what lead times they're giving to us. Our ability to deliver has not changed.
We call this our capability to deliver to customer orders. That's actually maybe even come down slightly in the last six months or so.
So, from our view point, we don't have a capacity limitation. We're not seeing anything that's unusual for us.
There are few areas where there is some tightness like raw wafer supply and some packaging, but it's pretty small and that's not something that we were concerning with or is limiting our capabilities with the products to customers. So, on the Maxim front, the things would normal.
Operator
Thank you. Our next question comes from the line of Ambrish Srivastava from BMO.
Your question please?
Ambrish Srivastava
I actually wanted to focus a little bit on the gross margin side, Bruce, and I apologize if you already gave it. The impact from sell-in has to be pretty tiny and longer term my question was, you're inching up toward that, if I call it the hollowed linear risks although linear was much higher in that drain.
So, what's the right way to think about the business Bruce, longer term? What can Maxim generate on the gross margin front then what are the levers?
Thank you.
Bruce Kiddoo
Yes. I think we were very pleased with kind of the results this quarter at 67.2%.
And there may have been or there probably was 0.5-point benefit from the accounting transitions, and that's why we guided to the 66.5% kind a midpoint for the September quarter, certainly above probably the most people we're expecting that to be. And I think we continue to see sort of momentum from our manufacturing transformation.
Most of those activities have been completed at this point in time. But sort of the tailwind as a result of that whether that's continuing to kind a maximize the loading in our remaining Oregon fab, as our take-or-pay comes down at the TowerJazz at San Antonio Fab whether that's the kind of the gap between depreciation at $25 million and CapEx at sort of kind of 2% of revenue, and that sort of in the low-teens of $1 million.
And so, over a multiple year, I think that will provide a tailwind for gross margin. Just to move into kind of pushing distribution, pushing SMD, industrial growing, I think that's a tailwind.
All of those things have, what's allowed us to kind of every quarter do a little bit better than what we thought. Now, at some point right that sort of kind of reaches equilibrium, that something we're looking at.
And I think when we get some comfort in that whether that's at an Investor Day or at the appropriate time, we'll share a new model. But for now, we're just pushing as hard as we can to continue to maximize gross margin, maximize the profitability for the Company and not be limited by a target at this point.
So, we feel good about the results, we'll continue to push and we think there is a lots of or several tailwinds that working in our direction.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Christopher Rolland from Susquehanna.
Your question please?
Christopher Rolland
So, distribution 47%, I think you said the highest ever. And you guys mentioned some changes that you're making in pushing distribution.
Perhaps, if you can remind us what some of those changes are? And then also, how much do you think you're benefiting here from guys like TI going more direct, and guys like ADI going exclusive with one just the -- how much of this do you attribute to competitive changes in the tail?
Tunc Doluca
Yes. So, in terms of what are we doing or what initiatives do we have to drive more sales through that channel.
I gave some brief summary in the opening remarks. But in essence we've gotten better at making sure that our products have better collateral for our customers thrilled to design them in more easily.
We made some improvements in actually how they can get parts from us from our website. And that should be helping, because it makes the look what was the desistence to use the product.
So that's number one. So, I just put that under the collateral header.
The other thing we’ve done is, we’ve gotten better of using analytics for following up on lease, people that have asked for samples, people that have done any kind of inquiry on anything. We’ve got that analysts helping in get more customers to use our products rather in our competitors.
And finally, I mean unlike some of the other competitors we got, we actually are expanding our distribution which is really important, we see. As I said, we’ve added distributors, four more distributors in various regions.
And we find that these distributors are highly confident in their field application support. And in analog that is really important, that’s really how you win designs.
And that’s going to be beneficial to us in terms of winning more business. So those are the things that, we’ve done, we’ve taken action onto increase our designing win ratio.
Of course, competitors are doing other things, they’ve got their own plans, and they’re pushing in that direction. It’s really very difficult to figure out whether we’re winning because of that or because of what we’re doing.
But we’ll take it any way it comes and I think that, we believe that with the total number of customers, we’re trying to serve, trying to do that alone is not a strategy that we work for Maxim. So that’s why we need our distribution partners and we’ll continue pushing in terms of our strategy going forward.
Operator
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse.
Your question please?
John Pitzer
I just kind of want to follow up to Ross' question. Notwithstanding, all the good work and execution on profitability, when you look at revenue growth for Maxim, even though, the absolute year-over-year growth is decent, it still seems that you’re kind of significantly underperforming peers even when you normalize for the transformation you’ve had in the consumer market and the diversification away from your largest customer there.
And so, I’m kind of curious, can you help me understand. Do you guys look at relative growth rates as a comparable metric?
And on that basis, do you feel as you’re keeping up with peers and I guess importantly as we go forward. What areas of your IP, do you think, you can really leverage to drive better than sort of industry average growth?
Tunc Doluca
Yes. So, that settles like a complete Investor Day presentation required, but I’ll do my best -- I'll do my best, John.
So, we did share a couple of years ago how we decided to change general strategy. We have been investing in areas where we saw great potential for us to be do better than our competitors, leveraging our strength, leveraging our brand, leveraging our design expertise in certain areas.
So that ended up in us really investing in some key areas and those where the one that we shared with you at Investor Day, obviously, automotive is one of those that we heavily invest in, and we have great products and great technology in power management both for infotainment and for driver assist-type applications. We have great technology and products for driver assistance, serial links to move vast amounts of data.
We're a significant supplied already for both infotainment now but in the long run in driver assist. We’ve investments in battery management products, because I think you know electric cars or these hydroelectric cars are going to keep growing because of various reasons.
So those are areas where in automotive where we have great technology and at least from our vantage point, an advantage over the competitors to be able to grow. The other area we talked about was industrial and a lot of factory automation.
We've been investing in that very heavily. In my prepared remarks I talked about, why the customers want to use our products, both in power and in the interface type products and industrial control and automation, so that's another area where we believe we have a unfair advantage so to speak.
And then finally in communications and data center, it's really putting -- we put a lot of effort into 100G inside the data center optical communications, and those are beginning to really ramp. In fact, if you look at our data center business, I was looking at this number just as the call was starting.
You know year-over-year it’s grown almost close to 30%, so those are big numbers in the areas that we decided to invest. And some of those are smaller than the overall major markets, but they're getting bigger, just like automotive.
It was 3 or 4% you know four-five years, now it’s big. And I think that we're going to see similar effects in all of these areas that we're investing in.
And on top of that we’ve made some changes in our ability to reach the broader customer base. We call these our core products.
And that's beginning to show effect as well, so all of these things we're doing, I think they're great for future growth but growth is never a straight line, Bruce and I was talking about this. You go through some -- you do go through some ups and downs that you didn’t expect.
Having said all that you did ask about how we're doing against our competitors, we do look at those numbers and what we usually find is there's some circumstances that apply to some and to others they don't. So, it kind of makes it very difficult to make a very good comparison between us and specially since some of most who don't really report by market as well, so it makes it very difficult, but absolutely we do look at how we're doing and look at our own performance relative to that.
But in general, you know the strategy that I just tried to summarize in a few minutes here. I think we're seeing it being very effective in those areas that we’re investing in are doing very well.
Bruce Kiddoo
And John, this is Bruce, just to put some numbers around this, right. I think we talked about industrial being up Q4 and is guided up in Q1 double digits.
Automotive up in Q4 and in Q1, comps and data center on a year over year basis both in Q4 and Q1, and there as the data centers up and a little bit of weakness in comp. The big area that I would say is holding us down right now has been our exposure to smartphones, we've been diversifying away from that.
We're not -- you know that business is still declining and so when you look at a year-over-year basis, smartphones are down substantially, 25%, 30%. Now, it's 12% of our revenue at this point, 12%, 13% of revenue, so it's become a much smaller number from where it was historically and so as we continue to grow the other parts of the business, and as Tunc said, as they become a much bigger part of our business, that impact from smartphones will be lesser-and-lesser going forward and we're very confident in sort of the markets we've picked to invest and on a year-over-year basis we just have to kind of get over the kind of the comps of the smartphones, but we're confident we made the right decision, and that long term this is the Company that should be able to grow or exceed the marketplace.
Operator
Thank you. Our next question comes from the line of Chris Danley from Citigroup.
Your question please?
Chris Danley
I guess this is the second quarter in a row where gross margins are reasonably above the long-term target, but the sales growth is little disappointing. So, you're guys I guess actively looking to get out some lower margin businesses, and if this keeps up, if we go through another quarter or two of nice, really nice gross margin, but a little bit disappointing revenue growth.
Would you look to -- could you look to trade off some margin for revenue growth? Is that possible?
Tunc Doluca
Well, I think from a strategy standpoint, on each decision, we make whether we want to take a business or not. We look at the overall margin, the defensibility of the socket, and so on.
And I think we're in a right balance and I think that we will update you soon in the future after we've got a little more confidence on what our margin targets are going to be. But I think our focus really is to deliver the right amount of growing cash flow but our focus is to really remain a differentiated company, which means higher margins then our competitors or most of them in any case.
So, those decisions are made every day in the Company, but I think that in general just saying that we're going to lower margins to grow revenue could be a dangerous path to follow. So, we're very careful about that.
We do have a mix of businesses, I think we've explained this in the past, not every -- there's no bar, but on in general we've an overall margin goal for the Company, some businesses are little slightly below that, some are above that. But we like to higher margin approach for Maxim.
Operator
Thank you. Our next question comes from the line of Amit Daryanani from RBC Capital Markets.
Your question please?
Amit Daryanani
I guess just on the industrial segment, you saw some really good growth I think was up 12% in June, you're guiding it up nicely in September as well. What's your comfort level?
Or how do you get comforted that this is where you all end market driven versus perhaps your customers just decided to hold onto more inventory given what they might read in papers or might be worried about. Is there a way to think about how much is it good you think that industrial is really end market driven versus perhaps your customers holding more inventory themselves?
Bruce Kiddoo
So, I'll answer the inventory side and Tunc can talk about the secular growth drivers. From an inventory of the best -- we can't see where the -- Siemens or our largest customers are holding, but to the extent that almost half our business now is through distribution and the big part of that is industrial.
Actually, the channel inventory actually went down from 63 days down to 61 days. So, we actually saw a decline and we had very strong resales.
That wasn’t just us not shipping less into the channel. It was -- resales were actually up 12% quarter-over-quarter and we are actually up 18% year-over-year.
And so that’s end demand. That’s not building inventory.
So, I think -- and I look at the retail data there was strength China, Japan, Europe, Taiwan all up very strong quarter-over-quarter. We had some weakness in the U.S.
We have talked about that before as far as kind of strengthening our position within the U.S. market and we brought on a new distributor in the quarter to further our improvements there.
So, overall, I mean when I look at for the channel inventory when I look at which is down, I look at resales which were strongly up, I mean being up 12% quarter-over-quarter when the normal seasonality is up three, that gives me confidence that this is end customer demand that’s driving this growth.
Tunc Doluca
Yes, so I think that just to give a little bit more color on all that, we are seeing strong growth as I said in the factory automation segment. Those are really a lot of upgrades from using our products to existing factories.
We are not hearing from customers that there is they have a, what I would call a concern about supply at least from us. So, there shouldn’t really not be a reason for them to hold a lot of Maxim product, whereas Bruce as very clearly said, we don’t have visibility into what the end customers are holding as inventory.
Having said that, we've seen seeing good growth in many of these products because the new cycles, the new technologies and they like that from our customers, and we also saw both growth in the core industrial business from the year-over-year basis as well as from our verticals. So those are all -- we see them as good signs.
And we are not getting any at least verbal mentions that customers that filing Maxim product for any concern. They said to previous answer that I gave we are telling them that our capability to deliver products is better now than it was six months ago.
So, they don’t see why they would be doing that. if they do it because their concern was other people then we wouldn’t be able to see through that and be able to understand that.
Operator
Our next question comes from the line of William Stein of SunTrust. Your question please.
William Stein
Thanks for taking my question and in the sense with the opposite of the last question and it's essentially this that, we have read in the press and also heard from channel checks that the shortages in passives and commodities semis have been getting worse. And I think we all understand that your customers need complete kits in order to ship systems.
I wonder if the shortages in passives and commodities are capping the rate of demand that we'd other see on Maxim.
Tunc Doluca
Yes, maybe, you're right. It is the opposite of the previous question.
I'll be honest with you we'd not be able to project that any way because this is not information that they share with us that they have shortages on something else, unless it's a very large customer that will tell us. But I have read and heard about similar things, but obviously, we neither sell passive and commodities products.
So, it's hard for us to see that.
Operator
Thank you. Our next question is a follow-up from the line of Ross Seymore from Deutsche Bank.
Your question please?
Ross Seymore
Bruce, you'd mentioned in your script about another one of the selling revenue recognition dynamic hitting you give in the fiscal second quarter. Can you give us a little more color on that please?
Bruce Kiddoo
Sure, we have one distributor left in North America, who is still on sell-through basis. We're making this transition before any change in the accounting standard, so we've to kind of follow the existing accounting rules, I mean doing that we have to have the capability of estimating any recurrence whether that's pricing credits or returns from that distributor.
And so, I think our belief is now that distributor has begun to kind of stabilize their ERP system and that will be able to make that transition into two that's kind of internal plan of records. We expected to be kind of similar dollar amount as what occurred in Q4, and then we also will probably have sort of similar mix by end market as well.
So, and just to be clear to everybody, sometimes people think, well, this is sort of special or onetime. This is -- if you think we've have 60 days of inventory in the channel, this is the product that we're shipped in FY '18 that was probably shipped in -- will be shipped into the channel in the first quarter that still -- that is fitting in inventory that -- got of accelerate the reorganization of that revenue but it was raw revenue, raw cost occurred in FY -- half -- and then FY '18 and then want to just recognize that in the second quarter.
Ross Seymore
Is the duration of that simply one quarter similar to this one, where you then go down in fiscal 3Q or because the size of Avnet is potentially a longer duration?
Bruce Kiddoo
Now, we will get it done in one quarter.
Operator
Our next question comes from the line of Craig Hettenbach from Morgan Stanley. Your question please?
Craig Hettenbach
Just want to follow up on the comments around comm. Infrastructure and I know some of the kind of the legacy business, but any additional color you can add in terms maybe what you seen by geography or kind of demand versus inventory?
Tunc Doluca
Yes, I think it's going to be difficult to add much in terms of what's going on comm infrastructure. I know and Bruce has some information, he is looking into his charts in front of him.
There is not much we're going to be able to add as to where we're seeing this weakness in the infrastructure side.
Bruce Kiddoo
I mean I think as you know we don't have strategic sockets where we basically just sell sort of legacy products for the most part into the infrastructure side of the business. So, we're never a good one unfortunately to provide any unique insights.
Clearly, we are seeing when I look at those markets, pretty much across the board whether it's kind of the wired wireless side. We're seeing sequential declines in that business in Q1.
Kathy Ta
Thanks, Craig. Jonathan, I think we have time of just one more questions.
Operator
Certainly. Our final question comes from the line of CJ Muse from Evercore.
Your question please.
CJ Muse
Yes, hi thanks for squeezing me in. I guess the question on the consumer business.
Can you talk to what kind of sequential growth you're expecting there? It looks like you're better than your overall guide roughly 3.5%.
And then I guess also now that handset exposures have been reduced. How should we think about seasonality into Q4, Q1 as reduced handset and I guess greater exposure elsewhere?
Thank you.
Bruce Kiddoo
Sure, I mean we guided consumer up which most people have a little decoder table somewhere, which up usually means kind a low single digit and it above to get mid-to-high single digits and we'll say strong up. And so, in general, you can think this as kind a low mid-single digit growth rate for the consumer business.
As we said cellphones are going to be flat and on a sequential and year-over-year both the tablets and wearables and gaming are all up strongly. And so, we feel good about that.
I think as far as seasonality goes, I think it's now that we're probably diversified. I think there will be kind of the less defined we used to thought of if we equated us with Samsung and kind of the timing of their product launches and their inventory corrections.
We're seeing less of that. I mean a good example is our opportunity at a large Japanese gaming company where we've seeing good growth from that both sort of in the first half of the year and continuing into the September quarter.
So, I think we're going to become as we become more broadly diversified hopefully it becomes more just a consistent business for us and less product cycle driven.
Kathy Ta
Well thank you CJ. So, Jonathan, I think that was our last question.
So, I'd like to wrap up the call. That concludes today's conference call.
We'd like to thank you for your participation and for your interest in Maxim.
Operator
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program.
You may now disconnect. Good day.